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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-22782
ESENJAY EXPLORATION, INC.
(Exact name of small business issuer in its charter)
DELAWARE 73-1421000
(State of incorporation) (I.R.S. Employer Identification Number)
500 N. WATER STREET, SUITE 1100
CORPUS CHRISTI, TEXAS 78471
(Address of registrant's principal executive offices, including zip code)
Registrant's telephone number, including area code: (512) 883-7464
Securities registered under Section 12(b) of the Exchange Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
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Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK
SERIES B COMMON STOCK PURCHASE WARRANTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $1,716,473
The aggregate market value of the voting stock held by non-affiliates of
the registrant (treating all executive officers and directors of the registrant,
for this purpose, as if they may be affiliates of the registrant) was
approximately $19,731,042 on March 26, 1999 (based on the last sales price of
$1.25 per share as reported on the NASDAQ Stock Market).
15,784,834 shares as the registrant's common stock were outstanding as of
March 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders is
incorporated by reference into Part III.
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ESENJAY EXPLORATION, INC.
FOR YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
FORM 10-KSB
PART I
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Item Page
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1. Description of Business.................................................... 3
2. Description of Property.................................................... 20
3. Legal Proceedings.......................................................... 22
4. Submission of Matters to a Vote of Security Holders........................ 22
PART II
5. Market for Common Equity and Related Stockholder Matters................... 23
6. Management's Discussion and Analysis or Plan of Operation.................. 23
6A Quantitative and Qualitative Disclosures about Market Risks................ 31
7. Financial Statements....................................................... 32
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................... 52
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act........................ 53
10 Executive Compensation..................................................... 53
11 Security Ownership of Certain Beneficial Owners
and Management........................................................... 53
12 Certain Relationships and Related Transactions............................. 53
PART IV
13 Exhibits and Reports on Form 8-K........................................... 54
Signatures................................................................. 56
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PART I
This Form 10-KSB contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the introductory paragraph to
Management's Discussion and Analysis beginning on page 23 of this Form 10-KSB.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
THE COMPANY
Esenjay Exploration, Inc. (the "Company") is an independent energy
company engaged in the exploration for and development of natural gas and
oil. The Company has assembled an inventory of 39 technology enhanced natural
gas and oil exploration projects along the Texas and Louisiana Gulf Coast
(the "Exploration Projects"). These Exploration Projects include substantial
interests in 28 projects the Company acquired on May 14, 1998 (the
"Acquisitions") from Esenjay Petroleum Corporation ("EPC") and Aspect
Resources LLC ("Aspect") pursuant to an Acquisition Agreement and Plan of
Exchange (as amended, the "Acquisition Agreement"). The Exploration Projects
also include the Company's interests in projects acquired both before and
after consummation of the Acquisitions. The Company, EPC and Aspect have
spent several years identifying and evaluating many of the Exploration
Projects. Each of the Exploration Projects differs in scope and character and
consists of one or more types of assets, such as 3-D seismic data, leasehold
positions, lease options, working interests in leases, royalty interests or
other mineral rights.
In connection with the Acquisitions, an affiliate of Enron Corp.
exercised an option to exchange $3.8 million of debt Aspect owed to such
Enron affiliate for 675,000 shares of the Company's Common Stock that would
otherwise have been issued to Aspect in the Acquisitions, at an effective
conversion rate of $5.63 per share. As a result of the Acquisitions and this
exchange and the underwritten offering described below, EPC, Aspect and the
Enron affiliate own approximately 32.8%, 27.7% and 4.3%, respectively, of the
Company's outstanding Common Stock.
On July 21, 1998 the Company closed an underwritten offering of
4,000,000 shares of its common stock at a price of $4.00 per share. The net
proceeds to the Company were approximately $14,880,000. After the offering the
Company had 15,762,723 shares outstanding.
OVERVIEW OF CURRENT ACTIVITIES AND RECENT EVENTS. The Exploration
Projects encompass a relatively large number of properties which the Company
intends to drill and/or otherwise exploit on a property by property basis over a
period of time based upon various factors including terms and locations of
leases, updated current drilling results, and the overall Company exploration
strategy.
The Company utilizes the successful efforts method of accounting.
Under this method it expenses its dry hole costs and the field acquisition
costs of 3-D seismic data as incurred. The undeveloped properties which were
acquired pursuant to the Acquisitions, and which were comprised primarily of
interests in unproven 3-D seismic based projects, recorded in May of 1998 at
an independently estimated fair market value of $54.2 million as determined
by Cornerstone Ventures, L.P., a Houston, Texas based investment banking
firm. Pursuant to the successful efforts method of accounting, the Company is
amortizing such initial costs as periodic impairments of unproved properties
on a straight-line basis over a period not to exceed forty-eight months, as
well as recognizing property specific impairments. These non-cash charges
effect all such costs which are not, in the accounting period they are to be
impaired, supported by proven oil and gas reserves. Hence significant
non-cash charges will likely depress reported earnings of the Company over
the next several years, but will not effect cash flows provided by operating
activities nor the ultimate realizable value of the Company's natural gas and
oil properties.
Most of the Exploration Projects have been enhanced with 3-D seismic
data in conjunction with computer aided exploration ("CAEX") technologies. The
3-D seismic data acquired to date covers approximately 1,700 square miles. A
significant number of the Exploration Projects have reached the drilling stage,
and the Company has budgeted approximately $16.5 million, in addition to funds
already spent, to fund its drilling budget in 1999. It has also budgeted
approximately $7.5 million for additional land and geophysical costs for a total
1999 capital
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expenditure budget of approximately $24.0 million. The budget is projected to
fund the Company's net cost in over 40 wells. The Company does not currently
have capital resources to fund the complete 1999 budget but believes such
resources or other optional means of exploration funding will be available. (See
Management's Discussion and Analysis - Liquidity and Capital Resources). The
Company believes that the Exploration Projects represent a diverse array of
technology enhanced, 3-D seismic evaluated, ready to drill natural gas
exploration projects.
The Company entered 1999 having gone from nominal second quarter 1998
gas and oil revenues of approximately $35,000 per month and large operating cash
flow deficits to a company with over $360,000 per month in oil and gas revenues
in the fourth quarter of 1998. This number is expected to exceed $700,000 per
month as first quarter 1999 exploration discoveries come on line and continue to
increase as additional wells are drilled. This should allow it to achieve
positive operating cash flow in 1999 and beyond. In addition, since December 31,
1998, the Company has closed a long term financing commitment for $9,000,000
with Duke Energy Field Services, Inc., it has closed a sale of project interests
to industry partners for a total of $3,768,500, and has entered into two
preliminary agreements to sell additional project interests, which it expects to
close in April 1999, for a total of approximately $3,900,000. The closed
financing, combined with the closed project sales, as well as those expected to
close, will result in an aggregate availability of over $16,600,000 in available
cash resources, which is expected to enhance working capital and contribute to
the Company's early 1999 capital expenditure plan. (See "See Management's
Discussion and Analysis - Liquidity and Capital Resources").
STRATEGY
The Company's strategy is to expand its reserves, production and cash
flow through the implementation of an exploration program that focuses on (i)
obtaining dominant positions in core areas of exploration; (ii) enhancing the
value of the Exploration Projects and reducing exploration risks through the use
of 3-D seismic and CAEX technologies; (iii) maintaining an experienced technical
staff with the expertise necessary to take advantage of the Company's
proprietary 3-D seismic and CAEX seismic data; (iv) reducing exploration risks
by focusing on the identification of potential moderate-depth gas reservoirs,
which the Company believes are conducive to hydrocarbon detection technologies;
and (v) retaining operational control over critical exploration decisions.
OBTAIN DOMINANT POSITION IN CORE AREAS. The Company has identified core
areas for exploration along the Texas and Louisiana Gulf Coasts that
have geological trends with demonstrated histories of prolific natural
gas production from reservoir rocks high in porosity and permeability
with profiles suitable for seismic evaluation. Unlike the Gulf of
Mexico, where 3-D seismic data typically is owned and licensed by many
companies that compete intensely for leases, the private right of
ownership of onshore mineral rights enables individual exploration
companies to proprietarily control the seismic data within focused core
areas. The Company believes that by obtaining substantial amounts of
proprietary 3-D seismic data and significant acreage positions within
its core areas, it will be able to achieve a dominant position in
focused portions of those areas. With such a dominant position, the
Company believes it can better control the core areas' exploration
opportunities and future production, and can attempt to minimize costs
through economies of scale and other efficiencies inherent in its
focused approach. Such cost savings and efficiencies include the
ability to use the Company's proprietary data to reduce exploration
risks and lower its leasehold acquisition costs by identifying and
purchasing leasehold interests only in those focused areas in which the
Company believes exploratory drilling is most likely to be successful.
USE OF 3-D SEISMIC AND CAEX TECHNOLOGIES. The Company attempts to
enhance the value of its Exploratory Projects through the use of 3-D
seismic and CAEX technologies, with an emphasis on direct hydrocarbon
detection technologies. These technologies create computer generated
3-dimensional displays of subsurface geological formations that enable
the Company's explorationists to detect seismic anomalies in structural
features that are not apparent in 2-D seismic surveys. The Company
believes that 3-D seismic technology, if properly used, will reduce
drilling risks and costs by reducing the number of dry holes,
optimizing well locations and reducing the number of wells required to
exploit a discovery. The Company believes that 3-D seismic surveys are
particularly suited to its Exploration Projects along the Texas and
Louisiana Gulf Coasts.
EXPERIENCED TECHNOLOGICAL TEAM. The Company maintains an experienced
technical staff, including engineers, geologists, geophysicists,
landmen and other technical personnel. After the Acquisitions, the
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Company hired most of EPC's technical personnel, who, in some
instances, have worked together for over 15 years. In addition, the
Company has contracts with various geotechnical services consultants
who provide the Company geophysical expertise in managing the design,
acquisition, processing and interpretation of 3-D seismic data in
conjunction with CAEX data.
FOCUSED DRILLING OBJECTIVES. In addition to using 3-D seismic and CAEX
technologies, the Company seeks to reduce exploration risks by
primarily exploring at moderate depths that are deep enough to discover
sizeable gas accumulations (generally 8,000 to 12,500 feet) and that
also are conducive to direct hydrocarbon detection, but not so deep as
to be highly exposed to the greater mechanical risks and drilling costs
incurred in the deep plays in the region. In conjunction with
interpreting the 3-D seismic and CAEX data relating to the Company's
moderate depth wells, the Company anticipates it will identify
potential prospects in deep gas provinces that the Company may elect to
pursue.
CONTROL OF EXPLORATION AND OPERATIONAL FUNCTIONS. The Company believes
that having control of the most critical functions in the exploration
process will enhance its ability to successfully develop its
Exploration Projects. The Company has a majority interest in many of
the Exploration Projects, including proprietary interests in most of
the 3-D seismic data relating to those projects. Although the Company
has partners in the Exploration Projects in which it does not own a
majority interest, in many cases, the Company owns a greater interest
than any of its project partners. As a result, the Company will often
be able to influence the areas to explore, manage the land permitting
and option process, determine seismic survey areas, oversee data
acquisition and processing, prepare, integrate and interpret the data
and identify each prospect drillsite. In addition, the Company will
likely be the operator of most of the wells drilled within the
Exploration Projects.
EXPLORATION PROJECTS
Most of the Exploration Projects are concentrated within the Downdip
Frio, Wilcox and Texas Hackberry core project areas. The Downdip Frio core area
generally is in the middle Texas Gulf Coast where the Company believes Frio
targets exist at moderate depths. The Wilcox core area generally is in the
middle Texas Gulf Coast in an area the Company believes to have prospects for
Wilcox sand exploration. The Texas Hackberry core area is located in Jefferson
and Orange Counties, Texas, in an area which the Company believes offers
drilling opportunities in the Hackberry formations, as well as Miocene and
deeper Vicksburg sands. Other Exploration Projects consist of the Starboard
Project, as well as other projects in Louisiana and Mississippi that either are
in early stage exploration areas that may develop into new core project areas,
or non-core area projects, which are projects that are not presently expected to
be further expanded.
Each of the Exploration Projects differs in scope and character and
consists of one or more types of assets, such as 3-D seismic data, leasehold
positions, lease options, working interests in leases, royalty interests or
other mineral rights. The Company's percentage interest in each Exploration
Project (a "Project Interest") represents the portion of the interest in the
Exploration Project it shares with its other project partners. Therefore, the
Company's Project Interest in an Exploration Project should not be confused with
the working interest that the Company will own when a given well is drilled. The
Company's working interest in the wells on each Exploration Project may be
higher or lower than its Project Interest.
The following table sets forth certain information about each of the
Exploration Projects:
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EXPLORATION PROJECTS
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ACRES LEASED OR UNDER
OPTION AT MARCH 26, SQUARE MILES OF
1999(1) 3-D SEISMIC DATA
--------------------------------- RELATING TO
PROJECT AREAS GROSS NET PROJECT AREA PROJECT INTEREST(2)
------------ ------------ ------------ ----------------
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SOUTH TEXAS
DOWNDIP FRIO CORE AREA
Allen Dome...................................... 833 136 -- 50.0%
Gillock......................................... 23,804 3,404 82 22.5%
Blessing........................................ 1,414 278 22 24.0%
Tidehaven....................................... 3,842 1,254 28 40.5%
El Maton........................................ 4,893 1,793 28 46.5%
Midfield........................................ 3,267 1,059 21 37.5%
Markham......................................... 2,584 1,480 -- 60.0%
Buckeye......................................... 20,279 7,667 50 45.0%
Duncan Slough.................................. 5,608 1,601 60 40.9%
Southwest Pheasant.............................. 3,033 1,781 10 75.0%
Geronimo........................................ 7,140 1,382 76 20.0%
Houston Endowment............................... 3,000 810 50 27.0%
Wolf Point...................................... 960 437 8 45.5%
Sheriff Field................................... 4,943 2,755 -- 75.0%
Bauer Ranch..................................... 22,000 4,803 56 33.3%
La Rosa......................................... 5,537 443 25 8.0%
Piledriver...................................... 640 400 2 62.5%
Archie ......................................... 903 207 14 25.0%
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Downdip Frio Sub-Total 114,680 31,690 532
WILCOX CORE AREA
Gila Bend....................................... 1,179 147 16 12.5%
Hall Ranch...................................... 7,894 3,266 57 41.5%
Hordes Creek.................................... 4,730 1,943 25 41.5%
Mikeska......................................... 7,898 2,850 32 38.0%
Duval/McMullen.................................. 1,980 1,782 12 90.0%
Verdad.......................................... 50,994 6,930 57 25.0%
Orangedale...................................... 2,353 2,086 3 90.0%
Riverdale....................................... 5,601 1,400 23 25.0%
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Wilcox Sub-Total 82,629 20,404 225
TEXAS HACKBERRY CORE AREA
Lox B........................................... 9,281 1,440 62 25.0%
West Port Acres................................. 881 86 21 12.5%
Big Hill/Stowell................................ 7,100 1,960 56 33.3%
Lovells Lake.................................... 18,213 4,262 65 33.3%
West Beaumont................................... 1,721 78 23 7.9%
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Texas Hackberry Sub-Total 37,196 7,826 227
LOUISIANA
Lapeyrouse...................................... 4,576 943 35 25.0% Average
Crab Lake....................................... 1,130 322 12 75.0%
S. L. Eocene(3)................................. 5,516 5,416 -- 100.0%
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Louisiana Sub-Total 11,222 6,681 47
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ACRES LEASED OR UNDER
OPTION AT MARCH 26, SQUARE MILES OF
1999(1) 3-D SEISMIC DATA
--------------------------------- RELATING TO
PROJECT AREAS GROSS NET PROJECT AREA PROJECT INTEREST(2)
------------ ------------ ------------ ----------------
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OTHER TEXAS
Raymondville.................................... 27,406 16,210 62 60.4%
Caney Creek..................................... 19,759 2,334 33 12.5%
East Texas Pinnacle Reef (4).................... -- -- 400 --
Papalote (3).................................... 25,316 21,685 -- 87.5% Average
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Other Texas Sub-Total 72,481 40,229 495
MISSISSIPPI
Thompson Creek.................................. 1,877 1,562 12 93.5%
Lipsmacker...................................... 2,892 452 64 22.0%
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Mississippi Sub-Total 4,769 2,014 76
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TOTAL ALL PROJECTS 322,977 108,844 1,602
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(1) Gross acres refers to the number of acres leased or under option in
which the Company owns an undivided interest. Net acres were determined
by multiplying the gross acres leased or under option times the
Company's working interest therein.
(2) Each of the Exploration Projects differs in scope and character and
consists of one or more types of assets, such as 3-D seismic data,
leasehold positions, lease options, working interests in leases,
royalty interests or other mineral rights. The Company's percentage
interest in each Exploration Project (a "Project Interest") represents
the portion of the interest in the Exploration Project it shares with
its other project partners. Therefore, the Company's Project Interest
in an Exploration Project should not be confused with the working
interest that the Company will own when a given well is drilled. The
Company's working interest in the wells on each Exploration Project may
be higher or lower than its Project Interest.
(3) Proprietary 3-D seismic data is planned to be shot over these areas in
the near future.
(4) Consists of 400 square miles of 3-D seismic data to which Aspect has
rights pursuant to a license agreement, and to which the Company may
acquire an interest pursuant to a geophysical technical services
agreement with Aspect.
EXPLORATION PROJECT DESCRIPTIONS. Set forth below is a description of
the Exploration Projects. The amounts specified for the interests in the
Exploration Projects and gross and net acreage of each Exploration Project and
the project description were determined as of March 26, 1999. Estimates of
drilling and completion costs are gross amounts and are not necessarily net to
the Company's interests in the related Exploration Projects. In addition,
predictions of well costs are estimates only, and actual costs may vary based
on, among other factors, down hole conditions and costs for drilling rigs at the
time of drilling. In prospects where 3-D seismic surveys are not yet shot,
processed and interpreted, such data may, when available, enhance or condemn
previously identified prospects or leads.
DOWNDIP FRIO CORE AREA PROJECTS
ALLEN DOME. The Allen Dome Project consists of leases and options of
approximately 833 gross acres with 271 net acres in Brazoria County, Texas. The
Company has a 50% Project Interest with 136 net acres to its interest. The
acreage targets the Frio "A" Sands and is updip from a show in the Frio "A"
Sand. Miocene potential exists in radial fault traps surrounding the dome. A
spec shoot is in the planning stage, and the Company is attempting to tie onto
the larger Speculative shoot in the area. A minimal amount of data will be
needed to image the trap. Estimated drilling and completion costs for the deep
Frio test is $1.2 million.
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GILLOCK. The Gillock Project consists of leases and options covering
approximately 23,804 gross acres with 15,129 net acres in Galveston County,
Texas, which also includes HBP leasehold. The Company has a 22.5% Project
Interest in this 3-D seismic project with 3,404 net acres to its interest. The
primary geological targets the Company has identified, for potential drilling,
are the Frio and Vicksburg Sands. A 70 square mile 3-D survey was completed in
July 1998, has been processed, and is currently being interpreted. Preliminary
interpretations have yielded several low risk prospects in the project area. The
estimated cost to drill and complete a shallow well is approximately $900,000,
with deeper wells costing over $3.5 million.
BLESSING. The Blessing Project consists of leases and options covering
approximately 1,414 gross acres with 1,157 net acres under 22 square miles of
3-D seismic coverage in Matagorda County, Texas. The Company has a non-operated
24.0% Project Interest with 278 net acres to its interest. A 3-D seismic survey
was conducted in conjunction with the Tidehaven 3-D shoot (see "Tidehaven
Project"). The Operator has drilled two (2) Upper Frio Sand wells. One well
produced 277 MMCF per day and 4,267 BC per day in 1998, and has been recompleted
in another pay zone, which is currently producing 1400 MCF per day and 20 BC per
day; the other well was a dry hole. The Company's Working Interest in the well
is 33.935%, although the Company's Project Interest in the remaining portion of
the project is 24.0%. No wells are planned for 1999. The estimated cost of
drilling and completing a shallow well in this project area is approximately
$550,000.
TIDEHAVEN. The Tidehaven Project consists of leases and options
covering over 3,842 gross acres with 3,097 net acres in Matagorda County, Texas.
The Company has a 40.5% Project Interest with 1,254 net acres to its interest.
These leases overlay a series of known field pays and multiple fault blocks,
which made this structure a 3-D seismic candidate. Initial interpretation of the
28 square mile 3-D seismic data set is complete. The Company has drilled and
completed two wells in the lower Frio. The first is currently producing 1.1 MMCF
per day and 7 BC per day, and the other was a dry hole. The estimated cost to
drill and complete a well ranges from approximately $550,000 to $1.5 million,
depending upon depth. There are several additional Mid Frio and Lower Frio
prospects.
EL MATON. The El Maton Project consists of leases and options covering
approximately 4,893 gross acres with 3,856 net acres in Matagorda County, Texas.
The Company has a 46.5% Project Interest with 1,793 net acres to its interest. A
29 square mile 3-D seismic survey was started in May 1997, as an extension of
the Tidehaven shoot. This seismic survey has been completed and the
interpretation is essentially complete. The geologic setting and target zones
are the same as for Tidehaven. The Company has merged the 3-D data sets in the
El Maton, Tidehaven, Blessing, and Midfield projects. The Company has identified
several Mid Frio and Lower Frio prospect leads. The estimated cost to drill and
complete a well ranges from approximately $550,000 to $1.5 million, depending
upon depth.
MIDFIELD. The Midfield Project consists of leases and options covering
approximately 3,267 gross acres with 2,825 net acres in Matagorda County, Texas.
The Company has a 37.5% Project Interest with 1,059 net acres to its interest.
The project is an extension of the Tidehaven, Blessing and El Maton 3-D seismic
shoots. All four of these 3-D seismic surveys have been merged. The Midfield
Project is adjacent to and up basin from, the Tidehaven Project. The geologic
setting and target zones are similar to Tidehaven. Initial data interpretation
on a 21 square mile 3-D seismic survey over this acreage is complete, and the
data has revealed two (2) low risk shallow drilling locations. The estimated
cost to drill and complete a shallow well is approximately $550,000.
MARKHAM. The Markham Project consists of leases and options covering
approximately 2,584 gross acres with 2,466 net acres in Matagorda County, Texas.
The Company has a 60% project interest with 1,048 net acres to its interest. The
3-D has been completed, and the Company is interpreting the data. Initial review
of the seismic is encouraging and several prospects have been identified. The
estimated costs to drill and complete a shallow well is approximately $550,000,
with deeper well costing approximately $1.3 million.
BUCKEYE RANCH. The Buckeye Ranch Project consists of approximately
20,279 gross acres with 17,037 net acres of lease options in Matagorda County,
Texas. The Company has a 45% Project Interest with 7,667 net acres to its
interest. A 3-D seismic survey has been completed, and the Company is currently
interpreting the data. The estimated cost to drill and complete a shallow well
is approximately $550,000, with deeper wells costing approximately $1.3 million.
Initial review of the seismic data is encouraging and numerous prospects have
been delineated.
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DUNCAN SLOUGH. The Duncan Slough Project consists of leases and options
covering approximately 5,608 gross acres with 3,906 net acres in Matagorda
County, Texas. The Company has a 40.99% Project Interest with 1,601 net acres to
its interest. The 3D survey has been completed, and the Company is interpreting
the data. Initial review of the seismic is encouraging and numerous prospects
have been delineated. The estimated cost to drill and complete a shallow well is
approximately $550,000, with deeper wells costing approximately $1.3 million.
The Company is planning to merge the Markham-Buckeye-Duncan Slough 3-D data with
the adjacent surveys.
SOUTHWEST PHEASANT. The Southwest Pheasant Project consists of leases
and options covering approximately 3,033 gross acres with 2,375 net acres in
Matagorda County, Texas. The Company has a 75.0% Project Interest with 1,781 net
acres to its interest. The primary geological objectives are the middle and
lower Frio sands. A portion of the project area is covered by an old Mobil 3-D
seismic that has been reprocessed and reinterpreted. The Company has identified
several shallow prospects. The estimated cost to drill and complete a shallow
well is approximately $550,000, with deeper wells costing approximately $1.3
million.
GERONIMO. The Geronimo Project consists of leases and options covering
approximately 7,140 gross acres with 6,911 net acres in San Patricio County,
Texas. The Company has a 20% Project Interest with 1,382 net acres to its
interest. A 76 square mile 3-D seismic survey has been shot, and the Company has
identified several prospective drillsites. One well has been drilled and is
producing 50 BO per day and 142 MCF per day. A deep Vicksburg test and an
Anderson Sand test well are currently being marketed. The estimated cost to
drill and complete a well is approximately $600,000 for a shallow well, $1.2
million for an intermediate depth well, and $4.0 million for a Vicksburg well.
HOUSTON ENDOWMENT. The Houston Endowment Project consists of leases and
options covering approximately 3,000 gross acres with 3,000 net acres in San
Patricio and Aransas Counties, Texas. The Company has a 27.0% Project Interest
with 810 net acres to its interest. A 50 square mile 3-D seismic survey has been
acquired. Esenjay Petroleum Corporation drilled one dry hole within the project
area before execution of the Acquisition Agreement. The Company drilled an
additional Deep Frio test, which was not successful. The estimated cost to drill
and complete a shallow well is approximately $700,000 with deeper wells costing
approximately $1.3 million.
WOLF POINT. The Wolf Point Project consists of state leases covering
approximately 960 gross acres with 960 net acres in Calhoun County, Texas. The
Company has a 45.5% Project Interest with 437 net acres to its interest. Esenjay
Petroleum Corporation drilled and completed two (2) successful wells within the
3-D seismic survey area before the Effective Date of the Acquisitions (November
1, 1997). Known field pays from this area are the 7,200-foot Frio, 7,500-foot
Frio, 7,700 foot Frio, Broughton, Oats, Upper, Middle and Lower Melbourne sands.
The Company drilled one successful well which is currently producing
approximately 1.3 MMcf per day and 13 BC per day. The Company has also drilled
one dry hole. The estimated cost to drill and complete a well is approximately
$900,000.
SHERIFF FIELD. The Sheriff Project consists of approximately 4,943
gross acres with 3,674 net acres of lease options in Calhoun County, Texas. The
Company has a 75.0% Project Interest with 2,755 net acres to its interest. The
Company has written off most of the book value of this project and does not
expect it to play a significant part in its near term exploration activities.
BAUER RANCH. The Bauer Ranch Project contains approximately 22,000
gross acres with 14,411 net acres of lease options in Jefferson County, Texas.
The Company has a 33.33% Project Interest with 4,803 net acres to its interest.
Numerous prospect leads have been generated within the area via log shows,
detailed structural mapping, and 2-D seismic data. Deep exploration zones also
are targeted. The Company recently completed shooting a 56 square mile 3-D
seismic survey and is currently interpreting the data. The estimated cost to
drill and complete a shallow well is approximately $650,000, with deeper wells
costing approximately $1.6 million.
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LA ROSA. The La Rosa Project consists of approximately 5,537 gross
acres with 5,537 net acres of leases and options in Refugio County, Texas. The
Company has non-operating Project Interest of between 8.0% and 13% with between
443 and 719 net acres to its interest. A 25 square mile 3-D seismic shoot has
been acquired and interpreted. Four wells have been drilled since the Effective
Date of the Acquisition for the Company's account. Three wells were dry holes.
The most recent well is currently producing 440 MCF per day. The Company has a
13% interest in this well. The estimated cost to drill and complete a Frio
formation well is approximately $450,000.
PILEDRIVER. The Piledriver Project consists of 640 gross acres and 640
net acres of state leases located in Chambers County, Texas. The Company has a
62.5% Project Interest with 400 net acres to its interest. The objectives are
two Frio age sands. One of these target sands has what the Company believes to
be a significant gas test at the top of the sand in a well that it believes is
down dip to the Company's acreage. A 3D seismic survey was recently conducted by
Western Geophysical. The Company has acquired the data and is interpreting it at
this time before making any drilling decisions. The estimated cost to drill and
complete a well is approximately $1.85 million.
ARCHIE. The Archie Project consists of leases covering 903 gross acres
and 826 net acres located in Chambers County, Texas. The Company owns a 25%
project interest with 207 net acres to its interest. Interpretations of the 13.4
square mile 3-D are complete and the location on the first of three low risk
prospects is being built. The target zones are the lower Frio Textularia
Mississippiensis sands. Estimated dry hole costs are $800,000.
WILCOX CORE AREA PROJECTS
GILA BEND. The Gila Bend Project consists of a continuous acreage block
of 1,179 gross acres with 1,179 net acres under a 16 square mile 3-D in Karnes
County, Texas. The Company has a 12.5% interest with 147 net acres to its
interest. The project is adjacent to the Company's Hall Ranch and Verdad
projects. The 3-D interpretation is complete, and a deviated well is scheduled
in the second quarter of 1999, to test multiple Wilcox Sands. The estimated cost
to drill and complete a deviated well, in the deep Wilcox, is approximately $3.0
million.
HALL RANCH. The Hall Ranch Project consists of leases and options
covering approximately 7,894 gross acres with 7,869 net acres under a 57 square
mile 3-D seismic survey in Karnes County, Texas. The Company has a 41.5% Project
Interest with 3,266 net acres to its interest. The Company believes the Hall
Ranch area is on an under-explored ridge on trend with several producing fields.
Multiple potential pay zones in four expanded fault blocks have been delineated
in the Wilcox sands from approximately 8,000 to 17,000 feet. Known field pays
are from Wilcox reservoirs in the Migura, Roeder, Bunger, Hackney, Middle Wilcox
L series sands, and the Upper Wilcox. The Company has delineated several
potential drill sites. The Company has drilled and run production casing on its
first well on this project. The well is currently producing 5 MMcf per day
without any production decline over the last 6 months. This well was drilled at
a location in which the Company owns a 20.75% non-operated Working Interest. The
Company will own and operate 41.5% Working Interest in offset locations. The
estimated cost to drill and complete a well ranges from approximately $270,000
to $600,000 for shallow wells, while wells completed in the deep zones (to
12,500 feet) cost approximately $2.0 million.
HORDES CREEK. The Hordes Creek Project contains leases and options on
approximately 4,730 gross acres with 4,683 net acres located in Goliad County,
Texas. The Company has a 41.5% Project Interest with 1,943 net acres to its
interest. The Company believes Hordes Creek has potential in the Miocene, Frio,
Yegua, and the Upper, Middle, and Lower Wilcox Sands. Preliminary migrated 3-D
seismic data covering 25 square miles has been interpreted. The Company has
drilled two shallow Wilcox wells in the project, both of which were dry holes. A
deep Wilcox (15,000 ft.) test is currently being marketed. A shallow Yegua well
is in the planning stage. The estimated cost to drill and complete a shallow
Yegua well is approximately $355,000.00. The estimated cost to drill and
complete a deep Wilcox test is $2.9 million.
MIKESKA. The Mikeska Project consists of leases covering approximately
7,898 gross acres with 7,500 net acres located in Live Oak County, Texas. The
Company has a 38.0% Project Interest with 2,850 net acres to its interest.
Multiple pay potential exists from 8,500 feet to at least 16,000 feet. This
portion of the Wilcox trend contains known pays from the Hockley, four Queen
City sands, four Slick sands, six Luling sands, three Tom Lyne sands and three
to five House sands. A 32 square mile 3-D seismic survey has been shot and the
data has been
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recently reprocessed and is being reinterpreted. One well has been
drilled and completed as a low volume oil well and is not an impact well. A
second well has been completed and tested 9 MMCF per day plus water, and is
awaiting pipeline connection. The Company has identified several drill sites
updip to the discovery well. The estimated cost to drill and complete a shallow
well is approximately $800,000, with deeper wells costing approximately $1.4
million.
DUVAL/MCMULLEN. The Duval/McMullen Project consists of approximately
1,980 gross acres with 1,980 net acres of options in Duval and McMullen
Counties, Texas. The Company has a 90.0% Project Interest with 1,782 net acres
to its interest. The Company is negotiating with Western Geophysical to acquire
a one-year-old proprietary 3-D seismic survey. The Company plans to interpret
the 3-D seismic data before drilling. The estimated cost to drill and complete a
shallow well is approximately $800,000, with deeper wells costing approximately
$1.2 million. These leases have not been available prior to the 3D seismic data
being acquired and released. Vastar Resources has recently enjoyed significant
drilling success adjacent to Esenjay's acreage.
VERDAD. The Verdad Project consists of leases and options covering
approximately 50,994 gross acres with 27,721 net acres under a 40 square mile
3-D seismic survey in Karnes County, Texas. The Company owns a non-operated 25%
interest in this project with 6,930 net acres to its interest. Verdad has
potential pays in the shallow Frio, Yegua, and Upper Wilcox, as well as the
upside potential in the numerous Middle and Lower Wilcox reservoirs. This
project is adjacent to the Company's Hall Ranch Project. The Company expects to
begin interpreting data in mid April 1999. Estimated drilling and completed well
costs in the project area range from approximately $270,000 to $600,000 for
shallow wells, while wells completed in the deep zones cost approximately $1.8
million.
ORANGEDALE. The Orangedale Project consists of approximately 2,353
gross acres with 2,318 net acres of leases in Bee County, Texas. The Company has
a 90% interest with 2,086 net acres to its interest. The prospect was originally
a subsurface idea backed up by 2-D data and then was recently shot as a large
spec 3-D shoot by a third party. Esenjay has rights to and has interpreted three
square miles of the 3-D data. Seitel has recently shot another 3-D survey, which
will overlap the survey shot by Edge in 1997, and will also cover additional
Esenjay leases not previously shot. Multiple pay potential exists from 8,800' to
15,000' in the expanded Upper and Middle Wilcox Sands. Wells required to test
the several proposed traps from a depth of 10,150' (non-pipe) to 15,000', cost
from $450,000 to $1,500,000, respectively.
RIVERDALE. The Riverdale Project consists of a continuous acreage block
of 5,601 gross acres with 5,601 net acres in a complexly faulted area ten miles
west of Goliad, Texas. The Company has a 25% non-operated interest with 1,400
net acres to its interest. The Frio, Vicksburg, Hockley, Yegua, Cook Mountain
and Upper Wilcox sands from depths of 1700' to 9500' have all produced in the
immediate area and are considered to be prospective. Large untested fault blocks
have been mapped in the area using approximately 100 miles of 2-D seismic in
conjunction with the available well control. Recently Western Geophysical has
acquired 3-D data across this project and the Company is interpreting the data.
This area is adjacent to and will be merged with the Company's Hordes Creek
project. The estimated cost to drill and complete a 9500' test is approximately
$800,000.
TEXAS HACKBERRY CORE AREA PROJECTS
LOX B. The Lox B Project consists of 9,281 gross acres with 5,759 net
acres of leases and options in Jefferson County, Texas. The Company has a 25.0%
non-operated Project Interest with 1,440 net acres to its interest. The primary
objectives of this project are the Hackberry and Vicksburg formations. The
acreage has been evaluated with 71 square miles of 3-D seismic data. The Company
has identified numerous potential prospects through the use of seismically
detected hydrocarbon indicators. The 3-D seismic survey has been merged with the
West Port Acres data, and ultimately will be merged with the Big Hill/Stowell
and Lovells Lake 3-D seismic surveys described below. The initial well was dry
and the second well appears to be a significant discovery. The operator, H.S.
Resources, Inc. anticipates flowing the well at 15 MMCF per day and 750 BC per
day. The estimated cost to drill and complete a Hackberry well is approximately
$1.3 million, and Vicksburg wells cost approximately $1.8 million to drill and
complete.
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WEST PORT ACRES. The West Port Acres Project consists of 881 gross
acres with 686 net acres of leases in Jefferson County, Texas, which have been
acquired and a 21 square mile 3-D seismic survey has been conducted. The Company
has a 12.5% non-operated Project Interest with 86 net acres. The Company has
identified several Hackberry prospects. The estimated cost to drill and complete
a Hackberry well is approximately $1.5 million.
BIG HILL/STOWELL. The Big Hill/Stowell Project consists of over 7,100
gross acres with 5,882 net acres of leases and options in Jefferson County,
Texas. The Company has a 33.33% Project Interest with 1,960 net acres to its
interest. The Company has entered an agreement to sell all of its undeveloped
property interests in the Big Hill/Stowell area to Helmerich & Payne, Inc.
LOVELLS LAKE. The Lovells Lake Project consists of 18,213 gross acres
with 12,788 net acres of leases and options in Jefferson County, Texas. The
Company has a 33.33% Project Interest with 4,262 net acres to its interest. The
Company has completed a 65 square mile 3-D seismic survey, which has been
interpreted, yielding numerous Hackberry prospects. The Company has drilled and
logged 58 feet of net gas pay in the first well and is awaiting completion. A
second well is currently being drilled. The Company anticipates drilling four
additional wells in 1999. The estimated cost to drill and complete a Hackberry
well ranges from approximately $1.0 million to $1.5 million.
WEST BEAUMONT. The West Beaumont Project consists of 1,721 gross acres
with 990 net acres of leases and options in Jefferson County, Texas. The Company
has a 7.9% non-operated Project Interest with 80 net acres to its interest. A
22.5 square mile 3-D seismic survey has been interpreted by the Company. Several
Frio and Hackberry age prospects have been identified. Two wells have been
drilled by the operator. The first well tested at 1.1 MMCF per day and 403 BO
per day. The second well has been drilled and pipe has been set awaiting
completion. The estimated cost to drill and complete a Hackberry well is
approximately $750,000. The Company has entered a contract to sell its
undeveloped property interests in this project.
LOUISIANA PROJECTS
LAPEYROUSE. The Company has non-operated working interests in the
leases over this project ranging from 12.0% to 46.875%, depending upon the
target formation depths. The project consists of approximately 4,576 gross and
3,772 net acres of leases in the Lapeyrouse Field in Terrebonne Parish,
Louisiana. The 3-D seismic data has been shot, processed and interpreted. After
seismic interpretation, two exploratory initial wells have been identified. Both
wells will expose the Company to significant reserve potential in a trend area
where numerous giant oil and gas fields are located. Drilling is expected to
commence in the fourth quarter of 1999. The estimated cost to drill and complete
a well is approximately $3.2 million to $5.5 million depending upon depth.
CRAB LAKE. The Company has retained a 75% project interest, which
consists of 1,130 gross and 429 net acres of leases in Cameron Parish,
Louisiana. The primary target objectives are in the Miocene series of sands. The
Company has interpreted a 12 square mile 3-D seismic shoot, part of a 52 square
mile 3-D. The first well is scheduled to be drilled in third quarter 1999, as a
development well to extend the field. The well will test multiple objectives,
and if successful, will require further development drilling. The estimated cost
to drill and complete a well is approximately $1.1 million.
S. L. EOCENE. The S. L. Eocene Project contains approximately 5,516
gross acres with 5,416 net acres of lease options in Beauregard Parish,
Louisiana. The Company has a 100.00% Project Interest with 5,416 net acres.
Numerous project leads have been generated within the area via log shows,
detailed facies mapping, and 2-D seismic data. The main target horizon for this
project is the Cockfield Formation. The shallower frio and deeper Wilcox zones
may also be targeted. The Company is currently marketing the project to
potential partners. The estimated cost to drill a Cockfield well is $275,000,
with a completed well cost estimated at $450,000.
OTHER TEXAS PROJECTS
RAYMONDVILLE. The Raymondville Project consists of approximately 27,406
gross acres with 26,849 net acres of leases and options in Willacy County,
Texas. The Company has a 60.37500% Project Interest with 16,210 net acres to its
interest. This project includes separate geologic structures known by four
different field names. The pre 3-D seismic geologic study of this area has
identified several possible drilling locations. These locations were
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selected based on subsurface well correlation and production analysis. A 62
square mile 3-D seismic survey has been acquired and currently is in processing.
The Company anticipates to begin interpreting the data in May 1999. Two of the
locations, which were identified by subsurface mapping prior to 3D seismic, have
been drilled. Both have logged multiple pay zones and both have been completed
as dual gas producers. The combined initial flow rate for the wells exceeded 10
MMcf per day, and they are currently producing 6 MMCF per day. The Company has
recently sold an 18.5% working interest for $3.76 million. The estimated cost to
drill and complete a well is approximately $550,000.
CANEY CREEK. The Caney Creek Project consists of options and leases
covering 19,759 gross acres with 18,670 net acres in Matagorda and Wharton
Counties, Texas. The Company has a 12.5% Project Interest with 2,334 net acres
to its interest. The project targets the Frio and Yegua reservoirs. A 32 square
mile 3-D seismic survey has been conducted, and the interpretation of the data
has been completed. Several leads have been identified. The Company entered a
contract to sell its undeveloped interests in this area.
EAST TEXAS PINNACLE REEF TREND. Aspect and certain of its affiliates
have licenses covering approximately 400 square miles of 3-D seismic data
pertaining to the East Texas Cotton Valley Reef Trend. This seismic data is
recently acquired and most of it is proprietary. Currently, there is no acreage
position or defined drilling opportunity associated with this project. The
Company intends to enter into a joint venture with Aspect or its affiliates to
attempt to generate drillable prospects. The joint venture will, if consummated,
be subject to the terms of any licensing or other agreements currently in
effect.
PAPALOTE. The Papalote Project consists of leases and options of
approximately 25,316 gross acres with 24,783 net acres in San Patricio and Bee
Counties, Texas. The Company has ownership of between 75% and 100% in the
Project at various stages in the development of the property. A +100 square mile
3-D is planned for 1999. The project will target the Frio sands with the
Vicksburg Sands as a secondary target, and the Yegua formation as the primary
exploratory target. Several Yegua leads have been identified with subsurface and
2-D seismic. A Frio/Vicks well will cost $250,000 to drill and complete and a
Yegua well will cost approximately $1.0 million.
MISSISSIPPI PROJECTS
THOMPSON CREEK. The Thompson Creek Project consists of approximately
1,877 gross acres with 1,671 net acres of leases and options in Wayne County,
Mississippi. The Company has a 93.5% Project Interest with 1,562 net acres to
its interest. Approximately 12 miles of 3D have been interpreted along the salt
ridge. The Company has written off most of the book value of this project and
does not expect it to play a significant part in its near term exploration
activities.
LIPSMACKER. The Lipsmacker Project consists of approximately 2,892
gross acres with 2,056 net acres of leases and options in Choctaw, Alabama and
Clarke Counties, Mississippi. The Company has a 22.0% Project Interest with 452
net acres to its interest. Esenjay Petroleum Corporation completed a 64 square
mile 3-D seismic survey in the fall of 1996, and while several drilling
locations were tested, the results generally were disappointing. The Company
believes there is one additional well to be drilled. The Company is currently
marketing this prospect. The estimated cost to drill and complete a well is
approximately $1.2 million.
CAEX TECHNOLOGY AND 3-D SEISMIC
The Company, either directly or through its partners, uses CAEX
technology to collect and analyze geological, geophysical, engineering,
production and other data obtained about potential gas or oil prospects. The
Company uses this technology to correlate density and sonic characteristics of
subsurface formations obtained from 2-D seismic surveys with like data from
similar properties, and uses computer programs and modeling techniques to
determine the likely geological composition of a prospect and potential
locations of hydrocarbons.
Once all available data has been analyzed to determine the areas with
the highest potential within a prospect area, the Company may conduct 3-D
seismic surveys to enhance and verify the geological interpretation of the
structure, including its location and potential size. The 3-D seismic process
produces a three-dimensional image based upon seismic data obtained from
multiple horizontal and vertical points within a geological formation. The
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calculations needed to process such data are made possible by computer programs
and advanced computer hardware.
While large oil companies have used 3-D seismic and CAEX technologies
for approximately 20 years, these methods were not affordable by smaller,
independent gas and oil companies until more recently, when improved data
acquisition equipment and techniques and computer technology became available at
reduced costs. The Company began using 3-D seismic and CAEX technologies in 1992
and is using these technologies on a continuing basis. The Company believes its
use of CAEX and 3-D seismic technology may provide it with certain advantages in
the exploration process over those companies that do not use this technology.
These advantages include better delineation of the subsurface, which can reduce
exploration risks and help optimize well locations in productive reservoirs. The
Company believes these advantages can be readily validated based upon general
industry experience as well as the experiences of Aspect and EPC. Because
computer modeling generally provides clearer and more accurate projected images
of geological formations, the Company believes it is better able to identify
potential locations of hydrocarbon accumulations and the desirable locations for
wellbores. However, the Company has not used the technology extensively enough
to arrive at any conclusion regarding the Company's ability to interpret and use
the information developed from the technology.
EXPLORATION AND DEVELOPMENT
The Company considers the Gulf Coast to be the premier area in the
United States to explore for significant new reserves. This conclusion is based
on several characteristics including (i) a large number of productive intervals
throughout a significant sedimentary section, (ii) numerous wells with which to
calibrate 3-D seismic data and (iii) complicated geological formations that the
Company believes 3-D seismic technology is particularly well suited to
interpretation. In 1994, the Company began devoting more of its energy to the
Gulf Coast region. The Company initially entered this area by evaluating the
onshore shallow Frio/Miocene Trend. Its emphasis expanded to include larger
exploration targets represented by large geological features such as those
present in the Starboard Project. Upon completion of the Acquisitions, the
Company spread its focus over an array of exploration projects along the Gulf
Coast and intends to expand its project inventory in these areas. The Company's
Exploration Project inventory is along the Gulf Coast of Texas, Louisiana,
Alabama and Mississippi. The focus is on natural gas exploration prospects with
a numerical concentration along the Texas Gulf Coast, many of which were
delineated by seismic hydrocarbon indicators. Additional 2-D and 3-D seismic
surveys may be required to evaluate these areas more fully, and when determined
appropriate, the Company intends to acquire acreage and drill wells as indicated
by the evaluations.
The Company intends to drill prospects where the formations being
tested are known to be productive in the general area and where it believes 3-D
seismic can be used to increase resolution and thereby reduce risk. The extent
to which the Company will pursue its activities in the onshore Gulf Coast region
will be determined by the availability of the Company's resources and the
availability of joint venture partners.
ACQUISITIONS AND DIVESTMENTS
The Company has periodically acquired producing natural gas and oil
properties. In connection with each acquisition, the Company considers (i)
current and historic production levels and reserve estimates, (ii) additional
exploration and exploitation potential via technology enhancements; (iii)
capital requirements; (iv) proximity of product markets; (v) regulatory
compliance; (vi) acreage potential; and (vii) existing production transportation
capabilities. The Company also considers the historic financial operating
results and cash flow potential of each acquisition opportunity. Evaluation of
the merits of a particular acquisition is based, to the extent relevant, on all
of the above factors as well as other factors deemed relevant by the Company's
management.
The Company has currently de-emphasized its producing property
acquisition activities. The Company intends to limit its near term producing
property acquisitions to opportunities that facilitate its exploration
activities. The Company may readdress this approach if it identifies an
opportunity it believes to be of exceptional benefit to its shareholders.
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HEDGING ACTIVITIES AND MARKETING
The Company markets its natural gas through monthly spot sales. Because
sales made under spot sales contracts result in fluctuating revenues to the
Company depending upon the market price of gas, the Company may enter into
various hedging agreements to minimize the fluctuations and the effect of price
declines or swings. During January 1999, the Company completed performance on a
1996 swap agreement on approximately 1,040 MMBtu's per day of Mid-Continent
natural gas production for $1.566 per MMBtu for the period beginning April 1,
1996 and ending January 31, 1999.
In October of 1998, the Company entered into two swap agreements, one
for 4,000 MMBtu's per day of its Gulf Coast natural gas production for $2.14 per
MMBtu for the period beginning November 1998 and ending in October 1999, and the
second one for 700 MMBtu's per day of its Gulf Coast natural gas production for
$2.13 per MMBtu for the period beginning November 1998 and ending in October
1999. Both of these swap agreements were supplemented in December 1998 when the
Company entered into additional swap agreements, one of which was for 4,000
MMBtu's per day of its Gulf Coast natural gas production for $2.07 per MMBtu for
the period beginning November 1999 and ending in October 2000, and the second
one was for 700 MMBtu's per day of its Gulf Coast natural gas production for
$2.07 per MMBtu for the period beginning November 1999 and ending in October
2000. As a result of the foregoing transactions, the Company has 4,700 MMBtu's
per day of its Gulf Coast natural gas production hedged through October 2000.
The Company expects that its daily production will continue to increase
rapidly and it will periodically consider additional hedge transactions
consistent with its ongoing policy. Its policy is to periodically review its
projected natural gas production from proved developed properties in light of
then current market conditions. Its objective is to seek to prudently stabilize
its future cash flows from proven producing properties. It believes that as it
continues to expand its drilling budget this methodology allows it to have more
control over its short-term cash flow while not giving up the upside potential
in its future revenues, a substantial portion of which it projects to be from
properties within its project inventory which are yet to be drilled.
All of the Company's oil production is now sold under market-sensitive
or spot price contracts. The Company's revenues from oil sales fluctuate
depending upon the market price of oil. No purchaser accounted for more than 10%
of the Company's total revenue in 1997 or 1998. The Company does not believe the
loss of any existing purchaser would have a material adverse effect on the
Company.
The Company has a credit facility with Duke Energy Field Services,
Inc., which allows the lender the right to gather, process, transport and
market, at competitive market rates, natural gas produced from a majority of the
Exploration Projects through December 31, 2005.
OPERATING HAZARDS AND INSURANCE
The gas and oil business involves a variety of operating risks,
including the risk of fire, explosions, blow-outs, pipe failure, abnormally
pressured formations, and environmental hazards such as oil spills, gas leaks,
ruptures or discharges of toxic gases, the occurrence of any of which could
result in substantial losses to the Company due to injury or loss of life,
severe damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, cleanup responsibilities, regulatory
investigation and penalties and suspension of operations.
The Company maintains a gas and oil lease operator insurance policy
that insures the Company against certain sudden and accidental risks associated
with drilling, completing and operating its wells. There can be no assurance
that this insurance will be adequate to cover any losses or exposure to
liability. The Company also carries comprehensive general liability policies and
an umbrella policy. The Company and its subsidiaries carry workers' compensation
insurance in all states in which they operate. The Company maintains various
bonds as required by state and federal regulatory authorities. Although the
Company believes these policies are customary in the industry, they do not
provide complete coverage against all operating risks. An uninsured or partially
insured claim, if successful and of sufficient magnitude, could have a material
adverse effect on the Company and its financial condition. If the Company
experiences significant claims or losses, the Company's insurance premiums could
be increased which may adversely affect the Company and its financial condition
or limit the ability of the Company to obtain coverage. Any difficulty in
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obtaining coverage may impair the Company's ability to engage in its business
activities.
REGULATION
GENERAL. The gas and oil industry is extensively regulated by federal,
state and local authorities. In particular, gas and oil production operations
and economics are affected by price controls, environmental protection statutes,
tax statutes and other laws and regulations relating to the petroleum industry,
as well as changes in such laws, changing administrative regulations and the
interpretations and application of such laws, rules and regulations. Gas and oil
industry legislation and agency regulation are under constant review for
amendment and expansion for a variety of political, economic and other reasons.
Numerous regulatory authorities, federal, and state and local governments issue
rules and regulations binding on the gas and oil industry, some of which carry
substantial penalties for failure to comply. The regulatory burden on the gas
and oil industry increases the Company's cost of doing business and,
consequently, affects its profitability. The Company believes it is in
compliance with all federal, state and local laws, regulations and orders
applicable to the Company and its properties and operations, the violation of
which would have a material adverse effect on the Company or its financial
condition.
SEISMIC PERMITS. Current law in the State of Louisiana requires permits
from owners of at least an undivided 80% interest in each tract over which the
Company intends to conduct seismic surveys. As a result, the Company may not be
able to conduct seismic surveys covering its entire area of interest. Moreover,
3-D seismic surveys typically are conducted from various locations both inside
and outside the area of interest to obtain the most detailed data of the
geological features within the area. To the extent that the Company is unable to
obtain permits to access locations to conduct the seismic surveys, the data
obtained may not be as detailed as might otherwise be available.
EXPLORATION AND PRODUCTION. The Company's operations are subject to
various regulations at the federal, state and local levels. Such regulations
include (i) requiring permits for the drilling of wells; (ii) maintaining
bonding requirements to drill or operate wells; and (iii) regulating the
location of wells, the method of drilling and casing wells, the surface use and
restoration of properties upon which wells are drilled, the plugging and
abandoning of wells and the disposal of fluids used in connection with well
operations. The Company's operations also are subject to various conservation
regulations. These include the regulation of the size of drilling and spacing
units, the density of wells that may be drilled, and the unitization or pooling
of gas and oil properties. In addition, state conservation laws establish
maximum rates of production from gas and oil wells, generally prohibiting the
venting or flaring of gas, and impose certain requirements regarding the
ratability of production. The effect of these regulations is to limit the amount
of gas and oil the Company can produce from its wells and to limit the number of
wells or the locations at which the Company can drill. Recently enacted
legislation and regulatory action in Texas and Oklahoma is intended to reduce
the total production of natural gas in those states. Although such restrictions
have not had a material impact on the Company's operations to date, the extent
of any future impact therefrom cannot be predicted.
NATURAL GAS MARKETING, GATHERING AND TRANSPORTATION. Federal
legislation and regulatory controls in the United States have historically
affected the price of the natural gas produced by the Company and the manner in
which such production is marketed. The transportation and sale for resale of
natural gas in interstate commerce are regulated by the Federal Energy
Regulatory Commission ("FERC") pursuant to the Natural Gas Act and the Natural
Gas Policy Act of 1978 ("NGPA"). The maximum selling prices of natural gas were
formerly established pursuant to regulation. However, on July 26, 1989, the
Natural Gas Wellhead Decontrol Act of 1989 ("Decontrol Act") was enacted, which
terminated wellhead price controls on all domestic natural gas on January 1,
1993 and amended the NGPA to remove completely by January 1, 1993 price and
nonprice controls for all "first sales" of natural gas, which will include all
sales by the Company of its own production. Consequently, sales of the Company's
natural gas currently may be made at market prices, subject to applicable
contract provisions. The FERC's jurisdiction over natural gas transportation was
unaffected by the Decontrol Act.
The FERC also regulates interstate natural gas transportation rates and
service conditions, which affect the marketing of natural gas produced by the
Company, as well as the revenues received by the Company for sales of such
natural gas. Since the latter part of 1985, the FERC has endeavored to make
interstate natural gas transportation more accessible to gas buyers and sellers
on an open and nondiscriminatory basis. The FERC's efforts have
16
<PAGE>
significantly altered the marketing and transportation of natural gas.
Commencing in April 1992, the FERC issued Order Nos. 636, 636-A, 636-B and 636-C
(collectively, "Order No. 636"), which, among other things, require interstate
pipelines to "restructure" their services to provide transportation separate or
"unbundled" from the pipelines' sales of gas. Also, Order No. 636 requires
interstate pipelines to provide open-access transportation on a
nondiscriminatory basis that is equal for all natural gas shippers. Order No.
636 has been implemented through decisions and negotiated settlements in
individual pipeline services restructuring proceedings. In many instances, the
result of Order No. 636 and related initiatives has been to substantially reduce
or eliminate the interstate pipelines' traditional role as wholesalers of
natural gas, and has substantially increased competition and volatility in
natural gas markets. The FERC has issued final orders in virtually all Order No.
636 pipeline restructuring proceedings. In July 1996, the United States Court of
Appeals for the District of Columbia Circuit largely upheld Order No. 636 and
remanded certain issues for further explanation or clarification. Numerous
petitions for review of the individual pipeline restructuring orders are
currently pending in that court. The issues remanded for further action do not
appear to materially affect the Company. Proceedings on the remanded issues are
currently ongoing before the FERC following its issuance of Order No. 636-C in
February 1997. Although it is difficult to predict when all appeals of pipeline
restructuring orders will be completed or their impact on the Company, the
Company does not believe that it will be affected by the restructuring rule and
orders any differently than other natural gas producers and marketers with which
it competes.
Although Order No. 636 does not regulate natural gas production
operations, the FERC has stated that Order No. 636 is intended to foster
increased competition within all phases of the natural gas industry. It is
unclear what impact, if any, increased competition within the natural gas
industry under Order No. 636 will have on the Company and its natural gas
marketing efforts. Although Order No. 636 could provide the Company with
additional market access and more fairly applied transportation service rates,
terms and conditions, it could also subject the Company to more restrictive
pipeline imbalance tolerances and greater penalties for violation of those
tolerances. The Company does not believe, however, that it will be affected by
any action taken with respect to Order No. 636 materially differently than other
natural gas producers and marketers with which it competes.
The FERC has recently announced its intention to reexamine certain of
its transportation-related policies, including the appropriate manner for
setting rates for new interstate pipeline construction, the manner in which
interstate pipeline shippers may release interstate pipeline capacity under
Order No. 636 for resale in the secondary market, the price that shippers can
charge for their released capacity, and the use of negotiated and market-based
rates and terms and conditions for interstate gas transmission. Several
pipelines have obtained FERC authorization to charge negotiated rates as an
alternative to traditional cost-of-service rate making methodology. In February
1997, the FERC announced a broad inquiry into issues facing the natural gas
industry to assist the FERC in establishing regulatory goals and priorities in
the post-Order No. 636 environment. In December 1997, the FERC requested
comments on the financial outlook of the natural gas pipeline industry,
including among other matters, whether the FERC's current rate making policies
are suitable in the current industry environment. In April 1998, the FERC issued
a new rule to further standardize pipeline transaction tariffs that, as the
result of newly standardized provisions regarding firm intra day transportation
nominations, could adversely affect the reliability of scheduled interruptible
transportation service on some pipelines. While any resulting FERC action would
affect the Company only indirectly, any new rules and policy statements may have
the effect of enhancing competition in natural gas markets.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. The Company cannot predict when or if any such
proposals might become effective, or their effect, if any, on the operations of
the Company. The natural gas industry historically has been very heavily
regulated; therefore, there is no assurance that the less stringent regulatory
approach recently pursued by the FERC and Congress will continue indefinitely
into the future. The regulatory burden on the oil and natural gas industry
increases the Company's cost of doing business and, consequently, affects its
profitability and cash flow. In as much as such laws and regulations are
frequently expanded, amended or reinterpreted, the Company is unable to predict
the future cost or impact of complying with such regulations.
LOUISIANA LEGISLATION. The Louisiana legislature passed Act 404 in
1993, which permits a party transferring an oil field site to establish a
site-specific trust account for such oil field. If the site-specific trust
account is established in accordance with the requirements of the statute, the
party transferring the oil field site shall
17
<PAGE>
not thereafter be held liable by the state for any site restoration costs or
actions associated with the transferred oil field site. The parties to a
transfer may elect not to establish a site-specific trust account, however, in
the absence of such an account, the transferring party will continue to have
liability for the costs of restoration of the site. If the parties to a transfer
elect to establish a site-specific trust account pursuant to the statute, the
Louisiana Department of Natural Resources ("DNR") requires an oil field site
restoration assessment to be made at the time of the transfer or within one year
thereafter, to determine the site restoration requirements existing at the time
of transfer. Based upon the site restoration assessment, the parties to the
transfer must propose to the DNR a funding schedule for the site-specific trust
account, providing for some contribution to the account at the time of transfer
and at least quarterly payment thereafter. If the DNR approves the establishment
and funding of the site-specific trust account, the purchaser will thereafter be
the responsible party to the state, except that the failure of a transferring
party to make a good faith disclosure of all oil field site conditions existing
at the time of the transfer will render that party liable for the costs of
restoration of such undisclosed conditions in excess of the balance of the
site-specific trust fund.
OIL SALES AND TRANSPORTATION RATES. The FERC also regulates rates and
service conditions for interstate transportation of crude oil, liquids and
condensate, which can affect the amount the Company receives from the sale of
these products. Rates for such transportation are generally subject to an
indexing system under which rates may be increased as long as they do not exceed
an index rate that is tied to inflation. Over time, this indexing system could
have the effect of increasing the cost of transporting crude oil, liquids and
condensate by pipeline. Sales of crude oil, condensate and gas liquids by the
Company are not regulated and are made at market prices. The price the Company
receives from the sale of these products is affected by the cost of transporting
the products to market.
ENVIRONMENTAL MATTERS. The Company's oil and natural gas exploration,
development and production operations are subject to stringent federal, state
and local laws and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection. Numerous
governmental agencies, such as the U.S. Environmental Protection Agency ("EPA"),
issue regulations to implement and enforce such laws, which often require
difficult and costly compliance measures that carry substantial administrative,
civil and criminal penalties or may result in injunctive relief for failure to
comply. These laws and regulations may require the acquisition of a permit
before drilling commences, restrict the types, quantities and concentrations of
various substances that can be released into the environment in connection with
drilling and production activities, limit or prohibit construction or drilling
activities on certain lands lying within wilderness, wetlands, ecologically
sensitive and other protected areas, require remedial action to prevent
pollution from former operations, such as plugging abandoned wells, or closing
pits, and impose substantial liabilities for pollution resulting from the
Company's operations. In addition, these laws and regulations may restrict the
rate of oil and natural gas production below the rate that would otherwise
exist. The regulatory burden on the oil and gas industry increases the cost of
doing business and consequently affects its profitability. Changes in
environmental laws and regulations occur frequently, and any changes that result
in more stringent and costly waste handling, storage, transport, disposal or
cleanup requirements could have a material adverse effect on the Company's
operations and financial position, as well as those of the oil and gas industry
in general. While management believes that the Company is in substantial
compliance with current applicable environmental laws and regulations and the
Company has neither experienced any material adverse effect nor experts any
significant capital expenditures from compliance with these environmental
requirements, there is no assurance that this trend will continue in the future.
The Comprehensive Environmental Response, Compensation and Liability
Act, as amended ("CERCLA"), also known as "Superfund," and comparable state laws
imposes liability without regard to fault or the legality of the original
conduct, on certain classes of persons who are considered to be responsible for
the release of a "hazardous substance" into the environment. These persons
include (i) the current owner and operator of a facility from which hazardous
substances are released, (ii) owners and operators of the facility at the time
the disposal of hazardous substances took place, (iii) generators of hazardous
substances who arranged for the disposal or treatment at or transportation to
such facility of hazardous substances and (iv) transporters of hazardous
substances to disposal or treatment facilities selected by them. Under CERCLA,
such persons may be subject to joint and several liability for the costs of
cleaning up the hazardous substances that have been released into the
environment, for damages to natural resources and for the costs of certain
health studies, and it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property damage allegedly
caused by the release of hazardous substances or other pollutants into the
environment. Furthermore, although petroleum, including crude oil and natural
gas, is exempt from CERCLA, at least two courts have ruled that certain wastes
associated with the
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<PAGE>
production of crude oil may be classified as "hazardous substances" under
CERCLA, and thus such wastes may become subject to liability and regulation
under CERCLA. Regulatory programs aimed at remediation of environmental releases
could have a similar impact on the Company.
The Resource Conservation and Recovery Act, as amended ("RCRA"),
generally does not regulate most wastes generated by the exploration and
production of oil and gas. RCRA specifically excludes from the definition of
hazardous waste "drilling fluids, produced waters, and other wastes associated
with the exploration, development, or production of crude oil, natural gas or
geothermal energy." However, these wastes may be regulated by EPA or state
agencies as solid waste. Moreover, ordinary industrial wastes, such as paint
wastes, waste solvents, laboratory wastes, and waste compressor oils, may be
regulated as hazardous waste. Pipelines used to transfer oil and gas may also
generate some hazardous wastes. Although the costs of managing solid and
hazardous waste may be significant, the Company does not expect to experience
more burdensome costs than similarly situated companies involved in oil and gas
exploration and production.
The Company currently owns or leases, and has in the past owned or
leased, numerous properties that for many years have been used for the
exploration and production of oil and gas. Although the Company has used
operating and disposal practices that were standard in the industry at the time,
hydrocarbons or other wastes may have been disposed of or released on or under
the properties owned or leased by the Company or on or under other locations
where such wastes have been taken for disposal. In addition, many of these
properties have been operated by third parties whose treatment and disposal or
release of hydrocarbons or other wastes was not under the Company's control.
These properties and the wastes disposed thereon may be subject to CERCLA, RCRA,
and analogous state laws. Under such laws, the Company could be required to
remove or remediate previously disposed wastes (including waste disposal of or
released by prior owners or operators), or property contamination (including
groundwater contamination by prior owners or operators), or to perform remedial
plugging or pit closure operations to prevent future contamination.
The Federal Water Pollution Control Act of 1972 as amended ("FWPCA"),
also known as the Clean Water Act ("CWA") and analogous state laws, impose
restrictions and strict controls regarding the discharge of pollutants including
produced waters and other oil and gas wastes, into state waters or waters of the
United States. The discharge of pollutants into regulated waters is prohibited,
except in accord with the terms of a permit issued by EPA or the state. These
proscriptions also prohibit certain activity in wetlands unless authorized by a
permit issued by the U.S. Army Corps of Engineers. Sanctions for unauthorized
discharges include administrative, civil and criminal penalties, as well as
injunctive relief.
The Oil Pollution Act of 1990, as amended ("OPA"), pertains to the
prevention of and response to spills or discharges of hazardous substances or
oil into navigable waters of the United States. Under OPA, a person owning or
operating a facility or equipment (including land drilling equipment) from which
there is a discharge or threat of a discharge of oil into or upon navigable
waters or adjoining shorelines is liable, regardless of fault, as a "responsible
party" for removal costs and damages. Federal law imposes strict, joint and
several liability on facility owners for containment and clean-up costs and
certain other damages, including natural resource damages, arising from a spill.
The OPA establishes a liability limit for onshore facilities of $350 million;
however, a party cannot take advantage of this liability limit if the spill is
caused by gross negligence or willful misconduct or resulted from a violation of
a federal safety, construction, or operating regulation. If a party fails to
report a spill or cooperate in the cleanup, the liability limits otherwise do
not apply. Federal regulations under the OPA and FWPCA also require certain
owners and operators of facilities that store or otherwise handle oil, such as
the Company, to prepare and implement spill prevention, control and
countermeasure plans and spill response plans relating to possible discharge of
oil into surface waters. The Company believes that it is in substantial
compliance with the requirements of the OPA and FWPCA and that any
non-compliance would not have a material adverse effect on the Company.
COMPETITION
The gas and oil industry is highly competitive in all of its phases.
The Company encounters strong competition from other gas and oil companies in
all areas of its operations, including the acquisition of exploratory and
producing properties, the permitting and conducting of seismic surveys and the
marketing of gas and oil. Many of these competitors possess greater financial,
technical and other resources than the Company. Competition for the acquisition
of producing properties is affected by the amount of funds available to the
Company, information about
19
<PAGE>
producing properties available to the Company and any standards the Company
establishes from time to time for the minimum projected return on investment.
Competition also may be presented by alternative fuel sources, including heating
oil and other fossil fuels. There has been increased competition for lower risk
development opportunities and for available sources of financing. In addition,
the marketing and sale of natural gas and processed gas are competitive. Because
the primary markets for natural gas liquids are refineries, petrochemical plants
and fuel distributors, prices generally are set by or in competition with the
prices for refined products in the petrochemical, fuel and motor gasoline
markets.
FACILITIES
The Company leases approximately 7,600 square feet of office space in
Houston, Texas, at an annual rent of $117,068. The lease expires in September
2001. The Company leases approximately 13,279 square feet of office space in
Corpus Christi, Texas. The annual rent is $135,446, and the Lease expires on
June 30, 2003. The Company currently has more office space than it needs in
Houston, and has sublet a portion of its office space.
EMPLOYEES
The Company has eight (8) full-time employees in its Houston, Texas
office, and 31 employees in its Corpus Christi, Texas office. Their functions
include management, production, engineering, geology, geophysics, land, legal,
gas marketing, accounting, financial planning and administration. Certain
operations of the Company's field activities are accomplished through
independent contractors who are supervised by the Company. The Company believes
its relations with its employees and contractors are good. No employees of the
Company are represented by a union.
ITEM 2. DESCRIPTION OF PROPERTY
PRINCIPAL AREAS OF OPERATIONS
The Company owns and operates producing properties located in four
states with proved reserves located primarily in Louisiana, Oklahoma and Texas.
Daily production from both operated and non-operated wells net to the Company's
interest averaged 1,794 Mcf per day and 24 Bbls of oil per day for the year
ended December 31, 1998 and 5,526 Mcf per day and 41 Bbls of oil per day for the
quarter ended December 31, 1998. These properties have provided most of the
Company's revenues to date.
DRILLING ACTIVITY
In 1997, the Company participated in eight wells, drilled one sidetrack
operation in an existing wellbore, which operations have resulted in two
successful completions, six dry holes, and one unsuccessful sidetrack operation
due to mechanical difficulties. These results were all prior to the Acquisitions
in May 1998, at which time the exploration functions of the Company changed
dramatically with new projects, new management and a new focus.
Since November 1, 1997 (the effective date of the Acquisitions) through
December 31, 1998, 24 wells have been drilled for the Company's account, of
which twelve have been completed, eleven were dry holes and one was drilling. In
the first quarter of 1999, the Company participated in the drilling of six
additional wells, of which one had been completed, two are awaiting completion,
one was a dry hole and two were drilling.
PRODUCTIVE WELL SUMMARY
The following table sets forth certain information regarding the
Company's ownership as of December 31, 1998 of productive gas and oil wells in
the areas indicated.
20
<PAGE>
<TABLE>
<CAPTION>
Gas Oil
--------------- -----------------
Gross Net Gross Net
----- ------ ----- ------
<S> <C> <C> <C> <C>
Texas ........ 12 2.73 4 0.75
Oklahoma...... 3 0.01 5 0.08
Louisiana..... 1 0.08 0 0.00
Kansas ....... 1 0.10 0 0.00
----- ------ ----- ------
Total......... 17 2.92 9 0.83
----- ------ ----- ------
----- ------ ----- ------
</TABLE>
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the
production volumes, average prices received (net of transportation) and average
production costs associated with the Company's sale of gas and oil for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997
----------------- --------------
<S> <C> <C>
Net Production:
Oil (Bbl)................................................ 8,878 7,286
Gas (Mcf)................................................ 653,325(1) 121,304
Gas equivalent (Mcfe).................................... 706,593(1) 165,020
Average sales price:
Oil ($ per Bbl).......................................... $ 10.92 $ 20.28
Gas ($ per Mcf).......................................... $ 1.95 $ 2.06
Average production expenses and taxes ($ per Mcfe)........ $ 0.52 $ 2.13(2)
</TABLE>
(1) The majority of the net production is attributable to the fourth quarter of
1998, during which time additional exploration discoveries commenced
production.
(2) This computation includes $164,792 in costs associated with the fulfillment
of contractual transportation obligations on the Company's Mobile Bay
Properties. If this amount were not included, the average production
expenses and taxes per Mcfe would have been $1.13.
LEASEHOLD ACREAGE
The following table sets forth as of December 31, 1998, the gross
and net acres of proved developed and proved undeveloped gas and oil leases
which the Company holds or has the right to acquire. It does not include
unproven acreage, which constitutes the majority of the Company's leasehold
position.
<TABLE>
<CAPTION>
Proved Developed Proved Undeveloped
----------------------- ------------------------
State Gross Net Gross Net
----- ------- ------- -------- ---------
<S> <C> <C> <C> <C>
Arkansas ................... 0.0 0.0 6,360.0 2,544.0
Kansas ..................... 640.0 30.6 0.0 0.0
Louisiana .................. 225.0 225.0 9,215.0 3,910.5
Oklahoma ................... 2,117.0 50.4 12,908.5 3,727.2
Texas ...................... 3,016.0 1,390.2 6,980.5 1,339.0
------- ------- -------- --------
Total ........... 5,998.0 1,696.2 35,464.0 11,520.7
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
21
<PAGE>
TITLE TO PROPERTIES
Title to properties is subject to royalty, overriding royalty, carried
working, net profits, working and other similar interests and contractual
arrangements customary in the gas and oil industry, liens for current taxes not
yet due and other encumbrances. As is customary in the industry in the case of
undeveloped properties, little investigation of record title is made at the time
of acquisition (other than a preliminary review of local records).
Investigations including a title opinion of local counsel generally are made
before commencement of drilling operations. The Company has granted to an
affiliate of a major public utility a mortgage on its interest in the Starboard
Project to secure repayment of the funding provided by the affiliate and
relating to the prospect, and has granted to Bank of America NT&SA ("B of A") a
mortgage on virtually all remaining gas and oil properties to secure repayment
of its credit facility with the bank and with Duke Energy Field Services, Inc.
("Duke"). B of A serves as collateral agent for both B of A and Duke pursuant to
an intercreditor agreement between each of them and the Company.
ITEM 3. LEGAL PROCEEDINGS
EPC was a defendant in a lawsuit regarding injuries to a oil field
worker not employed by the Company that resulted in a judgment against EPC of
approximately $17,700,000. The judgment was settled by EPC's insurers, who
agreed to make cash payments to the plaintiff, and by EPC who agreed to
implement a mutually agreeable work safety plan in exchange for approximately
$6.0 million in punitive damages that otherwise would have been payable to the
plaintiff. The settlement was entered into and approved by the court entering an
agreed judgment on December 3, 1997. On approximately April 16, 1998, the
plaintiff filed an action against both EPC and the Company alleging, in part,
that EPC has failed and refused to implement an appropriate safety plan and
entered into negotiations with the Company to convey material assets to it
which, if consummated, would negate plaintiffs benefits to be obtained by EPC's
safety plan, thereby fraudulently inducing plaintiff to settle the judgment
against EPC. The Company believes the claims are not supported by the facts and
are without merit. The Company has in fact implemented a safety plan as part of
its business strategy which it believes equals or exceeds the one EPC agreed to
implement. It took this action as part of its business activities and not due to
any obligation it believes exists to the Plaintiff. The Company and EPC have
been advised by counsel for the plaintiff that the litigation will be dismissed
subject to agreement on a procedure for verification of the Company's ongoing
safety plan. Charles J. Smith and Michael E. Johnson, shareholders of 100% of
the common stock of EPC, have indemnified the Company in the event that any
damages were to be assessed against the Company. In the event it is not timely
dismissed, the Company and EPC will vigorously defend the claims and the Company
does not believe it will sustain any material loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 3, 1998 the Company held its Annual Meeting of
Shareholders. At said meeting Mr. Hobart Smith and Mr. William D. Dodge III were
re-elected as directors with their new terms expiring at the Annual Stockholders
Meeting in 2001. The vote totals were as follows:
<TABLE>
<CAPTION>
Number of Number of Shares Number of
Shares Voted Shares Voted Shares
For: Against: Abstained
<S> <C> <C> <C>
William D. Dodge III 14,431,500 233 19,046
Hobart A. Smith 14,431,566 167 29,213
</TABLE>
There was no further business submitted to the shareholders for a vote.
22
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On November 12, 1993, the Company's predecessor, Frontier Natural Gas
Corporation's common stock, its Convertible Preferred Stock and its Series A
Warrants were all admitted to trading on the NASDAQ Small Cap Market under the
symbols "FNGC" for its common stock, "FNGCP" for its Convertible Preferred
Stock, and "FNGCW" for its Series A Warrants. All of the issued and outstanding
Convertible Preferred Stock was redeemed in June of 1998. The Series A Warrants
expired in November of 1998. On August 9, 1996, Frontier Natural Gas
Corporation's Series B Warrants were admitted to trading on the NASDAQ Small Cap
Market under the symbol "FNGCZ". In May of 1998 the Company reincorporated in
the State of Delaware and changed its name to Esenjay Exploration, Inc. Its
common stock trading symbol changed to "ESNJ" and its Series B Warrant symbol to
"ESNJZ". The Series B Warrants ceased to be listed on the NASDAQ Small Cap
Market in February of 1999 due to insufficient market makers and are not
currently listed on any national market.
The Company's common stock trades on the NASDAQ Small Cap Market under
the symbol "ESNJ". The Company estimates there are approximately 95 common
shareholders of record and 2,355 beneficial owners of the common stock.
<TABLE>
<CAPTION>
Convertible Series A Series B
Common Preferred Warrants(1) Warrants
-------------------------- ---------------------- --------------------- --------------------
Quarter Ended High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998 $ 3 3/16 $ 1 1/2 -- -- 5/32 1/32
September 30, 1998 4 3/8 1 13/16 -- -- 7/32 1/32
June 30, 1998 6 3/8 4 10 1/2 10 1/2 3/16 1/16
March 31, 1998 7 1/8 4 1/8 10 7/8 7 1/8 1/4 1/16
December 31, 1997 $12 $ 4 1/8 8 1/2 7 1/8 3/8 1/64 7/16 3/32
September 30, 1997 12 3 3/4 9 7 1/4 3/16 1/16 3/4 1/8
June 30, 1997 14 1/4 10 1/8 10 9 5/16 3/16 15/16 1/2
March 31, 1997 21 3/8 12 3/8 10 5/8 9 1/2 5/32 1 11/16 11/16
</TABLE>
(1) The Series A Warrants expired in November 1998. There were no 1998 trades
recorded prior to their expiration.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis reviews Esenjay Exploration,
Inc.'s and/or its predecessor Frontier Natural Gas Corporation's operations for
the twelve month periods ended December 31, 1998 and 1997 and should be read in
conjunction with the consolidated financial statements and notes related
thereto. Certain statements contained herein that set forth management's
intentions, plans, beliefs, expectations or predictions of the future are
forward-looking statements. It is important to note that actual results could
differ materially from those projected in such forward-looking statements. The
risks and uncertainties include but are not limited to potential unfavorable or
uncertain results of 3-D seismic surveys not yet completed, drilling costs and
operational uncertainties, risks associated with quantities of total reserves
and rates of production from existing gas and oil reserves and pricing
assumptions of said reserves, potential delays in the timing of planned
operations, competition and other risks associated with permitting seismic
surveys and with leasing gas and oil properties, potential cost overruns,
potential dry holes and regulatory uncertainties and the availability of capital
to fund planned expenditures as well as general industry and market conditions.
OVERVIEW
OVERVIEW OF HISTORICAL DEVELOPMENTS - INCEPTION THROUGH MAY 1998. In
mid-1996, the Company refocused its activities from acquiring gas reserves
principally in the Mid-Continent region of the United States to concentrate on
exploration and related development drilling projects in Southern Louisiana and
along the Gulf Coast
23
<PAGE>
region of Alabama, Mississippi and Texas. During 1996 and 1997, the Company's
drilling activities, which were based primarily on 2-D seismic data, were
largely unsuccessful. This fact, along with an unexpected drop in production
from the Company's Mobile Bay area wells, greatly reduced the Company's cash and
capital resources.
To address the Company's capital needs, the Board of Directors, at its
meeting on August 12, 1997, directed management to look for potential assets to
acquire in exchange for the Company's Common Stock, to identify and review
potential business consolidation opportunities, identify potential partners to
help fund the Company's proposed drilling activities, and to consider any other
avenues to strengthen the Company's capital resources and diversify its
exploration opportunities. The Board also directed management to reduce overhead
wherever prudently possible and the Company retained an investment advisor to
aid in achieving these objectives. The Company explored a series of such
transactions and the Board, after receipt of the advice of management and its
investment advisor, and receipt of due diligence reports and other materials,
unanimously agreed that a transaction with Aspect and EPC was the best option
for the Company's shareholders. This process led to the Company entering into
the Acquisition Agreement among the Company, EPC, and Aspect. This Acquisition
Agreement, and certain provisions of it, required approval of the shareholders
of the Company. At a special meeting of shareholders held on May 14, 1998 the
shareholders approved the Acquisition Agreement, a recapitalization of the
Company pursuant to which each outstanding share of common stock would convert
into one-sixth (1/6) of a share of new common stock (the "Reverse Split"), a
plan and agreement of merger pursuant to which the Company would reincorporate
in the state of Delaware and would change its name to Esenjay Exploration, Inc.
(the "Reincorporation"), and the election of seven directors.
On May 14, 1998 after a Special Meeting of Shareholders, the Company
closed the transactions provided for in the Acquisition Agreement, implemented
the Reverse Split, and completed the Reincorporation. All references in the
accompanying financial statements to the number of common shares have been
restated to reflect the foregoing. In addition, as required by the Acquisition
Agreement, the Company called for redemption, all of its issued and outstanding
cumulative convertible preferred stock and did redeem said preferred stock. The
result of the foregoing is that the Company conveyed a substantial majority of
its Common Stock to acquire an array of significant technology enhanced natural
gas oriented exploration projects. The Company believed the Acquisitions would
facilitate expanded access to capital markets due to the value and diversity of
its exploration project portfolio. The Company also believes the members of
EPC's management that joined the Company after consummation of the acquisitions
significantly enhanced the Company's management team.
In connection with the Acquisitions, an affiliate of Enron Corp.
exercised an option to exchange $3.8 million of debt Aspect owed to such Enron
affiliate for 675,000 shares of the Company's Common Stock that would otherwise
have been issued to Aspect in the Acquisitions, at an effective conversion rate
of $5.63 per share. As a result of the Acquisitions and this exchange and the
secondary public offering effective in July of 1998, EPC, Aspect and the Enron
affiliate own approximately 32.8%, 27.7% and 4.3%, respectively, of the
Company's Common Stock.
On July 21, 1998 the Company closed an underwritten offering of
4,000,000 shares of its common stock at a price of $4.00 per share. The net
proceeds to the Company were approximately $14,880,000. After the offering the
Company had 15,762,723 shares outstanding.
OVERVIEW OF CURRENT ACTIVITIES - SINCE MAY 1998. As a result of the
above-described acquisitions, restructuring, and the underwritten offering, the
Company believes it is positioned for a period of significant exploration
activity on its technology enhanced projects. Many of the projects have reached
the drilling stage. In many instances the requisite process of geological and/or
engineering analysis, followed by acreage acquisition of leasehold rights and
seismic permitting, and 3-D seismic field data acquisition, then processing of
the data and finally its interpretation, took several years of time and the
investment of significant capital. Management believes the acquisition of
projects at this advanced stage has not only reduced the drilling risk, but
should allow the Company to consistently drill on a broad array of exploration
prospects in 1999 and subsequent years. On Exploration Projects acquired
pursuant to the Acquisitions, the Company has participated in the drilling of
twenty-four wells through December 31, 1998 with working interests which range
from 8% to 79%. Out of the twenty-four wells drilled, twelve wells have been
completed, eleven were dry holes, and one is being drilled. Several of the
successful wells went into production late in the third quarter of 1998, and in
the fourth quarter of 1998. In addition, in the first quarter of 1999, the
Company participated in six additional wells of which one was completed, two are
awaiting completion, two were
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drilling, and one was dry. As a result, management believes net daily oil and
gas production, which currently approximates 5,300 Mcfe per day, will increase
to approximately 13,500 Mcfe per day as production from the new discoveries
comes on line.
The Company entered 1999 having gone from nominal second quarter 1998
gas and oil revenues of approximately $35,000 per month and large operating cash
flow deficits to a company with over $360,000 per month in oil and gas revenues
in the fourth quarter of 1998. This number is expected to exceed $700,000 per
month as first quarter 1999 exploration discoveries come on line and continue to
increase as additional wells are drilled. This should allow it to achieve
positive operating cash flow in 1999 and beyond. In addition, since December 31,
1998, the Company has closed a long term financing commitment for $9,000,000
with Duke Energy Field Services, Inc., it has closed a sale of project interests
to industry partners for a total of $3,768,500, and has entered into two
agreements to sell additional project interests for a total of approximately
$3,900,000. The closed financing, combined with the closed project sales, as
well as those expected to close, will result in an aggregate availability of
over $16,600,000 in available cash resources, which is expected to enhance
working capital and contribute to the Company's early 1999 capital expenditure
plan. (See "Liquidity and Capital Resources").
The Company will look to a variety of sources to fund its continuing
capital expenditures budget, including it's new credit facilities and sales of
promoted project interests to industry partners, as it seeks to maximize its
interests and manage its risks while aggressively pursuing its exploration
projects. (see "Liquidity and Capital Resources")
SUCCESSFUL EFFORTS ACCOUNTING AND RELATED MATTERS. The Company utilizes
the successful efforts method of accounting. Under this method it expenses its
dry hole costs and the field acquisition costs of 3-D seismic data as incurred.
The undeveloped properties which were acquired pursuant to the Acquisitions, and
which were comprised primarily of interests in unproven 3-D seismic based
projects, recorded in May of 1998 at an independently estimated fair market
value of $54.2 million as determined by Cornerstone Ventures, L.P., a Houston,
Texas based investment banking firm. Pursuant to the successful efforts method
of accounting, the Company is amortizing such initial costs as periodic
impairments of unproved properties on a straight-line basis over a period not to
exceed forty-eight months, as well as recognizing property specific impairments.
These non-cash charges effect all such costs which are not, in the accounting
period they are to be impaired, supported by proven oil and gas reserves. Hence
significant non-cash charges will likely depress reported earnings of the
Company over the next several years, but will not effect cash flows provided by
operating activities nor the ultimate realizable value of the Company's natural
gas and oil properties.
As a result of the tax rules applicable to the Acquisitions, the
Company will likely not be able to fully use its existing net operating loss
carry forward in the future.
YEAR 2000
The Company is exposed to the risk that the Year 2000 issue could cause
system failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send joint
interest billings, or engage in similar normal business activities. During 1998,
the Company undertook a corporate-wide initiative designed to assess the impact
of the Year 2000 issue on software and hardware utilized in the Company's
operations.
The Company's initiative is to be conducted in these phases:
assessment, implementation and testing. During the assessment phase, the Company
completed a comprehensive inventory of all "mission critical" systems and
equipment. Many of the Company's systems include hardware and packaged software
purchased from large vendors who have represented that these systems are already
Year 2000 compliant.
The Company relies on other producers and transmission companies to
conduct its basic operations. Should any third party with which the Company has
a material relationship fail, the impact could impair the Company's ability to
perform its basic operation. Examples of such changes are an inability to
transport production to market or an inability to continue drilling activities.
As part of the Company's assessment phase, the Company will address the most
reasonably likely worst-case scenarios and potential costs.
The majority of the Company's technical applications are not date
sensitive. Of those applications that are
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date sensitive, most have recently been, or are currently being, upgraded. The
Company intends to complete the testing of Year 2000 modifications during the
third quarter of 1999. The Company has not established a contingency plan but
intends to formulate one to address unavoidable risks, including those discussed
above. The Company expects to have the contingency plan formulated by the third
quarter of 1999.
The Company's efforts with respect to the Year 2000 issue have been
handled internally by management and other Company personnel. Costs of
developing and carrying out this initiative are being funded from the Company's
operations and have not represented a material expense to the Company. The
Company has not completed its assessment but currently believes that the costs
of addressing the Year 2000 issue should not be significant and should not have
a material adverse impact on the Company's financial condition.
COMPARISON OF 1998 TO 1997.
All comparative discussions should be considered in the context of the
Acquisitions closed on May 14, 1998, which, together with related changes
significantly modified the scope, focus and the method of doing business of the
Company. As a result, the comparisons are of more limited value when analyzing
relevant trends.
REVENUE. Total revenues increased 88.9% from $908,609 for the year ended
December 31, 1997 to $1,716,473 for the year ended December 31, 1998.
Total gas and oil revenues increased 106.6% from $664,126 to
$1,372,002. The increase in gas and oil revenue was attributed mainly to
revenues from wells placed into production during the third and fourth quarters
of 1998. There was a decrease in gain on the sale of assets of $446,445 from
$452,020 reported for 1997 to $5,375 reported for 1998. As a result of the
increase in operations stemming from both exploratory and developmental
drilling, operating fees increased 412.6% from $55,021 for 1997 to $282,020 for
1998. The Company realized a loss from various commodity transactions totaling
$113,911 for 1998 as compared to $375,410 for 1997. These losses were attributed
to various transactions in which the Company hedged its future gas delivery
obligations as a requirement of its bank loan facility. In addition to the
realized losses from commodity transactions, the Company recorded $128,936 in
unrealized gain for 1998 as compared to an unrealized loss of $128,936 for 1997.
This was due to the fact that by year end 1998 the Company's average production
volumes exceeded the hedged volumes, and it was able to fulfill its hedge
commitments. In addition to the foregoing, the Company had other revenues of
$42,051 for 1998 as compared to $241,788 for 1997.
COSTS AND EXPENSES. Total costs and expenses of the Company increased
429.4% from $5,862,412 for 1997 compared to $31,037,820 for 1998. The increases
primarily relate to the changes in scope, focus and method of doing business
which occurred upon closing of the Acquisitions. As a result, staffing and
activity volume increased dramatically. Also foundational was the increase in
3-D seismic and other geological and geophysical work intended to lead to
increased, risk-controlled drilling and ultimately increased gas and oil
reserves and production. Increasing during the year were amortization of gas and
oil properties, exploration costs-geological and geophysical, exploration
costs-dry hole, general and administrative costs, depletion, depreciation, and
amortization, interest expense and production taxes. Partially offsetting the
foregoing increases were decreases in lease operating expenses, transportation
and gathering costs, and delay rentals.
AMORTIZATION OF UNPROVED PROPERTIES FOR IMPAIRMENT was $6,937,300 in
1998 (none in 1997). The Company will amortize the undeveloped and unevaluated
value of the properties acquired pursuant to the Acquisitions over a period not
to exceed forty-eight months. (See "Successful Efforts Accounting and Related
Matters.")
IMPAIRMENT OF GAS AND OIL PROPERTIES increased from $349,384 in 1997 to
$5,832,024 in 1998. This non-cash impairment in 1998 is primarily the result of
the expanded property base acquired pursuant to the Acquisitions. Management's
periodic review of each individual Exploration Project resulted in the decision
to expense the book value of certain projects based upon the belief that they no
longer have a realistic potential to realize the book value from such projects
in the future. The impairment charges incurred were primarily attributable to
the Sheriff, Thompson Creek, and Vicksburg Phase II Exploration Projects. In
addition, $1,560,990 of impairment was taken on producing properties for which
the book value exceeded estimated future cash flow.
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EXPLORATION COSTS - GEOLOGICAL AND GEOPHYSICAL increased 1,110.5% from
$485,956 for 1997 to $5,882,307 for 1998. These exploration costs reflect the
costs of topographical, geological and geophysical studies and include the
expenses of geologists, geophysical crews and other costs of acquiring and
analyzing 3-D seismic data. The Company's exploration technology enhanced
exploration program on the Exploration Projects has required the acquisition and
interpretation of substantial quantities of such data and these costs have
greatly increased for 1998 as compared with 1997. The Company considers 3-D
seismic data a valuable asset; however, its successful efforts accounting method
requires such costs to be expensed for accounting purposes.
EXPLORATION COSTS - DRY HOLE increased 194.1% from $1,772,746 for 1997
to $5,213,930 for 1998 as a result of increased drilling activity in 1998.
During the year, the Company participated in the drilling of twenty-four wells
of which eleven were dry holes that were expensed.
GENERAL AND ADMINISTRATIVE EXPENSES increased 117.4% from $2,070,812
for 1997 as compared to $4,501,656 for 1998. This was primarily attributable to
increases in operational expenses incurred after May 14, 1998, the effective
date of the Acquisition Agreement with Aspect and EPC, and costs associated with
the Acquisitions, after which time the scope of the Company's activities
increased significantly. The primary components of general and administrative
expenses were payroll and payroll taxes, which increased 125% from $936,304 in
1997 to $2,104,818 in 1998, legal, accounting and other professional services
which increased 37% from $385,384 in 1997 to $528,705 in 1998.
DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A") increased 382.1% from
$315,880 for 1997 to $1,522,771 for 1998. The increase to DD&A was primarily
attributable to wells placed in production in the third and fourth quarters of
1998.
INTEREST EXPENSE increased 917.6% from $60,942 for 1997 to $620,121 for
1998. The increase in interest expense was primarily attributed to a credit
facility with Duke Energy Financial Services, Inc. closed in February 1998 which
was paid off in July, 1998 and an increase in borrowings pursuant to its credit
facility with Bank of America NT & SA in October, 1998. The Company capitalized
a large portion of its interest associated with its on-going projects, of which
capitalized amounts totaled $456,901 for 1998 and $235,977 for 1997.
PRODUCTION TAXES increased 290.8% from $24,497 for 1997 to $95,728 for
1998. The increase in production taxes was attributed to revenues of wells
placed in production during the third and fourth quarters of 1998, which
increase was partially offset by a production tax refund from the State of
Oklahoma for a production enhancement project completed in 1994.
LEASE OPERATING EXPENSE decreased 36.6% from $427,240 for 1997 to
$270,881 for 1998. The reduction in lease operating expense relates back to
ceased operational costs for the Company's Mobile Bay wells in 1997. Lease
operating costs associated with the Mobile Bay wells for 1997 included $110,000
accrued for plugging and abandonment costs. During 1998, the Company reversed
$68,739 of the accrual associated with these wells. These factors combined with
lease operating expense increases during the third and fourth quarters of 1998
because of wells placed in production during those periods. Lease operating
costs would have increased from $317,240 in 1997 to $339,620 were the Mobile Bay
wells, which are plugged and abandoned, not included. The increases would be
attributable to increased production activities in late 1998.
TRANSPORTATION AND GATHERING COSTS decreased 98.8% from $143,265 for
1997 to $1,719 for 1998. The decrease in transportation and gathering cost was
almost entirely attributable to the ceased production of the Mobile Bay Wells.
DELAY RENTAL EXPENSE decreased 24.7% from $211,690 for 1997 to $159,383
for 1998. These rental payments were primarily associated with the Company's
Starboard Prospect and various other prospects. The decrease was based upon the
Company's decision to release certain leases not deemed significant after
seismic evaluation.
NET LOSS PER COMMON SHARE decreased from a net loss of $3.07 per share
for 1997 to a net loss of $2.97 per share for 1998. There was an increase in net
loss applicable to common stockholders of $24,312,527 from 1997 as compared to
1998, but it was more than offset by the increased number of weighted average
common equivalent shares at December 31, 1998, resulting from the Acquisitions
which closed May 14, 1998, and the underwritten
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common stock offering closed July 21, 1998. Approximately 9,882,000 weighted
average common equivalent shares were outstanding at December 31, 1998 as
compared to approximately 1,646,000 at December 31, 1997.
KNOWN AND ANTICIPATED TRENDS, CONTINGENCIES AND DEVELOPMENTS IMPACTING FUTURE
OPERATING RESULTS.
The Company's future operating results will be substantially dependent
upon the success of the Company's efforts to develop the projects acquired in
the Acquisitions, as well as its other prospects.
While management believes that said projects represent the most
promising prospects in the Company's history, and the wells drilled on projects
acquired pursuant to the Acquisitions in 1998 substantially increased the
Company's revenues, the capital expenditures planned in 1999 will continue to
require substantial outlays of capital to explore, develop and produce. 1998
drilling results have in fact resulted in substantial revenue increases which
were evidenced in the fourth quarter. Wells drilled in the fourth quarter of
1998 and first quarter of 1999 are expected to contribute to continued rapid
increases in the Company monthly gas and oil revenues as they come on line in
the first and second quarters of 1999. However, because of the Company's
expanded 1999 drilling budget capital from sources other than cash flow from
operations will continue to be required for funding planned exploration
activities.
LIQUIDITY AND CAPITAL RESOURCES
The Company has budgeted approximately $24,000,000 to fund its 1999
capital budget which includes the drilling and/or completion of its interest in
over 40 wells on the Exploration Projects in 1999. The Company's sources of
financing include borrowing capacity under its existing credit facilities and
other potential credit facilities, the sale of promoted interests in the
Exploration Projects to industry partners and cash provided from operations.
The Company entered 1999 having gone from nominal second quarter 1998
gas and oil production of approximately $35,000 per month and large operating
cash flow deficits to a company which averaged over $360,000 per month in oil
and gas revenues in the fourth quarter of 1998, most of which is attributable to
wells which commenced production in September and throughout the fourth quarter
of 1998. This number is expected to continue to increase. The Company believes
it will exceed $700,000 per month as exploratory discoveries from the first
quarter of 1999 come on line. Additional drilling success in 1999 is expected to
continue the trend of rapid increases. This should allow it to achieve steadily
increasing operating cash flow throughout the year (prior to capital
expenditures and new 3-D seismic data acquisition costs, which costs the
successful efforts accounting method utilized by the Company mandate to be
expensed rather than capitalized). In addition, since December 31, 1998, the
Company has closed long term financings for $9,000,000, closed the sale of
project interests for $3,768,500, and has entered preliminary agreements to sell
certain project interests to two industry partners for a total of approximately
$3,900,000. The resultant aggregate availability of approximately $16,600,000 in
cash is expected to enhance working capital and fund the Company's exploration
plan into the second quarter of 1999.
The two transactions include a sale to Helmerich & Payne, Inc. ("H&P")
and a sale to Aspect Resources LLC ("Aspect"), an affiliate. The Company has
entered an agreement to sell to H&P all of its undeveloped property interests in
the Big Hill/Stowell project area and any interests in a project area called
Gill East for $1,300,000. Closing is to occur in May 1999. It has also entered
into an agreement to sell to Aspect a 12.5% (of 100%) interest in the Caney
Creek Project, a 12% (of 100%) interest in the Gillock Project, and all of the
Company's undeveloped property interests in the West Beaumont project area for
$2,610,000. Closing is scheduled for April 1999. Proceeds from the sale will be
used to settle amounts due Aspect. In that Aspect is a related party, closing is
subject to receipt of an independent fairness opinion which management believes
will be timely obtained.
On October 23, 1998, the Company amended and restated its credit
agreement dated January 3, 1996 with B of A. The amended agreement is in a total
amount of $20,000,000 and provided for an immediate borrowing base of up to
$9,000,000. The Company had drawn $7,500,000 pursuant to the B of A loan
facility as of December 31, 1998, and March 26, 1999. The loan is in two
tranches. Tranche A is a revolving facility with no required principal payments
for two years after which it converts into a thirty-six month term loan. Tranche
B is payable in interest only until maturity in eighteen months. Both loans are
at a varied interest rate utilizing either the B of A's Alternate Reference Rate
(Alternate Reference Rate is the greater of (i) B of A's Reference Rate and (ii)
the Federal Funds
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effective rate plus 0.50%) or the London Interbank rate plus 2% for Tranche A
and 4% for Tranche B. The remaining funds will be available for future drilling
activities of the Company, subject to the approval of the bank. The Tranche A
loan is secured by a mortgage on most proven properties currently owned by the
Company. In addition, certain mortgages on the Company's exploration project
inventory secure Tranche B of the credit facility with B of A as well as the
entire credit facility with Duke discussed below. All such shared collateral is
governed by an intercreditor agreement between B of A and Duke in which B of A
serves as the collateral agent. In addition to the foregoing, B of A received a
2.0% overriding royalty interest, proportionately reduced to the Company's net
interest, in the properties classified as proven as of the date of closing and
received a five year warrant to purchase 95,000 shares of common stock at a
price equal to the average daily closing price of the Company's common stock for
the thirty days prior to closing of the credit agreement. The credit agreement
does not provide for any additional overriding interests in favor of B of A.
Proceeds of the loan primarily supplement working capital and exploration costs.
On January 28, 1999, the Company closed a credit facility with Duke.
This facility provides for Duke to loan up to $9,000,000 to the Company for
eighteen months. The commitment reduces by $930,000 per quarter for five
quarters and reduces to zero on August 1, 2000. Principal outstanding cannot
exceed the commitment amount at any time. Duke is paid interest at a rate of
prime plus 4%. It also received a right to gather and process, at fair market
value, gas and condensate from a designated area of interest, and a net revenue
interest in certain of the Company's future drilling activities not to exceed
0.49% of the Company's net interest. Proceeds primarily supplement exploration
costs.
On January 28, 1999, the Company, B of A, and Duke entered into an
intercreditor agreement which governs the collateral which is used to secure the
credit facility with B of A and the credit facility with Duke. Tranche A of the
B of A credit facility is secured by a first mortgage on most of the Company's
proven properties. Collateral securing amounts outstanding under both the Duke
credit facility and Tranche B of the B of A facility is primarily comprised of
mortgages taken on a significant proportion of the Exploration Projects of the
Company which have not been developed. At such time as drilling is conducted on
the Exploration Projects and proven reserves are discovered, the Company has a
right to seek increases in the available amount to be drawn under Tranche A of
its credit facility with B of A. In the event B of A agrees to increase the
amounts available pursuant to Tranche A, then, subject to Duke's consent,
security interests in proven reserves would be used as additional primary
collateral on Tranche A loans from B of A supporting the borrowing availability
increases.
The Company will require additional sources of capital to fund its
exploration budget over the next 12 months. It anticipates substantial growth of
its credit facility with B of A as proven reserves of gas and oil are added by
its exploration program. It also plans to continue to sell promoted interests in
certain of its Exploration Projects to fund its exploration program over the
next 12 months. In the second quarter of 1999, its capital expenditures budget
will be significantly dependent upon sales of additional interests in the
Exploration Projects. Delays in such new sales would delay the drilling of
certain wells.
The Company historically has addressed its long-term liquidity needs
through the issuance of debt and equity securities, through bank credit and
other credit facilities and with cash provided by operating activities. Its
major obligations at March 26, 1999, consisted principally of (i) servicing
loans under the credit facilities with B of A and with Duke and other loans,
(ii) funding of the Company's exploration activities, and (iii) funding of the
day-to-day operating costs.
Many of the factors that may affect the Company's future operating
performance and long-term liquidity are beyond the Company's control, including,
but not limited to, oil and natural gas prices, governmental actions and taxes,
the availability and attractiveness of financing and its operational results.
The Company continues to examine alternative sources of long-term capital, the
acquisition of a company with producing properties for common stock or other
equity securities, including bank borrowings, the issuance of debt instruments,
the sale of common stock or other equity securities, the issuance of net profits
interests, sales of promoted interests in its Exploration Projects, and various
forms of joint venture financing. In addition, the prices the Company receives
for its future oil and natural gas production and the level of the Company's
production will have a significant impact on future operating cash flows.
In order to minimize the pricing risk associated with oil and gas
sales, the Company entered into hedging
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transactions aggregating a twenty-four month period with Bank of America's
Financial Engineering and Risk Management Group. The hedging instruments called
for the delivery of 4,700 MMBtu per day at prices which range from $2.07 to
$2.14 per MMBtu for the period November 1, 1998 through October 31, 2000.
WORKING CAPITAL. At December 31, 1998, the Company had a cash balance
of $646,200 and a working capital deficit of $10,956,500. The working capital
deficit was primarily attributable to substantial exploratory costs, including
the substantial costs of 3-D seismic data acquisition and analysis, incurred in
1998, and deficit cash flow from operations before changes in working capital
incurred in 1998. It was also effected by the fact that the Company received
approximately $9,000,000 less in net proceeds then planned from the sale of
common stock of the Company in the third quarter. In regard to said sale, the
Company sold fewer shares for less money per share than planned in its July
underwriting primarily due to market conditions beyond its control. Gas and oil
revenues from wells which went into production in 1998 are anticipated to
generate revenues which will equal or exceed ongoing costs of operations (prior
to capital expenditures and the cost of new 3-D seismic data acquisitions) in
the first half of 1999 and beyond. Since the end of 1998, the Company has closed
the above-described credit facility with Duke, closed the sale of project
interests to Xplor Energy, Inc. for approximately $3,768,500 and entered into
two previously referenced agreements to sell additional project interests for
approximately $3,900,000, which, if all closed, will have generated to the
Company's account over $16,600,000 million in available cash resources
subsequent to December 31, 1998. Such cash resources serve to substantially
improve working capital and have served to provide significant funds for capital
expenditures.
Due to limited working capital as described above, the Company had
slowed its exploration budget in the second half of 1998. Upon the closing of
the credit facilities with B of A, the sale of certain promoted interests and
exploration projects, and receipt of the Duke credit commitment, the Company
increased its exploration activities in the first quarter of 1999. It plans to
continue this more rapid pace of exploratory drilling activities. In order to
fully implement its 1999 exploration budget while maintaining adequate working
capital, the Company will rely upon additional sales of promoted project
interests through the summer of 1999. In this regard, it has budgeted sales to
industry partners netting approximately $10 million in net proceeds to the
Company by the summer of 1999. Delays in projected sales would delay certain
planned drilling. In the second half of the year, it projects certain increases
in its Tranche A facility with B of A. It also expects continued rapid increases
in monthly oil and gas revenues due to its exploration successes in the first
quarter of 1999. Increased revenues are anticipated to generate significantly
increasing cash flow as the year progresses, which cash flow will also further
supplement the Company's working capital.
SUMMARY. The Company believes it is positioned for a period of
significant exploration activity on its technology enhanced projects. Many of
the projects have reached the drilling stage. In many instances the requisite
process of geological and/or engineering analysis, followed by acreage
acquisition of leasehold rights and seismic permitting, and 3-D seismic field
data acquisition, then processing of the data and finally its interpretation
took several years of time and the investment of significant capital. Management
believes the acquisition of projects at this advanced stage has not only reduced
the drilling risk, but should allow the Company to consistently drill on a broad
array of exploration prospects throughout 1999. As evidence of this activity the
Company has participated in the drilling of twenty-two wells from March through
December 31, 1998, with working interests which range from 8% to 79%. Out of the
twenty-two wells drilled, ten wells were completed, eleven were dry holes and
one was being drilled. In the first quarter of 1999 through March 31, 1999, the
Company participated in the drilling of six wells, of which one was completed,
two are awaiting completion, two were drilling, and one was a dry hole. The
Company's recent drilling results have served to increase its confidence in its
anticipated 1999 drilling on the technology enhanced Exploration Projects. The
Company believes its monthly oil and gas revenues will exceed $700,000 per month
(at current natural gas one year futures prices) when the recently drilled wells
are all on line late in the second quarter. In that overhead is stable,
operating cash flow should steadily and substantially increase throughout 1999.
Additional exploration success would continue this positive trend.
In that the Company will not fund most of its 1999 capital expenditure
budget from cash flow, the Company will continue to look to a variety of sources
to fund its continuing capital expenditures budget including credit facilities
and sales of promoted project interests to industry partners, as it seeks to
maximize its interests and manage its risks while aggressively pursuing its
exploration projects. This process will be limited more by capital availability
than by its inventory of drillable prospects.
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Timing of funding its exploration budget will determine the pace of
drilling and, to the extent drilling is successful, the growth of future oil and
gas revenues. Management believes expanded credit facilities will be available
to it in 1999 if it achieves meaningful exploratory and developmental drilling
success, and that strategic sales of prospect interests will be contracted and
closed which will allow it to continue its planned exploration activities
throughout the year.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share"
and SFAS No. 129, "Disclosure Information about Capital Structure," which have
been reflected in the Company's year-end 1997 and 1998 financial statements. In
1997, FASB also issued SFAS No. 130, "Reporting Comprehensive Income", SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information", and
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities".
SFAS Nos. 130 and 131 were adopted effective January 1, 1997. The adoption of
those standards has had no impact on the Company's financial statement
presentation or disclosures as the Company had no items of other comprehensive
income and operates primarily in one segment. The Company is still evaluating
the impact of the application of SFAS No. 133, which when adopted, could have a
material effect on its financial position, liquidity or results of operations.
ITEM 6A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Market risk generally represents the risk that losses may occur in the
value of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices. The Company has entered
into interest-rate swap agreements to eliminate any movement in interest rate.
The energy markets have historically been very volatile, and there can
be no assurance that oil and gas prices will not be subject to wide fluctuations
in the future. In an effort to reduce the pricing risks associated with oil and
gas sales, the Company entered into hedging transactions aggregating a
twenty-four month period with B of A's Financial Engineering and Risk Management
Group. The hedging instruments called for the delivery of 4,700 MMBtu per day at
prices which range from $2.07 to $2.14 per MMBtu for the period November 1, 1998
through October 31, 2000. While the use of these hedging arrangements limit the
downside risk of adverse price movements, it also limits future gains from
favorable movements to the extent of the hedged volumes.
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ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Esenjay Exploration, Inc.
We have audited the accompanying consolidated balance sheets of Esenjay
Exploration, Inc. (formerly Frontier Natural Gas Corporation) and subsidiaries
(the "Company") as of December 31, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Houston, Texas
April 14, 1999
32
<PAGE>
ESENJAY EXPLORATION, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................... $ 646,200 $ 690,576
Accounts receivable, net of allowance for doubtful
accounts of $ 348,984 at December 31, 1998
and $ 15,488 at December 31, 1997 ........................ 3,209,633 221,864
Prepaid expenses and other .................................... 122,422 249,328
Receivables from affiliates ................................... 963,700 105,171
------------ -------------
Total current assets .............................. 4,941,955 1,266,939
Property and equipment............................................... 70,044,882 4,404,975
Less accumulated depletion, depreciation
and amortization .............................................. (15,517,656) (1,260,605)
------------ -------------
54,527,226 3,144,370
Other assets ........................................................ 447,091 164,699
------------ -------------
Total assets ...................................... $ 59,916,272 $ 4,576,008
------------ -------------
------------ -------------
</TABLE>
33
<PAGE>
ESENJAY EXPLORATION, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable ........................................................... $ 8,993,859 $ 911,396
Accounts payable to affiliate, net ......................................... 4,322,548 --
Revenue distribution payable ............................................... 1,996,091 68,131
Current portion of long-term debt .......................................... 101,236 401,085
Accrued and other liabilities .............................................. 484,756 299,704
------------ ------------
Total current liabilities ................................... 15,898,490 1,680,316
Long-term debt ................................................................ 7,500,000 22,680
Non-recourse debt ............................................................. 864,000 864,000
Accrued interest on non-recourse debt ......................................... 331,194 194,274
-- 9,918
Other long-term liabilities
------------ ------------
Total liabilities ........................................... 24,593,684 2,771,188
Stockholders' equity:
Cumulative convertible preferred stock $.01 par value;
5,000,000 shares authorized; 85,961 shares issued and
outstanding at December 31, 1997 ($859,610 aggregate
redemption and liquidation preference) .................................. -- 860
Common stock:
Class A common stock, $.01 par value; 40,000,000
shares authorized; 15,784,834 and 1,655,984 outstanding
at December 31, 1998 and 1997, respectively (1) ......................... 157,849 16,560
Unamortized value of warrants issued ....................................... -- (27,163)
Additional paid-in capital (1) ............................................. 77,651,602 14,751,425
Accumulated deficit......................................................... (42,486,863) (12,936,862)
------------ ------------
Total stockholders' equity .................................. 35,322,588 1,804,820
------------ ------------
Total liabilities and stockholders' equity................... $ 59,916,272 $ 4,576,008
------------ ------------
------------ ------------
</TABLE>
- ----------
(1) As a result of the 1:6 reverse stock split effected on May 14, 1998, all
numbers of shares and per share amounts have been restated for all periods
presented.
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
ESENJAY EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Revenues:
Gas and oil revenues ............................. $ 1,372,002 $ 664,126
Realized loss on commodity transactions .......... (113,911) (375,410)
Unrealized gain (loss) on commodity transactions . 128,936 (128,936)
Gain on sale of assets ........................... 5,375 452,020
Operating fees ................................... 282,020 55,021
Other revenues ................................... 42,051 241,788
------------ ------------
Total revenues ....................... 1,716,473 908,609
------------ ------------
Costs and expenses:
Lease operating expense .......................... 270,881 427,240
Production taxes ................................. 95,728 24,497
Transportation and gathering costs ............... 1,719 143,265
Depletion, depreciation and amortization ......... 1,522,771 315,880
Amortization of unproved properties .............. 6,937,300 --
Impairment of oil and gas properties ............. 5,832,024 349,384
Exploration costs-geological & geophysical ....... 5,882,307 485,956
Exploration costs-dry hole ....................... 5,213,930 1,772,746
Interest expense ................................. 620,121 60,942
Delay rentals .................................... 159,383 211,690
General and administrative ....................... 4,501,656 2,070,812
------------ ------------
Total costs and expenses ............. 31,037,820 5,862,412
------------ ------------
Loss before provision for income taxes ................. (29,321,347) (4,953,803)
Benefit (provision) for income taxes ................... -- --
Net loss ............................................... (29,321,347) (4,953,803)
Cumulative preferred stock dividend .................... 48,136 103,153
------------ ------------
Net loss applicable to common stockholders ............. $(29,369,483) $ (5,056,956)
------------ ------------
------------ ------------
Net loss per common share (1) .......................... $ (2.97) $ (3.07)
------------ ------------
------------ ------------
Weighted average number of common shares outstanding (1) 9,882,227 1,646,311
------------ ------------
------------ ------------
</TABLE>
- ----------
(1) As a result of the 1:6 reverse stock split effected on May 14, 1998, all
numbers of shares and per share amounts have been restated for all periods
presented.
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
ESENJAY EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Class A Unamortized
Stock Common Shares Value of Additional
------------------- ----------------------- Warrants Paid-in Accumulated
Shares Amount Shares(1) Amount(1) Issued Capital(1) Deficit
-------- ------- --------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1996..... 85,961 $ 860 1,644,317 $ 16,443 $(54,325) $14,681,542 $ (7,905,694)
Issuance of common
stock .............. -- -- 11,667 117 -- 69,883 --
Cumulative
preferred stock
dividend ........... -- -- -- -- -- -- (77,365)
Amortization of
warrants ........... -- -- -- -- 27,162 -- --
Net loss .............. -- -- -- -- -- -- (4,953,803)
-------- ------ ---------- --------- --------- ------------ -------------
Balance,
December 31, 1997... 85,961 860 1,655,984 16,560 (27,163) 14,751,425 (12,936,862)
Issuance of common
stock for
Acquisitions, net... -- -- 10,106,700 101,067 -- 49,360,831 --
Redemption of
preferred stock .... (85,961) (860) -- -- -- (858,750) (228,654)
Amortization of
warrants ............. -- -- -- -- 27,163 -- --
Secondary common
stock offering, net 4,000,000 40,000 14,364,980 --
Issuance of common
stock ............. 22,150 222 33,116 --
Net loss
-------- ------ ---------- --------- --------- ------------ -------------
Balance,
December 31, 1998... -- $ -- 15,784,834 $157,849 $ -- $77,651,602 $(42,486,863)
-------- ------ ---------- --------- --------- ------------ -------------
-------- ------ ---------- --------- --------- ------------ -------------
</TABLE>
- ----------
(1) As a result of the 1:6 reverse stock split effected on May 14, 1998, all
numbers of shares and per share amounts have been restated for all periods
presented.
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
ESENJAY EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................................... $(29,321,347) $ (4,953,803)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depletion, depreciation and amortization ................... 1,522,771 315,880
Amortization of unproven property .......................... 6,937,300 --
Impairment of oil and gas properties ....................... 5,832,024 349,384
Exploration costs .......................................... 11,096,237 2,258,702
Gain on sale of assets ..................................... (5,375) (452,020)
Gain on settlement of deferred compensation agreement ...... -- (25,794)
Amortization of financing costs and warrants ............... 136,677 46,128
Unrealized (gain) loss on commodity transitions ............ (128,936) 128,936
Changes in operating assets and liabilities:
Trade and affiliate receivables ............................ (3,846,298) 191,882
Prepaid expenses ........................................... 126,906 198,418
Other assets ............................................... (372,941) 272,679
Trade and affiliate payables ............................... 11,405,011 186,174
Revenue distribution payable ............................... 1,927,960 (292,032)
Accrued and other .......................................... 440,990 (118,936)
------------ ------------
Net cash provided by (used in) operating activities ........ 5,750,979 (1,894,402)
------------ ------------
Cash flows from investing activities:
Capital expenditures - gas and oil properties ...................... (29,818,845) (3,023,253)
Capital expenditures - other property and equipment ................ (300,724) (159,679)
Proceeds from sale of assets ....................................... 5,191,847 1,002,540
------------ ------------
Net cash used in investing activities ......................... (24,927,722) (2,180,392)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of debt ..................................... 15,800,000 182,382
Repayments of long-term debt ....................................... (8,641,494) (296,303)
Preferred stock redeemed ........................................... (859,610) --
Preferred stock dividends paid ..................................... (228,654) (77,365)
Net proceeds from issuance of common stock ......................... 14,438,318 --
Cost of issuing stock .............................................. (1,376,193) --
------------ ------------
Net cash provided by (used in) financing activities ........... 19,132,367 (191,286)
------------ ------------
Net decrease in cash and cash equivalents .......................... (44,376) (4,266,080)
Cash and cash equivalents at beginning of year ........................... 690,576 4,956,656
------------ ------------
Cash and cash equivalents at end of year ................................. $ 646,200 $ 690,576
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest ................................................... $ 835,186 $ 141,356
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C>
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of oil and gas properties ......................... $ 54,218,750 --
Assumption of exploration and other costs ..................... 2,380,659 --
Assumption of related liabilities ............................. 1,000,000 --
Issuance of 10,106,722 shares of common stock ................. 50,838,091 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION - Esenjay Exploration, Inc.'s (the "Company")
primary business activities include gas and oil exploration, production and
sales, primarily along the Texas and Louisiana Gulf Coast areas of the United
States. The accompanying consolidated financial statements include the accounts
of the Company, and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated upon consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Certain amounts from previous years have been reclassified to conform
to current presentation.
CASH EQUIVALENTS - The Company considers all investments with a
maturity of three months or less when purchased to be cash equivalents.
GAS AND OIL PROPERTIES - The Company uses the successful efforts method
of accounting for gas and oil exploration and development costs. All costs of
acquired wells, productive exploratory wells, and development wells are
capitalized and depleted by the unit of production method based upon estimated
proved developed reserves. Exploratory dry hole costs, geological and
geophysical costs, and lease rentals on non-producing leases are expensed as
incurred. Gas and oil leasehold acquisition costs are capitalized. Costs of
unproved properties are transferred to proved properties when reserves are
proved. Gains or losses on sale of leases and equipment are recorded in income
as incurred and depleted by the unit of production method based upon estimated
proved reserves. Valuation allowances are provided if the net capitalized costs
of gas and oil properties at the field level exceed their realizable values
based on expected future cash flows. This analysis resulted in $1,560,990 of
impairment charges during 1998. Unproved properties are periodically assessed
for impairment and, if necessary, a loss is recognized. Impairments of
$4,271,034 and $349,384 were recognized in 1998 and 1997, respectively.
In addition, the $54,200,000 fair market value assigned to unproven gas
and oil exploration projects contributed by Esenjay Petroleum Corporation
("EPC") and Aspect Resources LLC ("Aspect") pursuant to certain acquisitions of
undeveloped exploration projects (the "Acquisitions") which closed on May 14,
1998 is, until such time as the book value of each such project is either
drilled and transferred to producing properties or is otherwise evaluated as
impaired, are being amortized on a straight-line basis over a period not to
exceed forty-eight months. For the year ended December 31, 1998, such
amortization was $6,937,300.
The costs of multiple producing properties acquired in a single
transaction are allocated to individual producing properties based on estimates
of gas and oil reserves and future cash flows.
OTHER PROPERTY AND EQUIPMENT - Other property and equipment is carried
at cost. The Company provides for depreciation of other property and equipment
using the straight-line method over the estimated useful lives of the assets,
which range from three to ten years.
Upon sale or retirement of an asset, the cost of the asset disposed of
and the related accumulated depreciation are removed from the accounts, and the
resulting gain or loss is reflected in income.
INCOME TAXES - The Company accounts for income taxes on an asset and
liability method which requires, among other things, the recognition of deferred
tax liabilities and assets for the tax effects of temporary differences between
the financial and tax bases of assets and liabilities, operating loss
carryforwards, and tax credit carryforwards.
39
<PAGE>
COMMODITY TRANSACTIONS - The Company attempts to minimize the price
risk of a portion of its future oil and gas production with commodity futures
contracts. Gains and losses on these contracts are recognized in the period in
which revenue from the related gas and oil production is recorded or when the
contracts are closed. To the extent that the quantities hedged under the
commodity transaction exceed current production, the Company recognizes gains or
losses on the overhedged amount.
CAPITALIZED INTEREST - The Company capitalizes interest costs incurred
on exploration projects. Interest capitalized for the years ended December 31,
1998 and 1997 was approximately $456,901 and $235,977, respectively.
GAS BALANCING - The Company records gas revenue based on the
entitlement method. Under this method, recognition of revenue is based on the
Company's pro-rata share of each well's production. During such time as the
Company's sales of gas exceed its pro-rata ownership in a well, a liability is
recorded, and conversely a receivable is recorded for wells in which the
Company's sales of gas are less than its pro-rata share. The Company's gas
balancing position at December 31, 1998 and 1997 was approximately 31,298 MCF
and 29,244 MCF overproduced, respectively.
EXPLORATION COSTS - The Company expenses exploratory dry hole costs,
geological and geophysical costs, and impairment of unproved properties. In 1998
and 1997, the Company expensed $5,882,307 and $485,956 in geological and
geophysical costs respectively and $5,213,930 and $1,772,746 in dry hole costs
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standards No. 107. "Disclosures about Fair Value of Financial Instruments"
requires disclosure regarding the fair value of financial instruments for which
it is practical to estimate that value. The carrying amount of cash and cash
equivalents, accounts receivable and accounts payable, approximates fair market
value because of the short maturity of those instruments. The fair value of the
Company's long-term debt is estimated to approximate carrying value based on the
borrowing rates currently available to the Company for bank loans with similar
terms and average maturities.
The Company has interest rate and gas swap agreements that subject it
to off-balance sheet risk. The unrealized losses on these contracts, as
disclosed in the following footnotes, are based on market quotes. These
unrealized losses are not recorded in the consolidated financial statements to
the extent the swaps qualify for hedge accounting.
EARNINGS PER SHARE - Basic earnings per share has been computed by
dividing net income to common shareholders by the weighted average number of
common shares outstanding. Diluted earnings per share is calculated by dividing
net income to common shareholders by the weighted average number of common
shares outstanding plus dilutive potential common shares. For the years ended
December 31, 1998 and 1997 all potentially diluted securities are anti-dilutive
and therefore are not included in the earnings per share calculation.
The following table presents information necessary to calculate basic
and diluted earnings per share for the periods indicated:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
BASIC AND DILUTED EARNINGS PER SHARE
Weighted average common shares outstanding ................................... 9,882,227 1,646,311
Basic and diluted loss per share ............................................. $ (2.97) $ (3.07)
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Net loss ..................................................................... $(29,321,347) $ (4,953,803)
Preferred share dividends .................................................... (48,136) (103,153)
------------- -------------
Net loss to common shareholders (basic and diluted loss per share computation) $(29,369,483) $ (5,056,956)
------------- -------------
------------- -------------
</TABLE>
40
<PAGE>
2. RECENT EVENTS
On January 28, 1999, the Company closed a credit facility with Duke
Energy Financial Services, Inc. ("Duke"). This facility provides for Duke to
loan up to $9,000,000 to the Company for eighteen months. The commitment reduces
by $930,000 per quarter for five quarters and reduces to zero on August 1, 2000.
Principal outstanding cannot exceed the commitment amount at any time. Duke is
paid interest at a rate of prime plus 4%. Duke also received a right to gather
and process, at fair market value, gas and condensate from a designated area of
interest, and a net revenue interest in certain of the Company's future drilling
activities not to exceed 0.49% of the Company's net interest. Proceeds from the
credit facility will primarily supplement exploration costs.
On January 28, 1999, the Company, Bank of America NT&SA ("B of A"),
and Duke entered into an intercreditor agreement which governs the collateral
which is used to secure the credit facility with B of A and the credit
facility with Duke. Tranche A of the B of A credit facility is secured by a
first mortgage on most of the Company's proven properties at a given point in
time. Collateral securing amounts outstanding under both the Duke credit
facility and Tranche B of the B of A facility is primarily comprised of
mortgages taken on a significant proportion of the exploration projects of
the Company which have not been developed. At such time as drilling is
conducted on the exploration projects and proven reserves are discovered, the
Company has a right to seek increases in the available amount to be drawn
under Tranche A of its credit facility with B of A. In the event B of A
agrees to increase the amounts available pursuant to Tranche A, then, subject
to Duke's consent, security interests in proven reserves would be used as
additional primary collateral on Tranche A loans from B of A supporting the
borrowing availability increases.
In January 13, 1999, the Company closed the sale of approximately
23.45% of its interest in its Willacy County Project to a third party for
$3,768,500 plus potential future additional payments based upon future drilling
activity.
On March 22, 1999, the Company entered into an agreement with Aspect to
sell a 12.5% (of 100%) interest in the Caney Creek Project, a 12% (of 100%)
interest in the Gillock Project, and all of the Company's undeveloped property
interests in the West Beaumont project area for $2,610,000. Closing is scheduled
for April 1999. In that Aspect is a related party, closing is subject to receipt
of an independent fairness opinion which management believes will be timely
obtained. Proceeds will be utilized to reduce net accounts payable of $4,322,548
at December 31, 1998 from the Company to Aspect. In addition, on March 31, 1999
the Company entered into an agreement with Helmerich & Payne, Inc. to sell all
of its undeveloped property interests in the Big Hill/Stowell project area and
an area called East Gill for $1,300,000. Closing is expected in April 1999.
3. STOCKHOLDERS' EQUITY:
As a result of the Company's 1:6 reverse stock split effected May 14,
1998, all numbers of common shares and per share amounts have been restated for
all periods.
At December 31, 1996, the Company had 1,644,317 outstanding shares of
$0.01 par value common stock and 85,961 shares of cumulative convertible
preferred stock. In 1998 and 1997 the Company issued 14,128,850 and 11,667
additional shares of common stock, respectively.
On May 14, 1998, the shareholders approved the January 19, 1998
Acquisition Agreement with EPC and Aspect. This agreement called for the Company
to issue up to 5,165,260 shares of Common Stock, after giving effect to the
reverse split, to EPC in exchange for undeveloped oil and gas prospects and to
issue up to 4,941,440 shares of Common Stock, after giving effect to the reverse
split, to Aspect in exchange for undeveloped oil and gas prospects. The combined
assets of Aspect and EPC had a historical full cost basis of $19,900,000 and a
fair value of $54,200,000 as determined by an independent assessment by
Cornerstone Ventures L.P.. In addition, after November 1, 1997 (the effective
date) and prior to the date of closing, EPC incurred approximately $3,800,000 in
exploration and development costs and $300,000 in overhead costs associated with
the prospects and Aspect incurred approximately $3,955,000 in such costs, all of
which incurred costs were for the account of the Company.
CUMULATIVE CONVERTIBLE PREFERRED STOCK - During 1998 and 1997, $48,136
and $77,365 was declared and paid in cumulative preferred stock dividends. In
addition, during 1998 the Company paid dividends in arrears of
41
<PAGE>
$180,518 ($1.50 per share) on its cumulative preferred stock for the period from
May 1, 1995 to December 31, 1998. All shares of the cumulative convertible
preferred stock were redeemed in May of 1998.
WARRANTS - As of December 31, 1996, there were 263,013 Series A
Warrants outstanding. All of the Series A Warrants expired on November 13, 1998.
Since December 31, 1996, the Company has had Series B Warrants, which
entitles the holder to purchase one-sixth (1/6) share of common stock for $12.15
commencing August 8, 1997, and ending August 8, 2001. Each Series B Warrant is
redeemable by the Company with the prior consent of the underwriter at a price
of $0.06 per Series B Warrant, at any time after the Series B Warrants become
exercisable, upon not less than 30 days notice, if the last sale price of the
common stock has been at least 200% of the then exercise price of the Series B
Warrants for the 20 consecutive trading days ending on the third day prior to
the date on which the notice of redemption is given.
The Company had also issued a common stock warrant to purchase 4,167
shares of common stock at $24.00 per share in connection with a loan agreement.
This warrant expired on November 13, 1998. The loan was paid in full in 1993.
The Company and Hi-Chicago Trust agreed to a settlement in December
1995 whereby the Company issued 12,500 shares of common stock and a stock
purchase warrant to purchase up to 50,000 shares of common stock at an exercise
price of $18.00 per share to settle a claim asserted by Hi-Chicago Trust. The
warrant is exercisable through the earlier of 60 months from the settlement date
or for a period of 30 days after the closing bid price of the Company's stock
equals or exceeds $36.00 per share for sixty consecutive trading days. The
issued shares are unregistered.
In 1996, the Company issued to a bank providing financing, a warrant to
purchase up to 41,667 shares of common stock for a period of five years
beginning January 3, 1996, at an exercise price of the highest average of the
daily closing bid prices for thirty (30) consecutive trading days between
January 1, 1996, and June 30, 1996. The Company has recorded the warrants at a
value of approximately $82,500 as unamortized value of warrants issued. The
warrants were amortized using the interest method and were fully amortized
during 1998.
The Company has also issued a warrant to purchase 41,667 shares of the
Company's common stock at $12.00 per share to a financial advisor. The warrant
has a five year term commencing on January 12, 1996 and provides for anti-
dilution protection, registration rights, and permits partial exercise at the
election of the holder by exchanging the warrants with appreciated value equal
to each exercise price in lieu of cash. The Company has recorded the warrants at
their fair value of approximately $33,000.
On January 15, 1997, the Board of Directors authorized the Company to
enter into an agreement with a company to perform investor relations services
for the Company on a fee basis through January 15, 1999, and month to month
thereafter, which fee may be paid either in cash or common stock at the election
of the Company. The Company elected to compensate the investor relations firm
partially in cash and partially in stock, therefore the investor relations firm
was issued 11,667 shares of common stock during 1997 and 12,500 shares in 1998.
In the first quarter of 1998, the Company, in connection with a
financing arrangement, issued warrants to purchase 25,000 shares of common stock
at an exercise price of $3.00 per share.
On October 13, 1998, the Company entered into an amended credit
agreement with B of A part of which called for the Company to issue warrants to
purchase 95,000 shares of common stock at a price per share equal to the average
daily closing price of the Company's common stock during the 30 calendar days
prior to closing. The warrants have a five year term and provide for usual and
customary anti-dilution protection, registration rights, and put and call
provisions (including a call on the warrants if the stock price exceeds five
times the strike price).
EMPLOYEE OPTION PLAN-1997 - The plan authorizes the issuance of up to
115,892 options to purchase one share of common stock. Options to purchase
94,001 shares of common stock at prices ranging from $3.78 to $7.68 are
currently outstanding.
42
<PAGE>
Under the plan, the Board may grant options to officers and other
employees. Each option shall consist of an option to purchase one share of
common stock at an exercise price that shall be at least the fair market
value of the Common stock on the date of the grant of the option. However,
the Board may authorize vesting options as it deems necessary; such is the
case of certain officers reissued options under this plan during 1997. Unless
otherwise so designated, the options shall be exercisable at a rate of 33
1/3% on January 1, the year following the effective date of the grant, and 33
1/3% each January 1 thereafter. The Option holder's right is cumulative.
Unless otherwise designated by the Board, if the employment of the Option
holder is terminated for any reason, all unexercised Options shall terminate,
be forfeited and shall lapse within three months thereafter. The options have
a maximum life of ten years from the date of issuance.
MANAGEMENT INCENTIVE STOCK PLAN - The Plan initially authorized the
issuance of up to 40,000 units. Each unit consisted of (i) an option to purchase
one share of Common Stock and (ii) a cash payment ("Stock Appreciation Right" or
"SAR") to be made by the Company when the option is exercised. The value of the
SAR was equal to twice the amount by which the fair market value of the Common
Stock on the date of the exercise of the option exceeds the exercise price.
Currently all units have expired or have been canceled by the Board of Directors
and the plan is not effective.
The following table summarizes activity under the Company's stock
option plans for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Incentive Management Stock Incentive Employee Option
Stock Option Plan Incentive Stock Plan Option Plan 1997 Plan 1997
----------------- -------------------- ---------------- ---------------
1998 1997 1998 1997 1998 1997 1998 1997
----- ----- ----- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares available for grant............ -- -- -- -- -- 1,333 115,892 115,892
Shares under option at end of period..
-- -- -- 8,000 -- 20,333 94,001 100,167
$ 12.00- $8.82- $ 3.78- $ 3.78-
Option price per share................ -- -- -- 21.00 -- 12.75 7.68 11.28
Shares exercisable at end of period...
-- -- -- 8,000 -- 6,778 90,667 90,667
Sales canceled........................ -- 30,000 -- 10,667 -- 36,667 -- --
Weighted option price................. -- -- -- $ 18.12 -- $ 10.02 $ 3.92 $ 4.20
Weighted average fair value
of options granted during
the year at market price......... -- $ 3.30
</TABLE>
STOCK OPTION PLANS - The Company has one active fixed option plan which
reserves shares of common stock for issuance to executives, key employees and
directors. The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the Company's stock option plans
been determined based on fair value at the grant date for awards in 1998 and
1997 consistent with the provisions of SFAS No. 123, the Company's pro forma net
loss applicable to common stockholders and net loss per common and common
equivalent share would have been as indicated below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss applicable to common stockholders-as reported....... $(29,369,483) $(5,056,956)
Net loss applicable to common stockholders-pro forma......... $(29,370,094) $(5,679,620)
Net loss per common share-as reported........................ $ (2.97) $ (3.07)
Net loss per common share-pro forma.......................... $ (2.97) $ (3.42)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividends; expected volatility of 60%; risk-free interest rate
of 5.71% in 1998 and 1997; and expected lives of five (5) years.
43
<PAGE>
OPTION REPRICINGS - In the last quarter of 1997, the Company determined
to attempt to consummate a significant corporate transaction in order to satisfy
the Company's need for additional capital resources. In connection with pursuing
such a transaction, Mr. Berry and Mr. Christofferson entered into Incentive
Agreements and Contract Settlement Agreements with the Company pursuant to which
each of Mr. Berry and Mr. Christofferson were entitled to receive certain
Incentive Payments and Contract Settlement Payments upon the consummation of
such a transaction. The Acquisitions were such a transaction. Their employment
agreements terminated upon the consummation of the Acquisitions.
In negotiating the terms of the Incentive Agreements and Contract
Settlement Agreements, Mr. Berry and Mr. Christofferson determined that their
existing stock options would expire 90 days after their termination of
employment. The Compensation Committee of the Board of Directors which was
comprised of Messrs. Sweeny and Elliott, each of whom was an outside director,
recognized that the expiration of those options would result in a disincentive
for Mr. Berry and Mr. Christofferson to help the Company pursue a significant
corporate transaction. Therefore, the Compensation Committee determined that Mr.
Berry's and Mr. Christofferson's existing stock options should be canceled and
replaced with new stock options that would terminate not sooner than the date
their old options would have expired if their employment with the Company was
not terminated. As an added incentive, the Compensation Committee determined to
reprice Mr. Berry's and Mr. Christofferson's options so they could more readily
benefit from any upturn in the Company's Common Stock trading price upon the
consummation of a significant corporate transaction.
When determining the price at which Mr. Berry's and Mr.
Christofferson's new options would be exercisable, the Compensation Committee
took the average closing price of the Company's Common Stock on the NASDAQ
Small-Cap Market over the 20 day trading period immediately preceding the option
reprice date, and multiplied such average trading price by 65%. The Compensation
Committee believed that the discount to the average trading price was
appropriate because the shares of Common Stock issuable upon exercise of the
repriced options would not be freely tradable and the discount was appropriate
to reflect the actual fair market value of the liquid shares that would be
received upon the exercise of the new options.
The following table sets forth certain information with respect to
replacement stock options granted to Mr. Berry and Mr. Christofferson during the
year ended December 31, 1997, which are also reported above under "Option
Grants." There were no replacement stock options issued in 1998.
<TABLE>
<CAPTION>
Length of
Number of Original Option
Securities of Term Remaining
Underlying Market Price of Exercise Price New At Date of
Options/sars Stock At Time of At Time of Exercise Repricing or
Repriced Or Repricing or Repricing or Price Amendment
Name Date Amended Amendment Amendment (Months)
---- ---- ----------- ------------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
David W. Berry...................... 12/3/97 20,000 $5.82 $ 9.72 $3.78 102
President and 12/3/97 4,000 $5.82 $18.60 $3.78 69
Chief Executive Officer
David B. Christofferson............. 12/3/97 30,000 $5.82 $10.08 $3.78 62
Executive Vice 12/3/97 4,000 $5.82 $18.60 $3.78 69
President, General 12/3/97 16,667 $5.82 $ 8.82 $3.78 102
Counsel and Secretary
</TABLE>
4. SALE OF GAS AND OIL ASSETS AND SEISMIC DATA:
The Company sold various properties in a number of different
transactions during 1998 and 1997. These sales resulted in an aggregate gain of
approximately $485,813 for 1997. No gain or loss was recorded on the sale of gas
and oil assets in 1998 as these were the sale of partial interests in several
unproved properties and the proceeds were treated as a recovery of costs.
44
<PAGE>
5. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
----- ----
<S> <C> <C>
Note payable repaid in 1998....................................................................... $ $ 274,922
Non-recourse loan, payable out of an 8% ORRI on the Starboard Prospect,
interest accrued at 15%.......................................................................... 864,000 64,000
Note payable to bank, interest at 7.49% to 12.5%, payable in monthly
installments, collateralized by other property and equipment..................................... 1,236 48,843
Note payable, interest at 12%, payable monthly, is currently due.................................. 100,000 100,000
Loan with B of A, in two Tranches: Tranche A is a revolving credit facility
which terminates October 13, 2000, thereafter converting the unpaid balance
into a five year term loan requiring quarterly principle and interest payments;
Tranche B is payable in interest only until maturity on April 13, 2000, at which
time payment in full is required. Both loans are at a varied interest rate
utilizing either the B of A's Alternative Reference Rate (Alternative Reference
Rate is the greater of (i) B of A's Reference Rate and (ii) the Federal Funds
effective rate plus 0.50%) or the Interbank rate plus 2% for Tranche A and 4% for
Tranche B. The loan is secured by a mortgage on all properties currently
owned by the Company......................................................................... 7,500,000 --
---------- ----------
8,465,236 1,287,765
Less current portion.............................................................................. 101,236 401,085
---------- ----------
$8,364,000 $ 886,680
---------- ----------
---------- ----------
</TABLE>
Maturities of long-term debt (excluding non-recourse debt, which is
solely dependent upon the successful development and future production, if any,
of the Starboard Prospect) are as follows:
<TABLE>
<CAPTION>
Year At December 31, 1998
- ----- --------------------
<S> <C>
1999............... $ 101,236
2000............... 4,412,500
2001............... 650,000
2002............... 650,000
2003............... 650,000
</TABLE>
The remaining balance of $1,137,500 will be paid in 2004 and 2005.
45
<PAGE>
On October 13, 1998, the Company amended and restated the credit
agreement dated January 3, 1996 with B of A to an amount equal to the lesser
of the Collateral Value, or $20,000,000. The amended agreement provided for
an immediate borrowing base of up to $9,000,000 ($8,250,000 if the Company
did a third party financing in which the third party lender would share in
certain collateral of B of A). The $9,000,000 base represents the Collateral
Value until the initial Collateral Value Redetermination is made. The Company
has drawn $7,500,000 pursuant to the B of A facility. The loan is in two
tranches. Tranche A is a revolving facility which terminates on October 13,
2000 thereafter converting the unpaid balance into a five year term loan
requiring quarterly principle and interest payments. Tranche B is payable in
interest only until maturity on April, 13, 2000 at which time payment in full
is required. In conjunction with this financing, B of A received a 2%
overriding royalty interest, proportionately reduced to the Company's net
interest, in the properties classified proven as of the date of closing and
received a five year warrant to purchase 95,000 shares of common stock at a
price equal to the average daily closing price of the Company's common stock
for the thirty days prior to closing of the credit agreement. Proceeds of the
loan primarily supplement working capital. As part of the credit agreement,
the Company is subject to certain covenants and restrictions, among which are
the limitations on additional borrowing, and sales of significant properties,
working capital, cash, and net worth maintenance requirements and a minimum
debt to net worth ratio. The covenants regarding financial condition of
Company are as follows:
<TABLE>
<S> <C>
Tangible Net Worth................... $45,000,000 + 50% of Consolidated Net Income + 100% of net
proceeds received from sale of any Non-Redeemable Stock
Current Ratio........................ 1.1:1.0
Debt to Capitalization............... 0.5:1.0
Interest Coverage Ratio ............. 1.0:1.0 - 4th quarter 1998 and 1st quarter 1999, 3.0:1.0 2nd qtr 1999
and any consecutive quarters after June 30, 1999
</TABLE>
At December 31, 1998 the Company's tangible net worth as calculated
pursuant to the Credit Agreement was $35,322,586. B of A has waived
noncompliance with this covenant at December 31, 1998 and March 31, 1999. The
Company and B of A have been in discussions, both recognizing that the
covenant as initially established did not give adequate consideration to the
effects of the Company's successful efforts method of accounting on the
future book value of its properties, in particular the accounting treatment
that the Company has adopted which requires the amortization over a period
not to exceed forty-eight months of a substantial portion of the property
values recorded pursuant to the Acquisitions. As such, B of A has agreed with
the Company in concept to reduce the tangible net worth requirement to an
amount not in excess of $25,000,000, subject to approval of B of A's credit
committee anticipated in the second quarter of 1999. In the event the credit
committee does not approve the modification of the covenant, the Company
would be in noncompliance of this provision and will seek alternative
financing arrangements.
Further as of December 31, 1998, the Company's current ratio was
0.3128:1 and the Company's interest coverage ratio was (2.1368) to 1, both of
which were, therefore, in noncompliance. B of A has waived said noncompliance
at December 31, 1998. The Company believes it has improved its current ratio
and its interest coverage ratio since December 31, 1998 significantly;
however, it does not believe it is likely that it will be in compliance with
either of said covenants as of March 31, 1999. B of A has indicated that, in
the event the Company is in noncompliance, it will likely waive any such
covenants through April 1, 1999. Although the Company believes it can be in
compliance with both of these covenants throughout the remainder of 1999,
there can be no assurance
46
<PAGE>
that it will be in compliance. As a result it is possible that additional
waivers may be needed in the future. In the event B of A did not grant such
waivers, if needed, the Company would be in noncompliance of the covenants and
would seek alternative financing arrangements.
In addition, the Company has entered into an interest rate swap
guaranteeing a fixed interest rate of 8.28% on the loan, and the Company will
pay fees of one-eighth of 1% (.0125%) on the unused portion of the commitment
amount. The unrealized loss on the interest rate swap agreement was $21,910
and $1,275 at December 31, 1997 and 1998, respectively.
On March 12, 1996, the Company completed a financial package with a
group funded by a public utility to evaluate and develop a project in Terrebonne
Parish, Louisiana. This group will participate in 48% of all costs of evaluation
and development of the project area and provided a non-recourse loan to fund the
Company's 48% share of the leasehold and seismic evaluation costs of the
project. The loan is secured by a mortgage on the Company's interest in the
project. As of December 31, 1998 and 1997, the Company has received advances
aggregating $864,000 on the non-recourse loan. The non-recourse loan will be
paid solely by the assignment on an 8% overriding royalty interest in the future
revenues of the financed project. Future funding will be provided as costs are
incurred.
6. INCOME TAXES:
Deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
At December 31,
1998 1997
---- ----
<S> <C> <C>
Net operating tax loss carryforward......... $ 11,633,159 $ 4,332,710
Property and equipment...................... (435,246) (2,936,284)
Valuation allowance......................... (11,197,913) (1,396,426)
----------- -----------
Net deferred tax asset (liability)...... $ -- $ --
----------- -----------
</TABLE>
The Company has recorded a deferred tax valuation allowance since,
based on an assessment of all available historical evidence, it is more
likely than not that future taxable income will not be sufficient to realize
the tax benefit. The Company and its subsidiaries have net operating loss
carryforwards ("NOLs") at December 31, 1998, of approximately $33,200,000
which may be used to offset future taxable income. The operating loss
carryforwards expire in the tax years 2006 through 2018.
The ability of the Company to utilize NOLs and tax credit carryforwards
to reduce future federal income taxes of the Company may be subject to various
limitations under the Internal Revenue Code of 1986, as amended (the "Code").
One such limitation is contained in Section 382 of the Code which imposes an
annual limitation on the amount of a corporation's taxable income that can be
offset by those carryforwards in the event of a substantial change in ownership
as defined in Section 382 ("Ownership Change"). In general, Ownership Change
occurs if during a specified three-year period there are capital stock
transactions, which result in an aggregate change of more than 50% in the
beneficial ownership of the stock of the Company. In connection with the
Acquisition Agreement, the Company has incurred such an Ownership Change.
7. RELATED PARTY TRANSACTIONS:
The Company's outstanding advances to employees and affiliates of
the Company at December 31, 1998 and 1997 was $963,700 and $105,171,
respectively. The December 31, 1998 and 1997 receivables include
approximately $47,787 from an affiliated partnership for which the Company
serves as the managing general partner. In addition, the December 31, 1998
balance includes a $915,342 receivable from Esenjay Petroleum (EPC) primarily
related to joint interest billings to EPC. In addition, amounts payable of
$134,400 and $112,000 were due to David W. Berry and David B Christofferson,
respectively, in conjunction with the settlement of their prior employment
contracts. In addition, at December 31, 1998 the Company had a net account
payable to Aspect in the amount of $4,322,548. (See Note 9)
47
<PAGE>
8. COMMITMENTS AND CONTINGENCIES:
The Company leases office space under lease agreements, which are
classified as operating leases. Lease expense under these agreements was
$193,515 in 1998 and $112,432 in 1997. A summary of future minimum rentals on
these non-cancelable operating leases is as follows:
<TABLE>
<CAPTION>
Year At December 31, 1998
------ ---------------------
<S> <C>
1999................... $252,514
2000................... $252,514
2001................... $213,491
2002................... $135,446
2003................... $ 67,723
</TABLE>
The Company is party to various lawsuits arising in the normal course
of business. Management believes the ultimate outcome of these matters will not
have a material effect on the Company's consolidated financial position, results
of operation, and net cash flows.
The Company markets its natural gas through monthly spot sales. Because
sales made under spot sales contracts result in fluctuating revenues to the
Company depending upon the market price of gas, the Company may enter into
various hedging agreements to minimize the fluctuations and the effect of price
declines or swings. During January 1999, the Company completed performance on a
1996 swap agreement on approximately 1,040 MMBtu's per day of Mid-Continent
natural gas production for $1.566 per MMBtu for the period beginning April 1,
1996 and ending January 31, 1999.
In October of 1998, the Company entered into two swap agreements, one
on 4,000 MMBtu's per day of its Gulf Coast natural gas production for $2.14 per
MMBtu for the period beginning November 1998 and ending in October 1999, and the
second one on 700 MMBtu's per day of its Gulf Coast natural gas production for
$2.13 per MMBtu for the period beginning November 1998 and ending in October
1999. Both of these swap agreements were supplemented in December 1998 when the
Company entered into additional swap agreements, one of which was for 4,000
MMBtu's per day of its Gulf Coast natural gas production for $2.07 per MMBtu for
the period beginning November 1999 and ending in October 2000, and the second
one was on 700 MMBtu's per day of its Gulf Coast natural gas production for
$2.07 per MMBtu for the period beginning November 1999 and ending in October
2000. As a result of the foregoing transactions, the Company has 4,700 MMBtu's
per day of its Gulf Coast natural gas production hedged through October 2000.
9. ACQUISITIONS:
On May 14, 1998, the Company acquired substantial interests in 28
exploration projects from EPC and Aspect in exchange for 10,106,700 shares of
the Company's common stock. The estimated fair value on the date of acquisition
was approximately $60 million, which consists of the fair market value of $54.2
million, as determined by an independent third party, plus project costs from
the effective date of November 1, 1997 up to the closing of the Acquisition
Agreement. The acquired projects are primarily technology enhanced natural gas
exploration projects along the Texas and Louisiana Gulf Coast.
The Acquisitions have been recorded at their fair value and have been
included in the Company's consolidated financial statements from the date of
their acquisition. The following unaudited pro forma information presents a
summary of condensed consolidated results of operations as if the Acquisitions
had occurred on January 1, 1997:
48
<PAGE>
<TABLE>
<CAPTION>
Year ended
December 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Revenues................................................. $ 1,716,473 $ 908,609
Total costs and expenses................................. (33,325,677) (12,865,085)
------------- -------------
Net loss................................................. $(31,609,204) $ 11,956,476
------------- -------------
------------- -------------
Basic and diluted loss per share......................... $ (2.33) $ (1.02)
------------- -------------
------------- -------------
</TABLE>
10. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Gas and oil properties, at cost , successful
efforts method of accounting:
Proved ......................................... 14,006,244 1,181,811
Unproved, subject to amortization .............. 43,800,198 --
Unproved, not subject to amortization .......... 10,835,056 2,054,037
------------ ----------
Total gas and oil properties ................ 68,641,498 3,235,848
Other property and equipment ......................... 1,403,384 1,169,127
------------ ----------
Total property and equipment ................ 70,044,882 4,404,975
Less accumulated depletion, depreciation and
amortization........................................ (15,517,656) (1,260,605)
------------ ----------
Total property and equipment, net............$ 54,527,226 $3,144,370
------------ ----------
------------ ----------
</TABLE>
11. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED):
The Company's proved gas and oil reserves are located in the United
States. Proved reserves are those quantities of natural gas and crude oil which,
upon analysis of geological and engineering data, demonstrate with reasonable
certainty to be recoverable in the future from known gas and oil reservoirs
under existing economic and operating conditions (i.e. price and costs as of the
date the estimate is made). Proved developed (producing and non-producing)
reserves are those proved reserves which can be expected to be recovered through
existing wells with existing equipment and operating methods. Proved undeveloped
gas and oil reserves are reserves that are expected to be recovered from new
wells on undrilled acreage, or from existing wells where a relatively major
expenditure is required for recompletion.
Reserves on undrilled acreage shall be limited to those drilling units
offsetting productive units that are reasonably certain of production when
drilled. Proved reserves for other undrilled units can be claimed only where it
can be demonstrated with certainty that there is continuity of production from
the existing productive formation.
FINANCIAL DATA
The Company's gas and oil producing activities represent substantially
all of the business activities of the Company. The following costs include all
such costs incurred during each period, except for depreciation and amortization
of costs capitalized:
COSTS INCURRED IN GAS AND OIL EXPLORATION AND PRODUCTION ACTIVITIES:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Acquisition of properties:
Proved.................................................... $ -- $ 765,678
Unproved.................................................. 63,511,000 242,205
Exploration costs............................................. 13,412,133 1,861,432
Development costs............................................. 7,114,820 153,938
----------- ----------
Total costs incurred.................................. $84,037,952 $3,023,253
----------- ----------
----------- ----------
</TABLE>
49
<PAGE>
CAPITALIZED COSTS:
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Proved......................................................................... $ 14,006,244 $1,181,811
Unproved properties, subject to amortization................................... 43,800,198 --
Unproved properties not being amortized........................................ 10,835,056 2,054,037
Less accumulated amortization.................................................. (14,584,784) (438,044)
----------- -----------
Net capitalized costs......................................... $ 54,056,714 $2,797,804
----------- -----------
----------- -----------
</TABLE>
ESTIMATED QUANTITIES OF PROVED GAS AND OIL RESERVES:
The estimates of proved producing reserves were estimated. Proved
reserves cannot be measured exactly because the estimation of reserves involves
numerous judgmental and arbitrary determinations. Accordingly, reserve estimates
must be continually revised as a result of new information obtained from
drilling and production history or as a result of changes in economic
conditions.
<TABLE>
<CAPTION>
Crude Oil, Condensate and Natural
Gas Liquids
Natural Gas (Mcf) (Barrels)
---------------- ---------
Years Ended December 31, Years Ended December 31,
-------------------------- ------------------------
1998 1997 1998 1997
----- ----- ---- -----
<S> <C> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of period ....................... 5,500,363 8,901,555 114,399 183,735
Purchases of minerals-in-place ............ -- -- -- --
Sales of minerals-in-place ................ -- (159,528) -- (3,857)
Revisions of previous estimates ........... (5,284,456) (3,129,076) (97,420) (59,121)
Extensions, discoveries and other additions 12,367,076 8,716 92,094 928
Production ................................ (653,316) (121,304) (8,878) (7,286)
---------- ---------- -------- --------
End of period ............................. 11,929,667 5,500,363 100,195 114,399
---------- ---------- -------- --------
---------- ---------- -------- --------
Proved developed reserves:
Beginning of period ....................... 521,345 985,524 24,358 46,420
End of period ............................. 6,864,564 521,345 59,085 24,358
</TABLE>
Reserves of wells, which have performance history, were estimated
through analysis of production trends and other appropriate performance
relationships. Where production and reservoir data were limited, the volumetric
method was used and it is more susceptible to subsequent revisions.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS:
The standardized measure of discounted future net cash flows is based
on criteria established by Financial Accounting Standards Board Statement No.
69, "Accounting for Oil and Gas Producing Activities" and is not intended to be
a "best estimate" of the fair value of the Company's oil and gas properties. For
this to be the case, forecasts of future economic conditions, varying price and
cost estimates, varying discount rates and consideration of other than proved
reserves (i.e., probable reserves) would have to be incorporated into the
valuations. Future net cash inflows are based on the future production of proved
reserves of natural gas, natural gas liquids, crude oil and condensate as
estimated by petroleum engineers by applying current prices of gas and oil (with
consideration of price changes only to the extent fixed and determinable and
with consideration of the timing of gas sales under existing contracts or spot
market sales) to estimated future production of proved reserves. Average year
end prices used in determining future cash inflows for natural gas and oil for
the periods ended December 31, 1998 and 1997 were as follows: 1998 - $2.01 per
MCF-Gas, $9.03 per barrel-Oil; 1997 - $2.46 per MCF-Gas, $15.70 per barrel-Oil,
respectively. Future net cash flows are then calculated by reducing such
estimated cash inflows by the
50
<PAGE>
estimated future expenditures (based on current costs) to be incurred in
developing and producing the proved reserves and by the estimated future income
taxes. Estimated future income taxes are computed by applying the appropriate
year-end tax rate to the future pretax net cash flows relating to the Company's
estimated proved oil and gas reserves. The estimated future income taxes give
effect to permanent differences and tax credits and allowances.
The following table sets forth the Company's estimated standardized
measure of discounted future net cash flows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Future cash inflows .................................... $ 25,241,119 $ 15,752,040
Future development and production costs ................ (8,478,613) (7,468,887)
Future income tax expenses ............................. -- (365,224)
------------ ------------
Future net cash flows .................................. 16,762,506 7,917,929
Discount ............................................... (4,242,485) (4,019,429)
------------ ------------
Standardized measure of discounted future net cash flows $ 12,520,021 $ 3,898,500
------------ ------------
------------ ------------
</TABLE>
The following table sets forth changes in the standardized measure of
discounted future net cash flows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
---- ----
<S> <C> <C>
Standardized measure of discounted future cash flows-beginning of period $ 3,898,500 $ 16,758,544
Sales of oil and gas produced, net of operating expenses ............... (1,021,830) (312,198)
Net changes in sales prices and production costs ....................... (4,459,331) (10,601,580)
Extensions, discoveries and improved recovery, less related costs ...... 13,358,762 30,952
Change in future development costs ..................................... 5,135,315 (433,314)
Previously estimated development costs incurred during the year ........ 2,515 162,610
Revisions of previous quantity estimates ............................... (1,957,356) (4,973,603)
Accretion of discount .................................................. 402,566 2,169,632
Net change of income taxes ............................................. 127,157 4,810,619
Sales of minerals-in-place ............................................. -- (371,728)
Changes in production rates (timing) and other ......................... (2,966,277) (3,341,614)
------------ ------------
Standardized measure of discounted future cash flows-end of period....... $12,520,021 $ 3,898,500
------------ ------------
------------ ------------
</TABLE>
51
<PAGE>
ESENJAY EXPLORATION, INC.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
52
<PAGE>
ESENJAY EXPLORATION, INC.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item is hereby partially incorporated
by reference to the Company's proxy statement which will be filed with the
Commission within one hundred twenty (120) days of the close of the fiscal year
pursuant to regulation 14A. There is no additional required information.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by
reference to the Company's proxy statement, which will be filed with the
Commission within one hundred twenty (120) days of the close of the fiscal year
pursuant to regulation 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by
reference to the Company's proxy statement, which will be filed with the
Commission within one hundred twenty (120) days of the close of the fiscal year
pursuant to regulation 14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by
reference to the Company's proxy statement, which will be filed with the
Commission within one hundred twenty (120) days of the close of the fiscal year
pursuant to regulation 14A.
53
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Exhibit Name of Exhibit
- ------- ---------------
<S> <C>
2(a) Acquisition Agreement and Plan of Exchange dated as of January 19,
1998, by and among Frontier Natural Gas Corporation, Esenjay
Petroleum Corporation, and Aspect Resources LLC as incorporated by
reference to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997 dated April 6, 1998, wherein
the same appears as Exhibit 2.
2(b) First Amendment to Acquisition Agreement and Plan of Exchange
dated as of April 20, 1998, by and among Frontier Natural Gas
Corporation, Esenjay Petroleum Corporation, and Aspect Resources
LLC as incorporated by reference to the Company's Registration
Statement number 333-53581 dated May 21, 1998 wherein the same
appeared as Exhibit 10(x).
2(c) Second Amendment to Acquisition Agreement and Plan of Exchange
dated as of May 13, 1998, by and among Frontier Natural Gas
Corporation, Esenjay Petroleum Corporation, and Aspect Resources
LLC as incorporated by reference to the Company's Registration
Statement number 333-53581 dated May 21, 1998 wherein the same
appeared as Exhibit 10(y).
2(d) Plan and Agreement of Merger dated as of May 14, 1998, by and
between Esenjay Exploration, Inc., a Delaware corporation, and
Frontier Natural Gas Corporation as incorporated by reference to
the Company's Proxy Statement filed with the Securities and
Exchange Commission on April 24, 1998, wherein the same appeared
as Appendix F.
3(a) Certificate of Incorporation of the Company as incorporated by
reference to the Company's Registration Statement number 333-53581
dated May 21, 1998 wherein the same appeared as Exhibit 3(a).
3(b) By-Laws of the Company as incorporated by reference to the
Company's Registration Statement number 333-53581 dated May 21,
1998 wherein the same appeared as Exhibit 3(c).
4 See Articles V, VI and X of the Company's Certificate of
Incorporation and Articles I, II, V and VI of the Company's
By-Laws as provided at Exhibits 3(a) and 3(b) above.
10(a) Contract Settlement Agreement between Frontier Natural Gas
Corporation and David W. Berry dated effective January 1, 1998, as
incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997 dated April 6,
1998, wherein the same appears as Exhibit 10(b).
10(b) Contract Settlement Agreement between Frontier Natural Gas
Corporation and David B Christofferson dated effective January 1,
1998, as incorporated by reference to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1997 dated
April 6, 1998, wherein the same appears as Exhibit 10(d).
10(c)* $20,000,000 Amended and Restated Credit Agreement dated as of
October 13, 1998, between Esenjay Exploration, Inc. as the
borrower and Bank of America NT&SA as the lender.
10(d)* Credit Agreement by and between Esenjay Exploration, Inc. and Duke
Energy Financial Services, Inc. dated as of January 28, 1999, as
currently in effect.
10(e) Loan Agreement by and between Frontier Natural Gas Corporation and
420 Energy Investments, Inc. dated March 1, 1996, as currently in
effect as incorporated by reference to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1995 dated
March 29, 1996, wherein the same appears as Exhibit 10(r).
</TABLE>
54
<PAGE>
<TABLE>
<S> <C>
10(f) Employee Option Plan-1997 as currently in effect as incorporated
by reference to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997 dated April 6, 1998, wherein
the same appears as Exhibit 10(o).
10(g) Warrant Agreement between Frontier Natural Gas Corporation and
Gaines, Berland Energy Fund, L.P. dated January 14, 1998, as
incorporated by reference to the Company's Registration Statement
number 333-53581 dated May 21, 1998 wherein the same appeared as
Exhibit 10(q).
10(h) Warrant Agreement between Frontier Natural Gas Corporation and
Esenjay Petroleum Corporation dated January 14, 1998, as
incorporated by reference to the Company's Registration Statement
number 333-53581 dated May 21, 1998 wherein the same appeared as
Exhibit 10(r).
10(i) Warrant Agreement between Frontier Natural Gas Corporation and
Aspect Resources LLC dated January 14, 1998, as incorporated by
reference to the Company's Registration Statement number 333-53581
dated May 21, 1998 wherein the same appeared as Exhibit 10(s).
10(j) Warrant Agreement between Frontier Natural Gas Corporation and
Gaines, Berland Energy Fund, L.P. dated January 23, 1998, as
incorporated by reference to the Company's Registration Statement
number 333-53581 dated May 21, 1998 wherein the same appeared as
Exhibit 10(t).
10(k) Warrant Agreement between Frontier Natural Gas Corporation and
Esenjay Petroleum Corporation dated January 23, 1998, as
incorporated by reference to the Company's Registration Statement
number 333-53581 dated May 21, 1998 wherein the same appeared as
Exhibit 10(u).
10(l) Warrant Agreement between Frontier Natural Gas Corporation and
Aspect Resources LLC dated January 23, 1998, as incorporated by
reference to the Company's Registration Statement number 333-53581
dated May 21, 1998 wherein the same appeared as Exhibit 10(v).
11* Statement of Earnings per Share
21* Subsidiaries of Registrant.
27* Financial Data Schedule.
(b) Reports on Form 8-K. None
</TABLE>
- ----------
*Filed herewith
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13, or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ESENJAY EXPLORATION, INC.
Date: April 14, 1999 By: /s/ Michael E. Johnson
-----------------------------
Michael E. Johnson, President,
Chief Executive Officer and Director
Pursuant to the requirements of Section 13, or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: April 14, 1999 /s/ David B Christofferson
--------------------------
David B Christofferson, Senior Vice President
General Counsel and Chief Financial Officer
Date: April 14, 1999 /s/ Howard E. Williams
----------------------
Howard E. Williams, Vice President and
Principal Accounting Officer
Date: April 14, 1999 /s/ David W. Berry
----------------------
David W. Berry, Chairman and Director
Date: April 14, 1999 /s/ Charles J. Smith
--------------------
Charles J. Smith, Director
Date: April 14, 1999 /s/ Alex M. Cranberg
--------------------
Alex M. Cranberg, Director
Date: April 14, 1999 /s/ Alex B. Campbell
--------------------
Alex B. Campbell, Director
Date: April 14, 1999 /s/ Jack P. Randall
-------------------
Jack P. Randall, Director
Date: April 14, 1999 /s/ William D. Dodge
--------------------
William D. Dodge, Director
Date: April 14, 1999 /s/ Hobart A. Smith
-------------------
Hobart A. Smith, Director
56
<PAGE>
Execution Counterpart
U.S. $20,000,000
AMENDED AND RESTATED
CREDIT AGREEMENT,
dated as of October 13, 1998
between
ESENJAY EXPLORATION, INC.,
as the Borrower
and
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as the Lender
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS..........................................2
1.1. Defined Terms..................................................2
1.2. Use of Defined Terms..........................................26
1.3. Cross-References..............................................26
1.4. Accounting and Financial Determinations.......................27
ARTICLE II
COMMITMENTS, BORROWING PROCEDURES AND NOTES..............................28
2.1. Commitments...................................................28
2.1.1. Tranche A Commitment........................................28
2.1.2. Tranche B Commitment........................................28
2.1.3. Letters of Credit...........................................29
2.1.4. Lender Not Required To Make Loans, etc. Under Certain
Circumstances.............................................29
2.2. Reduction of Commitment Amounts.............................29
2.2.1. Optional....................................................29
2.2.2. Mandatory...................................................30
2.3. Borrowing Procedure...........................................30
2.4. Continuation and Conversion Elections.........................30
2.5. Loan Accounts and Notes.......................................30
2.6. Borrowing Base Redetermination and Collateral Value
Redeterminaton............................................31
2.7. Purposes......................................................32
ARTICLE III
REPAYMENTS, PREPAYMENTS, INTEREST AND FEES.............................32
3.1. Repayments and Prepayments and Certain Borrowing Base
Matters..................................................32
3.1.1. Repayments and Prepayments................................32
3.1.2. Borrowing Base Deficiencies, Collateral Value
Deficiencies and Asset Sales.............................34
3.2. Interest Provisions.........................................36
3.2.1. Rate......................................................36
3.2.2. Post-Maturity Rates.......................................36
3.2.3. Payment Dates.............................................36
3.2.4. Maximum Interest..........................................37
3.3. Fees........................................................38
i
<PAGE>
SECTION PAGE
3.3.1. Commitment Fee...........................................38
3.3.2. Structuring Fee..........................................38
3.3.3. Closing Fee..............................................38
3.3.4. Engineering Fee..........................................38
3.3.5. Letter of Credit Stated Amount Fee.......................39
3.3.6. Letter of Credit Issuance Fee............................39
3.3.7. Letter of Credit Administrative Fees.....................39
3.3.8. Borrowing Base Fee.......................................39
3.4. Proceeds Account.........................................39
3.5. Overriding Royalty Interest; Assignment is Not
Collateral Security......................................39
ARTICLE IV
LETTERS OF CREDIT......................................................40
4.1. Issuance Requests...........................................40
4.2. Issuances and Extensions....................................41
4.3. Expenses....................................................42
4.4. Disbursements...............................................42
4.5. Reimbursement...............................................43
4.6. Deemed Disbursements........................................43
4.7. Nature of Reimbursement Obligations.........................44
4.8. Increased Costs; Indemnity..................................46
ARTICLE V
CERTAIN INTEREST RATE AND OTHER PROVISIONS.............................47
5.1. LIBO Rate Lending Unlawful..................................47
5.2. Deposits Unavailable........................................47
5.3. Increased Loan Costs, etc...................................47
5.4. Funding Losses..............................................48
5.5. Increased Capital Costs.....................................49
5.6. Taxes ......................................................49
5.7. Payments, Computations, etc.................................50
5.8. Setoff......................................................51
5.9. Use of Proceeds.............................................51
ARTICLE VI
CONDITIONS PRECEDENT...................................................51
6.1. Initial Credit Extension....................................51
ii
<PAGE>
SECTION PAGE
6.1.1. Resolutions, etc..........................................51
6.1.2. Delivery of Notes.........................................52
6.1.3. Guaranties................................................52
6.1.4. Pledge Agreements.........................................52
6.1.5. Security Agreement........................................53
6.1.6. Consents and Mortgage Consents............................53
6.1.7. Mortgage..................................................53
6.1.8. Opinions of Counsel.......................................54
6.1.9. UCC-11s...................................................54
6.1.10. Evidence of Insurance....................................54
6.1.11. Engineering Reports......................................54
6.1.12. Environmental Report.....................................55
6.1.13. Budget...................................................55
6.1.14. Approved Development Plan................................55
6.1.15. Amended and Restated Security Documents..................55
6.1.16. ORRI Certificate, etc....................................55
6.1.17. Hedging Agreements.......................................55
6.1.18. Assignment...............................................55
6.1.19. Warrants.................................................56
6.1.20. Closing Fees, Expenses, etc..............................56
6.1.21. Other Documents..........................................56
6.2. Inclusion of Hydrocarbon Interests in the Borrowing Base....56
6.2.1. Environmental Report......................................56
6.2.2. Mortgage..................................................56
6.2.3. UCC-11s...................................................57
6.2.4. Evidence of Insurance.....................................57
6.2.5. Engineering Reports.......................................57
6.2.6. Material Contracts and Related Consents; Security
Agreement.................................................57
6.2.7. Guaranties................................................58
6.2.8. Additional Stock or Partnership Pledge....................58
6.2.9. Overriding Royalty Interests..............................58
6.2.10. Other Documents..........................................58
6.3. All Credit Extensions.....................................58
6.3.1. Compliance with Warranties, No Default, etc...............59
6.3.2. Credit Request............................................59
6.3.3. Satisfactory Legal Form...................................59
ARTICLE VII
REPRESENTATIONS AND WARRANTIES.........................................60
7.1. Organization, etc...........................................60
iii
<PAGE>
SECTION PAGE
7.2. Due Authorization, Non-Contravention, etc...................60
7.3. Government Approval, Regulation, etc........................61
7.4. Investment Company Act......................................61
7.5. Public Utility Holding Company Act..........................61
7.6. Validity, etc...............................................61
7.7. Financial Information.......................................61
7.8. No Material Adverse Change..................................61
7.9. Litigation, Labor Controversies, etc........................62
7.10. Ownership of Properties....................................62
7.11. Taxes......................................................62
7.12. Pension and Welfare Plans..................................62
7.13. Compliance with Law........................................63
7.14. Claims and Liabilities.....................................63
7.15. No Prohibition on Perfection of Security Documents.........63
7.16. Solvency...................................................63
7.17. Environmental Warranties...................................63
7.18. Regulations G, U and X.....................................65
7.19. Year 2000 Compliance.......................................66
7.20. Insurance..................................................66
7.21. Accuracy of Information....................................66
7.22. Title Warranty.............................................66
ARTICLE VIII
COVENANTS..............................................................67
8.1. Affirmative Covenants.......................................67
8.1.1. Financial Information, Reports, Notices, etc..............67
8.1.2. Compliance with Laws, etc.................................70
8.1.3. Maintenance, Development and Sale of Properties...........70
8.1.4. Insurance.................................................72
8.1.5. Books and Records.........................................73
8.1.6. Environmental Covenant....................................73
8.1.7. Further Assurances........................................74
8.1.8. Hydrocarbon Hedging.......................................75
8.1.9. Interest Rate Protection..................................75
8.1.10. Intercreditor Agreement..................................76
8.1.11. Merger of Certain Subsidiaries...........................76
8.2. Negative Covenants........................................76
8.2.1. Business Activities.......................................76
8.2.2. Indebtedness..............................................76
8.2.3. Liens.....................................................78
iv
<PAGE>
SECTION PAGE
8.2.4. Financial Condition.......................................80
8.2.5. Investments...............................................81
8.2.6. Restricted Payments, etc..................................82
8.2.7. Rental Obligations........................................82
8.2.8. Consolidation, Merger, etc................................82
8.2.9. Asset Dispositions, etc...................................83
8.2.10. Modification of Certain Documents........................83
8.2.11. Transactions with Affiliates.............................83
8.2.12. Negative Pledges, Restrictive Agreements, etc............84
8.2.13. Take or Pay Contracts....................................84
ARTICLE IX
EVENTS OF DEFAULT......................................................84
9.1. Listing of Events of Default................................84
9.1.1. Non-Payment of Obligations................................84
9.1.2. Breach of Warranty........................................85
9.1.3. Non-Performance of Certain Covenants and Obligations......85
9.1.4. Non-Performance of Other Covenants and Obligations........85
9.1.5. Default on Other Indebtedness.............................85
9.1.6. Judgments.................................................86
9.1.7. Pension Plans.............................................86
9.1.8. Control of the Borrower...................................86
9.1.9. Bankruptcy, Insolvency, etc...............................86
9.1.10. Impairment of Security, etc..............................87
9.1.11. Material Adverse Effect..................................87
9.2. Action if Bankruptcy........................................87
9.3. Action if Other Event of Default............................87
9.4. Rights Not Exclusive........................................88
ARTICLE X
MISCELLANEOUS PROVISIONS...............................................88
10.1. Waivers, Amendments, etc...................................88
10.2. Notices....................................................88
10.3. Payment of Costs and Expenses..............................89
10.4. Indemnification............................................90
10.5. Survival...................................................91
10.6. Severability...............................................91
10.7. Headings...................................................92
10.8. Execution in Counterparts, Effectiveness, etc..............92
v
<PAGE>
SECTION PAGE
10.9. Governing Law; Entire Agreement............................92
10.10. Successors and Assigns....................................92
10.11. Sale and Transfer of Loans and Notes;
Participations in Loans and Notes.........................92
10.11.1. Assignments.............................................92
10.11.2. Participations..........................................94
10.12. Forum Selection and Consent to Jurisdiction...............94
10.13. Waiver of Jury Trial......................................95
10.14. Notice....................................................95
vi
<PAGE>
SCHEDULE I Disclosure Schedule
SCHEDULE II Certain Oil and Gas Properties
SCHEDULE III Subsidiaries
SCHEDULE IV Minimum Hedging Volumes
SCHEDULE V Existing Mortgages
SCHEDULE VI Certain Consents and Mortgage Consents
EXHIBIT A - Form of Note
EXHIBIT B-1 - Form of Borrowing Request
EXHIBIT B-2 - Form of Continuation/Conversion Notice
EXHIBIT C - Form of Security Agreement
EXHIBIT D - Form of Mortgage
EXHIBIT E - Form of Secured Guaranty
EXHIBIT F-1 - Form of Pledge Agreement (Stock)
EXHIBIT F-2 - Form of Pledge Agreement (Partnership Agreement)
EXHIBIT G - Form of Lender Assignment Notice
EXHIBIT H - Form of Opinions of Counsel to the Borrower and
the other Obligors
EXHIBIT I - Form of Opinions of Special Title Counsel to
the Borrower
EXHIBIT J - Form of Assignment and Conveyance of Overriding
Royalty Interest
EXHIBIT K - Form of Certificate as to Overriding Royalty
Interests
EXHIBIT L - Form of Agreement as to Certain Tax Matters
EXHIBIT M - Form of Issuance Request
EXHIBIT N - Form of Irrevocable Standby Letter of Credit
EXHIBIT O-1 - Form of Warrant Agreement
EXHIBIT O-2 - Form of Warrants
EXHIBIT O-3 - Form of Registration Rights Agreement
EXHIBIT P - Form of Approved Development Plan
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT, dated as of October 13, 1998,
between ESENJAY EXPLORATION, INC., a Delaware corporation and the
successor-by-merger to Frontier Natural Gas Corporation (the "BORROWER"), and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking
association and the successor-by-merger to Bank of America Illinois (the
"LENDER"),
W I T N E S S E T H:
WHEREAS, the Borrower is engaged in the business of oil and gas exploration
and production, and activities related or ancillary thereto; and
WHEREAS, the Borrower's predecessor in interest (then known as "Frontier
Natural Gas Corporation") and the Lender's predecessor in interest (then known
as "Bank of America Illinois") are parties to that certain Credit Agreement
dated as of January 3, 1996 (the "PRIOR AGREEMENT"), pursuant to which the
Lender made Commitments to make Loans to the Borrower prior to the applicable
Commitment Termination Date in the maximum principal amount, of Loans at any one
time not to exceed in the aggregate the lesser of (x) the Collateral Value, or
(y) $15,000,000, and
WHEREAS, the Borrower and the Lender are also parties to that certain
Amendment No. 1 to Credit Agreement dated as of November 1, 1996 and that
certain Amendment No. 2 to Credit Agreement dated as of July 1, 1997 (the Prior
Agreement, as so amended, herein called the "EXISTING AGREEMENT"); and
WHEREAS, pursuant to that certain Acquisition Agreement and Plan of
Exchange dated January 19, 1998 ("ACQUISITION AGREEMENT"), between Frontier
Natural Gas Corporation, Esenjay Petroleum Corporation, a Texas corporation
("OLD ESENJAY") and Aspect Resources LLC, a Colorado limited liability company
("ASPECT"), certain assets of Old Esenjay and certain assets of Aspect were
transferred to Frontier Natural Gas Corporation in exchange for shares of the
capital stock of Frontier Natural Gas Corporation; and
WHEREAS, pursuant to that certain Plan and Agreement of Merger dated as of
May 14, 1998 ("MERGER AGREEMENT"), Frontier Natural Gas Corporation, an Oklahoma
corporation, merged with and into Esenjay Exploration, Inc, a Delaware
corporation; and
WHEREAS, the Lender has heretofore merged with and into Bank of America
National Trust and Savings Association; and
<PAGE>
WHEREAS, the Borrower desires to amend the Existing Agreement and to obtain
Commitments from the Lender pursuant to which Loans will be made to the Borrower
from time to time prior to the applicable Commitment Termination Date; in a
maximum aggregate principal amount of Loans at any one time not to exceed in
the aggregate the lesser of (x) the Collateral Value, or (y) $20,000,000; and
WHEREAS, the Lender is willing, on the terms and subject to the conditions
hereinafter set forth (including ARTICLE V), to amend the Existing Agreement, to
extend such Commitments, and to make such Loans to the Borrower; and
WHEREAS, the proceeds of such Loans will be used
(a) to refinance certain oil and gas producing Properties owned by the
Borrower or one of the Borrower's Subsidiaries in the States of Oklahoma,
Kansas, Louisiana and Texas;
(b) to further develop the Starboard Properties;
(c) to conduct other Approved Development Activities on the Oil and Gas
Properties owned by the Borrower or one of the Borrower's Subsidiaries,
including those Properties located in Matagorda, San Patricio, Karnes,
Willacy and Calhoun Counties, Texas; and
WHEREAS, the Parties have agreed it is in their respective best interests
to enter into this Agreement amending, restating and superseding the Existing
Agreement,
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.1. DEFINED TERMS. The following terms (whether or not
underscored) when used in this Agreement, including its preamble and recitals,
shall, except where the context otherwise requires, have the following meanings
(such meanings to be equally applicable to the singular and plural forms
thereof):
"ACQUIRED PROPERTIES" means those Oil and Gas Properties and other assets
that are acquired from time to time in an Acquisition.
"ACQUISITION" means an acquisition by the Borrower or one or more of its
Subsidiaries of Acquired Properties.
2
<PAGE>
"AFFILIATE" of any Person means any other Person which, directly or
indirectly, controls, is controlled by or is under common control with such
Person (excluding any trustee under, or any committee with responsibility for
administering, any Plan). A Person shall be deemed to be "controlled by" any
other Person if such other Person possesses, directly or indirectly, power
(a) to vote 10% 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.
"AGREEMENT" means, on any date, this Amended and Restated Credit Agreement
as originally in effect on the Effective Date and as thereafter from time to
time amended, supplemented, amended and restated, or otherwise modified and in
effect on such date.
"ALTERNATE BASE RATE" means, on any date and with respect to all Base Rate
Loans, a fluctuating rate of interest per annum equal to the higher of
(a) the rate of interest as announced from time to time by the Lender
as its "reference rate" at its Domestic Office; or
(b) the Federal Funds Rate most recently determined by the Lender plus
1/2%.
The Alternate Base Rate is not necessarily intended to be the lowest rate of
interest in connection with extensions of credit. Changes in the rate of
interest on that portion of any Loans maintained as Base Rate Loans will take
effect simultaneously with each change in the Alternate Base Rate. The Lender
will give notice to the Borrower of changes in the Alternate Base Rate.
"APPLICABLE LAW" means with respect to any Person or matter, any federal,
state, regional, tribal or local statute, law, code, rule, treaty, convention,
application, order, decree, consent decree, injunction, directive, determination
or other requirement (whether or not having the force of law) relating to such
Person or matter and, where applicable, any interpretation thereof by a
Government Agency having jurisdiction with respect thereto or charged with the
administration or interpretation thereof.
"APPLICABLE MARGIN" means, with respect to any Credit Extension at any time
of determination, a margin above the interest rate or fee applicable to such
Credit Extension equal to the following:
3
<PAGE>
- -------------------------------------------------------------------------
Alternate
LIBO Rate Base Rate
- -------------------------------------------------------------------------
Tranche A Loan 2% 0%
- -------------------------------------------------------------------------
Tranche B Loan 4% 2%
- -------------------------------------------------------------------------
Letter of Credit 2% 0%
- -------------------------------------------------------------------------
"APPROVALS" means each and every approval, authorization, license, permit,
consent, variance, land use entitlement, franchise, agreement, filing or
registration by or with any Government Agency or other Person necessary for all
stages of developing, operating, maintaining and abandoning Oil and Gas
Properties.
"APPROVED DEVELOPMENT ACTIVITIES" means development drilling on the
Mortgaged Properties and the Development Properties (i) in order to bring into
production Proven Reserves which the Lender has included in its determination of
the Borrowing Base, and (ii) in order to further develop the Mortgaged
Properties and the Development Properties, in each case as approved by the
Lender.
"APPROVED DEVELOPMENT PLAN" means the Borrower's plan, as approved by the
Lender, for conducting Approved Development Activities on the Oil & Gas
Properties comprising the Development Properties.
"ASPECT" is defined in the RECITALS.
"ASSIGNEE LENDER" is defined in SECTION 10.11.1.
"ASSIGNMENT" means the Assignment and Conveyance of Overriding Royalty
Interest, substantially in the form of EXHIBIT J, from the Borrower and/or the
Borrower's Subsidiaries to the Designee, assigning to the Designee, as
additional consideration for the making of Commitments by the Lender and not as
collateral security for the Loans, overriding royalty interests in its or their
Hydrocarbon Interests listed on SCHEDULE II, PART B (New Mortgaged Properties)
and SCHEDULE II, PART C (Starboard Properties).
"AUTHORIZED OFFICER" means, relative to any Obligor, those of its officers
whose signatures and incumbency shall have been certified to the Lender pursuant
to SECTION 6.1.1.
"BASE RATE LOAN" means a Loan bearing interest at a fluctuating rate
determined by reference to the Alternate Base Rate.
"BORROWER" is defined in the PREAMBLE.
4
<PAGE>
"BORROWING" means the Loans of the same type and, in the case of LIBO Rate
Loans, having the same Interest Period made by the Lender on the same Business
Day and pursuant to the same Borrowing Request in accordance with SECTION 2.1.
"BORROWING BASE" means, as at any date, (a) prior to the initial Borrowing
Base Redetermination, $4,000,000 and (b) thereafter, (i) that amount of
Indebtedness for borrowed money under the Facility that the Lender determines
can be supported by the Proven Reserves attributable to Hydrocarbon Interests
owned directly by the Borrower or its Subsidiaries which are a part of the
Mortgaged Properties, after an engineering and economic review of such reserves
conducted by the Lender using its normal procedures for oil and gas facilities
of this type, taking into account the value of all those proved developed
producing oil and gas reserves and certain portions of certain other categories
of Proven Reserves attributable to the Mortgaged Properties.
"BORROWING BASE DEFICIENCY" means the amount by which (a) the sum of the
aggregate outstanding principal amount of all Tranche A Loans plus Letter of
Credit Outstandings exceeds (b) the then current Borrowing Base.
"BORROWING BASE DEFICIENCY NOTIFICATION DATE" means the date on which any
notice of a Borrowing Base Deficiency is received by the Borrower.
"BORROWING BASE FEE" is defined in SECTION 3.3.8.
"BORROWING BASE REDETERMINATION" is defined in SECTION 2.6.
"BORROWING REQUEST" means a loan request and certificate duly executed by
an Authorized Officer of the Borrower, substantially in the form of EXHIBIT B-1
hereto.
"BUSINESS DAY" means
(a) any day which is neither a Saturday or Sunday nor any other day on
which banks are authorized or required to be closed in Chicago, Illinois;
and
(b) relative to the making, continuing, prepaying or repaying of any
LIBO Rate Loans, any day on which dealings in Dollars are carried on in the
London interbank market.
"CAPITAL EXPENDITURES" means, for any period, (without duplication) the
aggregate amount of all expenditures of the Borrower and its consolidated
Subsidiaries for fixed or capital assets made during such period which, in
accordance with GAAP, would be classified as capital expenditures including,
with respect to any period, payments made by the Borrower and its consolidated
Subsidiaries with respect to Capitalized Lease Liabilities incurred during such
period.
5
<PAGE>
"CAPITALIZATION" means, at any time, the sum of (a) the total Debt of the
Borrower and its consolidated Subsidiaries PLUS (b) the total equity of the
Borrower and its consolidated Subsidiaries.
"CAPITALIZED LEASE LIABILITIES" means all monetary obligations of the
Borrower or any of its consolidated Subsidiaries under any leasing or similar
arrangement which, in accordance with GAAP, would be classified as capitalized
leases, and, for purposes of this Agreement and each other Loan Document, the
amount of such obligations shall be the capitalized amount thereof, determined
in accordance with GAAP.
"CASH EQUIVALENT INVESTMENT" means, at any time:
(a) any evidence of Indebtedness, maturing not more than one year after
such time, issued or guaranteed by the United States Government;
(b) commercial paper, maturing not more than nine months from the date
of issue, which is issued by
(i) a corporation (other than an Affiliate of the Borrower)
organized under the laws of any state of the United States or of the
District of Columbia and rated at least A-1 by Standard & Poor's
Corporation or P-1 by Moody's Investors Service, Inc., or
(ii) the Lender;
(c) any certificate of deposit or bankers acceptance, maturing not more
than one year after such time, which is issued by
(i) a commercial banking institution that is a member of the
Federal Reserve System and has a combined capital and surplus and
undivided profits of not less than $500,000,000, or
(ii) the Lender; or
(d) any repurchase agreement entered into with the Lender (or other
commercial banking institution of the stature referred to in CLAUSE (c))
which
(i) is secured by a fully perfected security interest in any
obligation of the type described in any of CLAUSES (a) through (c); and
(ii) has a market value at the time such repurchase agreement is
entered into of not less than 100% of the repurchase obligation of the
Lender (or other commercial banking institution) thereunder.
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"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
"CERCLIS" means the Comprehensive Environmental Response Compensation
Liability Information System List.
"CHANGE IN CONTROL" means if either Old Esenjay or Aspect shall fail
beneficially to own at least 80% of their existing percentages of the
outstanding shares of the voting capital stock of the Borrower as of October 13,
1998 (subject to dilution only in the event of the issuance of additional shares
of such voting capital stock), on a fully diluted basis or Michael Johnson, Alex
Cranberg, David Berry and/or David Christofferson shall fail to be actively
involved in the management of the business of the Borrower or (b) if the
Borrower ceases to own beneficially and of record 100% of the capital stock of
each of the Borrower's Subsidiaries.
"CODE" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time, and the regulations promulgated
thereunder.
"COLLATERAL VALUE" shall mean, as at any date, (a) prior to the initial
Collateral Value Redetermination, $9,000,000 and (b) thereafter, the quotient of
(i) the projected net future cash flow, discounted at nine percent (9%) per
annum, from the anticipated production of Hydrocarbons from Proven Reserves
attributable to Hydrocarbon Interests owned directly by the Borrower or one of
the Borrower's Subsidiaries which are a part of the Mortgaged Properties, after
an engineering and economic review of such reserves conducted by the Lender
taking into account the value of all those proved developed producing oil and
gas reserves and all other categories of Proven Reserves attributable to the
Mortgaged Properties that the Lender expects can become proved developed
producing reserves within the next following eighteen (18) months with funds
that the Lender determines are available to the Borrower for such purpose and
use, divided by (ii) 1.65.
"COLLATERAL VALUE DEFICIENCY" means the amount by which (a) the sum of the
aggregate outstanding principal amount of all Tranche A Loans plus all Tranche B
Loans plus all Letter of Credit Outstandings exceeds (b) the then current
Collateral Value.
"COLLATERAL VALUE DEFICIENCY NOTIFICATION DATE" shall mean the date on
which any notice of a Collateral Value Deficiency is received by the Borrower.
"COLLATERAL VALUE REDETERMINATION" is defined in SECTION 2.6.
"COMMITMENT" means the Lender's commitment pursuant to SECTION 2.1 to make
Loans to the Borrower and to issue Letters of Credit in accordance with the
terms and provisions of this Agreement.
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"COMMITMENT AMOUNT" means the lesser of (i) $20,000,000, as reduced from
time to time pursuant to the provisions of Section 2.2, or (ii) the Borrowing
Base.
"COMMITMENT AVAILABILITY" means, on any date, the excess of
(a) the then applicable Commitment Amount, over
(b) the sum of
(i) the aggregate outstanding principal amount of all applicable
Loans on such date, plus
(ii) the Letter of Credit Outstandings on such date.
"COMMITMENT TERMINATION DATE" means the earliest of
(a) the Stated Maturity Date;
(b) the date on which either the Tranche A Commitment Amount or the
Tranche B Commitment Amount, or either of them, as applicable, is
terminated in full or reduced to zero pursuant to SECTION 2.2; and
(c) the date on which any Commitment Termination Event occurs.
"COMMITMENT TERMINATION EVENT" means
(a) the occurrence of any Default described in CLAUSES (a) through (d)
of SECTION 9.1.9 with respect to the Borrower or any Subsidiary; or
(b) the occurrence and continuance of any other Event of Default and
either
(i) the declaration of the Loans and other Obligations to be due
and payable pursuant to SECTION 9.3, or
(ii) in the absence of such declaration, the giving of notice by
the Lender to the Borrower that the Commitments have been terminated.
"CONSENT" means a Consent to Assignment executed and delivered pursuant to
SECTION 6.2.6, substantially in the form of EXHIBIT J, as amended, supplemented,
restated or otherwise modified from time to time pursuant to which the
Borrower's counterparty to each Material Contract (i) consents to the assignment
of each such Material Contract to the Lender as security for the Obligations and
(ii) provides the Lender an independent right to cure defaults under such
Material Contract.
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"CONSOLIDATED NET INCOME" means, with respect to the Borrower and its
consolidated Subsidiaries for any period, the consolidated net income (or loss)
of the Borrower and its consolidated Subsidiaries for such period determined in
accordance with GAAP.
"CONTINGENT LIABILITY" means, as to any Person, any direct or indirect
liability of that Person, whether or not contingent, with or without recourse,
(a) with respect to any Indebtedness, lease, dividend, letter of credit or other
obligation (the "primary obligations") of another Person (the "primary
obligor"), including any obligation of that Person (i) to purchase, repurchase
or otherwise acquire such primary obligations or any security therefor, (ii) to
advance or provide funds for the payment or discharge of any such primary
obligation, or to maintain working capital or equity capital of the primary
obligor or otherwise to maintain the net worth or solvency or any balance sheet
item, level of income or financial condition of the primary obligor, (iii) to
purchase property, securities or services primarily for the purpose of assuring
the owner of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation, or (iv) otherwise to assure or hold
harmless the holder of any such primary obligation against loss in respect
thereof (each, a "GUARANTY OBLIGATION"); (b) with respect to any Surety
Instrument issued for the account of that Person or as to which that Person is
otherwise liable for reimbursement of drawings or payments; or (c) to purchase
any materials, supplies or other property from, or to obtain the services of,
another Person if the relevant contract or other related document or obligation
requires that payment for such materials, supplies or other property, or for
such services, shall be made regardless of whether delivery of such materials,
supplies or other property is ever made or tendered, or such services are ever
performed or tendered.
"CONTINUATION/CONVERSION NOTICE" means a notice of continuation or
conversion and certificate duly executed by an Authorized Officer of the
Borrower, substantially in the form of Exhibit B-2 hereto.
"CONTROLLED GROUP" means all members of a controlled group of corporations
and all members of a controlled group of trades or businesses (whether or not
incorporated) under common control which, together with the Borrower, are
treated as a single employer under Section 414(b) or 414(c) of the Code or
Section 4001 of ERISA.
"CREDIT EXTENSION" means and includes
(a) the advancing of any Tranche A Loans by the Lender in connection
with a Borrowing hereunder,
(b) the advancing of any Tranche B Loans by the Lender in connection
with a Borrowing hereunder, and
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(c) any issuance by an Issuer, or the extension of the Stated Expiry
Date by an Issuer, of a Letter of Credit.
"CURRENT RATIO" means, as of the end of each Fiscal Quarter, the ratio
of
(a) the current assets (including the unused portion of the Commitment
Amount) of the Borrower and its consolidated Subsidiaries to
(b) the current liabilities (minus the current portion of long term
Debt) of the Borrower and its consolidated Subsidiaries.
"DEBT" means the outstanding principal amount of all Indebtedness of the
Borrower and its consolidated Subsidiaries of the nature referred to in CLAUSES
(a) AND (b) of the definition of "INDEBTEDNESS".
"DEBT TO CAPITALIZATION RATIO" means, as of the end of each Fiscal Quarter,
the ratio of (a) Debt to (b) Capitalization.
"DEFAULT" means any Event of Default or any condition, occurrence or event
which, after notice or lapse of time or both, would constitute an Event of
Default.
"DEVELOPMENT PROPERTIES" means those Oil & Gas Properties described in
SCHEDULE II, PART C (Starboard Properties) and SCHEDULE II, PART D (Other
Development Properties) to this Agreement.
"DISBURSEMENT DATE" is defined in SECTION 4.4.
"DESIGNEE" is defined in SECTION 3.5.
"DISBURSEMENT" means the amount disbursed by the Issuer on a Disbursement
Date.
"DISCLOSURE SCHEDULE" means the Disclosure Schedule attached hereto as
SCHEDULE I, as it may be amended, supplemented or otherwise modified from time
to time by the Borrower with the written consent of the Lender.
"DISTRIBUTION PAYMENTS" is defined in SECTION 8.2.6.
"DOLLAR" and the sign "$" mean lawful money of the United States.
"DOMESTIC OFFICE" means the office of the Lender designated as such on its
signature page hereto or designated in a Lender Assignment Notice or such other
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office of the Lender (or any successor or assign of the Lender) within the
United States as may be designated from time to time by notice from the Lender,
as the case may be, to each other Person party hereto.
"EBITDA" means for any period, the sum, without duplication, of the
following:
(a) Consolidated Net Income for such period, plus
(b) Interest Expense for such period, plus
(c) all depreciation and amortization of assets (including goodwill and
other intangible assets) of the Borrower and its consolidated Subsidiaries
deducted in determining Consolidated Net Income for such period, plus
(minus)
(d) all federal, state, local and foreign income taxes of the Borrower
and its consolidated Subsidiaries deducted (or credits added) in
determining Consolidated Net Income for such period, plus (minus)
(e) other non-cash items deducted or added in determining Consolidated
Net Income for such period.
"EFFECTIVE DATE" means the date this Agreement becomes effective
pursuant to SECTION 10.8.
"ENGINEERING REPORT" means one or more reports, in form and substance
satisfactory to the Lender, prepared at the sole cost and expense of the
Borrower by Netherland, Sewell & Associates, Inc. or another petroleum engineer
acceptable to the Lender in its reasonable business judgment, which shall
evaluate the Proven Reserves and probable reserves attributable to the
Hydrocarbon Interests owned directly by the Borrower and/or its Subsidiaries and
constituting part of the Mortgaged Properties, as of the immediately preceding
January 1 or July 1. Each Engineering Report shall set forth volumes,
projections of the future rate of production, Hydrocarbons prices, escalation
rates, discount rate assumptions, and net proceeds of production, present value
of the net proceeds of production, estimated costs of Remedial Action, operating
expenses and capital expenditures, in each case based upon updated economic
assumptions reasonably acceptable to the Lender.
"ENVIRONMENTAL LAWS" means all Applicable Laws relating to public health
and safety through protection of the environment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA also refer to any successor sections.
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"EVENT OF DEFAULT" is defined in SECTION 9.1.
"FACILITY" means the Tranche A Facility or the Tranche B Facility, or
either of them, as the case may be, providing for the Commitment and the Loans.
"FEDERAL FUNDS RATE" means, for any day, the rate set forth in the weekly
statistical release designated as H.15(519), or any successor publication,
published by the Federal Reserve Bank of New York (including any such successor,
"H.15(519)") on the preceding Business Day opposite the caption "Federal Funds
(Effective)"; or, if for any relevant day, such rate is not so published on any
such preceding Business Day, the rate for such day will be the arithmetic mean
as determined by the Lender of the rates for the last transaction in overnight
Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by
each of three leading brokers of Federal funds transactions in New York City
selected by the Lender.
"FISCAL QUARTER" means any quarter ending on the last day of March, June,
September, and December of a Fiscal Year.
"FISCAL YEAR" means any period of twelve consecutive calendar months ending
on December 31; references to a Fiscal Year with a number corresponding to any
calendar year (e.g., "Fiscal Year 1998") refer to the Fiscal Year ending on the
December 31 occurring during such calendar year.
"F.R.S. BOARD" means the Board of Governors of the Federal Reserve System
or any successor thereto.
"GAAP" is defined in Section 1.4.
"GOVERNMENT AGENCY" means any federal, state, regional, tribal or local
government or governmental department or other entity charged with the
administration, interpretation or enforcement of any Applicable Law.
"GUARANTIES" means the guaranties of the Obligations, executed and
delivered pursuant to Section 6.1.3 and Section 6.2.7, substantially in the form
of Exhibit E, given by each of the Borrower's Subsidiaries.
"HAZARDOUS MATERIAL" means
(a) any "hazardous substance", as defined by CERCLA;
(b) any "hazardous waste", as defined by the Resource Conservation and
Recovery Act, as amended;
(c) any petroleum, crude oil or fraction thereof;
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(d) any hazardous, dangerous or toxic chemical, material, waste or
substance within the meaning of any Environmental Law;
(e) any radioactive material, including any naturally occurring
radioactive material, and any source, special or by-product material as defined
in 42 U.S.C. Section 2011 ET SEQ., and any amendments or reauthorizations
thereof;
(f) asbestos-containing materials in any form or condition; or
(g) polychlorinated biphenyls in any form or condition.
"HEDGING AGREEMENTS" means:
(a) interest rate swap agreements, basis swap agreements, interest
rate cap agreements, forward rate agreements, interest rate floor
agreements and interest rate collar agreements, and all other agreements or
arrangements designed to protect such Person against fluctuations in
interest rates or currency exchange rates, and
(b) forward contracts, options, futures contracts, futures options,
commodity swaps, commodity options, commodity collars, commodity caps,
commodity floors and all other agreements or arrangements designed to
protect such Person against fluctuations in the price of commodities.
"HEDGING OBLIGATIONS" means, with respect to any Person, all liabilities
(including but not limited to obligations and liabilities arising in connection
with or as a result of early or premature termination of a Hedging Agreement,
whether or not occurring as a result of a default thereunder) of such Person
under a Hedging Agreement.
"HIGHEST LAWFUL RATE" is defined in SECTION 3.2.4.
"HYDROCARBON INTERESTS" means all rights, titles and interests in and to
oil and gas leases; oil, gas and mineral leases; other Hydrocarbon leases;
mineral interests; mineral servitudes; overriding royalty interests; royalty
interests; net profits interests; production payment interests; and other
similar interests.
"HYDROCARBONS" means, collectively, oil, gas, casinghead gas, drip
gasoline, natural gasoline, condensate, distillate and all other liquid or
gaseous hydrocarbons and related minerals and all products therefrom, in each
case whether in a natural or a processed state.
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"IMPERMISSIBLE QUALIFICATION" means, relative to the opinion or
certification of any independent public accountant as to any financial statement
of the Borrower, any qualification or exception to such opinion or certification
(a) which is of a "going concern" or similar nature;
(b) which relates to the limited scope of examination of matters
relevant to such financial statement;
(c) which relates to the treatment or classification of any item in
such financial statement and which, as a condition to its removal, would
require an adjustment to such item the effect of which would be to cause
the Borrower to be in default of any of its obligations under SECTION
8.2.4.; or
(d) which relates to possible errors generated by financial reporting
and related systems due to the Year 2000 Problem.
"INCLUDING" means including without limiting the generality of any
description preceding such term, and, for purposes of this Agreement and each
other Loan Document, the parties hereto agree that the rule of EJUSDEM GENERIS
shall not be applicable to limit a general statement, which is followed by or
referable to an enumeration of specific matters, to matters similar to the
matters specifically mentioned.
"INDEBTEDNESS" of any Person means, without duplication:
(a) all obligations of such Person for borrowed money and all
obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments;
(b) all obligations, contingent or otherwise, relative to the face
amount of all letters of credit, whether or not drawn, and banker's
acceptances issued for the account of such Person;
(c) all other items which, in accordance with GAAP, would be included
as liabilities on the liability side of the balance sheet of such Person as
of the date at which Indebtedness is to be determined;
(d) net liabilities of such Person under all Hedging Obligations;
(e) all net monetary obligations of such Persons with respect to
Production Payments;
(f) all Capitalized Lease Liabilities;
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<PAGE>
(g) whether or not so included as liabilities in accordance with
GAAP, all obligations of such Person to pay the deferred purchase price of
property or services, and indebtedness (excluding prepaid interest thereon)
secured by a Lien on property owned or being purchased by such Person
(including indebtedness arising under conditional sales or other title
retention agreements), whether or not such indebtedness shall have been
assumed by such Person or is limited in recourse; and
(h) all Contingent Liabilities of such Person;
For all purposes of this Agreement, the Indebtedness of any Person shall include
the Indebtedness of any partnership or joint venture in which such Person is a
general partner or a joint venturer, unless the Lender expressly permits
exclusion based on non-recourse provisions acceptable to the Lender set forth in
the agreements regarding such Indebtedness..
"INDEMNIFIED LIABILITIES" is defined in SECTION 10.4.
"INDEMNIFIED PARTIES" is defined in SECTION 10.4.
"INTEREST COVERAGE RATIO" means, for any four consecutive Fiscal Quarters,
the ratio of (a) EBITDA for such Fiscal Quarters to (b) Interest Expense for
such Fiscal Quarters; PROVIDED, HOWEVER, that solely for purposes of calculating
the Interest Coverage Ratio there shall be excluded from the calculation of
Consolidated Net Income those expenses of the Borrower and its Consolidated
Subsidiaries for geological and geophysical services and those incurred in
connection with oil and gas wells that were not commercially successful, in each
case with respect to such entities, Oil & Gas Properties where such expenses
have not been capitalized.
"INTEREST EXPENSE" means, for any period, the consolidated interest expense
of the Borrower and its consolidated Subsidiaries for such period (including all
imputed interest under Hedging Agreements, but excluding all fees paid under
SECTION 3.3), as determined in accordance with GAAP, including the interest
expense associated with any Capitalized Lease Liabilities of the Borrower and
its consolidated Subsidiaries.
"INTEREST PERIOD" means, relative to any LIBO Rate Loan, the period
beginning on (and including) the date on which such LIBO Rate Loan is made or
continued as, or converted into, a LIBO Rate Loan pursuant to SECTION 2.3 or 2.4
and ending on (but excluding) the day which numerically corresponds to such date
one, two, three or six months thereafter (or, if such month has no numerically
corresponding day, on the last Business Day of such month), in each case as the
Borrower may select in its relevant notice pursuant to SECTION 2.3 or 2.4;
PROVIDED, HOWEVER, that
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(a) no more than three different Interest Periods may be in effect at
any time;
(b) Interest Periods commencing on the same date for Loans comprising
part of the same Borrowing shall be of the same duration;
(c) if such Interest Period would otherwise end on a day which is not
a Business Day, such Interest Period shall end on the next following
Business Day (unless, if such Interest Period applies to LIBO Rate Loans,
such next following Business Day is the first Business Day of another
calendar month, in which case such Interest Period shall end on the
Business Day next preceding such numerically corresponding day);
(d) no Interest Period may end later than the Stated Maturity Date;
and
(e) the Borrower shall select each Interest Period for a particular
LIBO Rate Loan so as not to require (as reasonably foreseeable as possible)
a prepayment of such LIBO Rate Loan during such Interest Period.
"INVESTMENT" means, relative to any Person,
(a) any loan or advance made by such Person to any other Person
(excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business and excluding prepaid
expenses incurred in the ordinary course of business);
(b) any Contingent Liability of such Person; and
(c) any ownership or similar interest held by such Person in any
other Person; PROVIDED, HOWEVER, that (i) Hedging Obligations and (ii)
Production Payments where the Borrower or its Subsidiary is the grantor or
transferror thereof shall not be considered Investments.
The amount of any Investment shall be the original principal or capital amount
thereof less all returns of principal or equity thereon (and without adjustment
by reason of the financial condition of such other Person) and shall, if made by
the transfer or exchange of property other than cash, be deemed to have been
made in an original principal or capital amount equal to the fair market value
of such property.
"ISSUANCE REQUEST" means a request for the issuance of a Letter of Credit
and certificate duly executed by the chief executive, accounting or financial
Authorized Officer of the Borrower, in substantially the form of EXHIBIT M
attached hereto (with
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such changes thereto as may be agreed upon from time to time by the Issuer and
the Borrower).
"ISSUER" means the Lender or its designee, in its capacity as an issuer of
the Letters of Credit.
"LENDER ASSIGNMENT NOTICE" means a Lender Assignment Notice substantially
in the form of EXHIBIT G hereto.
"LENDER" is defined in the PREAMBLE.
"LETTER OF CREDIT" is defined in SECTION 4.1.
"LETTER OF CREDIT AVAILABILITY" means, at any time, the lesser of
(a) the excess of
(i) $1,000,000 OVER
(ii) the then Letter of Credit Outstandings,
OR
(b) the Tranche A Commitment Availability at such time.
"LETTER OF CREDIT OUTSTANDINGS" means, at any time, an amount equal to sum
of
(a) the aggregate Stated Amount at such time of all Letters of Credit
then outstanding and undrawn (as such aggregate Stated Amount shall be
adjusted, from time to time, as a result of drawings, the issuance of
Letters of Credit, or otherwise),
PLUS
(b) the then aggregate amount of all unpaid and outstanding
Reimbursement Obligations.
"LIBO RATE" means, with respect to each Interest Period for a LIBO Rate
Loan, the rate of interest equal to the average (rounded upward, if necessary,
to the nearest 1/16th of 1%) of the rates per annum at which Dollar deposits in
immediately available funds are offered to the Lender's LIBOR Office in the
London interbank market as at or about 11:00 a.m. London time two (2) Business
Days prior to the beginning of such Interest Period for Dollar deposits of
amounts comparable to the outstanding principal
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amount of the LIBO Rate Loan for which an interest rate is then being determined
with maturities comparable to the Interest Period to be applicable to such LIBO
Rate Loan.
"LIBO RATE LOAN" means a Loan bearing interest, at all times during an
Interest Period applicable to such Loan, at a fixed rate of interest determined
by reference to the LIBO Rate.
"LIBO RATE (RESERVE ADJUSTED)" means, relative to any Loan to be made,
continued or maintained as, or converted into, a LIBO Rate Loan for any Interest
Period, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of
1%) determined pursuant to the following formula:
LIBO Rate = LIBO RATE
-------------------------------
(Reserve Adjusted) 1.00 - LIBOR Reserve Percentage
The LIBO Rate (Reserve Adjusted) for any Interest Period for LIBO Rate
Loans will be determined by the Lender on the basis of the LIBOR Reserve
Percentage in effect on, and the applicable rates furnished to and received by
the Lender, two Business Days before the first day of such Interest Period.
"LIBOR OFFICE" means the office of the Lender designated as such on the
signature page hereto or designated in a Lender Assignment Notice or such other
office of the Lender (or any successor or assign of the Lender) as designated
from time to time by notice from the Lender to the Borrower, whether or not
outside the United States, which shall be making or maintaining LIBO Rate Loans
of the Lender hereunder.
"LIBOR RESERVE PERCENTAGE" means, relative to any Interest Period for LIBO
Rate Loans, the reserve percentage (expressed as a decimal) equal to the maximum
aggregate reserve requirements (including all basic, emergency, supplemental,
marginal and other reserves and taking into account any transitional adjustments
or other scheduled changes in reserve requirements) specified under regulations
issued from time to time by the F.R.S. Board and then applicable to assets or
liabilities consisting of and including "Eurocurrency Liabilities", as currently
defined in Regulation D of the F.R.S. Board, having a term approximately equal
or comparable to such Interest Period.
"LIEN" means any security interest, mortgage, deed of trust, pledge,
hypothecation, assignment, charge or deposit arrangement, encumbrance, lien
(statutory or otherwise), charge against or interest in Property to secure (i)
the payment of a debt or (ii) the performance of an obligation, or other
priority or preferential arrangement of any kind or nature whatsoever in respect
of any Property (including those created by, arising under or evidenced by any
conditional sale or other title retention agreement, the interest of a lessor
under a capital lease, any financing
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lease having substantially the same economic effect as any of the foregoing, or
the filing of any financing statement naming the owner of the asset to which
such lien relates as debtor, under the Uniform Commercial Code or any comparable
law) and any contingent or other agreement to provide any of the foregoing.
"LOANS" means the loans provided for by SECTION 2.1 and shall include
Tranche A Loans and Tranche B Loans.
"LOAN DOCUMENTS" means this Agreement, the Notes, the Security Documents,
the Warrant Documents, all Letters of Credit, all Hedging Agreements and all
other agreements relating to this Agreement entered into from time to time
between the Borrower (or any or all of its Subsidiaries or Affiliates) and the
Lender (or any Affiliate of the Lender), and any document delivered by the
Borrower or any of its Subsidiaries in connection with any of the foregoing.
"MMBTu" means one million British Thermal Units.
"MATERIAL ADVERSE EFFECT" means (a) a material adverse change in, or a
material adverse effect upon, the operations, business, properties, condition
(financial or otherwise) or prospects of the Borrower or any other Obligor and
its Subsidiaries; or (b) a material impairment of the ability of the Borrower or
any Obligor to perform under any Loan Document and to avoid any Event of
Default; or (c) a material adverse effect upon (i) the legality, validity,
binding effect or enforceability against the Borrower, its Subsidiaries or any
other Obligor of any Loan Document, or (ii) the perfection or priority of any
Lien granted under any of the Loan Documents.
"MATERIAL CONTRACT" means (i) each Acquisition Agreement, Hydrocarbon
purchase and sale agreement, or similar contract relating to any Hydrocarbon
Interests included in the Mortgaged Properties or (ii) other agreement
designated as such by the Lender.
"MERGER AGREEMENT" is defined in the RECITALS.
"MORTGAGE CONSENTS" means all consents required under existing oil and gas
leases or other agreements and Approvals by Governmental Agencies to the
granting of a Mortgage to the Lender, and as reasonably determined by the Lender
with respect to Acquired Properties that become Mortgaged Properties after the
Effective Date.
"MORTGAGES" means the Mortgage, Deed of Trust, Assignment, Security
Agreement, Financing Statements and Fixture Filing executed and delivered
pursuant to SECTION 6.1.7 and SECTION 6.2.2, substantially in the form of
EXHIBIT D hereto, as amended, supplemented, restated or otherwise modified from
time to time.
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"MORTGAGED PROPERTIES" means the Hydrocarbon Interests, Properties and
interests described in and secured by the Mortgages, as such Properties and
interests are from time to time constituted, all as further provided in SECTION
6.1.7 and SECTION 6.2.2.
"NON-REDEEMABLE STOCK" means stock issued by the Borrower or any of its
Subsidiaries, PROVIDED that such stock is not considered debt for GAAP, tax law
or any other purpose and PROVIDED FURTHER that neither the Borrower nor any of
its Subsidiaries has any obligation to redeem or purchase or pay dividends on
such stock or to exchange such stock for, or convert such stock to, any other
security, whether such obligation arises pursuant to the terms of such stock or
any other agreement relating thereto or otherwise and whether or not such
obligation exists in all circumstances or only upon the occurrence of a
particular event or condition or upon the passage of time or otherwise.
"NOTES" means the secured promissory note or notes of the Borrower payable
to the order of the Lender, in the form of EXHIBIT A hereto (as such promissory
notes may be amended, endorsed or otherwise modified from time to time),
evidencing the aggregate Indebtedness of the Borrower to the Lender resulting
from outstanding Loans, and also means all other promissory notes accepted from
time to time in substitution therefor or renewal thereof.
"OBLIGATIONS" means all obligations (monetary or otherwise) of the Borrower
and/or any other Obligor arising under or in connection with this Agreement, the
Notes and each other Loan Document, including without limitation, all Hedging
Obligations arising under Hedging Agreements between the Borrower (or any
Affiliate of the Borrower) and the Lender (or any Affiliate of the Lender).
"OBLIGOR" means the Borrower, any of its Subsidiaries or any other Person
(other than the Lender or any Affiliate of the Lender) obligated under, or
otherwise a party to, any Loan Document.
"OIL AND GAS PROPERTIES" means Hydrocarbon Interests; the Properties now or
hereafter pooled or unitized with Hydrocarbon Interests; all presently existing
or future unitization, pooling agreements and declarations of pooled units and
the units created thereby (including without limitation all units created under
orders, regulations and rules of any Government Agency having jurisdiction)
which may affect all or any portion of the Hydrocarbon Interests; all operating
agreements, joint venture agreements, contracts and other agreements which
relate to any of the Hydrocarbon Interests or the production, sale, purchase,
exchange or processing of Hydrocarbons from or attributable to such Hydrocarbon
Interests; all Hydrocarbons in and under and which may be produced and saved or
attributable to the Hydrocarbon Interests, the lands covered thereby and all oil
in tanks and all rents, issues, profits, proceeds, products, revenues and other
incomes from or attributable to the Hydrocarbon
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Interests; all tenements, profits a prendre, hereditaments, appurtenances and
Properties in anywise appertaining, belonging, affixed or incidental to the
Hydrocarbon Interests, Properties, rights, titles, interests and estates
described or referred to above, including any and all Property, real or
personal, now owned or hereinafter acquired and situated upon, used, held for
use or useful in connection with the operating, working or development of any of
such Hydrocarbon Interests or Property (excluding drilling rigs, automotive
equipment or other personal property which may be on such premises for the
purpose of drilling a well or for other similar temporary uses) and including
any and all oil wells, gas wells, water wells, injection wells or other wells,
buildings, structures, fuel separators, liquid extraction plants, plant
compressors, pumps, pumping units, field gathering systems, tanks and tank
batteries, fixtures, valves, fittings, machinery and parts, engines, boilers,
meters, apparatus, equipment, appliances, tools, implements, cables, wires,
towers, casing, tubing and rods, surface leases, rights-of-way, easements and
servitudes together with all additions, substitutions, replacements, accessions
and attachments to any and all of the foregoing.
"OLD ESENJAY" is defined in the RECITALS.
"ORGANIC DOCUMENT" means, relative to any corporate Obligor, its
certificate of incorporation, its by-laws and all shareholder agreements, voting
trusts and similar arrangements applicable to any of its authorized shares of
capital stock, and, relative to any partnership Obligor, its partnership
agreement.
"OVERRIDING ROYALTY INTEREST" means the interests conveyed and assigned by
the Assignment.
"PARTICIPANT" is defined in SECTION 10.11.2.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"PENSION PLAN" means a "pension plan", as such term is defined in section
3(2) of ERISA, which is subject to Title IV of ERISA (other than a multiemployer
plan as defined in section 4001(a)(3) of ERISA), and to which the Borrower or
any corporation, trade or business that is, along with the Borrower, a member of
a Controlled Group, may have liability, including any liability by reason of
having been a substantial employer within the meaning of section 4063 of ERISA
at any time during the preceding five years, or by reason of being deemed to be
a contributing sponsor under section 4069 of ERISA.
"PERCENTAGE" means, relative to the Lender, 100%, as such percentage may be
adjusted from time to time pursuant to Lender Assignment Notice(s) executed by
the Lender and its Assignee Lender(s) and delivered pursuant to SECTION 10.11.
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"PERSON" means any natural person, corporation, partnership, joint venture,
limited liability company, firm, association, trust, Government Agency or any
other entity, whether acting in an individual, fiduciary or other capacity.
"PLAN" means any Pension Plan or Welfare Plan.
"PLEDGE AGREEMENT" means a Pledge Agreement of the Borrower executed and
delivered pursuant to SECTION 6.1.4 and SECTION 6.2.8, substantially in the form
of EXHIBIT F-1 hereto, and a Pledge Agreement of each of the Borrower's
Subsidiaries executed and delivered pursuant to SECTION 6.1.4 and SECTION 6.2.8,
substantially in the form of EXHIBIT F-2 hereto, in each case as amended,
supplemented, restated or otherwise modified from time to time.
"PROCEEDS ACCOUNT" is defined in SECTION 3.4.
"PRODUCTION PAYMENTS" means a production payment (whether volumetric or
dollar denominated) or similar royalty, overriding royalty, net profits interest
or other similar interest in Oil and Gas Properties, or the right to receive all
or a portion of the production or the proceeds from the sale of production
attributable to such Oil and Gas Properties where the holder of such interest
has recourse solely to such interest and the grantor or transferor thereof has
an express contractual obligation to produce and sell Hydrocarbons from such Oil
and Gas Properties, or to cause such Oil and Gas Properties to be so operated
and maintained, in each case in a reasonably prudent manner.
"PROPERTY" means any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible.
"PROVEN RESERVES" means collectively, "proved oil and gas reserves,"
"proved developed producing oil and gas reserves," "proved developed
non-producing oil and gas reserves" (consisting of proved developed shut-in oil
and gas reserves and proved developed behind pipe oil and gas reserves), and
"proved undeveloped oil and gas reserves," as such terms are defined by the U.S.
Securities and Exchange Commission in its standards and guidelines.
"QUARTERLY PAYMENT DATE" means, commencing December, 1998, the last
Business Day of each March, June, September and December.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement,
substantially in the form of EXHIBIT O-3, between the Borrower and the Lender or
the Designee.
"REIMBURSEMENT OBLIGATION" is defined in SECTION 4.5.
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"RELEASE" means a "release," as such term is defined in CERCLA.
"REMEDIAL ACTION" means any action under Environmental Laws required to (a)
clean up, remove, treat, dispose of, abate, or in any other way address
pollutants (including Hazardous Materials) in the environment, (b) prevent the
Release or threat of a Release or minimize the further Release of pollutants, or
(c) investigate and determine if a remedial response is needed and to design
such a response and any post-remedial investigation, monitoring, operation, and
maintenance and care.
"REQUIRED ASSET SALES" means those sales of Oil and Gas Properties of the
Borrower and its Subsidiaries not containing Proven Reserves required to be
completed by the Borrower pursuant to SECTION 8.1.3(g).
"RESOURCE CONSERVATION AND RECOVERY ACT" means the Resource Conservation
and Recovery Act, 42 U.S.C. Section 6901, ET SEQ., as in effect from time to
time.
"RESTRICTED PAYMENT TESTS" means compliance with each of the following
restrictions (both before and immediately after giving effect to the applicable
Distribution Payment):
(a) Tangible Net Worth shall not be less than the sum of (i)
$45,000,000 plus (ii) fifty percent (50%) of Consolidated Net Income
(excluding the effects of consolidated net losses), for all Fiscal Quarters
beginning after the Effective Date and treated as a single accounting
period, plus (iii) one-hundred percent (100%) of the net proceeds received
by the Borrower or its Subsidiaries from the sale of any Non-Redeemable
Stock at any time after the Effective Date;
(b) the Current Ratio shall be not less than 1.1:1.0;
(c) the Debt to Capitalization Ratio shall not be greater than 50%;
(d) the Interest Coverage Ratio shall be not less than 3.0:1.0;
(e) all Tranche B Loans shall have been paid in full and the Tranche
B Commitment shall have been terminated;
(f) there shall exist no Collateral Value Deficiency;
(g) there shall exist no Borrowing Base Deficiency; and
(h) no Default shall have occurred and be continuing.
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"SECURITY AGREEMENT" means a security agreement and any similar instrument
or agreement executed and delivered pursuant to SECTION 6.1.5 or SECTION 6.2.6,
substantially in the form of EXHIBIT C, as amended, supplemented, restated or
otherwise modified from time to time.
"SECURITY DOCUMENTS" means, collectively, (a) the Guaranties, (b) the
Pledge Agreements, (c) the Mortgages, (d) the Security Agreements, (e) the
Consents and (f) the Mortgage Consents, together with any exhibits, schedules
and other attachments to such documents and any financing statements related
thereto, as such documents, exhibits, schedules, attachments or financing
statements may be, from time to time, amended, supplemented, restated or
otherwise modified.
"STARBOARD PROPERTIES" means those Oil & Gas Properties described in
SCHEDULE II, PART C to this Agreement located in Terrebonne Parish, Louisiana.
"STATED AMOUNT" of each Letter of Credit means the face amount or the
"Stated Amount" of such Letter of Credit (as defined therein).
"STATED EXPIRY DATE" is defined in SECTION 4.1.
"STATED MATURITY DATE means
(a) as to any Tranche A Loan, that date that is three (3) years after
the Tranche A Availability Termination Date; and
(b) as to any Tranche B Loan, the Tranche B Availability Termination
Date.
"SUBORDINATED CREDITOR" means Duke Energy Financial Services, Inc. and/or
such other Person or Persons who are acceptable to the Lender.
"SUBSIDIARY" means, with respect to any Person, (a) any corporation of
which more than 50% of the outstanding capital stock having ordinary voting
power to elect a majority of the board of directors of such corporation
(irrespective of whether at the time capital stock of any other class or classes
of such corporation shall or might have voting power upon the occurrence of any
contingency) is at the time directly or indirectly owned by such Person, (b) any
partnership, limited liability company, joint venture, association or other
business entity in which more than 50% of the equity interest or voting power is
at the time directly or indirectly owned by such Person, by such Person and one
or more other Subsidiaries of such Person, or by one or more other Subsidiaries
of such Person or (c) any partnership in which such Person is a general partner.
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"SURETY INSTRUMENTS" means all letters of credit (including standby and
commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds
and similar instruments.
"TANGIBLE NET WORTH" means the consolidated net worth of the Borrower and
its consolidated Subsidiaries after subtracting therefrom the aggregate amount
of any intangible assets of the Borrower and its consolidated Subsidiaries,
including goodwill, franchises, licenses, patents, trademarks, trade names,
copyrights, service marks and brand names.
"TAXES" is defined in SECTION 5.6.
"TERM LOAN" means a Tranche A Loan that has been converted from a revolving
loan to a term loan pursuant to the provisions of SECTION 2.1.1.
"TRANCHE A AVAILABILITY TERMINATION DATE" means October 13, 2000.
"TRANCHE A COMMITMENT" means the Lender's commitment pursuant to SECTION
2.1.1 to make Tranche A Loans to the Borrower in accordance with the terms and
provisions of this Agreement.
"TRANCHE A COMMITMENT AMOUNT" means $15,000,000 as reduced from time to
time pursuant to the provisions of SECTION 2.2.
"TRANCHE A FACILITY" means the Facility providing for the Tranche A
Commitment and the Tranche A Loans.
"TRANCHE A LOAN" means the loans made by the Lender to the Borrower
pursuant to its Tranche A Commitment in accordance with SECTIONS 2.1.1 and 2.3,
and includes such Loans during all times before and after they have been
converted into a Term Loan pursuant to SECTION 2.1.1(b).
"TRANCHE B AVAILABILITY TERMINATION DATE" means April 13, 2000.
"TRANCHE B COMMITMENT" means the Lender's commitment pursuant to SECTION
2.1.2 to make Tranche B Loans to the Borrower in accordance with the terms and
provisions of this Agreement.
"TRANCHE B COMMITMENT AMOUNT" means $5,000,000 as reduced from time to time
pursuant to the provisions of SECTION 2.2.
"TRANCHE B FACILITY" means the Facility providing for the Tranche B
Commitment and the Tranche B Loans.
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"TRANCHE B LOAN" means each loan made by the Lender to the Borrower from
time to time pursuant to its Tranche B Commitment in accordance with SECTIONS
2.1.2 and 2.3.
"TYPE" means, relative to any Loan, the portion thereof, if any, being
maintained as a Base Rate Loan or a LIBO Rate Loan.
"UNAVAILABLE COMMITMENT" means $20,000,000 less the Borrowing Base (in each
case as reduced from time to time pursuant to the provisions of SECTION 2.2).
"UNITED STATES" or "U.S." means the United States of America, its fifty
States and the District of Columbia.
"WARRANT AGREEMENT" means the Warrant Agreement, substantially in the form
of EXHIBIT O-1, between the Borrower and the Lender or the Designee.
"WARRANT DOCUMENTS" means the Warrant Agreement, the Warrants and the
Registration Rights Agreement.
"WARRANTS" means the warrants, substantially in the form of EXHIBIT O-2,
from the Borrower to the Lender or the Designee.
"WELFARE PLAN" means a "welfare plan", as such term is defined in section
3(1) of ERISA.
"YEAR 2000 COMPLIANT" is defined in SECTION 7.19.
"YEAR 2000 PROBLEM" is defined in SECTION 7.19.
SECTION 1.2. USE OF DEFINED TERMS. Unless otherwise defined or the
context otherwise requires, terms for which meanings are provided in this
Agreement shall have such meanings when used in the Disclosure Schedule and in
each Note, Borrowing Request, Continuation/Conversion Notice, notice and other
communication or other Loan Document delivered from time to time in connection
with this Agreement or any other Loan Document.
SECTION 1.3. CROSS-REFERENCES. Unless otherwise specified, references in
this Agreement and in each other Loan Document to any Article or Section are
references to such Article or Section in this Agreement or other Loan Document,
as applicable.
(a) The meanings of defined terms are equally applicable to the
singular and plural forms of the defined terms.
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(b) The words "hereof," "herein," "hereunder" and similar words refer
to this Agreement as a whole and not to any particular provision of this
Agreement; and subsection, Section, Schedule and Exhibit references are to
this Agreement or such other Loan Document, as the case may be, and, unless
otherwise specified, references in any Article, Section or definition to
any clause are references to such clause of such Article, Section or
definition.
(c) (i) The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other
writings, however evidenced.
(ii) In the computation of periods of time from a specified date
to a later specified date, the word "from" means "from and including"; the
words "to" and "until" each mean "to but excluding," and the word "through"
means "to and including."
(iii) The term "property" includes any kind of property or asset,
real, personal or mixed, tangible or intangible.
(d) Unless otherwise expressly provided herein, (i) references to
agreements (including this Agreement) and other contractual instruments
shall be deemed to include all subsequent amendments and other
modifications thereto, but only to the extent such amendments and other
modifications are not prohibited by the terms of any Loan Document, and
(ii) references to any statute or regulation are to be construed as
including all statutory and regulatory provisions consolidating, amending,
replacing, supplementing or interpreting the statute or regulation.
(e) This Agreement and other Loan Documents may use several different
limitations, tests or measurements to regulate the same or similar matters.
All such limitations, tests and measurements are cumulative and shall each
be performed in accordance with their terms. Unless otherwise expressly
provided, any reference to any action of the Lender by way of consent,
approval or waiver shall be deemed modified by the phrase "in its sole
discretion."
(f) This Agreement and the other Loan Documents are the result of
negotiations among and have been reviewed by counsel to the Lender, the
Borrower and the other parties, and are the products of all parties.
Accordingly, they shall not be construed against the Lender merely because
of the Lender's involvement in their preparation.
SECTION 1.4. ACCOUNTING AND FINANCIAL DETERMINATIONS. Unless otherwise
specified, all accounting terms used herein or in any other Loan Document shall
be
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interpreted, all accounting determinations and computations hereunder or
thereunder (including under SECTION 8.2.4) shall be made, and all financial
statements required to be delivered hereunder or thereunder shall be prepared in
accordance with, those generally accepted accounting principles ("GAAP") applied
in the preparation of the financial statements referred to in SECTION 7.7.
ARTICLE II
COMMITMENTS, BORROWING PROCEDURES AND NOTES
SECTION 2.1. COMMITMENTS. On the terms and subject to the conditions of
this Agreement (including ARTICLE V), the Lender agrees to make loans ("LOANS")
to the Borrower equal to the aggregate amount of the Borrowing of Loans
requested by the Borrower to be made pursuant to the Commitments on such day
described in this SECTION 2.1.
SECTION 2.1.1. TRANCHE A COMMITMENT.
(a) From time to time on any Business Day during the period from and
after the Effective Date to the earlier to occur of (x) Tranche A Availability
Termination Date and (y) any Commitment Termination Date relating to all
Commitments or to the Tranche A Commitment, the Lender will make Tranche A Loans
to the Borrower equal to the amount of the Tranche A Loan requested by the
Borrower to be made on such day in the applicable Borrowing Request therefor.
On the terms and subject to the conditions of this Agreement, the Borrower may
from time to time borrow, prepay and reborrow Tranche A Loans.
(b) On the terms and subject to the conditions of this Agreement, the
Lender agrees to convert the aggregate unpaid principal amount of the Tranche A
Loans outstanding at the opening of business on the Tranche A Availability
Termination Date to a Term Loan, PROVIDED that (i) no Event of Default has
occurred and is continuing at that time and (ii) the Borrower has provided a
certificate to the Lender to that effect. Once repaid or prepaid, such Term
Loan may not be reborrowed.
SECTION 2.1.2. TRANCHE B COMMITMENT. From time to time on any Business
Day during the period from and after the Effective Date to the earlier to occur
of (x) Tranche B Availability Termination Date, and (y) any Commitment
Termination Date relating to all Commitments or to the Tranche B Commitment, the
Lender will make Tranche B Loans to the Borrower equal to the aggregate amount
of the Tranche B Loan requested by the Borrower to be made on such day in the
applicable Borrowing Request therefor. On the terms and subject to the
conditions of this Agreement, the Borrower may from time to time borrow and
prepay or repay Tranche B Loans, but may not reborrow any amounts paid or
prepaid.
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SECTION 2.1.3. LETTERS OF CREDIT. From time to time on any Business Day,
the Issuer will issue the Letters of Credit in accordance with ARTICLE IV.
SECTION 2.1.4. LENDER NOT REQUIRED TO MAKE LOANS, ETC. UNDER CERTAIN
CIRCUMSTANCES. The Lender shall not be required to
(a) make any Loan if, after giving effect thereto
(i) the aggregate outstanding principal amount of all Tranche A Loans
would exceed the Tranche A Commitment Amount less the Letter of Credit
Outstandings, or
(ii) the aggregate outstanding principal amount of all Tranche B Loans
would exceed the Tranche B Commitment Amount, or
(iii) a Collateral Value Deficiency would exist; or
(iv) a Borrowing Base Deficiency would exist; or
(v) an Event of Default has occurred and is continuing; or
(b) cause an Issuer to issue any Letter of Credit if, after giving effect
thereto
(i) all Letter of Credit Outstandings together with the aggregate
outstanding principal amount of all Tranche A Loans would exceed the
Tranche A Commitment Amount; or
(ii) a Collateral Value Deficiency would exist; or
(iii) a Borrowing Base Deficiency would exist; or
(iv) all Letter of Credit Outstandings would exceed $1,000,000; or
(v) an Event of Default has occurred and is continuing.
SECTION 2.2. REDUCTION OF COMMITMENT AMOUNTS. Any Commitment Amount is
subject to reduction from time to time pursuant to this SECTION 2.2.
SECTION 2.2.1. OPTIONAL. The Borrower may, from time to time on any
Business Day, voluntarily reduce the Tranche A Commitment Amount, the Tranche B
Commitment Amount or either of them; PROVIDED, HOWEVER, that all such reductions
shall require at least three (3) Business Days' prior notice to the Lender and
be permanent, and any partial reduction of either Commitment Amount shall be in
a minimum amount of $250,000 and in an integral multiple of $50,000.
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SECTION 2.2.2. MANDATORY.
(a) On the Tranche A Availability Termination Date, the unused
portion of the Tranche A Commitment shall, without any further action,
automatically and permanently be cancelled.
(b) On the Tranche B Availability Termination Date, the unused
portion of the Tranche B Commitment shall, without any further action,
automatically and permanently be cancelled.
(c) On any Commitment Termination Date, the Commitment Amount of each
Facility shall be reduced to zero.
SECTION 2.3. BORROWING PROCEDURE. By delivering a Borrowing Request to
the Lender on or before 10:00 a.m. (Chicago time) on a Business Day, the
Borrower may from time to time irrevocably request, on not less than three (3)
nor more than five (5) Business Days' notice, that a Borrowing be made in a
minimum amount of $250,000 and an integral multiple of $50,000, or in the unused
amount of the applicable Commitment. On the terms and subject to the conditions
of this Agreement, each Borrowing shall be made on the Business Day specified in
such Borrowing Request. The Lender shall make such funds available to the
Borrower by wire transfer to the accounts the Borrower shall have specified in
its Borrowing Request.
SECTION 2.4. CONTINUATION AND CONVERSION ELECTIONS. By delivering a
Continuation/Conversion Notice to the Lender on or before 10:00 a.m. (Chicago
time) on a Business Day, the Borrower may from time to time irrevocably
elect, on not less than three (3) nor more than five (5) Business Days'
notice that all, or any portion in an aggregate minimum amount of $250,000
and an integral multiple of $50,000, of any LIBO Rate Loans, be converted
into a Base Rate Loan or continued as a LIBO Rate Loan (in the absence of
delivery of a Continuation/Conversion Notice with respect to any LIBO Rate
Loan at least three (3) Business Days before the last day of the then current
Interest Period with respect thereto, such LIBO Rate Loan shall, on such last
day, automatically convert to a Base Rate Loan); PROVIDED, HOWEVER, that no
portion of the outstanding principal amount of any LIBO Rate Loan may be
continued as, and no portion of the outstanding principal amount of any Base
Rate Loan may be converted into, LIBO Rate Loans when any Default has
occurred and is continuing.
SECTION 2.5. LOAN ACCOUNTS AND NOTES.
(a) The Loans made by the Lender shall be evidenced by one or more
loan accounts or records maintained by the Lender in the ordinary course of
business. The loan accounts or records maintained by the Lender shall be
conclusive absent manifest error of the amount of the Loans made by the
Lender to the Borrower and the interest and payments thereon. Any failure
so
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to record or any error in doing so shall not, however, limit or otherwise affect
the obligation of the Borrower hereunder to pay any amount owing with respect to
the Loans.
(b) The Loans made by the Lender shall also be evidenced by a Note or
Notes payable to the order of the Lender in a maximum principal amount
equal to the original, aggregate Commitment Amount. The Borrower hereby
irrevocably authorizes the Lender to make (or cause to be made) appropriate
notations on the grid attached to the Notes (or on any continuation of such
grid) or in other books and records maintained by the Lender, which
notations, if made, shall evidence, INTER ALIA, the date of, the
outstanding principal of, and the interest rate applicable to the Loans
evidenced thereby (the Borrower may from time to time reasonably request a
copy of such grid). Such notations shall be conclusive and binding on the
Borrower absent manifest error rebuttable presumptive evidence of the
matters described therein; PROVIDED, HOWEVER, that the failure of the
Lender to make any such notations shall not limit or otherwise affect any
Obligations of the Borrower or any other Obligor.
(c) The Borrower acknowledges that the Note delivered to the Lender
as of the Effective Date amends, restates and renews the promissory note
given by the Borrower under the Existing Agreement.
SECTION 2.6. BORROWING BASE REDETERMINATION AND COLLATERAL VALUE
REDETERMINATON.
(a) Within thirty (30) days after receipt of the Engineering Report
required to be delivered semi-annually, commencing with the Engineering
Report required to be delivered sixty (60) days after January 1, 1999, the
Lender shall notify the Borrower in writing of the Borrowing Base
determined by the Lender on the basis of such Engineering Report. Borrower
or Lender may request, and Lender will consider, one (1) additional
determination of the Borrowing Base at any time during each calendar year
following the Effective Date. Each such determination is herein called a
"BORROWING BASE REDETERMINATION". Contemporaneously with each Borrowing
Base Redetermination that shall occur at any time that any Tranche B Loan
is outstanding, the Lender shall notify the Borrower in writing of the
Collateral Value determined by the Lender on the basis of such Engineering
Report. Each such determination is herein called a "COLLATERAL VALUE
REDETERMINATION". Each Borrowing Base Redetermination (and, as applicable,
Collateral Value Redetermination) shall be effective as of April 1st (with
respect to Engineering Reports effective January 1st), October 1st (with
respect to Engineering Reports effective July 1st) or upon notice from the
Lender (with respect to any requested Borrowing Base Redetermination) when
the Borrower is notified of the amount of the redetermined Borrowing Base
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(and, as applicable the amount of the redetermined Collateral Value) by the
Lender.
(b) The Borrowing Base and Collateral Value are also subject to
adjustment as provided for in SECTION 3.1.2.
SECTION 2.7. PURPOSES. The Borrower shall apply the proceeds of each Loan
only in the following manner:
(a) in the case of Tranche A Loans, to refinance certain oil and gas
producing properties owned by the Borrower or one of the Borrower's
Subsidiaries in the States of Oklahoma, Kansas, Louisiana and Texas, and
for other general corporate and working capital purposes;
(b) in the case of Tranche B Loans, to finance Approved Development
Activities with respect to (i) the Development Properties owned by the
Borrower or one of the Borrower's Subsidiaries including those Properties
located in Matagorda, San Patricio, Karnes, Willacy and Calhoun Counties,
Texas and (ii) Oil & Gas Properties which the Borrower has acquired from
Old Esenjay and Aspect.
ARTICLE III
REPAYMENTS, PREPAYMENTS, INTEREST AND FEES
SECTION 3.1. REPAYMENTS AND PREPAYMENTS AND CERTAIN BORROWING BASE
MATTERS. The Borrower shall repay the unpaid principal amount of the Loans as
set forth in this SECTION 3.1.
SECTION 3.1.1. REPAYMENTS AND PREPAYMENTS. The Borrower shall repay in
full the unpaid principal amount of each Tranche A Loan, and each Tranche A Loan
shall mature and be due and payable, on the Tranche A Availability Termination
Date; PROVIDED, HOWEVER, that, as provided in SECTION 2.1.1(b), if no Event of
Default has occurred and is continuing, the unpaid principal amount of the
Tranche A Loans shall, on the Tranche A Availability Termination Date, not be
due and payable but shall convert to a Term Loan. The Borrower shall repay in
full the unpaid principal amount of each Loan upon the Stated Maturity Date
applicable thereto. Prior thereto, the Borrower
(a) may, from time to time on any Business Day, make a voluntary
prepayment, in whole or in part, of the outstanding principal amount of any
Loans; PROVIDED, HOWEVER, that
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(i) any such prepayment shall be made PRO RATA among Loans of the
same type;
(ii) no such prepayment of any LIBO Rate Loan may be made on any
day other than the last day of the Interest Period for such Loan;
(iii) all such voluntary prepayments shall require at least three
(3) but no more than five (5) Business Days' prior written notice to
the Lender (which notice is irrevocable) stating the date and amount
of such prepayment and the type of Loan to be prepaid; and
(iv) all such voluntary partial prepayments shall be in an
aggregate minimum amount of $100,000 and an integral multiple of
$50,000;
(b) shall, on each date when any reduction in any Commitment Amount
shall become effective, including pursuant to SECTION 2.2, make a mandatory
prepayment (which shall be applied (or held for application, as the case
may be) by the Lender to the payment of the aggregate unpaid principal
amount of those Loans then outstanding and then to the payment of the then
Letter of Credit Outstandings) equal to the excess, if any, of the
aggregate outstanding principal amount of all Loans and Letter of Credit
Outstandings over such Commitment Amount as so reduced;
(c) shall make prepayments as specified in SECTION 3.1.2;
(d) shall, if Tranche A Loans have been converted to a Term Loan
pursuant to the terms and conditions hereof, on each Quarterly Payment Date
after the Tranche A Availability Termination Date, make a payment in an
amount equal to that necessary to amortize the principal of all Tranche A
Loans that have been converted into a Term Loan equally over the remaining
Quarterly Payment Dates and the Stated Maturity Date that is applicable to
Tranche A Loans;
(e) shall, on the Tranche B Availability Termination Date, pay in
full all Tranche B Loans;
(f) shall, immediately upon any acceleration of the Loans pursuant to
SECTION 9.2 or SECTION 9.3, repay all Loans, unless, pursuant to SECTION
9.3, only a portion of all Loans is so accelerated.
Each payment or prepayment of any Loans made pursuant to this Section shall be
without premium or penalty, except as may be required by SECTION 4.4, and shall
be applicable, to the extent of such prepayment, in the inverse order of
maturity. No
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voluntary prepayment of principal of any Loans or any prepayment pursuant to the
preceding CLAUSE (c) shall cause a reduction in any Commitment Amount.
SECTION 3.1.2. BORROWING BASE DEFICIENCIES, COLLATERAL VALUE DEFICIENCIES
AND ASSET SALES.
(a) Upon the occurrence of a Borrowing Base Deficiency and/or a
Collateral Value Deficiency, the Lender may notify the Borrower of such
Borrowing Base Deficiency and/or such Collateral Value Deficiency, as
applicable. Within ten (10) days from and after the Borrowing Base
Deficiency Notification Date and/or such Collateral Value Deficiency
Notification Date, as applicable, the Borrower shall notify the Lender that
it shall take one of the following actions:
(i) execute and deliver to the Lender supplemental or additional
Security Documents, in form and substance reasonably satisfactory to
the Lender and its counsel, securing payment of the Notes and the
other Obligations and covering additional Oil and Gas Properties
directly owned by the Borrower or one or more of the Borrower's
Subsidiaries which are not then covered by any Loan Document and which
are of a type and nature satisfactory to the Lender, and having a
value, in addition to other Oil and Gas Properties already subject to
a Mortgage, sufficient to eliminate the Borrowing Base Deficiency and
the Collateral Value Deficiency, as applicable, all as more
particularly described in SECTION 8.1.7(a) and (b); or
(ii) make a payment with respect to the Obligations, (which shall
be applied (or held for application, as the case may be) by the Lender
to the payment of the aggregate unpaid principal amount of those Loans
then outstanding and then to the payment of the then Letter of Credit
Outstandings) in an aggregate principal amount sufficient to eliminate
such Borrowing Base Deficiency and Collateral Value Deficiency, as
applicable, within sixty (60) days after the Borrowing Base Deficiency
Notification or Collateral Value Deficiency Notification Date, as
applicable.
If the Borrower shall elect to execute and deliver (or cause one or more of
the Borrower's Subsidiaries to execute and deliver) supplemental or
additional Security Documents to the Lender pursuant to CLAUSE (i), it
shall provide the Lender with descriptions of the additional assets to be
collaterally assigned (together with current valuations, Engineering
Reports, Security Documents described in CLAUSE (i) and title evidence
applicable thereto, each of which shall be in form and substance reasonably
satisfactory to the Lender) within sixty (60) days after the Borrowing Base
Deficiency Notification Date or Collateral
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Value Deficiency Notification Date, as applicable. Such supplemental or
additional Security Documents shall be subject to the terms of SECTION
8.1.7. If the Borrower fails to take any of the actions described in
CLAUSES (i) or (ii) above within such ten (10) day period, then without any
necessity for notice to the Borrower or any other person, the Borrower
shall become obligated immediately to pay Obligations in an aggregate
principal amount equal to the applicable Borrowing Base Deficiency and/or
Collateral Value Deficiency.
(b) If the Borrower or any Subsidiary sells, transfers or otherwise
disposes of Oil and Gas Properties included in the most recent
determination of the Borrowing Base and that have a fair market value in
the aggregate for the Borrower and such Subsidiaries in excess of $250,000
during the period from the effective date of the most recent Borrowing Base
Redetermination until the effective date of the next Borrowing Base
Redetermination, the Borrowing Base and the Collateral Value shall be
immediately reduced, until the effective date of the next Borrowing Base
Redetermination and Collateral Value Redetermination, by an amount as
reasonably determined by the Lender, or if the value of the applicable Oil
and Gas Properties cannot be readily determined by the Lender, by the net
sales proceeds realized from the sale, transfer or other disposition of
such assets.
If such reduction shall result in a Borrowing Base Deficiency and/or
Collateral Value Deficiency, then in lieu of the provisions of CLAUSE (a)
of SECTION 3.1.2, the Borrower shall immediately make a payment with
respect to the Obligations in an amount equal to the greater of such
Borrowing Base Deficiency or such Collateral Value Deficiency. In addition
to and cumulative of the foregoing , if a Borrowing Base Deficiency and/or
Collateral Value Deficiency exists prior to such sale, transfer or other
disposition of assets, then in lieu of the provisions of CLAUSE (a) of
SECTION 3.1.2, the Borrower shall, with the written consent of the Lender,
immediately make a payment with respect to the Obligations (which shall be
applied (or held for application, as the case may be) by the Lender first
to the payment of the aggregate unpaid principal amount of those Loans then
outstanding, and then to the payment of the then Letter of Credit
Outstandings) in an aggregate principal amount equal to the lesser of (i)
the greater of the amount of the Collateral Value Deficiency or the amount
of the Borrowing Base Deficiency (after giving effect to the applicable
sale, transfer or other disposition) or (ii) 100% of the net sales proceeds
realized from the applicable sale, transfer or other disposition.
(c) In addition, if the Borrower or any of its Subsidiaries raises
capital through the issuance of any type of equity or issues any
subordinated debt or senior unsecured debt, the proceeds of such issuance
will first be applied to cure any Borrowing Base Deficiency and/or
Collateral Value Deficiency
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SECTION 3.2. INTEREST PROVISIONS. Interest on the outstanding principal
amount of Loans shall accrue and be payable in accordance with this SECTION 3.2.
SECTION 3.2.1. RATE. Pursuant to an appropriately delivered Borrowing
Request or Continuation/Conversion Notice, the Borrower may elect that Loans
accrue interest at a rate per annum:
(a) on that portion maintained from time to time as a Base Rate Loan,
equal to the Alternate Base Rate plus the Applicable Margin from time to
time in effect; and
(b) on that portion maintained as a LIBO Rate Loan, during each
Interest Period applicable thereto, equal to the sum of the LIBO Rate
(Reserve Adjusted) for such Interest Period plus the Applicable Margin.
All LIBO Rate Loans shall bear interest from and including the first day of the
applicable Interest Period to (but not including) the last day of such Interest
Period at the interest rate determined as applicable to such LIBO Rate Loan.
SECTION 3.2.2. POST-MATURITY RATES. After (w) the date any principal
amount of any Loan shall have become due and payable (whether on the Stated
Maturity Date, upon acceleration or otherwise), (x) the date any other monetary
Obligation of the Borrower shall have become due and payable, (y) the date any
other Event of Default shall have occurred (and so long as such Event of Default
shall be continuing), and (z) the date that is sixty (60) days after a Borrowing
Base Deficiency Notification Date or after a Collateral Value Deficiency
Notification Date, if the applicable Borrowing Base Deficiency or Collateral
Value Deficiency, as applicable, has not been cured, the Borrower shall pay, but
only to the extent permitted by Applicable Law, interest (after as well as
before judgment) on all Obligations at a rate per annum equal to
(a) with respect to LIBO Rate Loans for the period from the date such
Loan becomes due and payable to the end of the then current Interest
Period, the higher of (i) the sum of the LIBO Rate (Reserve Adjusted) for
such Interest Period plus the Applicable Margin plus a margin of 3%, or
(ii)the sum of the Alternate Base Rate plus the Applicable Margin plus a
margin of 3%; or
(b) in all other cases, the sum of the Alternate Base Rate plus the
Applicable Margin plus a margin of 3%.
SECTION 3.2.3. PAYMENT DATES. Interest accrued on each Loan shall be
payable, without duplication:
(a) on the Stated Maturity Date;
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(b) on the date of any optional or required payment or prepayment, in
whole or in part, of principal outstanding on such Loan and on that portion
of such Loan so paid or prepaid;
(c) with respect to Base Rate Loans, on each Quarterly Payment Date
occurring after the Effective Date;
(d) with respect to LIBO Rate Loans, on the last day of each
applicable Interest Period and, if such Interest Period shall exceed three
months, on the ninetieth (90th) day of such Interest Period; and
(e) on that portion of any Loans which is accelerated pursuant to
SECTION 9.2 or SECTION 9.3, immediately upon such acceleration.
Interest accrued on Loans or other monetary Obligations arising under this
Agreement or any other Loan Document after the date such amount shall have
become due and payable (whether on the Stated Maturity Date, upon acceleration
or otherwise) shall be payable upon demand.
SECTION 3.2.4. MAXIMUM INTEREST. It is the intention of the parties hereto
to conform strictly to applicable usury laws and, anything herein to the
contrary notwithstanding, the Obligations of the Borrower to the Lender under
this Agreement shall be subject to the limitation that payments of interest
shall not be required to the extent that receipt thereof would be contrary to
provisions of Applicable Law limiting rates of interest which may be charged or
collected by the Lender. Accordingly, if the transactions contemplated hereby
would be usurious under Applicable Law with respect to the Lender then, in that
event, notwithstanding anything to the contrary in this Agreement, it is agreed
as follows:
(a) the provisions of this SECTION 3.2.4 shall govern and control;
(b) the aggregate of all consideration which constitutes interest
under Applicable Law that is contracted for, charged or received under this
Agreement, or under any of the other aforesaid agreements or otherwise in
connection with this Agreement by the Lender shall under no circumstances
exceed the maximum amount of interest allowed by Applicable Law (such
maximum lawful interest rate, if any, with respect to the Lender herein
called the "HIGHEST LAWFUL RATE"), and any excess shall be credited to the
Borrower by the Lender (or, if such consideration shall have been paid in
full, such excess refunded to the Borrower);
(c) all sums paid, or agreed to be paid, to the Lender for the use,
forbearance and detention of the indebtedness of the Borrower to the Lender
hereunder shall, to the extent permitted by Applicable Law, be amortized,
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prorated, allocated and spread throughout the full term of such
indebtedness until payment in full so that the actual rate of interest is
uniform throughout the full term thereof; and
(d) if at any time the interest provided pursuant to SECTIONS 3.2.1
and 3.2.2 together with any other fees payable pursuant to this Agreement
and deemed interest under Applicable Law, exceeds that amount which would
have accrued at the Highest Lawful Rate, the amount of interest and any
such fees to accrue to the Lender pursuant to this Agreement shall be
limited, notwithstanding anything to the contrary in this Agreement, to
that amount which would have accrued at the Highest Lawful Rate, but any
subsequent reductions, as applicable, shall not reduce the interest to
accrue to such Lender pursuant to this Agreement below the Highest Lawful
Rate until the total amount of interest accrued pursuant to this Agreement
and such fees deemed to be interest equals the amount of interest which
would have accrued to such Lender if a varying rate per annum equal to the
interest provided pursuant to SECTIONS 3.2.1 and 3.2.2 had at all times
been in effect, PLUS the amount of fees which would have been received but
for the effect of this SECTION 3.2.4.
SECTION 3.3. FEES. The Borrower agrees to pay the fees set forth in this
SECTION 3.3. All such fees shall be non-refundable.
SECTION 3.3.1. COMMITMENT FEE. The Borrower agrees to pay to the Lender,
for the period (including any portion thereof when any of the Commitments are
suspended by reason of the Borrower's inability to satisfy any condition of
ARTICLE V) commencing on December 31, 1998, and continuing through the final
Commitment Termination Date, a commitment fee at the rate of three-eighths of
one percent (0.375%) per annum on the average daily Commitment Availability.
Such fees shall be payable by the Borrower in arrears on the last Business Day
of each March, June, October and December, commencing with the first such day
following the Effective Date, and on each Commitment Termination Date.
SECTION 3.3.2. STRUCTURING FEE. The Borrower has agreed to pay to the
Lender, on or before the Effective Date, a structuring fee in the amount of
$50,000. If paid before the Effective Date, such fee shall be credited against
the closing fee provided for in SECTION 3.3.3.
SECTION 3.3.3. CLOSING FEE. On the Effective Date, the Borrower agrees to
pay to the Lender a closing fee in the amount of $250,000.
SECTION 3.3.4. ENGINEERING FEE. The Borrower agrees to pay an annual
engineering and re-determination fee in the amount of $25,000. The applicable
portion of such fees shall be payable by the Borrower in arrears on each
Quarterly Payment Date.
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SECTION 3.3.5. LETTER OF CREDIT STATED AMOUNT FEE. The Borrower agrees to
pay to the Issuer a fee for each Letter of Credit for the period from and
including the date of the issuance of such Letter of Credit to (but not
including) the date upon which such Letter of Credit expires, at a rate per
annum equal to 1% of the Stated Amount of such Letter of Credit, based on a year
comprised of three-hundred and sixty (360) days. A prorated portion of such fee
shall be payable by the Borrower in arrears on each Quarterly Payment Date, and
on the earlier of the Tranche A Availability Termination Date or the Tranche A
Commitment Termination Date for any period then ending for which such fee shall
not theretofore have been paid, commencing on the first such date after the
issuance of such Letter of Credit.
SECTION 3.3.6. LETTER OF CREDIT ISSUANCE FEE. The Borrower agrees to pay
to the Issuer an issuance fee for each Letter of Credit issued by the Issuer for
the period from and including the date of issuance of such Letter of Credit to
(but not including) the date upon which such Letter of Credit expires, the
greater of (x) 0.25% of the Stated Amount of such Letter of Credit or (y) $300.
Such fee shall be payable by the Borrower on the date of issuance of such Letter
of Credit.
SECTION 3.3.7. LETTER OF CREDIT ADMINISTRATIVE FEES. The Borrower agrees
to pay to the Lender the amounts described in SECTION 4.3.
SECTION 3.3.8. BORROWING BASE FEE. The Borrower agrees to pay to the
Lender a fee in the amount of $150,000 (the "BORROWING BASE FEE") immediately
following the first time the Borrowing Base is redetermined (pursuant to a
Borrowing Base Redetermination) to be in excess of $10 million.
SECTION 3.4. PROCEEDS ACCOUNT. The Security Documents contain an
assignment to the Lender by the Borrower and its Subsidiaries, as applicable, of
all production of Hydrocarbons and all proceeds attributable thereto properly
allocable to the Mortgaged Properties. Notwithstanding such assignment of
production, the Borrower may, until the Lender shall give notice to the
contrary, receive such proceeds. Thereafter, all such proceeds from the sale of
such production shall be paid directly into an account of the Borrower
maintained with the Lender (the "PROCEEDS ACCOUNT"). The Borrower hereby grants
to the Lender, subject to the prior assignment in favor of the Lender of such
production and its proceeds, a security interest in the Proceeds Account and all
proceeds thereof.
SECTION 3.5. OVERRIDING ROYALTY INTEREST; ASSIGNMENT IS NOT COLLATERAL
SECURITY.
(a) In addition to interest paid on the Loans, the Borrower and its
Subsidiaries, as applicable, shall assign and convey to the Lender's
designee ("DESIGNEE"), as additional consideration payable to the Lender to
be retained in perpetuity and not as additional collateral security, an
overriding royalty
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interest in the Borrower's and each of Borrower's Subsidiaries' Hydrocarbon
Interests that are described on SCHEDULE II, PART B (New Mortgaged
Properties) and SCHEDULE II, PART C (Starboard Properties). Such
overriding royalty interest shall be conveyed by the Assignment. In
addition to the representations and warranties given in the Assignment, the
Borrower hereby represents and warrants that the overriding royalty
interest conveyed by the Assignment is free and clear of any mortgages,
deeds of trust, voluntary or contractual liens, pledges, security
interests, charges, conditional sales or other title retention documents,
or other encumbrances or burdens other than those in favor of the Lender,
if any, and as expressly set forth in EXHIBIT A to the Assignment.
(b) If all Tranche B Loans are paid in full and the Tranche B
Commitment is terminated on or before January 13, 2000, then the Borrower
may purchase the overriding royalty interest conveyed by the Assignment in
consideration of the payment of $200,000. Such conveyance shall be without
recourse, representation or warranty of any kind, except that the Designee
shall warrant against liens created by, through or under the Designee.
(c) The overriding royalty interest described in the foregoing
SUBSECTIONS (a) AND (b) shall not affect in any way the overriding royalty
interests acquired by the Designee pursuant to the Prior Agreement.
ARTICLE IV
LETTERS OF CREDIT
SECTION 4.1. ISSUANCE REQUESTS. By delivering to the Issuer an Issuance
Request on or before 12:00 noon (Chicago time), the Borrower may request, from
time to time prior to the earlier to occur of (x) the Tranche A Availability
Termination Date and (y) the Tranche A Commitment Termination Date, and on not
less than three (3) nor more than ten (10) Business Days' notice, that the
Issuer issue an irrevocable standby letter of credit in substantially the form
of EXHIBIT N hereto, or in such other form as may be mutually agreed by the
Borrower and the Issuer (each a "LETTER OF CREDIT"), in support of financial
obligations of the Borrower incurred in the Borrower's ordinary course of
business and which are described in such Issuance Request. Each Letter of
Credit shall by its terms:
(a) be issued in a Stated Amount which
(i) is at least $50,000;
(ii) does not exceed (or would not exceed) the then Letter of
Credit Availability;
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(b) be stated to expire on a date (its "STATED EXPIRY DATE") no later
than the earlier of (i) one (1) year after its date of issuance, or (ii)
one (1) year after the Availability Termination Date; and
(c) on or prior to its Stated Expiry Date
(i) terminate immediately upon notice to the Issuer from the
beneficiary thereunder that all obligations covered thereby have been
terminated, paid, or otherwise satisfied in full,
(ii) reduce in part immediately and to the extent the beneficiary
thereunder has notified the Issuer that the obligations covered
thereby have been paid or otherwise satisfied in part, or
(iii) terminate thirty (30) Business Days after notice to the
beneficiary thereunder from the Lender that an Event of Default has
occurred and is continuing.
So long as no Default has occurred and is continuing, by delivery to the Issuer
of an Issuance Request at least three (3) but not more than ten (10) Business
Days prior to the Stated Expiry Date of any Letter of Credit, the Borrower may
request the Issuer to extend the Stated Expiry Date of such Letter of Credit for
an additional period not to exceed the earlier of one (1) year from its date of
extension, the Tranche A Availability Termination Date or the Tranche A
Commitment Termination Date.
SECTION 4.2. ISSUANCES AND EXTENSIONS. On the terms and subject to the
conditions of this Agreement (including ARTICLE VI), the Issuer shall issue
Letters of Credit, and extend the Stated Expiry Dates of outstanding Letters of
Credit, in accordance with the Issuance Requests made therefor. The Issuer will
make available the original of each Letter of Credit which it issues in
accordance with the Issuance Request therefor to the beneficiary thereof and
will notify the beneficiary under any Letter of Credit of any extension of the
Stated Expiry Date thereof. Upon the expiration of any Letter of Credit, the
Borrower may re-use any portion of the Letter of Credit Availability for the
issuance of new Letters of Credit prior to the earlier to occur of the Tranche A
Availability Termination Date or the Tranche A Commitment Termination Date.
The Issuer is under no obligation to issue any Letter of Credit if:
(i) any order, judgment or decree of any Government Agency or
arbitrator shall by its terms purport to enjoin or restrain the Issuer from
issuing such Letter of Credit, or any requirement of Applicable Law or any
request or directive (whether or not having the force of law) from any
Government Agency with jurisdiction over the Issuer shall prohibit, or
request that the Issuer refrain
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from, the issuance of letters of credit generally or such Letter of Credit in
particular or shall impose upon the Issuer with respect to such Letter of Credit
any restriction, reserve or capital requirement (for which the Issuer is not
otherwise compensated hereunder) not in effect on the Effective Date, or shall
impose upon the Issuer any unreimbursed loss, cost or expense which was not
applicable on the Effective Date and which the Issuer in good faith deems
material to it;
(ii) one or more of the applicable conditions contained in ARTICLE VI
is not then satisfied;
(iii) the expiry date of any requested Letter of Credit is prior to the
maturity date of any financial obligation to be supported by the requested
Letter of Credit;
(iv) any requested Letter of Credit does not provide for drafts, or is
not otherwise in form and substance acceptable to the Issuer, or the
issuance of a Letter of Credit shall violate any applicable policies of the
Issuer;
(v) any standby Letter of Credit is for the purpose of supporting the
issuance of any letter of credit by any other Person; or
(vi) such Letter of Credit is in a face amount denominated in a
currency other than Dollars.
The Uniform Customs and Practice for Documentary Credits most recently published
by the International Chamber of Commerce at the time of issuance of any Letter
of Credit shall (unless otherwise expressly provided in the Letters of Credit)
apply to the Letters of Credit.
SECTION 4.3. EXPENSES. The Borrower agrees to pay to the Issuer all
reasonable administrative expenses of the Issuer in connection with the
issuance, maintenance, modification (if any) and administration of each Letter
of Credit issued by the Issuer upon demand from time to time.
SECTION 4.4. DISBURSEMENTS. The Issuer will notify the Borrower promptly
of the presentment for payment of any Letter of Credit, together with notice of
the date (the "DISBURSEMENT DATE") such payment shall be made. Subject to the
terms and provisions of such Letter of Credit, the Issuer shall make such
payment to the beneficiary (or its designee) of such Letter of Credit. In
paying any drawing under a Letter of Credit, the Issuer shall not have any
responsibility to obtain any document (other than to obtain and review any sight
draft and certificates expressly required by the Letter of Credit) or to
ascertain or inquire as to the validity or accuracy of any such document or the
authority of the Person executing or delivering any such document.
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Prior to 12:00 noon (Chicago time) on the Disbursement Date, the Borrower will
reimburse the Issuer for all amounts which it has disbursed under the Letter of
Credit. To the extent the Issuer is not reimbursed in full in accordance with
the preceding sentence, the Borrower's Reimbursement Obligation shall accrue
interest at a fluctuating rate equal to the lesser of (i) the Highest Lawful
Rate or (ii) the Alternate Base Rate, plus the Applicable Margin, plus a margin
of 3% per annum, payable on demand. In the event the Issuer is not reimbursed
by the Borrower on the Disbursement Date, or if the Issuer must for any reason
return or disgorge such reimbursement, the Lender shall, on the terms and
subject to the conditions of this Agreement, fund the Reimbursement Obligation
therefor by making, on the next Business Day, Loans as provided in SECTION 2.1.1
(the Borrower being deemed to have given a timely Borrowing Request therefor for
such amount); PROVIDED, HOWEVER, for the purpose of determining the availability
of the Commitments to make Loans immediately prior to giving effect to the
application of the proceeds of such Loans, such Reimbursement Obligation shall
be deemed not to be outstanding at such time.
SECTION 4.5. REIMBURSEMENT. The Borrower's obligation (a "REIMBURSEMENT
OBLIGATION") under SECTION 4.4 to reimburse the Issuer with respect to each
Disbursement (including interest thereon) shall be absolute and unconditional
under any and all circumstances and irrespective of any setoff, counterclaim, or
defense to payment which the Borrower may have or have had against the Lender,
the Issuer or any beneficiary of a Letter of Credit, including any defense based
upon the occurrence of any Default, any draft, demand or certificate or other
document presented under a Letter of Credit proving to be forged, fraudulent,
invalid or insufficient, the failure of any Disbursement to conform to the terms
of the applicable Letter of Credit (if, in the Issuer's good faith opinion, such
Disbursement is determined to be appropriate) or any non-application or
misapplication by the beneficiary of the proceeds of such Disbursement, or the
legality, validity, form, regularity, or enforceability of such Letter of
Credit; PROVIDED, HOWEVER, that nothing herein shall adversely affect the right
of the Borrower to commence any proceeding against the Issuer for any wrongful
Disbursement made by the Issuer under a Letter of Credit as a result of acts or
omissions constituting gross negligence or wilful misconduct on the part of the
Issuer.
SECTION 4.6. DEEMED DISBURSEMENTS. Upon the occurrence and during the
continuation of any Event of Default or the occurrence of the Tranche A
Commitment Termination Date, an amount equal to that portion of Letter of Credit
Outstandings attributable to outstanding and undrawn Letters of Credit shall, at
the election of the Lender, and without demand upon or notice to the Borrower,
be deemed to have been paid or disbursed by the Lender under such Letters of
Credit (notwithstanding that such amount may not in fact have been so paid or
disbursed), and, upon notification by the Lender to the Borrower of its
obligations under this Section, the Borrower shall be immediately obligated to
reimburse the Lender the amount deemed to have been so paid or disbursed by the
Lender. Any amounts so received by the Lender from the Borrower pursuant to
this Section shall be held as collateral security for the repayment
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of the Borrower's obligations in connection with the Letters of Credit issued by
the applicable Issuer. At any time when such Letters of Credit shall terminate
and all Obligations to the Lender are either terminated or paid or reimbursed to
the Lender in full, the Obligations of the Borrower under this Section shall be
reduced accordingly (subject, however, to reinstatement in the event any payment
in respect of such Letters of Credit is recovered in any manner from the Lender
or the Issuer), and the Lender will return to the Borrower the excess, if any,
of
(a) the aggregate amount deposited by the Borrower with the Lender
and not theretofore applied by the Lender to any Reimbursement Obligation
OVER
(b) the aggregate amount of all Reimbursement Obligations to the
Lender pursuant to this Section, as so adjusted.
At such time when all Events of Default shall have been cured or waived, the
Lender shall return to the Borrower all amounts then on deposit with the Lender
pursuant to this Section. All amounts on deposit pursuant to this Section
shall, until their application to any Reimbursement Obligation or their return
to the Borrower, as the case may be, bear interest for the Borrower's account at
the daily average Federal Funds Rate from time to time in effect (net of the
costs of any reserve requirements, in respect of amounts on deposit pursuant to
this Section, pursuant to F.R.S. Board Regulation D), which interest shall be
held by the Lender as additional collateral security for the repayment of the
Borrower's Obligations in connection with the Letters of Credit issued by the
Lender.
SECTION 4.7. NATURE OF REIMBURSEMENT OBLIGATIONS. The Borrower shall
assume all risks of the acts, omissions, or misuse of any Letter of Credit by
the beneficiary thereof. Neither the Lender nor any Issuer (except to the
extent of its own gross negligence or wilful misconduct) shall be responsible
for:
(a) the form, validity, sufficiency, accuracy, genuineness, or legal
effect of any Letter of Credit or any document submitted by any party in
connection with the application for and issuance of a Letter of Credit,
even if it should in fact prove to be in any or all respects invalid,
insufficient, inaccurate, fraudulent, or forged;
(b) the form, validity, sufficiency, accuracy, genuineness, or legal
effect of any instrument transferring or assigning or purporting to
transfer or assign a Letter of Credit or the rights or benefits thereunder
or proceeds thereof in whole or in part, which may prove to be invalid or
ineffective for any reason;
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(c) failure of the beneficiary to comply fully with conditions
required in order to demand payment under a Letter of Credit;
(d) errors, omissions, interruptions, or delays in transmission or
delivery of any messages, by mail, cable, telegraph, telex, facsimile or
otherwise;
(e) any loss or delay in the transmission or otherwise of any
document or draft required in order to make a Disbursement under a Letter
of Credit or of the proceeds thereof;
(f) any change in the time, manner or place of payment of, or in any
other term of, all or any of the obligations of the Borrower in respect of
any Letter of Credit;
(g) the existence of any claim, set-off, defense or other right that
the Borrower may have at any time against any beneficiary or any transferee
of any Letter of Credit (or any Person for whom any such beneficiary or any
such transferee may be acting), the Issuer (if other than the Lender or its
Affiliates) or any other Person, whether in connection with this Agreement,
the transactions contemplated hereby or by the Letters of Credit or any
unrelated transaction;
(h) any payment by an Issuer under any Letter of Credit against
presentation of a draft or certificate that does not strictly comply with
the terms of any Letter of Credit; or any payment made by an Issuer under
any Letter of Credit to any Person purporting to be a trustee in
bankruptcy, debtor-in-possession, assignee for the benefit of creditors,
liquidator, receiver or other representative of or successor to any
beneficiary or any transferee of any Letter of Credit, including any
arising in connection with any insolvency proceeding; or
(i) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing, including any other circumstance that
might otherwise constitute a defense available to, or a discharge of, the
Borrower or a guarantor.
None of the foregoing shall affect, impair, or prevent the vesting of any of the
rights or powers granted the Lender or the Issuer hereunder. In furtherance and
extension, and not in limitation or derogation, of any of the foregoing, any
action taken or omitted to be taken by the Lender or the Issuer in good faith
and not constituting gross negligence or willful misconduct shall be binding
upon the Borrower and shall not put the Lender or the Issuer under any resulting
liability to the Borrower.
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SECTION 4.8. INCREASED COSTS; INDEMNITY. If by reason of
(a) any change in Applicable Law after the Effective Date or any
change in the interpretation or application by any judicial or regulatory
authority of any Applicable Law, or
(b) compliance by the Lender with any direction, request or
requirement (whether or not having the force of law) of any Government
Agency, including Regulation D of the F.R.S. Board:
(i) the Lender shall be subject to any tax (other than taxes on
net income and franchises), levy, charge or withholding of any nature
or to any variation thereof or to any penalty with respect to the
maintenance or fulfillment of its obligations under this ARTICLE IV,
whether directly or by such being imposed on or suffered by the
Lender;
(ii) any reserve, deposit or similar requirement is or shall be
applicable, increased, imposed or modified in respect of any Letters
of Credit issued by an Issuer; or
(iii) there shall be imposed on the Lender any other
condition regarding this ARTICLE IV or any Letter of Credit,
and the result of the foregoing is directly or indirectly to increase the cost
to the Lender or the Issuer of issuing or maintaining any Letter of Credit or to
reduce any amount receivable in respect thereof by the Lender or the Issuer,
then and in any such case may, at any time after the additional cost is incurred
or the amount received is reduced, notify the Borrower thereof, and the Borrower
shall pay on demand such amounts as the Lender or the Issuer may specify to be
necessary to compensate the Lender or the Issuer for such additional cost or
reduced receipt, together with interest on such amount from the date demanded
until payment in full thereof at a rate equal at all times to the Alternate Base
Rate plus the Applicable Margin plus three percent (3%) per annum. The
determination by the Lender or the Issuer, as the case may be, of any amount due
pursuant to this Section, as set forth in a statement setting forth the
calculation thereof in reasonable detail shall, in the absence of manifest
error, be final and conclusive and binding on all of the parties hereto.
(c) In addition to amounts payable as elsewhere provided in this
ARTICLE IV, the Borrower hereby indemnifies, exonerates and holds the
Lender and each Issuer harmless from and against any and all actions,
causes of action, suits, losses, costs, liabilities and damages, and
expenses incurred in connection therewith (irrespective of whether the
Lender or the Issuer is a party to the action for which indemnification is
sought), including reasonable
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attorneys' fees and disbursements, which the Lender or the Issuer may incur or
be subject to as a consequence, direct or indirect, of
(i) the issuance of the Letters of Credit, other than as a
result of the gross negligence or wilful misconduct of the Issuer as
determined by a court of competent jurisdiction, or
(ii) the failure of the Issuer to honor a drawing under any
Letter of Credit as a result of any act or omission, whether rightful
or wrongful, of any present or future de jure or de facto Government
Agency.
ARTICLE V
CERTAIN INTEREST RATE AND OTHER PROVISIONS
SECTION 5.1. LIBO RATE LENDING UNLAWFUL. If the Lender shall determine
(which determination shall, upon notice thereof to the Borrower, be conclusive
and binding on the Borrower) that the introduction of or any change in or in the
interpretation of any law makes it unlawful, or any central bank or other
governmental authority asserts that it is unlawful, for the Lender to make,
continue or maintain any Loan as, or to convert any Loan into, a LIBO Rate Loan,
the obligation of the Lender to make, continue, maintain or convert into any
such LIBO Rate Loans shall, upon such determination, forthwith be suspended
until the Lender shall notify the Borrower that the circumstances causing such
suspension no longer exist, and all LIBO Rate Loans shall automatically convert
into Base Rate Loans at the end of the then current Interest Periods with
respect thereto or sooner, if required by such law or assertion.
SECTION 5.2. DEPOSITS UNAVAILABLE. If the Lender shall have determined
that Dollar deposits in the relevant amount are not available to the Lender in
its relevant market, then, upon notice from the Lender to the Borrower, the
obligations of the Lender under SECTION 2.3 to make any Loans shall forthwith be
suspended until the Lender shall notify the Borrower that the circumstances
causing such suspension no longer exist.
SECTION 5.3. INCREASED LOAN COSTS, ETC. If by reason of
(a) any change in Applicable Law after the Effective Date or any
change in the interpretation or application by any judicial or regulatory
authority of any Applicable Law, or
(b) compliance by the Lender with any direction, request or
requirement (whether or not having the force of Governmental Agency,
including Regulation D of the F.R.S. Board:
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(i) the Lender shall be subject to any tax (other than taxes on
net income and franchises), levy, charge or withholding of any nature
or to any variation thereof or to any penalty with respect to any
payment due under any LIBO Rate Loan or other amounts due under this
Agreement, whether directly or by such being imposed on or suffered by
the Lender;
(ii) any reserve, deposit or similar requirement is or shall be
applicable, increased, imposed or modified in respect of Letters of
Credit issued by an Issuer or any other extensions of credit or other
assets of, or any deposits with or other liabilities of, the Lender or
Loans made by the Lender, or against any other funds, obligations or
other property owned or held by the Lender and the Lender actually
incurs such additional costs; or
(iii) there shall be imposed on the Lender any other condition
affecting this Agreement (or any of such extensions of credit or
liabilities),
and the result of the foregoing is directly or indirectly to increase the cost
to the Lender of making, continuing or the Issuer of issuing or maintaining (or
of its obligation to make, continue or maintain) any Loans as, or of converting
(or of its obligation to convert) any Loans into, LIBO Rate Loans, any Letter of
Credit or to reduce any amount receivable in respect thereof by the Lender or
the Issuer, then and in any such case the Lender may, at any time after the
additional cost is incurred or the amount received is reduced, notify the
Borrower thereof, and the Borrower shall pay on demand such amounts as the
Lender or the Issuer may specify to be necessary to compensate the Lender or the
Issuer for such additional cost or reduced receipt, together with interest on
such amount from the date demanded until payment in full thereof at a rate equal
at all times to the Alternate Base Rate plus three percent (3%) per annum. The
determination by the Lender or the Issuer, as the case may be, of any amount due
pursuant to this Section, as set forth in a statement setting forth the
calculation thereof in reasonable detail, shall, in the absence of manifest
error, be final and conclusive and binding on all of the parties hereto.
SECTION 5.4. FUNDING LOSSES. In the event the Lender shall incur any loss
or expense (including any loss or expense incurred by reason of the liquidation
or reemployment of deposits or other funds acquired by the Lender to make,
continue or maintain any portion of the principal amount of any Loan as, or to
convert any portion of the principal amount of any Loan into, a LIBO Rate Loan)
as a result of
(a) any conversion or repayment or prepayment of the principal amount
of any LIBO Rate Loans on a date other than the scheduled last day of the
Interest Period applicable thereto, whether pursuant to SECTION 3.1 or
otherwise;
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(b) any Loans not being made as LIBO Rate Loans in accordance with the
Borrowing Request therefor by reason of any act or omission by the Borrower
or failure of a condition precedent to be satisfied; or
(c) any Loans not being continued as, or converted into, LIBO Rate
Loans in accordance with the Continuation/ Conversion Notice therefor by
reason of any act or omission by the Borrower;
then, upon the written notice of the Lender to the Borrower, the Borrower shall,
within five (5) days of its receipt thereof, pay to the Lender such amount as
will (in the reasonable determination of the Lender) reimburse the Lender for
such loss or expense. Such written notice (which shall include calculations in
reasonable detail) shall, in the absence of manifest error, be conclusive and
binding on the Borrower.
SECTION 5.5. INCREASED CAPITAL COSTS. If any change in, or the
introduction, adoption, effectiveness, interpretation, reinterpretation or
phase-in of, any Applicable Law of any Government Agency, affects or would
affect the amount of capital required or expected to be maintained by the Lender
or any Person controlling the Lender, and the Lender determines (in its sole and
absolute discretion) that the rate of return on its or such controlling Person's
capital as a consequence of its Commitments hereunder, issuance of Letters of
Credit or the Loans made by the Lender is reduced to a level below that which
the Lender or such controlling Person could have achieved but for the occurrence
of any such circumstance, then, in any such case upon notice from time to time
by the Lender to the Borrower, the Borrower shall immediately pay directly to
the Lender additional amounts sufficient to compensate the Lender or such
controlling Person for such reduction in rate of return. A statement of the
Lender as to any such additional amount or amounts (including calculations
thereof in reasonable detail) shall, in the absence of manifest error, be
conclusive and binding upon the Borrower. In determining such amount, the
Lender may use any method of averaging and attribution that it (in its
reasonable discretion) shall deem applicable.
SECTION 5.6. TAXES. All payments by the Borrower of principal of, and
interest on, the Loans and all other amounts payable hereunder shall be made
free and clear of and without deduction for any present or future income,
excise, stamp or franchise taxes and other taxes, levies, assessments, imposts,
deductions, fees, duties, withholdings or other charges and all liabilities with
respect thereto of any nature whatsoever imposed by any taxing authority, but
excluding franchise taxes and taxes imposed on or measured by the Lender's net
income or receipts (such non-excluded items being called "TAXES"). In the event
that any withholding or deduction from any payment to be made by the Borrower
hereunder is required in respect of any Taxes pursuant to any Applicable Law
then (unless the Borrower already knows of such withholding or deduction, upon
notice thereof from the Lender) the Borrower will
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(a) pay directly to the relevant authority the full amount required
to be so withheld or deducted;
(b) promptly forward to the Lender an official receipt or other
documentation satisfactory to the Lender evidencing such payment to such
authority; and
(c) pay to the Lender such additional amount or amounts as is
necessary to ensure that the net amount actually received by the Lender
will equal the full amount the Lender would have received and retained had
no such withholding or deduction been required.
Moreover, if any Taxes are directly asserted against the Lender with respect to
any payment received by the Lender hereunder, the Lender may pay such Taxes and
the Borrower will promptly pay such additional amounts (including any penalties,
interest or expenses) as is necessary in order that the net amount received by
such person after the payment of such Taxes (including any Taxes on such
additional amount) shall equal the amount such person would have received had
not such Taxes been asserted.
If the Borrower fails to pay any Taxes when due to the appropriate taxing
authority or fails to remit to the Lender the required receipts or other
required documentary evidence, the Borrower shall indemnify the Lender for any
incremental Taxes or other liability (including interest, expenses or penalties)
that may become payable by the Lender as a result of any such failure, whether
or not such Taxes or liabilities were correctly or legally asserted. Payment
under this indemnity shall be made within thirty (30) days after the date the
Lender makes written demand therefor.
Upon the request of the Borrower, each Assignee Lender that is organized
under the laws of a jurisdiction other than the United States shall, prior to
the due date of any payment in respect of the Borrowings, execute and deliver to
the Borrower, on or about January 15 of each calendar year, one or more (as the
Borrower may reasonably request) United States Internal Revenue Service Forms
4224 or Forms 1001 or such other forms or documents (or successor forms or
documents), appropriately completed, as may be applicable to establish the
extent, if any, to which a payment to such Assignee Lender is exempt from
withholding or deduction of Taxes.
SECTION 5.7. PAYMENTS, COMPUTATIONS, ETC. Unless otherwise expressly
provided, all payments by the Borrower pursuant to this Agreement, the Note or
any other Loan Document shall be made by the Borrower without setoff, deduction
or counterclaim, not later than 11:00 a.m. (Chicago time) on the date due, in
U.S. Dollars in same day or immediately available funds, to such account with
the Lender in Chicago, Illinois as the Lender shall specify from time to time by
notice to the Borrower. Funds received after that time shall be deemed to have
been received by the Lender on the next succeeding Business Day and any
applicable interest or fee
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shall continue to accrue. All interest shall be computed on the basis of the
actual number of days (including the first day but excluding the last day)
occurring during the period for which such interest is payable over a year
comprised of 360 days (or, in the case of interest on a Base Rate Loan (other
than when calculated with respect to the Federal Funds Rate), 365 days or, if
appropriate, 366 days). Whenever any payment to be made shall otherwise be due
on a day which is not a Business Day, such payment shall (except as otherwise
required by CLAUSE (c) of the definition of the term "Interest Period" with
respect to LIBO Rate Loans) be made on the next succeeding Business Day and such
extension of time shall be included in computing interest and fees, if any, in
connection with such payment.
SECTION 5.8. SETOFF. The Lender shall, upon the occurrence of any Default
described in CLAUSES (a) through (d) of SECTION 9.1.9 or upon the occurrence of
any other Event of Default, have the right to appropriate and apply to the
payment of the Obligations owing to it (whether or not then due), and (as
security for such Obligations) the Borrower hereby grants to the Lender a
continuing security interest in, any and all balances, credits, deposits,
accounts or moneys of the Borrower then or thereafter maintained with or
otherwise held by the Lender, including without limitation, the Proceeds
Account. The Lender agrees promptly to notify the Borrower after any such
setoff and application made by the Lender; PROVIDED, HOWEVER, that the failure
to give such notice shall not affect the validity of such setoff and
application. The rights of the Lender under this SECTION 5.8 are in addition to
other rights and remedies (including other rights of setoff under Applicable Law
or otherwise) which the Lender may have.
SECTION 5.9. USE OF PROCEEDS. The Borrower shall apply the proceeds of
each Borrowing in accordance with SECTION 2.7; without limiting the foregoing,
no proceeds of any Loan will be used to acquire any equity security of a class
which is registered pursuant to Section 12 of the Securities Exchange Act of
1934 or any "margin stock", as defined in F.R.S. Board Regulation U, X or G.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1. INITIAL CREDIT EXTENSION. The obligation of the Lender to
make the initial Credit Extension shall be subject to the prior or concurrent
satisfaction of each of the conditions precedent set forth in this SECTION 6.1.
SECTION 6.1.1. RESOLUTIONS, ETC. The Lender shall have received from the
Borrower and each of Borrower's Subsidiaries a certificate, dated not later than
the date of the initial Credit Extension, of the respective Secretary or
Assistant Secretary of each of the Borrower and the Borrower's Subsidiaries,
respectively, as to
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(a) resolutions of the respective Boards of Directors of the
Borrower, or such Borrower's Subsidiary then in full force and effect
authorizing the execution, delivery and performance of this Agreement, the
Notes and each other Loan Document to be executed by it;
(b) the incumbency and signatures of those of its officers or Persons
authorized to act with respect to this Agreement, the Notes and each other
Loan Document executed by it;
(c) the Organic Documents of the Borrower or such Borrower's
Subsidiary; and
(d) evidence that each of the Borrower or such Borrower's Subsidiary
in good standing under the laws of the jurisdiction of its respective
organization and in each of the jurisdictions where the Mortgaged
Properties are located,
upon which certificates the Lender may conclusively rely until it shall have
received a further certificate of the Secretary of the Borrower canceling or
amending such prior certificate.
SECTION 6.1.2. DELIVERY OF NOTES. The Lender shall have received the
Notes duly executed and delivered by the Borrower.
SECTION 6.1.3. GUARANTIES. The Lender shall have received executed
counterparts of the Guaranties, dated as of the date hereof, duly executed by
each of the Borrower's Subsidiaries.
SECTION 6.1.4. PLEDGE AGREEMENTS. To the extent not previously delivered
in connection with the Existing Agreement, the Lender shall have received
executed counterparts of the Pledge Agreements, or Ratifications of Pledge
Agreements previously delivered under the Existing Agreement, dated as of the
date hereof, duly executed by the Borrower pledging all of its interest in the
capital stock of each of the Borrower's Subsidiaries, in each case together with
the certificates, evidencing all of the issued and outstanding shares of capital
stock pledged pursuant to the Pledge Agreements, which certificates shall in
each case be accompanied by undated stock powers duly executed in blank, or, if
any securities pledged pursuant to the Pledge Agreements are uncertificated
securities, confirmation and evidence satisfactory to the Lender that the
security interest in such uncertificated securities has been transferred to and
perfected by the Lender in accordance with Section 8-313 and Section 8-321 of
the Uniform Commercial Code, as in effect in the State of Illinois, and, as
applicable, with the evidence of completion (or satisfactory arrangement for the
completion) of all filings and recordings of the Pledge Agreements as may be
necessary, or in the reasonable opinion of the Lender, desirable, effectively to
create
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a valid, perfected first priority lien against and security interest in the
collateral covered thereby.
SECTION 6.1.5. SECURITY AGREEMENT. The Lender shall have received
executed counterparts of a Security Agreement, or Ratifications of Security
Agreements previously delivered under the Existing Agreement, dated as of the
date hereof, duly executed by the Borrower and each of its Subsidiaries, as
applicable, together with
(a) executed copies of Uniform Commercial Code financing statements
(Form UCC-1), in proper form for filing, naming the Borrower (or its
Subsidiary, as applicable) as the debtor and the Lender as the secured
party, or other similar instruments or documents, filed under the Uniform
Commercial Code of all jurisdictions as may be necessary or, in the opinion
of the Lender, desirable to perfect the security interest of the Lender
pursuant to such Security Agreement; and
(b) executed copies of proper Uniform Commercial Code Form UCC-3
termination statements, if any, necessary to release all Liens and other
rights of any Person in any collateral described in such Security Agreement
previously granted by any Person together with such other Uniform
Commercial Code Form UCC-3 termination statements as the Lender may
reasonably request from the Borrower.
SECTION 6.1.6. CONSENTS AND MORTGAGE CONSENTS. The Lender shall have
received true and correct copies, certified by the Borrower, of all Mortgage
Consents and Consents required in connection with the Properties to be
encumbered by Mortgages delivered pursuant to SECTION 6.1.7 or the Security
Agreements delivered pursuant to SECTION 6.1.5, respectively.
SECTION 6.1.7. MORTGAGE. The Lender shall have received counterparts of a
Mortgage, or Amendments to Mortgages previously delivered under the Existing
Agreement, relating to the Hydrocarbon Interests and related Oil and Gas
Properties of the Borrower and its Subsidiaries that are included in the
Lender's determination of the initial Borrowing Base, dated as of a recent date,
duly executed by the Borrower and/or its Subsidiaries, as applicable, together
with
(a) evidence of the completion (or satisfactory arrangements for the
completion) of all recordings and filings of such Mortgage as may be
necessary or, in the reasonable opinion of the Lender, desirable
effectively to create a valid, perfected first priority Lien against the
Properties purported to be covered thereby;
(b) favorable mortgagee's title opinions in favor of the Lender (in
form and substance and issued by title counsel reasonably satisfactory to
the Lender,
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substantially in the form of EXHIBIT I hereto), with respect to the
Property purporting to be covered by the Mortgage setting forth the working
interest and net revenue interest of the Borrower and/or its Subsidiaries
in such Properties and opining that the Borrower's and/or its Subsidiaries'
title to such property is good and marketable and valid and that the
interests created by the Mortgage constitute valid first Liens thereon free
and clear of all defects and encumbrances other than as approved by the
Lender; and
(c) such other approvals, opinions, or documents as the Lender may
reasonably request.
SECTION 6.1.8. OPINIONS OF COUNSEL. The Lender shall have received
opinions, dated the date of the initial Borrowing and addressed to the Lender,
from
(a) Porter & Hedges, counsel to the Borrower and the Borrower's
Subsidiaries, substantially in the form of EXHIBIT H hereto;
(b) J. Bennett Trimble, Jr., as to the Mortgaged Properties located
in the Vicksburg Field, San Patricio County, Texas and the Tidehaven Field,
Matagorda County, Texas; David M. Fortney, as to the Mortgaged Properties
located n the Wolf Point, Hall Ranch and Blessing Fields, located in
Calhoun, Karnes and Matagorda Counties, Texas, respectively; and Ronald L.
Chachere, as to the Mortgaged Properties located in the Raymondville Field,
Willacy County, Texas, special title counsel to the Borrower, substantially
in the form of EXHIBIT I hereto.
SECTION 6.1.9. UCC-11S. The Lender shall have received certified copies
of Uniform Commercial Code Requests for Information or Copies (Form UCC-11), or
a similar search report certified by a party acceptable to the Lender, dated a
date reasonably near to the date of the initial Borrowing, listing all effective
financing statements which name the Borrower, its Subsidiaries, and each other
Obligor (under their present names and any previous names) as the debtor and
which are filed in the State of Texas, together with copies of such financing
statements (none of which shall cover any collateral described in the Existing
Mortgages).
SECTION 6.1.10. EVIDENCE OF INSURANCE. The Lender shall have received
certificates of insurance satisfactory to it evidencing the existence of all
insurance required to be maintained by the Borrower by this Agreement and the
other Loan Documents.
SECTION 6.1.11. ENGINEERING REPORTS. The Lender shall have received
Engineering Reports from (i) Netherland, Sewell & Associates, dated as of
December 31, 1997, as to the Lapeyrouse Field, Terrebonne Parish, Louisiana;
(ii) Hoffman & Associates, as of December 31, 1997, as to the Mortgaged
Properties listed on PART
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A of SCHEDULE II; (iii) Netherland, Sewell & Associates, dated as of August 1,
1998, as to the Mortgaged Properties listed on PART B of SCHEDULE II.
SECTION 6.1.12. ENVIRONMENTAL REPORT. The Lender shall have received the
Phase I environmental assessments prepared by Cornerstone Environmental
Resources, Inc. with respect to the Mortgaged Properties; a completed
environmental disclosure questionnaire and such other information with respect
to the ownership and past use of the Mortgaged Properties as the Lender may
reasonably request, and such reports and questionnaire shall be satisfactory in
form, substance and scope to the Lender.
SECTION 6.1.13. BUDGET. The Lender shall have received a budget for the
Borrower for the twelve (12) months immediately following July 1, 1998, in form,
scope and detail reasonably satisfactory to the Lender. The budget shall
contain, among other things, a quarterly projection of Capital Expenditures
showing the proposed use of proceeds from Loans, the use of proceeds from loans
made by Subordinated Creditors and the use of proceeds from Required Asset
Sales.
SECTION 6.1.14. APPROVED DEVELOPMENT PLAN. The Lender shall have received
the Approved Development Plan for the eighteen (18) months immediately following
the Effective Date, in form, scope and detail reasonably satisfactory to the
Lender.
SECTION 6.1.15. AMENDED AND RESTATED SECURITY DOCUMENTS. The documents,
instruments and agreements comprising or evidencing the collateral security for
the Existing Agreement shall each have been amended, or amended and restated to
provide that such documents, instruments and agreements secure the Obligations,
in each case pursuant to instruments in form and substance satisfactory to the
Lender and its counsel.
SECTION 6.1.16. ORRI CERTIFICATE, ETC. The Lender shall have received an
executed Certificate as to Overriding Royalty Interests, substantially in the
form of EXHIBIT K, and the executed Agreement as to Certain Tax Matters,
substantially in the form of EXHIBIT L.
SECTION 6.1.17. HEDGING AGREEMENTS. The Borrower shall have entered into
(and shall have delivered to the Lender copies of) each of the Hedging
Agreements required by SECTIONS 8.1.8 and 8.1.9.
SECTION 6.1.18. ASSIGNMENT. The Lender shall have received counterparts
of the Assignment with respect to those Oil and Gas Properties described on
SCHEDULE II, PART B, duly executed by the Borrower and the Borrower's
Subsidiaries, together with
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(a) evidence of the completion (or satisfactory arrangements for the
completion) of all recordings and filings of the Assignment as may be
necessary or desirable to vest title to the Overriding Royalty Interest
described therein in favor of the Designee; and
(b) such title opinions or other assurances of title with respect to
the overriding royalties which are the subject of the Assignment as the
Lender may reasonably require.
SECTION 6.1.19. WARRANTS. The Lender or the Designee shall have received
the Warrant Documents, in each case executed and delivered by the Borrower.
SECTION 6.1.20. CLOSING FEES, EXPENSES, ETC. The Lender shall have
received all reasonable costs and expenses due and payable pursuant to
SECTIONS 3.3 and 10.3, if then invoiced.
SECTION 6.1.21. OTHER DOCUMENTS. The Lender shall have received such
other documents, including Approvals, as it may reasonably request.
SECTION 6.2. INCLUSION OF HYDROCARBON INTERESTS IN THE BORROWING BASE.
The inclusion of any additional Hydrocarbon Interests in the Borrowing Base is
subject to the following conditions having been satisfied and receipt by the
Lender of the following documents, in each case with respect to each Hydrocarbon
Interest and related Oil and Gas Properties which the Borrower requests be
included in the Borrowing Base, and each of which conditions and documents shall
be satisfactory to the Lender in form and substance:
SECTION 6.2.1. ENVIRONMENTAL REPORT. The Lender shall have
received Phase I environmental assessments as of a recent date prepared by an
environmental consulting firm as shall be acceptable to the Lender, a completed
environmental disclosure questionnaire and such other information with respect
to the ownership and past use of the Mortgaged Properties relating to such
Hydrocarbon Interests as the Lender may reasonably request, and such reports and
questionnaire shall be satisfactory in form, substance and scope to the Lender.
SECTION 6.2.2. MORTGAGE. The Lender shall have received counterparts of a
Mortgage relating to such Hydrocarbon Interests and related Oil and Gas
Properties, dated as of a recent date, duly executed by the Borrower and/or its
Subsidiaries, as applicable, together with
(a) evidence of the completion (or satisfactory arrangements for the
completion) of all recordings and filings of such Mortgage as may be
necessary or, in the reasonable opinion of the Lender, desirable
effectively to create a
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valid, perfected first priority Lien against the Properties purported to be
covered thereby;
(b) favorable mortgagee's title opinions in favor of the Lender (in
form and substance and issued by title counsel reasonably satisfactory to
the Lender, substantially in the form of EXHIBIT I hereto), with respect to
the Property purporting to be covered by the Mortgage setting forth the
working interest and net revenue interest of the Borrower and/or its
Subsidiaries in such Properties and opining that the Borrower's and/or its
Subsidiaries' title to such property is good and marketable and valid and
that the interests created by the Mortgage constitute valid first Liens
thereon free and clear of all defects and encumbrances other than as
approved by the Lender; and
(c) such other approvals, opinions, or documents as the Lender may
reasonably request.
SECTION 6.2.3. UCC-11S. The Lender shall have received certified copies
of Uniform Commercial Code Requests for Information or Copies (Form UCC-11), or
a similar search report certified by a party acceptable to the Lender, dated as
of a recent date, listing all effective financing statements which name the
Borrower or its Subsidiaries (under their present names and any previous names)
as the debtor and which are filed in the jurisdictions in the State of Texas or
the state in which such Oil and Gas Properties are located and in which the
Mortgage referenced in SECTION 6.2.2. is to be filed, together with copies of
such financing statements (none of which shall cover any collateral described in
any such Mortgage).
SECTION 6.2.4. EVIDENCE OF INSURANCE. The Lender shall have received
certificates of insurance satisfactory to it evidencing the existence of all
insurance required to be maintained by the Borrower by this Agreement and the
other Loan Documents with respect to the Hydrocarbon Interests and related Oil
and Gas Properties being added to the Borrowing Base.
SECTION 6.2.5. ENGINEERING REPORTS. The Lender shall have received an
Engineering Report, dated as of a recent date from a petroleum engineer
reasonably acceptable to the Lender, as to the Hydrocarbon Interests being added
to the Borrowing Base.
SECTION 6.2.6. MATERIAL CONTRACTS AND RELATED CONSENTS; SECURITY
AGREEMENT. The Lender shall have received true and correct copies, certified by
the Borrower, and approved the form and substance of, each Material Contract
related to the Hydrocarbon Interests being added to the Borrowing Base. In
addition, the Lender shall have received duly executed counterparts of a
Security Agreement or, if applicable, amendments to an existing Security
Agreement which add any such Material Contract to the Collateral (as defined in
the Security Agreement), a Consent
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and, as applicable, a Mortgage Consent, for each such Material Contract, dated
as of a recent date.
SECTION 6.2.7. GUARANTIES. The Lender shall have received duly executed
counterparts of a Guaranty from any Subsidiary of the Borrower which is adding
Hydrocarbon Interests to the Borrowing Base, unless such a Guaranty has already
been delivered to the Lender in connection with a previous addition to the
Borrowing Base or on the Effective Date.
SECTION 6.2.8. ADDITIONAL STOCK OR PARTNERSHIP PLEDGE. The Lender shall
have received executed counterparts of the Pledge Agreement, dated not later
than the date of such Loan, duly executed by the Borrower or the applicable
Guarantor pledging its interest in the capital stock or partnership interest, as
the case may be, of any Subsidiary which is adding Hydrocarbon Interests to the
Borrowing Base, unless such Pledge Agreement has already been delivered to the
Lender, accompanied by the original share certificate evidencing such capital
stock and executed stock powers (in blank) and the evidence of satisfactory
arrangement for the completion of all filings and recordings of the Pledge
Agreement as may be necessary or, in the reasonable opinion of the Lender,
desirable, effectively to create a valid, perfected first priority lien against
and security interest in the collateral covered thereby.
SECTION 6.2.9. OVERRIDING ROYALTY INTERESTS. To the extent that certain
new Properties (or new classifications of Properties) are considered by the
Lender in a redetermination of the Borrowing Base and the Collateral Value as a
result of drilling on the Starboard Properties, the Designee shall have received
an Assignment and a Certificate as to Overriding Royalty Interests with respect
to such Properties duly executed by the Borrower and the Borrower's
Subsidiaries, together with
(a) evidence of the completion (or satisfactory arrangements for the
completion) of all recordings and filings of the Assignment as may be
necessary or desirable to vest title to the Overriding Royalty Interest
described therein; and
(b) such title opinions or other assurances of title with respect to
the overriding royalties which are the subject of the Assignment as the
Lender may reasonably require.
SECTION 6.2.10. OTHER DOCUMENTS. The Lender shall have received such
other documents as it may reasonably request.
SECTION 6.3. ALL CREDIT EXTENSIONS. The obligation of the Lender to make
any Credit Extension shall be subject to the satisfaction of each of the
conditions precedent set forth in this SECTION 6.3.
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SECTION 6.3.1. COMPLIANCE WITH WARRANTIES, NO DEFAULT, ETC. Both before
and after giving effect to any Credit Extension (but, if any Default of the
nature referred to in SECTION 9.1.5 shall have occurred with respect to any
other Indebtedness, without giving effect to the application, directly or
indirectly, of the proceeds of any borrowing) the following statements shall be
true and correct
(a) the representations and warranties set forth in ARTICLE VII
(excluding, however, those contained in SECTION 7.9) shall be true and
correct with the same effect as if then made (unless stated to relate
solely to an earlier date, in which case such representations and
warranties shall be true and correct as of such earlier date);
(b) except as disclosed by the Borrower to the Lender pursuant to
SECTION 7.9
(i) no labor controversy, litigation, arbitration or
governmental investigation or proceeding shall be pending or, to the
knowledge of the Borrower, threatened against the Borrower or any of
its Subsidiaries which has or might reasonably be expected to have a
Material Adverse Effect; and
(ii) no development shall have occurred in any labor controversy,
litigation, arbitration or governmental investigation or proceeding
disclosed pursuant to SECTION 7.9 which has or might reasonably be
expected to have a Material Adverse Effect; and
(c) no Default shall have then occurred and be continuing, and
neither the Borrower nor any other Obligor are in material violation of any
Applicable Law or court order or decree if such violation has or might
reasonably be expected to have a Material Adverse Effect.
SECTION 6.3.2. CREDIT REQUEST. The Lender shall have received a Borrowing
Request or Issuance Request, as the case may be, for such Credit Extension.
Each of the delivery of a Borrowing Request or an Issuance Request and the
acceptance by the Borrower of the proceeds of the Borrowing or the issuance of
the Letter of Credit as applicable, shall constitute a representation and
warranty by the Borrower that on the date of such Borrowing (both immediately
before and after giving effect to such Borrowing and the application of the
proceeds thereof) or the issuance of the Letter of Credit, as applicable, the
statements made in SECTION 6.3.1 are true and correct.
SECTION 6.3.3. SATISFACTORY LEGAL FORM. All documents executed or
submitted pursuant hereto by or on behalf of the Borrower or any of its
Subsidiaries shall be reasonably satisfactory in form and substance to the
Lender and its counsel; the
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Lender and its counsel shall have received all information, approvals, opinions,
documents or instruments as the Lender or its counsel may reasonably request.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
In order to induce the Lender to enter into this Agreement and to make
Loans and to issue Letters of Credit hereunder, the Borrower represents and
warrants unto the Lender as set forth in this ARTICLE VII.
SECTION 7.1. ORGANIZATION, ETC. The Borrower is a Delaware corporation
and each of the Borrower's Subsidiaries is an Oklahoma corporation validly
organized and existing and in good standing under the laws of the jurisdiction
of its organization, is duly qualified to do business and is in good standing as
a foreign corporation in each jurisdiction where the nature of its business
requires such qualification, where the failure so to qualify would have a
Material Adverse Effect and has full power and authority and holds all requisite
governmental licenses, permits and other approvals to enter into and perform its
Obligations under this Agreement, the Notes and each other Loan Document to
which it is a party and to own and hold under lease its Property and to conduct
its business substantially as currently conducted by it, in each case where the
failure so to do would have a Material Adverse Effect. As of the Effective
Date, Old Esenjay is the owner of not less than 30% of the issued and
outstanding shares of the Borrower, and Aspect is the owner of not less than 25%
of the issued and outstanding shares of the Borrower. The Borrower is the sole
shareholder of each of the Borrower's Subsidiaries. As of the Effective Date,
the Borrower has no Subsidiaries other than as listed in SCHEDULE IV.
SECTION 7.2. DUE AUTHORIZATION, NON-CONTRAVENTION, ETC. The execution,
delivery and performance by the Borrower and each other Obligor of this
Agreement, the Notes and each other Loan Document executed or to be executed by
it are within the Borrower's and each such Obligor's corporate powers, have been
duly authorized by all necessary corporate action, and do not
(a) contravene the Borrower's or such Obligor's Organic Documents;
(b) contravene or result in any violation of or default under any
Applicable Law or any material contractual restriction, court decree or
order, in each case binding on or affecting the Borrower or any other
Obligor or any Properties, businesses, assets or revenues of the Borrower;
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(c) result in, or require the creation or imposition of, any Lien on
(except for the Liens of the Loan Documents) any of the Borrower's or any
other Obligor's Properties, businesses, assets or revenues.
SECTION 7.3. GOVERNMENT APPROVAL, REGULATION, ETC. No authorization or
approval or other action by, and no notice to or filing with, any Government
Agency or other Person is required for the due execution, delivery or
performance by the Borrower or any other Obligor of this Agreement, the Notes or
any other Loan Document to which it is a party.
SECTION 7.4. INVESTMENT COMPANY ACT. Neither the Borrower, its
Subsidiaries nor any Affiliate thereof, is an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
SECTION 7.5. PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Borrower nor
any of its Subsidiaries is a "holding company" or a "subsidiary company" of a
"holding company", or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company", within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
SECTION 7.6. VALIDITY, ETC. This Agreement constitutes, and the Notes and
each other Loan Document executed by the Borrower or any of its Subsidiaries
will, on the due execution and delivery thereof, constitute, the legal, valid
and binding obligations of the Borrower and such Subsidiaries, as applicable,
enforceable in accordance with their respective terms, and each Loan Document
executed pursuant hereto by each other Obligor will, on the due execution and
delivery thereof by such Obligor, be the legal, valid and binding obligation of
such Obligor enforceable in accordance with its terms, in each case subject to
the effect of any applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally.
SECTION 7.7. FINANCIAL INFORMATION. The audited consolidated balance
sheets of the Borrower and each of its consolidated Subsidiaries as at
December 31, 1997 and the related consolidated unaudited statements of
operations and cash flow of the Borrower and each of its Subsidiaries, copies of
which have been furnished to the Lender, have been prepared in accordance with
GAAP consistently applied, and present fairly the consolidated financial
condition of the corporations covered thereby as at the date thereof and the
results of their unaudited operations for the period then ended, and show all
material Indebtedness of the Borrower and its consolidated Subsidiaries, as of
the date thereof, including liabilities for taxes, material commitments and
Contingent Liabilities.
SECTION 7.8. NO MATERIAL ADVERSE CHANGE. Since the date of that certain
Prospectus dated as of July 16, 1998, wherein the Borrower offered for sale
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4,000,000 shares of its common stock, a true and correct copy of which has been
delivered to the Lender, there has been no change in the financial condition,
operations, assets, business, Properties or prospects of the Borrower or its
Subsidiaries that has or might reasonably be expected to have a Material Adverse
Effect, except that the Borrower expects to report operating results in the
third quarter of 1998 comparable to those reported for the second quarter of
1998.
SECTION 7.9. LITIGATION, LABOR CONTROVERSIES, ETC. There is no pending
or, to the knowledge of the Borrower, threatened litigation, action, proceeding,
or labor controversy affecting the Borrower or any of its Subsidiaries, or any
of their respective Properties, businesses, assets or revenues, which has or
might reasonably be expected to have a Material Adverse Effect, except as
disclosed in ITEM 7.9 ("LITIGATION") of the Disclosure Schedule.
SECTION 7.10. OWNERSHIP OF PROPERTIES. Each of the Borrower and each of
its Subsidiaries has good and merchantable title to its Properties (including,
without limitation, all Hydrocarbon Interests), free and clear of all Liens
except (a) those referred to in the financial statements referred to in
SECTION 7.7, (b) as disclosed to the Lender in the DISCLOSURE SCHEDULE or (c) as
permitted by SECTION 8.2.3. After giving full effect to all Liens permitted
under SECTION 8.2.3, the Borrower and its Subsidiaries own the net interests in
Hydrocarbons produced from the Oil and Gas Properties as reflected in the most
recent Engineering Report, and neither the Borrower nor any of its Subsidiaries
is obligated to bear costs or expenses in respect of the Oil and Gas Properties
in excess of its working interest percentage as reflected in the most recent
Engineering Report.
SECTION 7.11. TAXES. Each of the Borrower and its Subsidiaries has filed
all Federal and other tax returns and reports required by Applicable Law to have
been filed by it and has paid all taxes and other governmental charges thereby
shown to be owing, except any such taxes or charges which are being diligently
contested in good faith by appropriate proceedings and for which adequate
reserves in accordance with GAAP shall have been set aside on its books.
SECTION 7.12. PENSION AND WELFARE PLANS. During the
twelve-consecutive-month period prior to the Effective Date and prior to the
date of any borrowing hereunder, no steps have been taken to terminate any
Pension Plan, and no contribution failure has occurred with respect to any
Pension Plan sufficient to give rise to a Lien under section 302(f) of ERISA.
No condition exists or event or transaction has occurred with respect to any
Pension Plan which might result in the incurrence by the Borrower or any member
of the Controlled Group of any material liability, fine or penalty. Except as
disclosed in ITEM 7.12 ("EMPLOYEE BENEFIT PLANS") of the Disclosure Schedule or
as otherwise reflected in the Financial Statements of the Borrower and its
consolidated Subsidiaries, neither the Borrower nor any member of the Controlled
Group has any contingent liability with respect to any post-retirement
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benefit under a Welfare Plan, other than liability for continuation coverage
described in Part 6 of Title I of ERISA.
SECTION 7.13. COMPLIANCE WITH LAW. Neither the Borrower nor any of its
Subsidiaries (a) is in violation of any Applicable Law of, or the terms of any
Approval issued by, any Government Agency; or (b) has failed to obtain any
Approval necessary to ownership of any of its properties or the conduct of its
business (including without limitation any such authorization from the Federal
Energy Regulatory Commission or any state conservation commission or similar
body); which violation or failure could reasonably be expected to have a
Material Adverse Effect.
SECTION 7.14. CLAIMS AND LIABILITIES. Except as disclosed to the Lender
in ITEM 7.14 ("CLAIMS AND LIABILITIES") of the Disclosure Schedule, neither the
Borrower nor any of its Subsidiaries has accrued any liabilities under gas
purchase contracts for gas not taken, but for which it is liable to pay if not
made up and which, if not paid, would have a Material Adverse Effect. Except as
disclosed to the Lender in ITEM 7.14 of the Disclosure Schedule, no claims exist
against the Borrower or any of its Subsidiaries for gas imbalances which claims
if adversely determined would have a Material Adverse Effect. No purchaser of
product supplied by the Borrower or any of its Subsidiaries has any claim
against the Borrower or any of its Subsidiaries for product paid for, but for
which delivery was not taken as and when paid for, which claim if adversely
determined would have a Material Adverse Effect.
SECTION 7.15. NO PROHIBITION ON PERFECTION OF SECURITY DOCUMENTS. None of
the terms or provisions of any indenture, mortgage, deed of trust, agreement or
other instrument to which the Borrower or any of its Subsidiaries is a party or
by which the Borrower or any of its Subsidiaries or the property of the Borrower
or any of its Subsidiaries is bound prohibit the filing or recordation of any of
the Loan Documents or any other action which is necessary or appropriate in
connection with the perfection of the Liens evidenced and created by any of the
Loan Documents.
SECTION 7.16. SOLVENCY. Neither the Borrower nor any of its Subsidiaries
is "insolvent", as such term is used and defined in the United States Bankruptcy
Code, 11 U.S.C. Section 101, ET SEQ.
SECTION 7.17. ENVIRONMENTAL WARRANTIES. As a reasonable and prudent
operator of oil and gas producing properties, in the ordinary course of its
business, the Borrower has conducted, with respect to its Oil and Gas
Properties, and, on an ongoing basis, conducts a review of the effect of
Environmental Laws on the business, operations and Properties of the Borrower
and its Subsidiaries, in the course of which it identifies and evaluates
associated liabilities and costs (including any capital or operating
expenditures required for Remedial Action or other clean-up or closure of
Properties presently owned or operated, any capital or operating expenditures
required for Remedial Action or otherwise to achieve or maintain
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compliance with environmental protection standards imposed by any Environmental
Law or as a condition of any Approval, license, permit or contract, any related
constraints on operating activities, including any periodic or permanent
shutdown of any facility or reduction in the level of or change in the nature of
operations conducted thereat and any actual or potential liabilities to third
parties, including employees, and any related costs and expenses). On the basis
of this review, the Borrower has reasonably concluded that, except as disclosed
in ITEM 7.17 ("ENVIRONMENTAL MATTERS") of the Disclosure Schedule, to the best
of its knowledge after due inquiry:
(a) all facilities and Property (including underlying groundwater)
owned, leased or operated by the Borrower or any of its Subsidiaries have
been, and continue to be, owned, leased or operated by the Borrower or any
of its Subsidiaries in compliance with all Environmental Laws where the
failure to do so could reasonably be expected to have a Material Adverse
Effect;
(b) there have been no past, and there are no pending or threatened
(i) claims, complaints, notices or inquiries to, or requests for
information received by, the Borrower or any of its Subsidiaries with
respect to any alleged violation of any Environmental Law, that,
singly or in the aggregate, have or may reasonably be expected to have
a Material Adverse Effect, or
(ii) claims, complaints, notices or inquiries to, or requests for
information received by, the Borrower or any of its Subsidiaries
regarding potential liability under any Environmental Law or under any
common law theories relating to operations or the condition of any
facilities or Property (including underlying groundwater) owned,
leased or operated by the Borrower or any of its Subsidiaries that,
singly or in the aggregate, have, or may reasonably be expected to
have a Material Adverse Effect;
(c) there have been no Releases of Hazardous Materials at, on or
under any Property now or previously owned or leased by the Borrower or any
of its Subsidiaries that, singly or in the aggregate, have, or may
reasonably be expected to have, a Material Adverse Effect;
(d) each of the Borrower or any of its Subsidiaries, as applicable,
has been issued and is in compliance with all permits, certificates,
approvals, licenses and other authorizations relating to environmental
matters and necessary or desirable for its business where the failure to do
so could reasonably be expected to have a Material Adverse Effect;
(e) no Property now or previously owned, leased or operated by the
Borrower or any of its Subsidiaries is listed or proposed for listing on
the
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National Priorities List pursuant to CERCLA, or, to the extent that such listing
may, singly or in the aggregate, have, or may reasonably be expected to have a
Material Adverse Effect, on the CERCLIS or on any other similar federal or state
list of sites requiring investigation or clean-up;
(f) there are no underground storage tanks, active or abandoned,
including petroleum storage tanks, on or under any Property now or
previously owned, leased or operated by the Borrower or any of its
Subsidiaries that, singly or in the aggregate, have, or may reasonably be
expected to have, a Material Adverse Effect;
(g) neither the Borrower nor any Subsidiaries of the Borrower has
directly transported or directly arranged for the transportation of any
Hazardous Material to any location which is listed or proposed for listing
on the National Priorities List pursuant to CERCLA, or, to the extent that
such listing may, singly or in the aggregate, have, or may reasonably be
expected to have a Material Adverse Effect, on the CERCLIS or on any
similar federal or state list or which is the subject of federal, state or
local enforcement actions or other investigations which may lead to
material claims against the Borrower or any of its Subsidiaries for any
remedial work, damage to natural resources or personal injury, including
claims under CERCLA;
(h) there are no polychlorinated biphenyls, radioactive materials or
friable asbestos present at any Property now or previously owned or leased
by the Borrower or any of its Subsidiaries that, singly or in the
aggregate, have, or may reasonably be expected to have, a Material Adverse
Effect; and
(i) no condition exists at, on or under any property now or
previously owned or leased by the Borrower or any of its Subsidiaries
which, with the passage of time, or the giving of notice or both, would
give rise to material liability under any Environmental Law that, singly or
in the aggregate have, or may reasonably be expected to have a Material
Adverse Effect.
SECTION 7.18. REGULATIONS G, U AND X. Neither the Borrower nor any of its
Subsidiaries is engaged in the business of extending credit for the purpose of
purchasing or carrying margin stock, and no proceeds of any Loans will be used
for a purpose which violates, or would be inconsistent with, F.R.S. Board
Regulation G, U or X. Terms for which meanings are provided in F.R.S. Board
Regulation G, U or X or any regulations substituted therefor, as from time to
time in effect, are used in this Section with such meanings.
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SECTION 7.19. YEAR 2000 COMPLIANCE.
(a) The Borrower is: (i) developing a review and assessment program
of all areas with its and each of its Subsidiaries' businesses and operations
(including those affected by suppliers and vendors) that could be adversely
affected by the "YEAR 2000 PROBLEM" (that is, the risk that computer
applications (as well as imbedded microchips) used by the Borrower or any of its
Subsidiaries (or any of their suppliers and vendors) may be unable to recognize
and perform properly date-sensitive functions involving certain dates prior to
and any date after December 31, 1999); (ii) developing a plan and a timetable
for addressing the Year 2000 Problem on a timely basis; and (iii) to date,
implementing that plan in accordance with that timetable.
(b) The Borrower reasonably believes that all computer applications
(including those of their suppliers and vendors) that are material to its or its
Subsidiaries' businesses and operations will, on a timely basis, be able to
perform properly date-sensitive functions for all dates before and after
January 1, 2000 (that is, be "YEAR 2000 COMPLIANT"), except to the extent that a
failure to do so could not reasonably be expected to have a Material Adverse
Effect."
SECTION 7.20. INSURANCE. The Borrower and its Subsidiaries have the
benefit of the insurance coverage described in the certificates of insurance
delivered pursuant to SECTION 6.1.10 and required to be maintained pursuant to
SECTION 8.1.4.
SECTION 7.21. ACCURACY OF INFORMATION. All factual information heretofore
or contemporaneously furnished by or on behalf of the Borrower or any of its
Subsidiaries in writing to the Lender for purposes of or in connection with this
Agreement or any transaction contemplated hereby (including without limitation
each Engineering Report) is, and all other such factual information hereafter
furnished by or on behalf of the Borrower or any of its Subsidiaries to the
Lender will be, true and accurate in every material respect on the date as of
which such information is dated or certified and as of the date of execution and
delivery of this Agreement by the Lender, and such information is not, or shall
not be, as the case may be, incomplete by omitting to state any material fact
necessary to make such information not misleading.
SECTION 7.22. TITLE WARRANTY. Assignor represents and warrants that the
Overriding Royalty Interest conveyed in the Assignment is free and clear of any
mortgages, deeds of trust, voluntary or contractual liens, pledges, security
interests, charges, conditional sales or other title retention documents, or
other encumbrances or burdens other than those in favor of Assignee and as
expressly set forth in Exhibit A to the Assignment, and Assignor hereby binds
itself, its successors and assigns to warrant and forever defend the title to
the Overriding Royalty Interest therein granted, conveyed, assigned, and
transferred unto Assignee, its successors and assigns, against the lawful claims
and demands of every person whomsoever
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claiming or to claim the same or any part thereof, by, through or under Assignor
but not otherwise.
ARTICLE VIII
COVENANTS
SECTION 8.1. AFFIRMATIVE COVENANTS. The Borrower agrees with the Lender
that, until all Commitments have terminated and all Obligations have been paid
and performed in full, the Borrower and each of its Subsidiaries will perform
the obligations set forth in this SECTION 8.1.
SECTION 8.1.1. FINANCIAL INFORMATION, REPORTS, NOTICES, ETC. The Borrower
will furnish, or will cause to be furnished, to the Lender copies of the
following financial statements, reports, notices and information:
(a) as soon as available and in any event within 50 days after the
end of each of the first three Fiscal Quarters of each Fiscal Year of the
Borrower, consolidated and consolidating balance sheets of the Borrower and
its consolidated Subsidiaries as of the end of such Fiscal Quarter and
consolidated and consolidating statements of operations and cash flow of
the Borrower and its consolidated Subsidiaries for such Fiscal Quarter and
for the period commencing at the end of the previous Fiscal Year and ending
with the end of such Fiscal Quarter, certified by the chief financial
Authorized Officer of the Borrower;
(b) as soon as available and in any event within 95 days after the
end of each Fiscal Year of the Borrower, a copy of the annual audit report
for such Fiscal Year for the Borrower and its consolidated Subsidiaries,
including therein the audited consolidated and consolidating balance sheets
of the Borrower and its consolidated Subsidiaries as of the end of such
Fiscal Year and audited statements of operations and cash flow of the
Borrower and its consolidated Subsidiaries for such Fiscal Year, in the
case of such audited financials, each case certified (without any
Impermissible Qualification) in a manner reasonably acceptable to the
Lender by an independent public accountant acceptable to the Lender,
together with a certificate from the Chief Financial Officer of the
Borrower from such accountants containing a computation of, and showing
compliance with, each of the financial ratios and restrictions contained in
SECTION 8.2.4 and to the effect that, in making the examination necessary
for the signing of such annual report by such accountants, they have not
become aware of any Default that has occurred and is continuing, or, if
they have become aware of such Default, describing such Default and the
steps, if any, being taken to cure it;
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(c) concurrently with the delivery of the financial statements
referred to in CLAUSES (a) and (b), a certificate, executed by the
Authorized Officer of the Borrower, showing (in reasonable detail and with
appropriate calculations and computations in all respects reasonably
satisfactory to the Lender) (i) compliance with the financial covenants set
forth in SECTION 8.2.4 and (ii) a comparison between the actions described
in the then current Approved Development Plan and the actual actions taken
in such period, and also certifying, to such Authorized Officer's best
knowledge, that no Default has occurred and is then outstanding;
(d) commencing November 30, 1999, and thereafter on or prior to
October 30th of each year, an Approved Development Plan for the Borrower
for the immediately following eighteen (18) month period, reasonably
satisfactory to the Lender, such plan to be substantially in the form of
EXHIBIT P;
(e) on or prior to December 31st of each calendar year, a budget for
the Borrower for the following calendar year in form, scope and detail
reasonably satisfactory to the Lender;
(f) no later than the date six (6) months after the Effective Date, a
budget for the Borrower for the twelve (12) month period immediately
following such date, in form, scope and detail reasonably satisfactory to
the Lender;
(g) as soon as possible and in any event within five (5) Business
Days after any responsible officer of the Borrower becomes aware of the
occurrence of each Default and any event which has or is reasonably likely
to have a Material Adverse Effect, a statement of Authorized Officer of the
Borrower setting forth details of such Default or event and the action
which the Borrower has taken and proposes to take with respect thereto;
(h) as soon as possible and in any event within five (5) Business
Days after any responsible officer of the Borrower becomes aware of (x) the
occurrence of any adverse development with respect to any litigation,
action, proceeding or labor controversy described in SECTION 7.9 or (y) the
commencement of any litigation, action, proceeding or labor controversy of
the type described in SECTION 7.9, notice thereof and, to the extent
reasonably requested by the Lender, copies of all documentation relating
thereto not subject to the attorney-client privilege;
(i) as soon as possible and in any event within ten (10) days after
any responsible officer of the Borrower or any of its Subsidiaries has
actual knowledge thereof, notice of
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(i) any claim by any Person against the Borrower or any of its
Subsidiaries of nonpayment of, or
(ii) any attempt by any Person to collect upon or enforce
any accounts payable (that are more than 30 days past due) of the Borrower
or any of its Subsidiaries, in the case of any single account payable in
excess of $100,000, or in the case of all accounts payable in the aggregate
in excess of $250,000;
(j) upon, but in no event later than ten (10) days after, any
responsible officer of the Borrower or any of its Subsidiaries becomes
aware of (i) any and all enforcement, cleanup, removal or other
governmental or regulatory actions instituted, completed or threatened or
other environmental claims against the Borrower or any Subsidiary or any of
its Properties pursuant to any applicable Environmental Laws which could
have a Material Adverse Effect, and (ii) any environmental or similar
condition on any real property adjoining or in the vicinity of the property
of the Borrower or any Subsidiary that could reasonably be anticipated to
cause such property or any part thereof to be subject to any restrictions
on the ownership, occupancy, transferability or use of such property under
any Environmental Laws;
(k) as soon as available and in any event within sixty (60) days
after January 1, 1999 and January 1st of each calendar year, an Engineering
Report from an independent petroleum engineering firm acceptable to the
Lender in its reasonable judgment, and as soon as available and in any
event within sixty (60) days after July lst of each calendar year
commencing in 1999, an Engineering Report from the Borrower's internal
reserve engineers, unless the Lender, at least sixty (60) days before the
required delivery date of such Engineering Report, has requested that it be
prepared by an independent petroleum engineering firm reasonably acceptable
to the Lender;
(l) promptly after (i) the sending or filing thereof, copies of all
reports which the Borrower sends to any of its security holders, (ii) the
sending or filing thereof, all material reports and registration statements
which the Borrower or any of its Subsidiaries files with the Securities and
Exchange Commission or any national securities exchange, (iii) the filing
thereof, copies of all tariff and rate cases and other material reports
filed with any regulatory authority (other than routine operating reports),
and (iv) receipt thereof, copies of all notices received from any
regulatory authority concerning material noncompliance by the Borrower or
any of its Subsidiaries with any applicable regulations;
(m) immediately upon becoming aware of the institution of any steps
by the Borrower or any other Person to terminate any Pension Plan, or the
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failure to make a required contribution to any Pension Plan if such failure
is sufficient to give rise to a Lien under section 302(f) of ERISA, or the
taking of any action with respect to a Pension Plan which could result in
the requirement that the Borrower furnish a bond or other security to the
PBGC or such Pension Plan, or the occurrence of any event with respect to
any Pension Plan which could result in the incurrence by the Borrower of
any material liability, fine or penalty, or any material increase in the
contingent liability of the Borrower with respect to any post-retirement
Welfare Plan benefit, notice thereof and copies of all documentation
relating thereto;
(n) promptly after the Borrower discovers or determines that any
computer application (including those of its suppliers or vendors) that is
material to the businesses or operations of the Borrower and its
Subsidiaries taken as a whole will not be Year 2000 Compliant on a timely
basis, notice thereof and a copy of the Borrower's plan for dealing with
such problem except to the extent such failure could not reasonably be
expected to have a Material Adverse Effect; and
(o) such other information respecting the condition or operations,
financial or otherwise, of the Borrower or any of its Subsidiaries as the
Lender may from time to time reasonably request including operational and
accounting information with respect to the Mortgaged Properties including
production volumes, revenues, operating costs, drilling and completion
reports and well test data.
SECTION 8.1.2. COMPLIANCE WITH LAWS, ETC. The Borrower will, and will
cause each of its Subsidiaries to, comply with all Applicable Laws, except where
failure to so comply would not be reasonably expected to have a Material Adverse
Effect, such compliance to include (without limitation):
(a) the maintenance and preservation of its corporate existence and
qualification as a foreign corporation; and
(b) the payment, before the same become delinquent, of all taxes,
assessments and governmental charges imposed upon it or upon its property
except to the extent being diligently contested in good faith by
appropriate proceedings and for which adequate reserves in accordance with
GAAP shall have been set aside on its books.
SECTION 8.1.3. MAINTENANCE, DEVELOPMENT AND SALE OF PROPERTIES.
(a) The Borrower will, and will cause each of its Subsidiaries to,
maintain (subject to any disposition permitted by SECTION 8.2.9), preserve,
protect and keep its Properties in good repair, working order and condition
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(ordinary wear and tear excepted), and make necessary and proper repairs,
renewals and replacements so that its business carried on in connection
therewith may be properly conducted at all times in accordance with
standard industry practices. In particular, the Borrower will, and will
cause each of its Subsidiaries to, operate or cause to be operated its Oil
and Gas Properties as a reasonable and prudent operator.
(b) The Borrower shall use all reasonable efforts promptly to
complete the drilling and development program contemplated by the Approved
Development Plan. In addition, the Borrower shall use all reasonable
efforts to develop and bring into production in a prudent and businesslike
manner all proved developed non-producing reserves that the Lender has
considered in its determination of the Borrowing Base.
(c) The Borrower shall ensure that at all times it has available to
it, either through its employees or through independent contractors,
petroleum engineers with appropriate experience and expertise in the proper
operation and development of properties similar to the Mortgaged
Properties.
(d) From time-to-time, but not less than once each Fiscal Quarter
during the time any Tranche B Loan is outstanding, the Borrower shall
propose to the Lender revisions to the Approved Development Plan then in
effect, showing, among other things, revised projections of Capital
Expenditures for the eighteen (18) month period following such revision,
which revisions shall in all respects satisfactory to the Lender. Once
approved in writing by the Lender, the then existing Approved Development
Plan shall be amended and shall thereafter replace and supersede the prior
Approved Development Plan.
(e) Promptly after the drilling and completion of each well drilled
on the Oil and Gas Properties that have been considered by the Lender in
the determination or redetermination of the Borrowing Base or the
Collateral Value, the Borrower shall promptly request assignments of any
interests earned by virtue of such drilling and, within fifteen (15) days
after the earlier to occur of the receipt of such assignments or sixty (60)
days after first production from such well, shall deliver to the Lender:
(i) true and correct copies of any such assignments of record title
of the applicable Oil & Gas Properties into the Borrower or its
Subsidiary, as applicable,
(ii) true and correct copies of all required Consents and Approvals
(including copies of applications to the Mineral Board of the State of
Louisiana for the relevant Approvals) applicable to such assignments,
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(iii) original, executed and acknowledged counterparts of an
Assignment from the Borrower or its Subsidiary, as applicable, to the
Designee (effective not later than the date of first production from
such well),
(iv) original, executed and acknowledged counterparts of a
supplemental Mortgage and related amendments to financing statements
and
(v) a favorable mortgagee's title opinion showing that the Borrower
or its Subsidiary, as applicable, is vested with good and marketable
title to interests in the applicable Mortgaged Property consistent
with the working interests and net revenue interest for such property
shown in the most recent Engineering Report and showing that the
interests created by such supplemental Mortgage constitute valid first
Liens thereon, free and clear of all defects and encumbrances other
than as approved by the Lender,
in each case in form and substance reasonably satisfactory to the Lender.
(f) The Borrower and each of its Subsidiaries shall, promptly after
the Effective Date, take all necessary actions and use its reasonable best
efforts to obtain appropriate Consents from the Mineral Board of the State
of Louisiana of the granting of the Assignment and the Mortgage with
respect to any State of Louisiana leases covered by such instruments.
(g) The Borrower will offer for sale and sell Oil and Gas Properties
of the Borrower and its Subsidiaries not containing Proven Reserves on a
schedule generating net sales proceeds at a cumulative rate of not less
than $3 million during each Fiscal Quarter after the Effective Date such
that, within fifteen (15) months after the Effective Date, the Borrower
shall have received net sales proceeds from such Required Asset Sales of
not less than $15 million.
SECTION 8.1.4. INSURANCE. The Borrower will, and will cause each of its
Subsidiaries to, maintain or cause to be maintained with responsible insurance
companies insurance with respect to its properties and business against such
casualties and contingencies and of such types and in such amounts as is
customary in the case of similar businesses (including, where appropriate, well
control, operator's extra expense and remediation insurance) and will furnish to
the Lender at reasonable intervals at the request of the Lender a certificate of
an Authorized Officer of the Borrower setting forth the nature and extent of all
insurance maintained by the Borrower and its Subsidiaries in accordance with
this SECTION 8.1.4. The following shall apply to the insurance required by this
SECTION 8.1.4:
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(a) Each policy for property insurance covering the Mortgaged Property
shall show the Lender as loss payee;
(b) Each policy for liability insurance covering the Mortgaged Property
shall show the Lender as additional insured;
(c) Each insurance policy covering the Mortgaged Property shall provide
that at least thirty (30) days prior written notice of cancellation,
reduction in amount or other change in coverage, or of lapse shall be given
to the Lender by the insurer; and
(d) The Borrower shall, if so requested by the Lender, deliver to the
Lender the original or a certified copy of each insurance policy covering
the Mortgaged Property.
SECTION 8.1.5. BOOKS AND RECORDS. The Borrower will, and will cause each of
its Subsidiaries to, keep books and records which accurately reflect all of its
material business affairs and transactions and permit the Lender or any of its
respective representatives, at reasonable times (but in any event, within three
(3) Business Days after notice from the Lender and during all normal business
hours) and at reasonable intervals, to visit all of its offices, to discuss its
financial matters with its officers, directors and, after forty-eight (48) hours
notice to the Borrower and independent public accountant (and the Borrower
hereby authorizes such independent public accountant to discuss the Borrower's
and its Subsidiaries' financial matters with the Lender or its representatives
whether or not any representative of the Borrower is present) and to examine
(and, at the expense of the Borrower, photocopy extracts from) any of its books
or other corporate records. The Borrower shall pay any reasonable fees of such
independent public accountant incurred in connection with the Lender's exercise
of its rights pursuant to this Section. Furthermore, the Borrower will permit
the Lender, or its agents, at the cost and expense of the Borrower, to enter
upon the Oil and Gas Properties and all parts thereof, for the purpose of
investigating and inspecting the condition and operation thereof, and shall
permit reasonable access to the field offices and other offices, including the
principal place of business, of the Borrower to inspect and examine the Oil and
Gas Properties.
SECTION 8.1.6. ENVIRONMENTAL COVENANT. The Borrower will, and will cause
each of its Subsidiaries to,
(a) use, operate and maintain all of its facilities and Properties in
compliance with all Environmental Laws, keep all necessary permits,
approvals, certificates, licenses and other authorizations relating to
environmental matters in effect and remain in compliance therewith, and
handle all Hazardous Materials in compliance with all applicable
Environmental Laws where failure to do so would reasonably be expected to
have a Material Adverse Effect;
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(b) (i) promptly notify the Lender, and if requested by the Lender, and
provide copies of all written claims, complaints, notices or inquiries
relating to the condition of its facilities and Properties or compliance
with Environmental Laws, (ii) use all reasonable efforts within ninety (90)
days to have dismissed with prejudice any actions or proceedings relating
to compliance with Environmental Laws which would or could in the
reasonable opinion of the Lender have a Material Adverse Effect, and (iii)
diligently pursue cure of any material underlying environmental problem
which forms the basis of any such claim, complaint, notice or inquiry; and
(c) provide such information and certifications which the Lender may
reasonably request from time to time to evidence compliance with this
Section 8.1.6.
SECTION 8.1.7. FURTHER ASSURANCES.
(a) The Borrower shall, and shall cause each of its Subsidiaries to,
upon the request of the Lender, take such actions and execute and deliver
such documents and instruments as the Lender shall require to ensure that
the Lender shall, at all times, have received currently effective, duly
executed Loan Documents encumbering Oil and Gas Properties of the Borrower
and its Subsidiaries constituting 90% of the Proven Reserves to which value
is given in the determination of the then current Borrowing Base and
Collateral Value (with accompanying letters in lieu of transfer orders) and
satisfactory title evidence in form and substance reasonably acceptable to
the Lender in its reasonable business judgment as to ownership of such Oil
and Gas Properties; PROVIDED that, upon thirty (30) days notice to the
Borrower, the Lender may require, and the Borrower and/or its Subsidiaries,
as applicable, shall execute, acknowledge and deliver to the Lender,
Mortgages effectively encumbering 100% of the Oil and Gas Properties of the
Borrower and its Subsidiaries to which value is given in the determination
of the then current Borrowing Base.
(b) If the Lender shall determine that, as of the date of any Borrowing
Base Redetermination, the Borrower or any of its Subsidiaries shall have
failed to comply with the preceding SUBSECTION 8.1.7(a), the Lender may
notify the Borrower in writing of such failure and, within thirty (30) days
from and after receipt of such written notice by the Borrower, the Borrower
or its Subsidiaries (as applicable) shall execute and deliver to the Lender
supplemental or additional Loan Documents, in form and substance reasonably
satisfactory to the Lender and its counsel, securing payment of the Notes
and the other Obligations and covering additional assets not then
encumbered by any Loan Documents
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(together with current valuations, Engineering Reports, and title evidence
applicable to the additional assets collaterally assigned, each of which
shall be in form and substance reasonably satisfactory to the Lender) such
that the Lender shall have received currently effective duly executed Loan
Documents encumbering Oil and Gas Properties constituting at least 90% (or,
as provided in SUBSECTION 8.1.7(a), 100%) of the Proven Reserves of the
Borrower and its Subsidiaries to which value is given in the determination
of the then current Borrowing Base (with accompanying letters in lieu of
transfer orders) and satisfactory title evidence in form and substance
acceptable to the Lender in its reasonable business judgment as to
ownership of such Oil and Gas Properties.
(c) The Borrower shall ensure that all written information, exhibits,
certificates and reports furnished by or on behalf of the Borrower to the
Lender do not and will not contain any untrue statement of a material fact
and do not and will not omit to state any material fact or any fact
necessary to make the statements contained therein not misleading in light
of the circumstances in which made, and will promptly disclose to the
Lender and correct any defect or error that may be discovered therein or in
any Loan Document or in the execution, acknowledgment or recordation
thereof.
SECTION 8.1.8. HYDROCARBON HEDGING. On or before the date of the initial
Loans hereunder, the Borrower will enter into natural gas and crude oil Hedging
Agreements with counterparties and on such other terms as are satisfactory to
the Lender, that will enable the Borrower to obtain a net realized price of not
less than (a) $1.75 per MMBtu of natural gas and (b) $16.00 per barrel of oil
produced from its and each Borrower's Subsidiary's Hydrocarbon Interests on the
volumes set forth on SCHEDULE IV (being an amount not less than 50% and not more
than 70% of the estimated production (for the period commencing as of the
Effective Date and ending twelve months later) from proved developed producing
reserves attributable to the Hydrocarbon Interests of the Borrower and its
Subsidiaries as of the Effective Date), commencing no later than the date of the
initial Loans hereunder; PROVIDED, HOWEVER, that prior to the expiration of such
twelve month period, the Borrower shall enter into Hedging Agreements covering
the period beginning with the 13th month after the Effective Date and ending
with the 18th month after the Effective Date, with respect to the volumes to be
produced during such period.
SECTION 8.1.9. INTEREST RATE PROTECTION. On or before the date of the
initial Loans hereunder, the Borrower shall enter into Hedging Agreements, with
counterparties and on such other terms as are satisfactory to the Lender,
designed to ensure a maximum interest rate of (a) 9% on the notional amount
projected to be outstanding as Tranche A Loans and (b) 11% per annum on the
notional amount
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projected to be outstanding as Tranche B Loans for all periods prior to the
Tranche B Availability Termination Date.
SECTION 8.1.10. INTERCREDITOR AGREEMENT. If the Borrower enters into any
binding agreement with a Subordinated Creditor, then the Borrower shall deliver
to the Lender, contemporaneously with the execution of such agreement with such
Subordinated Creditor, executed counterparts of an intercreditor agreement,
dated as of the date not later than ninety (90) days after the Effective Date
and satisfactory in form and substance to the Lender, duly executed by the
Borrower and each of its Subsidiaries, as applicable, and each of the
Subordinated Creditors together with such subordination agreements and related
documents and agreements as are necessary to implement such intercreditor
agreement. Notwithstanding any other provision of this Agreement to the
contrary, the Borrower's ability to request and the Lender's obligation to make
Tranche B Loans shall be limited to an aggregate principal amount of $4,250,000
until such time as (i) such intercreditor arrangements are implemented to the
satisfaction of the Lender, or (ii) the Borrower notifies the Lender in writing
that it has determined not to enter into financing arrangements with Duke Energy
Financial Services, Inc.
SECTION 8.1.11. MERGER OF CERTAIN SUBSIDIARIES. The Borrower shall, on or
before December 14, 1998, cause Frontier, Inc. and Frontier Exploration and
Production Corporation to be merged with and into the Borrower and shall deliver
to the Lender Certificates of Merger from the appropriate Government Agencies
evidencing such mergers.
SECTION 8.2. NEGATIVE COVENANTS. The Borrower agrees with the Lender that,
until all Commitments have terminated and all Obligations have been paid and
performed in full, the Borrower will perform the obligations set forth in this
SECTION 8.2.
SECTION 8.2.1. BUSINESS ACTIVITIES. The Borrower will not, and will not
permit its Subsidiaries to, engage in any business activity, except those
described in the first recital and such activities as may be incidental or
related thereto. Until the merger of Frontier, Inc. and Frontier Exploration and
Production Corporation with and into the Borrower as described in SECTION
8.1.11, the Borrower will not, and will not permit any of its Subsidiaries, to
conduct any business in such Subsidiaries other than as may be necessary to
manage and operate its existing properties and to implement such mergers.
SECTION 8.2.2. INDEBTEDNESS. The Borrower will not, and will not permit any
of its Subsidiaries to, create, incur, assume or suffer to exist or otherwise
become or be liable in respect of any Indebtedness, other than, without
duplication, the following:
(a) Indebtedness in respect of the Loans and other Obligations;
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(b) Indebtedness in an aggregate principal amount not to exceed
$500,000 at any time outstanding which is incurred by the Borrower or any
of its Subsidiaries to a vendor of any assets to finance its acquisition of
such assets;
(c) unsecured Indebtedness incurred in the ordinary course of business
(including (i) open accounts extended by suppliers on normal trade terms in
connection with purchases of goods and services, and (ii) gas balancing,
but excluding Indebtedness incurred through the borrowing of money or
Contingent Liabilities);
(d) Hedging Obligations incurred pursuant to the Hedging Agreements
approved by the Lender pursuant to SECTIONS 8.1.8 and 8.1.9; and
(e) Contingent Obligations incurred to satisfy bonding requirements
imposed by any Government Agency not to exceed, in the aggregate, $100,000;
(f) Indebtedness of its Subsidiaries existing as of the Effective Date
which is identified in ITEM 8.2.2(f) of the Disclosure Schedule;
(g) Indebtedness in respect of Capitalized Lease Obligations in an
amount not to exceed $150,000 at any time outstanding;
(h) Indebtedness owed by the Borrower to any of the Subsidiaries or by
any Subsidiary of the Borrower to the Borrower or any Subsidiary;
(i) endorsements of negotiable instruments for collection in the
ordinary course of business;
(j) Indebtedness of the Borrower and its Subsidiaries which are
Investments to the extent permitted by SECTION 8.2.5(b);
(k) subordinated Indebtedness of the Borrower to Subordinated Creditors
which contains terms and conditions, including subordination provisions,
acceptable to the Lender;
(l) unsecured Indebtedness to Aspect in respect of geological and
geophysical services provided to the Borrower in an amount not to exceed
$3,000,000.00;
(m) any nonrecourse obligations of the Borrower to 420 Energy
Investments, Inc., a Delaware corporation, in an amount not to exceed
$864,000 plus accrued interest relating to the recoupment of the Borrower's
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share of costs incurred in connection with a 3-D seismic program and
payable out of production which may be obtained from the Properties
involved in such program;
(n) additional Indebtedness not permitted by CLAUSES (a) through (m)
above, PROVIDED, HOWEVER, that the aggregate amount of all Indebtedness
incurred by the Borrower and its consolidated Subsidiaries pursuant to this
CLAUSE (n) shall not exceed $150,000 at any one time outstanding;
PROVIDED, HOWEVER, that no Indebtedness otherwise permitted by CLAUSE (b) shall
be permitted if, after giving effect to the incurrence thereof, any Default
shall have occurred and be continuing.
SECTION 8.2.3. LIENS. The Borrower will not, and will not permit any of the
Subsidiaries to create, incur, assume or suffer to exist any Lien upon any of
its Property, revenues or assets, whether now owned or hereafter acquired,
except:
(a) Liens securing payment of the Obligations, granted pursuant to any
Loan Document;
(b) Liens granted to secure payment of Indebtedness of the type
permitted and described in CLAUSE (b) of SECTION 8.2.2 and covering only
those assets acquired with the proceeds of such Indebtedness;
(c) Liens granted to secure payment of Indebtedness of the type
permitted and described in CLAUSE (n) of SECTION 8.2.2;
(d) Hydrocarbon production sales contracts;
(e) Liens for taxes, assessments or other governmental charges or
levies not at the time delinquent or thereafter payable without penalty or
being diligently contested in good faith by appropriate proceedings and for
which adequate reserves in accordance with GAAP shall have been set aside
on its books;
(f) Liens of carriers, warehousemen, mechanics, materialmen and
landlords incurred in the ordinary course of business for sums not overdue
or being diligently contested in good faith by appropriate proceedings and
for which adequate reserves in accordance with GAAP shall have been set
aside on its books; PROVIDED, that at no time shall such sums exceed in the
aggregate $100,000;
(g) Liens incurred in the ordinary course of business in connection
with workmen's compensation, unemployment insurance or other forms of
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governmental insurance or benefits, or to secure performance of bonds,
licenses, statutory obligations, and performance bonds, tenders, statutory
obligations, leases and contracts (other than for borrowed money), all
other obligations of a like nature entered into in the ordinary course of
business or to secure obligations on surety or appeal bonds, all other
obligations of a like nature;
(h) zoning and similar covenants, restrictions, easements, servitudes,
permits, conditions, exceptions, reservations, minor rights, minor
encumbrances, minor irregularities in title or conventional rights of
reassignment prior to abandonment and similar restrictions and other
similar encumbrances or title defects which do not materially interfere
with the occupation, use and enjoyment by the Borrower of its assets in the
ordinary course of business as presently conducted, or materially impair
the value thereof for the purpose of such business;
(i) judgment Liens in existence less than thirty (30) days after the
entry thereof or with respect to which execution has been stayed or the
payment of which is covered in full (subject to a customary deductible) by
insurance maintained with responsible insurance companies;
(j) deposits of cash to secure insurance in the ordinary course of
business;
(k) banker's liens arising by operation of law securing fees and costs
of such banks, but not liens securing borrowed money;
(l) subordinated Liens on Hydrocarbon Interests of the Borrower and its
Subsidiaries consisting of Proven Reserves to the extent that the Lender
has a superior and senior Lien on such Properties;
(m) Liens in favor of operators and non-operators under joint operating
agreements or similar contractual arrangements arising in the ordinary
course of the business of the Borrower to secure amounts owing, which
amounts are not yet due or are being contested in good faith by appropriate
proceedings, if such reserve as may be required by GAAP shall have been
made therefor;
(n) production sales agreements, division orders, operating agreements
and other agreements customary in the oil and gas business for producing,
processing, gathering, transporting and selling Hydrocarbons;
(o) the terms any provisions of the leases, unit agreements,
assignments and other transfer of title documents in the chain of title
under which the Borrower acquired the relevant Properties;
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(p) any Liens securing Indebtedness, neither assumed nor guaranteed by
the Borrower nor on which it customarily pays interest, existing upon real
estate or rights in or relating to real estate acquired by the Borrower for
substation, metering station, pump station, storage, gathering line,
transmission line, transportation line, distribution line, or right of way
purposes, and any Liens reserved in leases for rent and compliance with the
terms of the leases in the case of leasehold estates, so long as no default
has occurred in the payment or performance thereof, and to the extent that
any such Lien referred to in this clause does not materially impair the use
of the Properties covered by such Lien for the purposes for which such
Properties is held by the Borrower;
(q) the statutory Lien to secure payment of the proceeds of Hydrocarbon
production established by Texas Bus. & Com. Code SECTION.9.319 and similar
laws of other jurisdictions;
(r) rights reserved to or vested in any Government Agency by the terms
of any right, power, franchise, grant, license, or permit, or by any
provision of law, to terminate such right, power, franchise, grant,
license, or permit or to purchase, condemn, expropriate, or recapture or to
designate a purchaser of any of the Properties of the Borrower;
(s) rights of a common owner of any interest in real estate, rights of
way, or easements held by the Borrower and such common owner as tenant in
common or through other common ownership; and
(t) any lien securing nonrecourse obligations of the Borrower described
in SECTION 8.2.2(m).
SECTION 8.2.4. FINANCIAL CONDITION. The Borrower will not permit:
(a) Tangible Net Worth at any time to be less than $45,000,000, plus
(i) fifty percent (50%) of Consolidated Net Income (excluding the effects
of consolidated net losses) for all Fiscal Quarters beginning after the
Effective Date and treated as a single accounting period, plus (ii)
one-hundred percent (100%) of the net proceeds received by the Borrower or
its Subsidiaries from the sale of any Non-Redeemable Stock at any time
after the Effective Date;
(b) the Current Ratio at any time, commencing on October 1, 1998, to be
less than 1.1:1.0;
(c) the Debt to Capitalization Ratio at any time to be greater than
50%; or
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(d) the Interest Coverage Ratio (i) for the Fiscal Quarter prior to and
including December 31, 1998, to be less than 1.0:1.0, (ii) for any two
consecutive Fiscal Quarters prior to and including March 31, 1999, to be
less than 1.0:1.0, (iii) for the Fiscal Quarter prior to and including June
30, 1999, to be less than 3.0:1.0, and (iv) for any four consecutive Fiscal
Quarters after June 30, 1999, to be less than 3.0:1.0.
The Borrower shall not, and shall not suffer or permit any Subsidiary to, make
any significant change in accounting treatment or reporting practices, except as
required by GAAP, or, without the consent of the Lender, such consent not to be
unreasonably withheld, change the fiscal year of the Borrower or of any
Subsidiary.
SECTION 8.2.5. INVESTMENTS. The Borrower will not, and will not permit any
of its Subsidiaries to, make, incur, assume or suffer to exist any Investment in
any other Person, except:
(a) Cash Equivalent Investments;
(b) without duplication, Investments permitted as Indebtedness pursuant
to SECTION 8.2.2;
(c) without duplication, Investments in the nature of Capital
Expenditures;
(d) to the extent the formation or acquisition of any Subsidiary is
permitted hereunder, Investments in such Subsidiary; and
(e) Investments permitted by SECTION 8.2.8; PROVIDED, HOWEVER, that
(f) any Investment which when made complies with the requirements of
the definition of the term "CASH EQUIVALENT INVESTMENT" may continue to be
held notwithstanding that such Investment if made thereafter would not
comply with such requirements; and
(g) no Investment otherwise permitted by CLAUSE (b) shall be permitted
to be made if, immediately before or after giving effect thereto, any
Default shall have occurred and be continuing.
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SECTION 8.2.6. RESTRICTED PAYMENTS, ETC. On and at all times after the
Effective Date:
(a) the Borrower will not, and will not permit any of its Subsidiaries
(other than a wholly-owned Subsidiary) to, declare, pay or make any
dividend or distribution (in cash, property or obligations) on any class of
equity (now or hereafter outstanding) of the Borrower or such Subsidiary or
on any options, warrants or other rights with respect to any interest or
shares of any class of capital stock (now or hereafter outstanding) of the
Borrower or such Subsidiary or apply any of its funds, property or assets
to the purchase, redemption, sinking fund or other retirement of, any class
of capital stock (now or hereafter outstanding) of the Borrower, or
options, warrants or other rights with respect to any interest or shares of
or in any class of capital stock (now or hereafter outstanding) of the
Borrower or such Subsidiary (such dividends, distributions or applications
being called "DISTRIBUTION PAYMENTS") other than Distribution Payments
which do not cause the Borrower to be in violation of the Restricted
Payment Tests; and
(b) the Borrower will not permit any Subsidiary to make any
Distribution Payments other than to the Borrower; and
(c) the Borrower will not, and will not permit its Subsidiaries to,
make any deposit for any of the foregoing purposes.
SECTION 8.2.7. RENTAL OBLIGATIONS. The Borrower will not, and will not
permit any of its Subsidiaries to, enter into at any time any arrangement
(excluding oil and gas leases entered into in the ordinary course of business)
which involves the leasing by the Borrower or any Subsidiary from any lessor of
any real or personal property (or any interest therein), except arrangements
which, together with all other such arrangements which shall then be in effect,
will not require the payment of an aggregate amount of rentals by the Borrower
or any Subsidiary in excess of (excluding escalations resulting from a rise in
the consumer price or similar index) $250,000 for any Fiscal Year or $1,250,000
during the full remaining term of such arrangements; PROVIDED, HOWEVER, that any
calculation made for purposes of this SECTION 8.2.7 shall exclude any amounts
(i) required to be expended for maintenance and repairs, insurance, taxes,
assessments, and other similar charges and (ii) any amounts relating to
Capitalized Lease Obligations.
SECTION 8.2.8. CONSOLIDATION, MERGER, ETC. The Borrower will not, and will
not permit any of its Subsidiaries to, liquidate or dissolve, consolidate with,
or merge into or with, any other partnership or corporation, unless, in the case
of such consolidation or merger, the Borrower is the surviving entity and
Principal Shareholders retain control over the Borrower. The Borrower will not
create any Subsidiary except with the prior written consent of the Lender.
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SECTION 8.2.9. ASSET DISPOSITIONS, ETC. The Borrower will not, and will not
permit any of its Subsidiaries to, sell, transfer, lease, contribute or
otherwise convey, or grant options, warrants or other rights with respect to,
all or substantially all of the assets of the Borrower or any of its
Subsidiaries in any one transaction or in any series of transactions, whether or
not related; and the Borrower will not, and will not permit any of its
Subsidiaries to, sell, transfer, lease, contribute or otherwise convey, or grant
options, warrants or other rights with respect to, less than all or any
substantial part of its assets (including accounts receivable) to any Person
other than
(a) farmouts under standard industry terms of Properties not holding
Proven Reserves;
(b) abandonment of Properties not capable of producing Hydrocarbons in
paying quantities after the expiration of their primary terms;
(c) if such assets are not in the Borrowing Base, such sale, transfer,
lease, contribution or conveyance is for cash or other consideration having
a value at least equal to the fair market value of such assets;
(d) if such assets are in the Borrowing Base, the Borrower complies
with the terms of SECTION 3.1.2 and such sale, transfer, lease,
contribution or conveyance is for cash in an amount at least equal to the
fair market value of such assets;
(e) Required Asset Sales; or
(f) as permitted by SECTION 2.7 of the Mortgages.
SECTION 8.2.10. MODIFICATION OF CERTAIN DOCUMENTS. Except with respect to
amendments that do not directly and materially affect the rights of Lender under
the Loan Documents, the Borrower will not amend its Organic Documents or consent
to any amendment, supplement or other modification of any of the terms or
provisions contained in, or applicable to, the Material Contracts, in each case
without the prior written consent of the Lender.
SECTION 8.2.11. TRANSACTIONS WITH AFFILIATES. The Borrower will not, and
will not permit any of its Subsidiaries to, enter into, or cause, suffer or
permit to exist any arrangement or contract with any of its other Affiliates
unless such arrangement or contract is fair and equitable to the Borrower and is
an arrangement or contract of the kind which would be entered into by a prudent
Person in the position of the Borrower or such Subsidiary with a Person which is
not one of its Affiliates.
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SECTION 8.2.12. NEGATIVE PLEDGES, RESTRICTIVE AGREEMENTS, ETC. The Borrower
will not, and will not permit any of its Subsidiaries to, enter into any
agreement (excluding this Agreement, any other Loan Document and any agreement
governing any Indebtedness permitted by CLAUSES (b) or (e) of SECTION 8.2.2 as
in effect on the Effective Date as to the assets financed with the proceeds of
such Indebtedness) prohibiting
(a) the creation or assumption of any Lien upon its properties,
revenues or assets, whether now owned or hereafter acquired (other than
those assets subject to Liens permitted by SECTION 8.2.3(b)), or the
ability of the Borrower or any other Obligor to amend or otherwise modify
this Agreement or any other Loan Document; or
(b) the ability of any Subsidiary to make any payments, directly or
indirectly, to the Borrower by way of dividends, advances, repayments of
loans or advances, reimbursements of management and other intercompany
charges, expenses and accruals or other returns on investments, or any
other agreement or arrangement which restricts the ability of any such
Subsidiary to make any payment, directly or indirectly, to the Borrower.
SECTION 8.2.13. TAKE OR PAY CONTRACTS. Except as disclosed to the Lender in
ITEM 8.2.13 of the Disclosure Schedule, and except for reservation charges
payable for reservations of capacity in gathering systems and pipelines incurred
in the ordinary course of business on an arm's length basis for volumes
reasonably expected to be produced from the Borrowers' Properties to be
transported through such systems and pipelines, the Borrower will not, and will
not permit any of its Subsidiaries to, enter into or be a party to any
arrangement for the purchase of materials, supplies, other property (including
without limitation Hydrocarbons), or services if such arrangement requires that
payment be made by the Borrower or such Subsidiary regardless of whether such
materials, supplies, other property, or services are delivered or furnished to
it.
ARTICLE IX
EVENTS OF DEFAULT
SECTION 9.1. LISTING OF EVENTS OF DEFAULT. Each of the following events or
occurrences described in this SECTION 9.1 shall constitute an "EVENT OF
DEFAULT".
SECTION 9.1.1. NON-PAYMENT OF OBLIGATIONS. The Borrower shall default in
the payment or prepayment when due of any principal of any Loan; the Borrower
shall default in the payment when due of any Reimbursement Obligation or Hedging
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Obligation under a Hedging Agreement in effect between the Borrower and the
Lender or an Affiliate of the Lender; or the Borrower shall default (and such
default shall continue unremedied for a period of five (5) days) in the payment
when due of any interest on any Loan or any fee or of any other Obligation.
SECTION 9.1.2. BREACH OF WARRANTY. Any representation or warranty of the
Borrower or any other Obligor made or deemed to be made hereunder or in any
other Loan Document executed by it or any other writing or certificate furnished
by or on behalf of the Borrower or any other Obligor to the Lender for the
purposes of or in connection with this Agreement or any such other Loan Document
(including any certificates delivered pursuant to ARTICLE VI) is or shall be
incorrect when made in any material respect.
SECTION 9.1.3. NON-PERFORMANCE OF CERTAIN COVENANTS AND OBLIGATIONS. The
Borrower shall default in the due performance and observance of any of its
obligations under SECTION 3.1.2, SECTION 8.1 (other than 8.1.2, 8.1.3 and 8.1.6)
or SECTION 8.2.
SECTION 9.1.4. NON-PERFORMANCE OF OTHER COVENANTS AND OBLIGATIONS. The
Borrower or any other Obligor shall default in the due performance and
observance of any other agreement contained herein or in any other Loan Document
executed by it, and such default shall continue unremedied for a period of
fifteen (15) days after notice thereof shall have been given to the Borrower by
the Lender.
SECTION 9.1.5. DEFAULT ON OTHER INDEBTEDNESS.
(a) A default shall occur in the payment when due (subject to any
applicable grace period), whether by acceleration or otherwise, of any
Indebtedness (including any subordinated indebtedness permitted by SECTION
8.2.2 and any Hedging Agreements in effect between the Borrower and the
Lender or any Affiliate of the Lender, but excluding Indebtedness described
in SECTION 9.1.1) of the Borrower, any consolidated Subsidiary or other
Obligor having a principal amount, individually or in the aggregate, in
excess of $50,000, or a default shall occur in the performance or
observance of any obligation or condition with respect to such Indebtedness
if the effect of such default is to accelerate the maturity of any such
Indebtedness or such default shall continue unremedied for any applicable
period of time sufficient to permit any holder of such Indebtedness, or any
trustee or agent for such holders, to cause such Indebtedness to become due
and payable prior to its expressed maturity.
(b) A failure to pay when due any royalty, overriding royalty or
similar interest burdening the Oil and Gas Properties of the Borrower, in
the aggregate, in excess of $50,000.
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SECTION 9.1.6. JUDGMENTS. Any judgment, decree, arbitration award or order
for the payment of money in excess of $50,000 in excess of valid and collectible
insurance in respect thereof the payment of which is not being disputed or
contested by the insurer or insurers shall be rendered against the Borrower, any
consolidated Subsidiary, or other Obligor and either
(a) enforcement proceedings shall have been commenced by any creditor
upon such judgment or order; or
(b) there shall be any period of ten (10) consecutive days during which
a stay of enforcement of such judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect.
SECTION 9.1.7. PENSION PLANS. Any of the following events shall occur with
respect to any Pension Plan
(a) the institution of any steps by the Borrower, any member of its
Controlled Group or any other Person to terminate a Pension Plan if, as a
result of such termination, the Borrower or any such member could be
required to make a contribution to such Pension Plan, or could reasonably
expect to incur a liability or obligation to such Pension Plan; or
(b) a contribution failure occurs with respect to any Pension Plan
sufficient to give rise to a Lien under Section 302(f) of ERISA.
SECTION 9.1.8. CONTROL OF THE BORROWER. Any Change in Control shall occur.
SECTION 9.1.9. BANKRUPTCY, INSOLVENCY, ETC. The Borrower or any other
Obligor shall
(a) become insolvent or generally fail to pay, or admit in writing its
inability or unwillingness to pay, debts as they become due;
(b) apply for, consent to, or acquiesce in, the appointment of a
trustee, receiver, sequestrator or other custodian for the Borrower or any
other Obligor or any property of any thereof, or make a general assignment
for the benefit of creditors;
(c) in the absence of such application, consent or acquiescence, permit
or suffer to exist the appointment of a trustee, receiver, sequestrator or
other custodian for the Borrower or any other Obligor or for a substantial
part of the property of any thereof, and such trustee, receiver,
sequestrator or other custodian shall not be discharged within sixty (60)
days, PROVIDED that the Borrower and each other Obligor hereby expressly
authorizes the Lender to
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appear in any court conducting any relevant proceeding during such 60-day
period to preserve, protect and defend its rights under the Loan Documents;
(d) permit or suffer to exist the commencement of any bankruptcy,
reorganization, debt arrangement or other case or proceeding under any
bankruptcy or insolvency law, or any dissolution, winding up or liquidation
proceeding, in respect of the Borrower or any other Obligor, and, if any
such case or proceeding is not commenced by the Borrower or such other
Obligor, such case or proceeding shall be consented to or acquiesced in by
the Borrower or such other Obligor or shall result in the entry of an order
for relief or shall remain for sixty (60) days undismissed, PROVIDED that
the Borrower and each other Obligor hereby expressly authorizes the Lender
to appear in any court conducting any such case or proceeding during such
60-day period to preserve, protect and defend its rights under the Loan
Documents; or
(e) take any action authorizing, or in furtherance of, any of the
foregoing.
SECTION 9.1.10. IMPAIRMENT OF SECURITY, ETC. Any Loan Document, or any Lien
granted thereunder, shall (except in accordance with its terms), in whole or in
part, terminate, cease to be effective or cease to be the legally valid, binding
and enforceable obligation of any Obligor party thereto; the Borrower, any other
Obligor or any other party shall, directly or indirectly, contest in any manner
such effectiveness, validity, binding nature or enforceability; or any Lien
securing any Obligation shall, in whole or in part, cease to be a perfected
first priority Lien, subject only to those exceptions expressly permitted by
such Loan Document.
SECTION 9.1.11. MATERIAL ADVERSE EFFECT. Any Material Adverse Effect shall
occur.
SECTION 9.2. ACTION IF BANKRUPTCY. If any Event of Default described in
CLAUSES (a) through (d) of SECTION 9.1.9 shall occur with respect to the
Borrower or any other Obligor, the Commitments (if not theretofore terminated)
shall automatically terminate and the outstanding principal amount of all
outstanding Loans and all other Obligations shall automatically be and become
immediately due and payable, without notice or demand.
SECTION 9.3. ACTION IF OTHER EVENT OF DEFAULT. If any Event of Default
(other than any Event of Default described in CLAUSES (a) through (d) of SECTION
9.1.9 with respect to the Borrower or any other Obligor) shall occur for any
reason, whether voluntary or involuntary, and be continuing, the Lender, may by
notice to the Borrower declare all or any portion of the outstanding principal
amount of the Loans and other Obligations to be due and payable and/or the
Commitments (if not theretofore terminated) to be terminated, whereupon the full
unpaid amount of such Loans and
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other Obligations which shall be so declared due and payable shall be and
become immediately due and payable, without further notice, demand or
presentment, and/or, as the case may be, the Commitments shall terminate.
SECTION 9.4. RIGHTS NOT EXCLUSIVE. The rights provided for in this
Agreement and the other Loan Documents are cumulative and are not exclusive of
any other rights, powers, privileges or remedies provided by Applicable Law or
in equity, or under any other instrument, document or agreement now existing or
hereafter arising.
ARTICLE X
MISCELLANEOUS PROVISIONS
SECTION 10.1. WAIVERS, AMENDMENTS, ETC.
(a) The provisions of this Agreement and of each other Loan Document
may from time to time be amended, modified or waived, if such amendment,
modification or waiver is in writing and consented to by the Borrower and
the Lender. No failure or delay on the part of the Lender in exercising any
power or right under this Agreement or any other Loan Document shall
operate as a waiver thereof, nor shall any single or partial exercise of
any such power or right preclude any other or further exercise thereof or
the exercise of any other power or right. No notice to or demand on the
Borrower in any case shall entitle it to any notice or demand in similar or
other circumstances. No waiver or approval by the Lender under this
Agreement or any other Loan Document shall, except as may be otherwise
stated in such waiver or approval, be applicable to subsequent
transactions. No waiver or approval hereunder shall require any similar or
dissimilar waiver or approval thereafter to be granted hereunder.
(b) This Agreement is an amendment and restatement of, and replaces and
supersedes the Existing Agreement; PROVIDED, HOWEVER, that no right,
interest, claim or cause of action of any kind of the Lender which may have
existed under the Existing Agreement shall in any way be released,
modified, compromised or waived by virtue of this Agreement superseding and
replacing the Existing Agreement.
SECTION 10.2. NOTICES.
(a) All notices and other communications provided to any party hereto
under this Agreement or any other Loan Document shall be in writing and
shall be hand delivered or sent by overnight courier, certified mail
(return receipt requested), or telecopy to such party at its address or
telecopy number set forth
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on the signature pages hereof or set forth in the Lender Assignment Notice
or at such other address or telecopy number as may be designated by such
party in a notice to the other parties. Without limiting any other means by
which a party may be able to provide that a notice has been received by the
other party, a notice shall be deemed to be duly received (a) if sent by
hand, on the date when left with a responsible person at the address of the
recipient; (b) if sent by telefax, on the date of receipt by the sender of
an acknowledgment or transmission reports generated by the machine from
which the telefax was sent indicating that the telefax was sent in its
entirety to the recipient's telefax number.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery, or faxed, be effective when delivered
for overnight (next-day) delivery, or transmitted in legible form by
facsimile machine, respectively, or if mailed, upon the third Business Day
after the date deposited into the U.S. mail, or if delivered, upon
delivery.
(c) Any agreement of the Lender herein to receive certain notices by
telephone or facsimile is solely for the convenience and at the request of
the Borrower. The Lender shall be entitled to rely on the authority of any
Person purporting to be a Person authorized by the Borrower to give such
notice and the Lender shall not have any liability to the Borrower or other
Person on account of any action taken or not taken by the Lender in
reliance upon such telephonic or facsimile notice. The obligation of the
Borrower to repay the Loans shall not be affected in any way or to any
extent by any failure by the Lender to receive written confirmation of any
telephonic or facsimile notice or the receipt by the Lender of a
confirmation which is at variance with the terms understood by the Lender
to be contained in the telephonic or facsimile notice.
SECTION 10.3. PAYMENT OF COSTS AND EXPENSES. The Borrower agrees to pay
within thirty (30) days after written demand all reasonable expenses of the
Lender (including the reasonable fees and out-of-pocket expenses of internal and
external counsel to the Lender and of local counsel, if any, who may be retained
by counsel to the Lender) in connection with
(a) the negotiation, preparation, execution and delivery of this
Agreement and of each other Loan Document, including schedules and
exhibits, and any amendments, waivers, consents, supplements or other
modifications to this Agreement or any other Loan Document as may from time
to time hereafter be required, whether or not the transactions contemplated
hereby are consummated,
(b) the filing, recording, refiling or rerecording of the Mortgages,
the Security Agreements, the Pledge Agreements and/or any Uniform
Commercial
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Code financing statements relating thereto and all amendments, supplements
and modifications to, and all releases and terminations of, any thereof and
any and all other documents or instruments of further assurance required to
be filed or recorded or refiled or rerecorded by the terms hereof or of the
Mortgages, the Security Agreements and the Pledge Agreements, and
(c) the preparation and review of the form of any document or
instrument relevant to this Agreement or any other Loan Document.
The Borrower further agrees to pay, and to save the Lender harmless from all
liability for, any stamp or other taxes (other than any income or franchise tax
of the Lender) which may be payable in connection with the execution or delivery
of this Agreement, the borrowings hereunder, the issuance of the Notes, the
issuance of the Letters of Credit, or any other Loan Documents. The Borrower
also agrees to reimburse the Lender within thirty (30) days after written demand
for all reasonable out-of-pocket expenses (including attorneys' fees and legal
expenses of internal and external attorneys, and the expenses of any accountant,
engineer or other expert retained or utilized in connection therewith) incurred
by the Lender in connection with (x) the negotiation of any restructuring or
"work-out", whether or not consummated, of any Obligations and (y) the
enforcement of any Obligations. All requests for payment under this SECTION 10.3
shall be accompanied by invoices containing reasonable details.
SECTION 10.4. INDEMNIFICATION. In consideration of the execution and
delivery of this Agreement by the Lender and the extension of the Commitments,
the Borrower hereby indemnifies, exonerates and holds the Lender, any Issuer and
each of their respective officers, directors, employees and agents
(collectively, the "INDEMNIFIED PARTIES") free and harmless from and against any
and all actions, causes of action, suits, losses, costs, liabilities and
damages, and expenses incurred in connection therewith (irrespective of whether
any such Indemnified Party is a party to the action for which indemnification
hereunder is sought), including reasonable attorneys' fees and disbursements
(collectively, the "INDEMNIFIED LIABILITIES"), incurred by the Indemnified
Parties or any of them as a result of, or arising out of, or relating to
(a) this Agreement, any Loan Document or any document contemplated by
or referred to herein;
(b) any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of any Loan, including any
Acquisition, or the use of any Letter of Credit;
(c) any investigation, litigation or proceeding related to any
acquisition or proposed acquisition by the Borrower or any of its
Subsidiaries of all or any
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portion of the stock or assets of any Person, whether or not the Lender is
party thereto;
(d) any investigation, litigation or proceeding related to any
environmental cleanup, audit, compliance or other matter relating to any
Environmental Law or the condition of any facility or Property owned,
leased or operated by the Borrower or any of its Subsidiaries;
(e) the presence on or under, or the escape, seepage, leakage,
spillage, discharge, emission, discharging or releases from, any facility
or Property owned, leased or operated by the Borrower or any of its
Subsidiaries thereof of any Hazardous Material (including any losses,
liabilities, damages, injuries, costs, expenses or claims asserted or
arising under any Environmental Law), regardless of whether caused by, or
within the control of, the Borrower or any of its Subsidiaries; or
(f) any misrepresentation, inaccuracy or breach in or of SECTION 7.17
or SECTION 8.1.6,
except for any such Indemnified Liabilities arising for the account of a
particular Indemnified Party by reason of the relevant Indemnified Party's gross
negligence or wilful misconduct. If and to the extent that the foregoing
undertaking may be unenforceable for any reason, the Borrower hereby agrees to
make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under Applicable Law. The
obligations in this SECTION 10.4 shall survive payment of all other Obligations.
At the election of any Indemnified Party, the Borrower shall defend such
Indemnified Party using legal counsel satisfactory to such Indemnified Party in
such Person's sole discretion, at the sole cost and expense of the Borrower. All
amounts owing under this SECTION 10.4 shall be paid within thirty (30) days
after written demand.
SECTION 10.5. SURVIVAL. The obligations of the Borrower under SECTIONS
10.3 and 10.4 shall in each case survive any termination of this Agreement, the
payment in full of all Obligations and the termination of all Commitments. The
representations and warranties made by each Obligor in this Agreement and in
each other Loan Document shall survive the execution and delivery of this
Agreement and each such other Loan Document.
SECTION 10.6. SEVERABILITY. Any provision of this Agreement or any other
Loan Document which is prohibited or unenforceable in any jurisdiction shall, as
to such provision and such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions of
this Agreement or such Loan Document or affecting the validity or enforceability
of such provision in any other jurisdiction.
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SECTION 10.7. HEADINGS. The various headings of this Agreement and of each
other Loan Document are inserted for convenience only and shall not affect the
meaning or interpretation of this Agreement or such other Loan Document or any
provisions hereof or thereof.
SECTION 10.8. EXECUTION IN COUNTERPARTS, EFFECTIVENESS, ETC. This Agreement
may be executed by the parties hereto in several counterparts, each of which
shall be executed by the Borrower and the Lender and be deemed to be an original
and all of which shall constitute together but one and the same agreement. This
Agreement shall become effective when counterparts hereof are executed on behalf
of the Borrower and the Lender. This Agreement is made and entered into for the
sole protection and legal benefit of the Borrower and the Lender and Persons
indemnified hereunder, and their permitted successors and assigns, and no other
Person shall be a direct or indirect legal beneficiary of, or have any direct or
indirect cause of action or claim in connection with, this Agreement or any of
the other Loan Documents.
SECTION 10.9. GOVERNING LAW; ENTIRE AGREEMENT. THIS AGREEMENT, THE NOTES
AND EACH OTHER LOAN DOCUMENT (OTHER THAN THE MORTGAGES OR AS EXPRESSLY PROVIDED
IN ANY SUCH DOCUMENT) SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. This Agreement, the
Notes and the other Loan Documents constitute the entire understanding among the
parties hereto with respect to the subject matter hereof and supersede any prior
agreements, written or oral, with respect thereto.
SECTION 10.10. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns; PROVIDED, HOWEVER, that:
(a) the Borrower may not assign or transfer its rights or obligations
hereunder without the prior written consent of the Lender; and
(b) the rights of sale, assignment and transfer of the Lender are
subject to SECTION 10.11.
SECTION 10.11. SALE AND TRANSFER OF LOANS AND NOTES; PARTICIPATIONS IN
LOANS AND NOTES. The Lender may assign, or sell participations in, its Loans and
Commitments to one or more other Persons in accordance with this SECTION 10.11.
SECTION 10.11.1. ASSIGNMENTS. The Lender may at any time assign and
delegate to one or more Persons, including without limitation, commercial banks
or other financial institutions (each Person to whom such assignment and
delegation is to be made, being hereinafter referred to as an "ASSIGNEE
LENDER"), all or any fraction of the Lender's total Loans and Commitments (which
assignment and delegation shall
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be of a constant, and not a varying, percentage of all the Lender's Loans and
Commitments) in a minimum aggregate amount of $1,000,000 (or the entire
remaining amount of the Lender's Loans and Commitments); PROVIDED, HOWEVER, that
the Lender is required at all times to maintain Loans, Letter of Credit
Outstandings and Commitments hereunder in an aggregate amount of $1,000,000
(unless the Lender shall have reduced its Loans, Letter of Credit Outstandings
and Commitments to zero); PROVIDED, FURTHER, HOWEVER, that the Borrower and each
other Obligor shall be entitled to continue to deal solely and directly with the
Lender in connection with the interests so assigned and delegated to an Assignee
Lender until
(a) written notice of such assignment and delegation, together with
payment instructions, addresses and related information with respect to
such Assignee Lender, shall have been given to the Borrower by the Lender
and such Assignee Lender,
(b) such Assignee Lender shall have executed and delivered to the
Borrower and the Lender a Lender Assignment Notice, accepted by the Lender,
and
(c) the processing fees described below shall have been paid.
From and after the date that the Assignee Lender delivers such Lender Assignment
Notice, (x) the Assignee Lender thereunder shall be deemed automatically to have
become a party hereto and to the extent that rights and obligations hereunder
have been assigned and delegated to such Assignee Lender in connection with such
Lender Assignment Notice, shall have the rights and obligations of a Lender
hereunder and under the other Loan Documents, and (y) the assignor Lender, to
the extent that rights and obligations hereunder have been assigned and
delegated by it in connection with such Lender Assignment Notice, shall be
released from its obligations hereunder and under the other Loan Documents.
Within five Business Days after its receipt of notice that the Lender has
received an executed Lender Assignment Notice and the Borrower has received from
the Lender execution copies of appropriate Notes, the Borrower shall execute and
deliver to the relevant Assignee Lender new Notes evidencing such Assignee
Lender's assigned Loans and Commitments and, if the assignor Lender has retained
Loans and Commitments hereunder, replacement Notes in the principal amount of
the Loans and Commitments retained by the assignor Lender hereunder (each such
Note to be in exchange for, but not in payment of, the corresponding Note then
held by such assignor Lender). The assignor Lender shall mark the predecessor
Note "exchanged" and deliver it to the Borrower. Accrued interest on that part
of the predecessor Note evidenced by the new Notes, and accrued fees, shall be
paid as provided in the Lender Assignment Notice. Accrued interest on that part
of the predecessor Note evidenced by the replacement Notes shall be paid to the
assignor Lender. Accrued interest and accrued fees shall be paid at the same
time or times provided in the predecessor Notes and in this Agreement. Such
assignor Lender or
93
<PAGE>
such Assignee Lender must also pay a processing fee to the Lender upon delivery
of any Lender Assignment Notice in the amount of $2,500. Any attempted
assignment and delegation not made in accordance with this SECTION 10.11.1 shall
be null and void. Nothing contained in this Agreement shall prohibit any Lender
from pledging or assigning any Note to any Federal Reserve Bank in accordance
with Applicable Law.
SECTION 10.11.2. PARTICIPATIONS. The Lender may at any time sell to one
or more Persons, including without limitation commercial banks or other
financial institutions (each of such Persons being herein called a
"PARTICIPANT") participating interests in any of the Loans, Commitments, or
other interests of the Lender hereunder; PROVIDED, HOWEVER, that
(a) no participation contemplated in this SECTION 10.11.2 shall relieve
the Lender from its Commitments or its other obligations hereunder or under
any other Loan Document,
(b) the Lender shall remain solely responsible for the performance of
its Commitments and such other obligations,
(c) the Borrower and each other Obligor shall continue to deal solely
and directly with the Lender in connection with the Lender's rights and
obligations under this Agreement and each of the other Loan Documents, and
(d) the Borrower shall not be required to pay any amount under SECTION
5.2 or SECTION 10.3 that is greater than the amount which it would have
been required to pay had no participating interest been sold.
The Borrower acknowledges and agrees that each Participant, for purposes of
SECTIONS 5.1 and 5.2 (except as provided in SECTION 10.11.2(d)), 10.3 and 10.4,
shall be considered a Lender.
SECTION 10.12. FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION
BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE LENDER OR THE BORROWER SHALL BE
BROUGHT AND MAINTAINED IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED
STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED, HOWEVER,
THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY
BE BROUGHT, AT THE LENDER'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH
COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE BORROWER HEREBY EXPRESSLY AND
IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS
AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF
94
<PAGE>
ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND
IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION
WITH SUCH LITIGATION. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE
OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR
WITHOUT THE STATE OF ILLINOIS. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE
OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN
ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR
HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY
LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT,
ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS
PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS
OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
SECTION 10.13. WAIVER OF JURY TRIAL. THE LENDER AND THE BORROWER HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR
ACTIONS OF THE LENDER OR THE BORROWER. THE BORROWER ACKNOWLEDGES AND AGREES THAT
IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH
OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT
THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER ENTERING INTO THIS
AGREEMENT AND EACH SUCH OTHER LOAN DOCUMENT.
SECTION 10.14. NOTICE THIS WRITTEN AGREEMENT TOGETHER WITH THE OTHER LOAN
DOCUMENTS REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
95
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
ESENJAY EXPLORATION, INC.,
a Delaware corporation
By /s/ Michael Johnson
-------------------------------------
Name: Michael Johnson
Title: President
All notices should be sent to:
One Allen Center
500 Dallas Street, Suite 2920
Houston, Texas 77002
Fax: (713) 739-7124
1100 CCNB Center South
500 N. Water Street,
Suite 1100
Corpus Christi, Texas 78471
Fax: (512) 883-3244
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By
-------------------------------------
Title: Vice President
Address: 231 South LaSalle Street
Chicago, Illinois 60697
All notices should be sent to:
333 Clay Street,
Suite 4550
Houston, Texas 77002
Fax: (713) 651-4888
96
<PAGE>
SCHEDULE I
DISCLOSURE SCHEDULE
ITEM 7.9 LITIGATION.
The Borrower is a party in a lawsuit filed on April 16, 1998 in the 28th
Judicial District Court of Nueces County, Texas, No. 98-01884-00-0-A. A true
and correct copy of the petition and the Borrower's answer has been delivered to
the Lender. Said lawsuit was brought by Juan Ramon Caballero ("CABALLERO") as
Plaintiff and Esenjay Petroleum Corporation ("EPC") and Frontier Natural Gas
Corporation ("FRONTIER") as Defendant. The original lawsuit was filed against
EPC in 1995 by Plaintiff who suffered serious and disabling personal injury
while working on a wellsite owned and operated by Defendant EPC. The case was
tried to a jury which, on or about July 2, 1997, returned a verdict for Juan
Ramon Caballero for actual damages and, in addition, for an additional $30
million in punitive damages. After the application of the statutorily mandated
maximum caps on punitive damages, the court entered its judgment for exemplary
damages in favor of the Plaintiff against Defendant EPC in the amount of
$6,003,231.60. Following the entry of judgment, Plaintiff agreed to a
settlement of said lawsuit. Under the terms of the settlement, Plaintiff agreed
to, and did give up right to the recovery of punitive damages in return for
EPC's agreement to implement a safety plan. Such agreement was consummated by
the entry of an Agreed Judgment. As part of the agreement for the safety plan,
Plaintiff agreed to, and did pay the sum of $14,902.50 to an engineer for the
development of a safety plan which was furnished to EPC on or about the 19th day
of January, 1998. Plaintiff believes and alleges that EPC has failed, refused
and neglected to implement the safety plan. Plaintiff believes and alleges that
EPC, in fact, never had any intention of implementing the safety plan.
Plaintiff believes and alleges that EPC knew they would be merging with Frontier
and forming a new entity which would be operated by the same principals
(although under a different corporate name), without the safety plan which EPC
had promised to implement. The case, No. 98-01884-00-0-A, is ongoing and the
Borrower believes that it will ultimately be resolved at no loss (other than
defense costs) to the Borrower. The Borrower has hired its own safety expert
and prepared a plan with the same general outline as the original EPC plan. The
plans are currently being compared and analyzed and are in the process of being
reviewed by all parties.
ITEM 7.12 EMPLOYEE BENEFIT PLANS.
None
ITEM 7.14 CLAIMS AND LIABILITIES.
None
ITEM 7.17 ENVIRONMENTAL MATTERS.
None
ITEM 8.2.2(f) EXISTING INDEBTEDNESS.
None
ITEM 8.2.13 TAKE OR PAY CONTRACTS.
None
SCHEDULE II
Certain Oil and Gas Properties
97
<PAGE>
SCHEDULE II
PART A - EXISTING MORTGAGED PROPERTIES:
WELL NAME LOCATION COUNTY STATE
Brownell "1-C"#3 SEC 1-32S-35W Stevens Kansas
Degolyer #1-64 SEC 64-1S-2W Feliciana.W. Louisiana
Loman #1-6 SEC 6-9N-3W Cleveland Oklahoma
McCuistion, CH#1 SEC 22-B-CCSD Upton Texas
Morgan #1,3,4&5 SEC 24-B-CCSD Upton Texas
Neal Heirs #1-21 SEC 21-B-CCSD Upton Texas
Owens"D" #1,2,3 SEC 23-B-CCSD Upton Texas
Reynolds,D#2-22 SEC 22-B-CCSD Upton Texas
SCHEDULE II
PART B - NEW MORTGAGED PROPERTIES:
Lease Name Field Name County State Operator
A S Herman 1 Blessing Matagorda Texas Pitts Oil
McCampbell 1 Geronimo San Patricio Texas Esenjay Exploration
Green-Hall 1 Hall Ranch Karnes Texas Dan A. Hughes
Green-Hall 2 Hall Ranch Karnes Texas Esenjay Exploration
Yturria 1 Raymondville Willacy Texas Esenjay Exploration
Yturria 2 Raymondville Willacy Texas Esenjay Exploration
Yturria 3 Raymondville Willacy Texas Esenjay Exploration
Yturria 4 Raymondville Willacy Texas Esenjay Exploration
PHS 1 Tidehaven Matagorda Texas Esenjay Exploration
ST 76 1 Wolf Point Calhoun Texas Esenjay Exploration
WELL NAME LOCATION COUNTY STATE
Arthur "D" #1-28 SEC 28-3N-2W Garvin Oklahoma
Cassell #4-15 SEC 15-2N-1W Garvin Oklahoma
Morgan #1,3,4&5 SEC 24-B-CCSD Upton Texas
98
<PAGE>
SCHEDULE II
PART C - STARBOARD PROPERTIES:
All Lands located within the area outlined by a heavy line on the attached plat
entitled "Exhibit "A" - Fina Oil and Chemical Company, U.S. Exploration
Division, 3-D Seismic Participation Agreement dated May 30, 1996, insofar and
only insofar as wells drilled are completed to produce from the following
reserves:
The Netherland, Sewell & Associates, Inc. (NS&A) reserve report which was
prepared for Frontier Natural Gas Corporation (FNGC) and dated March 4, 1998
identified five well locations in the Lapeyrouse Field in Terrebonne Parish,
Louisiana which were attributable to FNGC's interest in the field as of December
31, 1997. Those locations were identified on the work maps prepared by NS&A's
technical staff in conjunction with the above-referenced evaluation, and were
spotted/identified on those maps as:
Location 1, containing proved undeveloped reserves in the mapped formations
identified on those work maps as the "HH", "10930", "10875", and "10850."
Location 2, containing proved undeveloped reserves in the mapped formations
identified on those work maps as the "Bourg B" and the "Exposito B" (referenced
in the 3/4/98 report as "Expsito B").
Location 2N, containing proved undeveloped reserves in the mapped formations
identified on those work maps as the "Exposito C" and the "Exposito B"
(referenced in the 3/4/98 report as "Expsito C" and "Expsito B").
Location 3, containing proved undeveloped reserves in the mapped formation
identified on those work maps as the "Pelican A".
Location 6, containing proved undeveloped reserves in the mapped formations
identified on those work maps as the "Duval" and the "Pelican A".
The Starboard Properties include any well or wells drilled and completed from
those proved undeveloped reserves irrespective of the Starboard location or
number of wells drilled.
SCHEDULE II
PART D - OTHER DEVELOPMENT PROPERTIES:
See attached Pages
SCHEDULE III
Subsidiaries
1. Frontier Acquisition Corporation, an Oklahoma corporation
2. Frontier, Inc., an Oklahoma corporation (formerly known as Frontier
National Gas Corporation)
3. Frontier Exploration and Production Corporation, an Oklahoma corporation
Note: Frontier, Inc., an Oklahoma corporation (formerly known as Frontier
National Gas Corporation) and Frontier Exploration and Production Corporation,
an Oklahoma corporation, each a Subsidiary of the Borrower, will merge with and
into the Borrower.
99
<PAGE>
SCHEDULE IV
Minimum Hedging Volumes
4.7 MMBtu/day of natural gas
EXISTING SECURITY DOCUMENTS
<TABLE>
<CAPTION>
NO. JURISDICTION DEBTOR SECURED PARTY DOCUMENT FILE NO. DATE
<S> <C> <C> <C> <C>
1. Federal Frontier, Inc., Bank of America Illinois Mortgage, Deed of Rejected N/A
Bureau of Frontier Acquisition Trust, Assignment, See
Land Corporation Security Agreement and Attach-
Management, and Frontier Exploration & Financing Statement for ment
Santa Fe, Production Corporation Major County, Oklahoma
New Mexico
2. Alabama Frontier Exploration and Legacy Resources Co., L.P. Release of UCC 94-45932 95-45932 4/25/96
Secretary of Production Corporation filed 11/9/95
State
3. Alabama Frontier Inc., Bank of America Illinois, UCC-1 Financing 96-18104 4/25/96
Secretary of Frontier Acquisition as Agent Statement
State Corporation and Frontier
Exploration and Production
Corporation
4. Alabama Frontier Inc., Bank of America Illinois, UCC-3 changing address 96-18104 10/02/96
Secretary of Frontier Acquisition as Agent of Debtors B96-18104
State Corporation and Frontier
Exploration and Production
Corporation
5. Mobile Frontier Exploration and Legacy Resources Co., L.P. Release of Lien claimed Real Property 4/12/96
County, Production Corporation in Affidavit filed in Book 4349,
Alabama Real Property Book Page 0397;
4311, Page 715 on File No.
November 28, 1995, 96-024070
referring to JOA
recorded on Real
Property Records Book
4281, Page 1414; and
release of UCC E33333
filed 12/6/95 (Legacy)
6. Mobile Frontier Inc., Bank of America Illinois, UCC-1 Financing E35772 04/12/96
County, Frontier Acquisition as Agent Statement
Alabama Corporation and Frontier
Exploration and Production
Corporation
7. Mobile Frontier Inc., Bank of America Illinois, UCC-3 changing address E35772 10/04/96
County, Frontier Acquisition as Agent of Debtors No.
Alabama Corporation and Frontier 96068851
Exploration and Production 3/20/97
Corporation 97018383
8. Mobile Frontier Inc., Bank of America Illinois Mortgage, Deed of Real Property 04/12/96
County, Frontier Acquisition Trust, Assignment, Book 4349,
Alabama Corporation and Frontier Security Agreement and Page 0351;
Exploration and Production Financing Statement File No.
Corporation 96-024069
9. Mobile Frontier Inc., Bank of America Illinois UCC-3 changing address Real Property
County, Frontier Acquisition of Debtors Book 4349,
Alabama Corporation and Frontier Page 0351;
Exploration and Production File No.
Corporation 96-024069
10. Mobile Frontier Exploration and N/A Mortgage Recordation Real Property N/A
County, Production Corporation, Tax Order Book 4349,
Alabama Petitioner Page 0395
11. Kansas Frontier Natural Gas Waldorf Corporation Release of UCC 1818957 2210745 01/18/96
Secretary of Corporation filed 7/28/92
State
12. Kansas Frontier, Inc., Bank of America Illinois, UCC-1 Financing 2210746 01/18/96
Secretary of Frontier Acquisition As Agent Statement
State Corporation, Frontier (Mortgage, Deed of
Exploration and Production Trust, Assignment,
Corporation Security Agreement and
Financing Statement)
13. Kansas Frontier, Inc., Bank of America Illinois, UCC-3 changing address 2210746 10/02/96
Secretary of Frontier Acquisition As Agent of Debtors No.
State Corporation, Frontier 2286626
Exploration and Production
Corporation
14. Stevens Centran Corporation and Waldorf Corporation Partial Release of Book 166, 01/19/96
County, Frontier Natural Gas Mortgage filed at Book Page 518
Kansas Corporation 149, Page 690 on
7/28/92
15. Stevens Centran Corporation and Waldorf Corporation Release of UCC 1774 2981 01/19/96
County, Frontier Natural Gas filed on 7/28/92
Kansas Corporation
16. Stevens Frontier, Inc., Bank of America Illinois Mortgage, Deed of Book 166, 01/19/96
County, Frontier Acquisition Trust, Assignment, Page 545
Kansas Corporation, Frontier Security Agreement and (Register of
Exploration and Production Financing Statement Deeds)
Corporation
17. Stevens Frontier, Inc., Bank of America Illinois UCC-3 changing address Book 166, NOTE:
County, Frontier Acquisition of Debtors Page 545 Rejected,
Kansas Corporation, Frontier no
Exploration and Production original
Corporation filing in
UCC
records
18. West Frontier, Inc., Bank of America Illinois, UCC-1 Financing 4691 01/24/96
Feliciana Frontier Acquisition as Agent Statement
Parish, Corporation, Frontier (Mortgage, Deed of
Louisiana Exploration and Production Trust, Assignment,
Corporation Security Agreement and
Financing Statement)
19. West Frontier, Inc., Bank of America Illinois, UCC-3 changing address 4691 10/02/96
Feliciana Frontier Acquisition as Agent of Debtors #4854
Parish, Corporation, Frontier
Louisiana Exploration and Production
Corporation
20. West Frontier, Inc., Bank of America Illinois Mortgage, Deed of Mtg. Book 01/24/96
Feliciana Frontier Acquisition Trust, Assignment, 85A,
Parish, Corporation, Frontier Security Agreement and Page 401,
Louisiana Exploration and Production Financing Statement Conv. Book
Corporation 126,
Page 677,
File No.
60641
100
<PAGE>
NO. JURISDICTION DEBTOR SECURED PARTY DOCUMENT FILE NO. DATE
21. West Frontier, Inc., Bank of America Illinois UCC-3 changing address Mtg. Book 10/02/96
Feliciana Frontier Acquisition of Debtors 85A, #4853
Parish, Corporation, Frontier Page 401,
Louisiana Exploration and Production Conv. Book
Corporation 126,
Page 677,
File No.
60641
22. McKenzie Frontier Natural Gas Corp. Guaranty Bank & Trust Co. Release of Mortgage, 324090 01/17/96
County, Doc. No. 321698 filed
North 2/21/95
Dakota
23. North Dakota Frontier Natural Gas Guaranty Bank & Trust Co. Release of UCC 95- 96-000568501 01/29/96
Secretary of Corporation 489473 filed 2/22/95
State
24. Oklahoma Centran Corporation and Waldorf Corporation Release of UCC N00559 N00559 01/19/96
Central Frontier Natural Gas Corp. filed 2/12/92
Filing
25. Oklahoma Frontier Exploration and Legacy Resources Co., L.P. Release of UCC 59561 59561 01/19/96
Central Production Corporation filed 11/9/95
Filing
26. Oklahoma Frontier Natural Gas Guaranty Bank & Trust Co. Release of UCC 007790 007790 01/19/96
Central Corporation filed 2/13/95
Filing
27. Oklahoma Frontier, Inc., Bank of America Illinois, UCC-1 Financing N00253 01/22/96
Central Frontier Acquisition as Agent Statement (Mortgage,
Filing Corporation, Frontier Deed of Trust,
Exploration and Production Assignment, Security
Corporation Agreement and Financing
Statement)
28. Oklahoma Frontier, Inc., Bank of America Illinois, UCC-3 Partial Release N00253 07/10/96
Central Frontier Acquisition as Agent
Filing Corporation, Frontier
Exploration and Production
Corporation
29. Oklahoma Frontier, Inc., Bank of America Illinois, UCC-3 changing address N00253 10/03/96
Central Frontier Acquisition as Agent of Debtors #051709
Filing Corporation, Frontier
Exploration and Production
Corporation
30. Oklahoma Frontier, Inc., Bank of America Illinois, UCC-3 - Partial Release N00253 NOTE:
Central Frontier Acquisition as Agent and Uniform Commercial No record
Filing Corporation, Frontier Code Termination found
Exploration and Production Statement
Corporation
31. Oklahoma Frontier, Inc., Bank of America Illinois, UCC-3 - Partial Release N00252 NOTE:
Central Frontier Acquisition as Agent and Uniform Commercial No record
Filing Corporation, Frontier Code Termination found
Exploration and Production Statement
Corporation
32. Oklahoma Frontier Natural Gas Bank of America Illinois, UCC-1 Financing N00252 01/22/96
Secretary of Corporation as Agent Statement (Pledge
State Agreement)
33. Oklahoma Frontier Natural Gas Bank of America Illinois, UCC-3 Partial Release N00252 07/10/96
Secretary of Corporation as Agent
State
34. Oklahoma Frontier Natural Gas Bank of America Illinois, UCC-3 changing address N00252 10/03/96
Secretary of Corporation as Agent of Debtor #051708
State
35. Beaver Frontier Natural Gas Corp. Guaranty Bank & Trust Co. Release of Mortgage Book 959, 01/17/96
County, filed Book 0941, Page Page 380,
Oklahoma 001 on 2/13/95 File No.
G0333
36. Beaver Frontier Natural Gas Guaranty Bank & Trust Co. Release of UCC 000057 10 01/17/96
County, Corporation filed 2/13/95
Oklahoma
37. Blaine Centran Corporation and Waldorf Corporation Release of UCC 112 112 01/19/96
County, Frontier Natural Gas filed 2/12/92
Oklahoma Corporation
38. Blaine Centran Corporation and Waldorf Corporation Partial Release of Book 714, 01/19/96
County, Frontier Natural Gas Mortgage filed at Book Page 162,
Oklahoma Corporation 632, Page 422 on File No. 0275
2/12/92
39. Canadian Frontier Natural Gas Corp. Guaranty Bank & Trust Co. Release of Mortgage Book 1975, 01/17/96
County, filed Book 1919, Page Page 846
Oklahoma 811 on 2/13/95
40. Canadian Frontier Natural Gas Corp. Guaranty Bank & Trust Co. Release of UCC 0181 0181 01/17/96
County, filed 2/13/95
Oklahoma
101
<PAGE>
NO. JURISDICTION DEBTOR SECURED PARTY DOCUMENT FILE NO. DATE
41. Cleveland Frontier Natural Gas Corp. Guaranty Bank & Trust Co. Release of Mortgage Book 2698, 01/24/96
County, filed Book 2616, Page Page 312,
Oklahoma 670 on 2/16/95 File No.
94235
42. Cleveland Frontier Natural Gas Guaranty Bank & Trust Co. Release of UCC 300, 300 01/24/96
County, Corporation filed 2/16/95
Oklahoma
43. Cleveland Frontier, Inc., Bank of America Illinois, UCC-1 Financing 135 01/24/96
County, Frontier Acquisition as Agent Statement
Oklahoma Corporation and Frontier (Mortgage, Deed of
Exploration and Production Trust, Assignment,
Corporation Security Agreement and
Financing Statement)
44. Cleveland Frontier, Inc., Bank of America Illinois, UCC-3 changing address 135 10/09/96
County, Frontier Acquisition as Agent of Debtors (file
Oklahoma Corporation and Frontier #2068-
Exploration and Production Ameri
Corporation Search)
45. Cleveland Frontier, Inc., Bank of America Illinois Mortgage, Deed of Book 2698, 01/24/96
County, Frontier Acquisition Trust, Assignment, Page 335,
Oklahoma Corporation and Frontier Security Agreement and File No.
Exploration and Production Financing Statement 94237
Corporation
46. Cleveland Frontier, Inc., Bank of America Illinois UCC-3 changing address Book 2698, 10/09/96
County, Frontier Acquisition of Debtors Page 335, file
Oklahoma Corporation and Frontier File No. #128282
Exploration and Production 94237 bk.2772
Corporation pg. 24
47. Dewey County, Frontier Natural Gas Corp. Guaranty Bank & Trust Co. Release of Mortgage Book 1041, 01/24/96
Oklahoma filed Book 1024, Page Page 202,
183 on 2/13/95 File No.
000264
48. Dewey County, Frontier Natural Gas Guaranty Bank & Trust Co. Release Book 6, 2032 01/24/96
Oklahoma Corporation Page 182,
File No. 2508
49. Dewey Centran Corporation and Waldorf Corporation Release of UCC 1034, 2033 01/24/96
County, Frontier Natural Gas Corp. Book 6, Page 135 filed
Oklahoma 2/12/92
50. Dewey County, Centran Corporation and Waldorf Corporation Partial Release of Book 1041, 01/24/96
Oklahoma Frontier Natural Gas Mortgage filed at Book Page 203,
Corporation 934, Page 12 on 2/12/92 File No.
000265
51. Dewey Frontier, Inc., Bank of America Illinois, UCC-1 Financing Book 6, 01/24/96
County, Frontier Acquisition as Agent Statement Page 196,
Oklahoma Corporation and Frontier (Mortgage, Deed of File No. 2921
Exploration and Production Trust, Assignment,
Corporation Security Agreement and
Financing Statement)
52. Dewey Frontier, Inc., Bank of America Illinois, UCC-3 Partial Release Book 6, 07/05/96
County, Frontier Acquisition as Agent Page 196,
Oklahoma Corporation and Frontier File No. 2921
Exploration and Production
Corporation
53. Dewey Frontier, Inc., Bank of America Illinois, UCC-3 changing address Book 6, 10/03/96
County, Frontier Acquisition as Agent of Debtors Page 196, file no.
Oklahoma Corporation and Frontier File No. 2921 3207
Exploration and Production Book 6,
Corporation Page 205
54. Dewey County, Frontier, Inc., Bank of America Illinois Mortgage, Deed of Book 1041, 01/24/96
Oklahoma Frontier Acquisition Trust, Assignment, Page 228,
Corporation and Frontier Security Agreement and File No.
Exploration and Production Financing Statement 000267
Corporation
55. Dewey County, Frontier, Inc., Bank of America Illinois UCC-3 - Partial Release Book 1050, 07/05/96
Oklahoma Frontier Acquisition and Uniform Commercial Page 123-131,
Corporation and Frontier Code Termination File No.
Exploration and Production Statement 001896
Corporation
56. Dewey County, Frontier, Inc., Bank of America Illinois UCC-3 changing address Book 1041, 10/09/96
Oklahoma Frontier Acquisition of Debtors Page 228, file no.
Corporation and Frontier File No. 002754,
Exploration and Production 000267 bk.1054,
Corporation pg. 457
57. Grady County, Frontier Natural Gas Corp. Guaranty Bank & Trust Co. Release of Mortgage Book 2834, 01/18/96
Oklahoma filed Book 2765, Page Page 92,
129-131 on 2/13/95 File No.
117667
58. Grady County, Frontier Natural Gas Guaranty Bank & Trust Co. Release of UCC 000205H 000205H 01/18/96
Oklahoma Corporation filed 2/13/95
59. Grady County, Frontier, Inc., Bank of America Illinois, UCC-1 Financing Book 2834, 01/18/96
Oklahoma Frontier Acquisition as Agent Statement Page 154,
Corporation and Frontier (Mortgage, Deed of File No.
Exploration and Production Trust, Assignment, 117669,
Corporation Security Agreement and UCC #000110I
Financing Statement)
60. Grady County, Frontier, Inc., Bank of America Illinois, UCC-3 Partial Release Book 2834,
Oklahoma Frontier Acquisition as Agent Page 154,
Corporation and Frontier File No.
Exploration and Production 117669,
Corporation UCC #000110I
102
<PAGE>
NO. JURISDICTION DEBTOR SECURED PARTY DOCUMENT FILE NO. DATE
61. Grady County, Frontier, Inc., Bank of America Illinois, UCC-3 changing address Book 2834, 10/09/96
Oklahoma Frontier Acquisition as Agent of Debtors Page 154, #130255
Corporation and Frontier File No. Bk.2890
Exploration and Production 117669, pg. 342
Corporation UCC #000110I
62. Grady County, Frontier, Inc., Bank of America Illinois UCC-3 - Partial Release Book 2834,
Oklahoma Frontier Acquisition and Uniform Commercial Page 93,
Corporation and Frontier Code Termination File No.
Exploration and Production Statement 117669
Corporation
63. Grady County, Frontier, Inc., Bank of America Illinois Mortgage, Deed of Book 2834, 01/18/96
Oklahoma Frontier Acquisition Trust, Assignment, Page 93,
Corporation and Frontier Security Agreement and File No.
Exploration and Production Financing Statement 117668
Corporation
64. Grady County, Frontier, Inc., Bank of America Illinois, UCC-3 Partial Release Book 2834,
Oklahoma Frontier Acquisition as Agent Page 154,
Corporation and Frontier File No.
Exploration and Production 117668
Corporation
65. Grady County, Frontier, Inc., Bank of America Illinois UCC-3 changing address Book 2834, 10/09/96
Oklahoma Frontier Acquisition of Debtors Page 93, #130256
Corporation and Frontier File No. bk 2890
Exploration and Production 117668 pg. 363
Corporation
66. Grady County, Frontier, Inc., Bank of America Illinois UCC-3 - Partial Release Book 2834,
Oklahoma Frontier Acquisition and Uniform Commercial Page 93,
Corporation and Frontier Code Termination File No.
Exploration and Production Statement 117668
Corporation
67. Major County, Centran Corporation and Waldorf Corporation Release of UCC 9546 9546 01/24/96
Oklahoma Frontier Natural Gas filed 2/12/92
Corporation
68. Major County, Centran Corporation and Waldorf Corporation Partial Release of Book 1400, 01/24/96
Oklahoma Frontier Natural Gas Mortgage filed Book Page 54,
Corporation 1257 of Misc., Page 174 File No.
on 2/12/92 42995
69. Major County, Frontier Natural Gas Corp. Guaranty Bank & Trust Co. Release of Mortgage Book 1400, 01/24/96
Oklahoma filed Book 1378, Page Page 71,
181 on 2/13/95 File No.
42996
70. Major County, Frontier Natural Gas Guaranty Bank & Trust Co. Release of UCC filed Book 1400, 01/24/96
Oklahoma Corporation Book 1378, Page 184, Page 72,
File No. 39211 File No.
42997
71. Major County, Frontier, Inc., Frontier Bank of America Illinois, UCC-1 Financing 2142 01/24/96
Oklahoma Acquisition Corporation as Agent Statement
and Frontier Exploration (Mortgage, Deed of
and Production Corporation Trust, Assignment,
Security Agreement and
Financing Statement)
72. Major County, Frontier, Inc., Frontier UCC-3 changing address 2142 10/03/96
Oklahoma Acquisition Corporation Bank of America Illinois, of Debtors #2512
and Frontier Exploration as Agent
and Production Corporation
73. Major County, Frontier, Inc., Frontier Bank of America Illinois, UCC-3 Partial Release 2142 07/05/96
Oklahoma Acquisition Corporation as Agent
and Frontier Exploration
and Production Corporation
74. Major County, Frontier, Inc., Frontier Bank of America Illinois, UCC-3 - Partial Release 2142 07/05/96
Oklahoma Acquisition Corporation as Agent and Uniform Commercial Book 1410
and Frontier Exploration Code Termination Pgs. 189-199
and Production Corporation Statement File No.
44853
75. Major County, Frontier, Inc., Bank of America Illinois Mortgage, Deed of Book 1400, 01/24/96
Oklahoma Frontier Acquisition Trust, Assignment, Page 112,
Corporation and Frontier Security Agreement and File No.
Exploration and Production Financing Statement 43000
Corporation
76. Major County, Frontier, Inc., Bank of America Illinois UCC-3 Partial Release For Book 07/05/96
Oklahoma Frontier Acquisition 1400,
Corporation and Frontier Page 112,
Exploration and Production File No.
Corporation 43000; filed
as Doc. #
44852
77. Major County, Frontier, Inc., Bank of America Illinois Partial Release and Book 1410, 07/05/96
Oklahoma Frontier Acquisition Uniform Commercial Code Page 189-
Corporation and Frontier Termination Statement 199, File No.
Exploration and Production 44853
Corporation
78. Major County, Frontier, Inc., Bank of America Illinois UCC-3 changing address Book 1400, 10/03/96
Oklahoma Frontier Acquisition of Debtors Page 112, #45744
Corporation and Frontier File No.
Exploration and Production 43000
Corporation
79. Major County, Frontier, Inc., Bank of America Illinois UCC-3 - Partial Release Book 1400, 07/05/96
Oklahoma Frontier Acquisition and Uniform Commercial Page 112,
Corporation and Frontier Code Termination File No.
Exploration and Production Statement 43000
Corporation
80. Payne County, Frontier Natural Gas Corp. Guaranty Bank & Trust Co. Release of Mortgage Book 1090, 01/16/96
Oklahoma filed Book 1064, Page 0167,
Page 0382 on 2/14/95 File No.
96000457
103
<PAGE>
NO. JURISDICTION DEBTOR SECURED PARTY DOCUMENT FILE NO. DATE
81. Payne County, Frontier Natural Gas Guaranty Bank & Trust Co. Release of UCC 000255 106 01/16/96
Oklahoma Corporation filed 2/14/95
82. Roger Mills Frontier Natural Gas Corp. Guaranty Bank & Trust Co. Release of Mortgage Book 1482, 01/17/96
County, filed Book 1455, Page Page 550,
Oklahoma 585-587 on 2/13/95 File No.
02595
83. Roger Mills Frontier Natural Gas Guaranty Bank & Trust Co. Release of UCC 03161 Book 1482, 01/17/96
County, Corporation filed Book 1455, Page Page 551,
Oklahoma 588 on 2/13/95 File No.
02596
84. Texas Frontier Natural Gas Guaranty Bank & Trust Co. Release of UCC 95- 95-032535 01/17/96
Secretary of Corporation 032535 on 2/17/95
State
85. Texas Centran Corporation and Waldorf Corporation Release of UCC 92- 92-027252 01/17/96
Secretary of Frontier Natural Gas 027252 filed 2/12/92
State Corporation
86. Texas Frontier, Inc., Bank of America Illinois, UCC-1 Financing 96-008789 01/17/96
Secretary of Frontier Acquisition as Agent Statement
State Corporation and Frontier (Mortgage, Deed of
Exploration and Production Trust, Assignment,
Corporation Security Agreement and
Financing Statement)
87. Texas Frontier, Inc., Bank of America Illinois, UCC-3 changing address 96-008789 10/02/96
Secretary of Frontier Acquisition as Agent of Debtors (S10026)
State Corporation and Frontier
Exploration and Production
Corporation
88. Coke County, Frontier Natural Gas Guaranty Bank & Trust Co. Release of UCC 2834 Previously N/A
Texas Corporation filed 2/21/95 Terminated
on 5/18/95
89. Harrison Frontier Natural Gas Guaranty Bank & Trust Co. Release of UCC 25-1995 25-1995 02/05/96
County, Corporation filed 2/24/95
Texas
90. Harrison Frontier Natural Gas Guaranty Bank & Trust Co. Release of Deed of Real No. 451, 01/16/96
County, Corporation Trust filed Vol. 1381, Vol. 1470,
Texas Page 168 on 2/24/95 Page 230
91. Upton County, Centran Corporation and Waldorf Corporation Release UCC 107413 Vol. 643, 01/18/96
Texas Frontier Natural Gas filed 2/12/92 Page 179,
Corporation File No.
116396
92. Upton County, Centran Corporation and Waldorf Corporation Release of Deed of Vol. 643, 01/18/96
Texas Frontier Natural Gas Trust file no. 107413, Page 112,
Corporation Book 586, Page 818 on File No.
2/12/92 116392
93. Upton County, Frontier Natural Gas Guaranty Bank & Trust Co. Release of Deed of Vol. 643, 01/18/96
Texas Corporation Trust filed Vol. 631, Page 111,
Page 293 on 2/17/95 File No.
116391
94. Upton County, Frontier Natural Gas Guaranty Bank & Trust Co. Release of UCC 4000 4000 01/18/96
Texas Corporation filed 2/17/95
95. Upton County, Frontier, Inc. N/A Certified Copy of Name Vol. 643, 01/18/96
Texas Change Page 119,
File No.
116393
96. Upton County, Frontier, Inc., Bank of America Illinois Mortgage, Deed of Vol. 643, 01/18/96
Texas Frontier Acquisition Trust, Assignment, Page 134,
Corporation and Frontier Security Agreement and File No.
Exploration and Production Financing Statement 116395
Corporation
97. Upton County, Frontier, Inc., Bank of America Illinois UCC-3 changing address Vol. 643, 10/04/96
Texas Frontier Acquisition of Debtors Page 134, #117999
Corporation and Frontier File No. vol. 652
Exploration and Production 116395 pg. 404
Corporation
</TABLE>
104
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SCHEDULE VI
CERTAIN CONSENTS AND MORTGAGE CONSENTS
Those consents to assignment (including assignments to the Borrower and the
Assignment to the Designee of overriding royalty interests in certain of the
Borrower's Oil and Gas Properties) and consents to the granting of deeds of
trust as identified by the title examiners delivering opinions as to the
Borrower's title to the Mortgaged Properties.
105
<PAGE>
CREDIT AGREEMENT
by and between
ESENJAY EXPLORATION, INC.
and
DUKE ENERGY FINANCIAL SERVICES, INC.
Dated as of January 28, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE 1 - DEFINITIONS AND ACCOUNTING TERMS...................................1
1.1 DEFINED TERMS................................................1
1.2 ACCOUNTING TERMS............................................16
1.3 NUMBER AND GENDER OF WORDS..................................16
ARTICLE 2 - TERMS OF FACILITY.................................................16
2.1 ADVANCING COMMITMENT........................................16
2.2 ADVANCES AND PAYMENTS UNDER THE NOTE........................19
2.3 REPAYMENT PROVISIONS........................................20
2.4 FACILITY FEE................................................22
2.5 INTEREST RATES..............................................22
2.6 OVERRIDING ROYALTY INTERESTS................................22
2.7 GENERAL PROVISIONS RELATING TO INTEREST.....................24
2.8 LOANS TO SATISFY OBLIGATIONS................................25
2.9 VOLUNTARY PREPAYMENT........................................25
2.10 AMENDMENT TO EXISTING CREDIT AGREEMENT. ....................25
ARTICLE 3 - CONDITIONS PRECEDENT..............................................26
3.1 CONDITIONS OF LENDER........................................26
3.2 FURTHER CONDITIONS TO EACH ADVANCE PURSUANT TO
SUBSECTION 2.1(b)...........................................29
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES....................................30
4.1 EXISTENCE AND GOOD STANDING.................................30
4.2 DUE AUTHORIZATION...........................................30
4.3 VALID AND BINDING OBLIGATIONS...............................30
4.4 SCOPE AND ACCURACY OF FINANCIAL STATEMENTS..................30
4.5 LIABILITIES AND LITIGATION..................................30
4.6 TITLE TO ASSETS.............................................31
4.7 AUTHORIZATIONS AND CONSENTS.................................31
4.8 COMPLIANCE WITH LAWS........................................31
i
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4.9 PROPER FILING OF TAX RETURNS AND PAYMENT OF TAXES DUE.......31
4.10 ERISA COMPLIANCE............................................32
4.11 INVESTMENT COMPANY ACT COMPLIANCE...........................32
4.12 PUBLIC UTILITY HOLDING COMPANY ACT COMPLIANCE...............32
4.13 LIEN PRIORITY...............................................32
4.14 USE OF PROCEEDS.............................................32
4.15 FULL DISCLOSURE.............................................32
4.16 PLACES OF BUSINESS..........................................33
4.17 SUBSIDIARIES................................................33
ARTICLE 5 - AFFIRMATIVE COVENANTS.............................................33
5.1 MAINTENANCE AND ACCESS TO RECORDS...........................33
5.2 QUARTERLY FINANCIAL STATEMENTS..............................33
5.3 ANNUAL FINANCIAL STATEMENTS.................................34
5.4 COMPLIANCE CERTIFICATES.....................................34
5.5 RESERVE REPORT..............................................34
5.6 PROSPECT REPORT.............................................34
5.7 QUARTERLY MEETINGS..........................................35
5.8 PROSPECT INFORMATION........................................35
5.9 SALES AND PRODUCTION REPORTS................................35
5.10 ADDITIONAL LIENS............................................35
5.11 STATEMENT OF MATERIAL ADVERSE EFFECT........................36
5.12 TITLE DEFECTS...............................................36
5.13 ADDITIONAL INFORMATION......................................36
5.14 COMPLIANCE WITH LAWS AND PAYMENT OF TAXES...................36
5.15 MAINTENANCE OF EXISTENCE AND GOOD STANDING..................36
5.16 FURTHER ASSURANCES..........................................36
5.17 INITIAL EXPENSES OF THE LENDER..............................37
5.18 SUBSEQUENT EXPENSES OF THE LENDER...........................37
5.19 MAINTENANCE OF TANGIBLE PROPERTY............................37
5.20 MAINTENANCE OF INSURANCE....................................38
5.21 RIGHT OF INSPECTION.........................................38
5.22 COMPLIANCE WITH ERISA.......................................38
5.23 NOTICE......................................................38
5.24 HAZARDOUS SUBSTANCES INDEMNIFICATION........................39
ii
<PAGE>
ARTICLE 6 - NEGATIVE COVENANTS................................................39
6.1 OTHER DEBT OF BORROWER......................................39
6.2 GUARANTY OF PAYMENT OR PERFORMANCE..........................40
6.3 LOANS, ADVANCES OR INVESTMENTS..............................40
6.4 MORTGAGES OR PLEDGES OF ASSETS..............................40
6.5 CANCELLATION OF INSURANCE...................................40
6.6 SALES OF PROPERTY...........................................40
6.7 SALE AND LEASEBACK..........................................41
6.8 DIVIDENDS AND DISTRIBUTIONS.................................41
6.9 CHANGES IN CORPORATE STRUCTURE..............................41
6.10 PAYMENT OF ACCOUNTS PAYABLE.................................41
6.11 TRANSACTIONS WITH AFFILIATES................................41
6.12 LIMITATION ON NEGATIVE PLEDGE CLAUSES.......................41
6.13 NATURE OF BUSINESS..........................................41
6.14 NO SUBSIDIARIES.............................................42
6.15 ASPECT DEBT.................................................42
6.16 AMENDMENT TO BANK OF AMERICA CREDIT.........................42
ARTICLE 7 - EVENTS OF DEFAULT.................................................43
7.1 EVENTS OF DEFAULT...........................................43
7.2 RIGHTS UPON OCCURRENCE OF UNMATURED EVENT OF DEFAULT........46
7.3 RIGHTS UPON OCCURRENCE OF AN EVENT OF DEFAULT...............46
ARTICLE 8 - MISCELLANEOUS.....................................................47
8.1 NOTICES.....................................................47
8.2 AMENDMENTS AND WAIVERS......................................47
8.3 INVALIDITY..................................................48
8.4 SURVIVAL OF AGREEMENTS......................................48
8.5 SUCCESSORS AND ASSIGNS......................................48
8.6 RENEWAL, EXTENSION OR REARRANGEMENT.........................48
8.7 WAIVERS.....................................................49
8.8 CUMULATIVE RIGHTS...........................................49
8.9 TAXES, ETC..................................................49
8.10 EXHIBITS; CONFLICTS.........................................49
8.11 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS................49
8.12 JURISDICTION................................................49
8.13 JURY TRIAL WAIVED...........................................50
8.14 COUNTERPARTS................................................50
iii
<PAGE>
8.15 EFFECTIVENESS...............................................50
8.16 DOCUMENTS...................................................50
8.17 RIGHTS OF THIRD PERSON......................................50
8.18 ANNOUNCEMENTS...............................................50
8.19 CONFIDENTIALITY.............................................50
8.20 SURVIVAL OF CERTAIN COVENANTS...............................51
8.21 GOVERNING LAW...............................................51
iv
<PAGE>
LIST OF EXHIBITS:
I Form of Note
II Form of Compliance Certificate
III Existing Prospects
IV New Prospect Counties
V Form of Conveyance of Overriding Royalty Interests
VI GPMT Agreement
VII Properties Encumbered by 420 Energy Investments
VIII GPM&T Exceptions
IX Schedule of Litigation
X Prospects Mortgaged at Closing
v
<PAGE>
CREDIT AGREEMENT
This CREDIT AGREEMENT, dated as of January 28, 1999, is by and between
ESENJAY EXPLORATION, INC., a Delaware corporation (the "BORROWER"), and DUKE
ENERGY FINANCIAL SERVICES, INC., a Delaware corporation (the "LENDER").
W I T N E S S E T H T H A T:
The Borrower has requested the Lender to extend credit to the Borrower
in order to enable it to borrow from time to time on or before July 31, 2000
sums not to exceed, either singularly or cumulatively, $9,000,000.00 to be used
for the payment of development costs of certain oil and gas prospects. The
Lender agrees to extend such credit to the Borrower upon the terms and subject
to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and of the loans and commitment hereinafter referred to, the
Borrower and the Lender agree as follows:
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
1.1 DEFINED TERMS. As used in this Agreement, the following terms have
the following meanings:
"ADVANCE" means a direct advance of immediately available funds by the
Lender to the Borrower or funds advanced to another Person for and on behalf
of and at the direction of the Borrower pursuant to Section 2.1 of this
Agreement.
"AFFILIATE" means any Person controlling, controlled by, or under
common control with, any other Person. For purposes of this definition,
"control" (including "controlled by" and "under common control with") means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or otherwise.
"AGREEMENT" means this Credit Agreement and all exhibits and schedules
hereto, as the same may be amended from time to time according to the terms
hereof.
1
<PAGE>
"ALLOWED BANK OF AMERICA TRANCHE B REPAYMENT" means a repayment made by
the Borrower to Bank of America of any advance or portion thereof under the
Bank of America Tranche B which is made contemporaneously as a repayment of
principal Debt evidenced by the Note and is not greater than an amount equal
to (i) the ratio of the amount of all outstanding principal amount of loans
under the Bank of America Tranche B immediately prior to such repayments to
the principal amount outstanding evidenced by the Note immediately prior to
such repayments times (ii) the amount of the repayment of principal Debt
evidenced by the Note.
"ASPECT DEBT" means the Debt of the Borrower owed Aspect Resources LLC
for operating costs incurred in connection with Oil and Gas Properties
transferred by Aspect Resources LLC to the Borrower in exchange for capital
stock of the Borrower and assumed by the Borrower pursuant to the terms of
such exchange, with such amount of Debt being approximately $298,000.00 as of
the date of this Agreement.
"BANK OF AMERICA" means Bank of America National Trust and Savings
Association, a national banking association.
"BANK OF AMERICA CREDIT AGREEMENT" means that certain Amended and
Restated Credit Agreement dated as of October 13, 1998 between Bank of
America, as lender, and the Borrower, as borrower, as amended by that certain
Amendment No. 1 to Amended and Restated Credit Agreement dated as of January
28, 1999 between Bank of America and the Borrower.
"BANK OF AMERICA TRANCHE A" means that certain revolving line of credit
made available by Bank of America to the Borrower as governed by the Bank of
America Credit Agreement.
"BANK OF AMERICA TRANCHE B" means that certain advancing line of credit
of up to $5,000,000.00 made available by Bank of America to the Borrower as
governed by the Bank of America Credit Agreement.
"BORROWER" has the meaning indicated in the opening paragraph hereof.
"BORROWING REQUEST" means a written application by the Borrower for an
Advance. Each such Borrowing Request shall specify the requested amount of
such Advance, the requested date of such Advance and the purposes for which
proceeds for such Advance will be used.
2
<PAGE>
"BUSINESS DAY" means a day other than a Saturday, Sunday or legal
holiday for commercial banks in the State of Colorado.
"CLOSING DATE" means the date when all the conditions precedent set
forth in Section 3.1 of this Agreement have been fulfilled.
"COLLATERAL" means the Property now or at any time hereafter securing
the Obligations.
"COMMITMENT" means the obligation of the Lender as set forth herein:
(a) contemporaneously with the execution and delivery of this
Agreement to extend credit by means of an Advance to the Borrower in
the amount of $3,000,000.00;
(b) through April 30, 1999, to extend credit to the Borrower by
means of Advances for the purposes set forth in Subsection 2.1(b), with
the sum of all such Advances made pursuant to Subsections 2.1(a) and
(b) from the date hereof through such date not to exceed either
singularly or cumulatively, $9,000,000.00;
(c) from May 1, 1999 through July 31, 1999, to extend credit to
the Borrower by means of Advances for the purposes set forth in
Subsection 2.1(c), with the sum of all such Advances made pursuant to
Subsection 2.1(c) during such period of time not to exceed either
singularly or cumulatively, the difference, if positive, between
$8,070,000.00 and the sum of all Advances made pursuant to Subsections
2.1(a) and (b);
(d) from August 1, 1999 through October 31, 1999, to extend
credit to the Borrower by means of Advances for the purposes set forth
in Subsection 2.1(d), with the sum of all such Advances made pursuant
to Subsection 2.1(d) during such period of time not to exceed either
singularly or cumulatively, the difference, if positive, between
$7,140,000.00 and the sum of all Advances made pursuant to Subsections
2.1(a), (b) and (c);
3
<PAGE>
(e) from November 1, 1999 through January 31, 2000, to extend
credit to the Borrower by means of Advances for the purposes set forth
in Subsection 2.1(e), with the sum of all such Advances made pursuant
to Subsection 2.1(e) during such period of time not to exceed either
singularly or cumulatively, the difference, if positive, between
$6,120,000.00 and the sum of all Advances made pursuant to Subsections
2.1(a), (b), (c) and (d);
(f) from February 1, 2000 through April 30, 2000, to extend
credit to the Borrower by means of Advances for the purposes set forth
in Subsection 2.1(f), with the sum of all such Advances made pursuant
to Subsection 2.1(f) during such period of time not to exceed either
singularly or cumulatively, the difference, if positive, between
$5,280,000.00 and the sum of all Advances made pursuant to Subsections
2.1(a), (b), (c), (d) and (e); and
(g) from May 1, 2000 through July 31, 2000, to extend credit to
the Borrower by means of Advances for the purposes set forth in
Subsection 2.1(g), with the sum of all such Advances made pursuant to
Subsection 2.1(g) during such period of time not to exceed either
singularly or cumulatively, the difference, if positive, between
$4,350,000.00 and the sum of all Advances made pursuant to Subsections
2.1(a), (b), (c), (d), (e) and (f).
"COMPLIANCE CERTIFICATES" means the certificates of the president or
chief financial officer of the Borrower submitted to the Lender from time to
time pursuant to this Agreement, which certificates shall be substantially in
the form attached hereto as Exhibit II.
"CONTESTED IN GOOD FAITH" means contested in good faith by appropriate
and lawful proceedings diligently conducted, reasonably satisfactory to the
Lender, (a) in which foreclosure, distraint, sale, forfeiture, levy,
execution or other similar proceedings have not been initiated or have been
stayed and continue to be stayed, (b) in which a good faith contest will not
materially detract from the value of the Collateral, jeopardize the Rights of
the Lender with respect to the Collateral, interfere in any material respect
with the operation by the Borrower of its business, or otherwise have a
Material
4
<PAGE>
Adverse Effect, and (c) for which matter a reserve or other appropriate
provision has been established in accordance with the requirements of GAAP.
"DEBT" of any Person means, to the extent of such Person's liability,
(a) all items of indebtedness for borrowed money, obligations, and
liabilities (whether matured or unmatured, liquidated or unliquidated, direct
or indirect, joint or several, contingent or otherwise), which in accordance
with GAAP should be classified upon such Person's balance sheet as
liabilities, but in any event including liabilities secured by any Lien
existing on Property of such Person or a Subsidiary of such Person, (b) the
deferred purchase price of Property or services and direct and contingent
obligations incurred in connection with letters of credit and similar
agreements and obligations as a lessee under leases which have been, or which
in accordance with GAAP should be, capitalized for financial reporting
purposes, (c) all guaranties, endorsements (other than for collection or
deposit in the ordinary course of business), letters of credit and other
contingent obligations of such Person with respect to obligations of other
Persons of the types described in clauses (a) and/or (b) preceding, (d)
liabilities of unfunded vested benefits under any Plan, (e) Swaps of such
Person and (f) all obligations to supply funds to, invest in or maintain
working capital or equity capital of any other Person, or otherwise to
maintain the net worth or solvency or any balance sheet condition of any
other Person.
"DEBTOR RELIEF LAWS" means the Bankruptcy Code of the United States of
America, as amended from time to time, and all other applicable liquidation,
conservatorship, bankruptcy, moratorium, rearrangement, receivership,
insolvency, reorganization, or similar debtor relief Laws or general
equitable principles from time to time in effect affecting the Rights of
creditors generally.
"DEFAULT RATE" means a per annum rate of interest equal to the Prime
Rate plus eight percent (8%), but in no event to exceed the Highest Lawful
Rate.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) which together with the Borrower would be treated as a single
employer under Section 4001 of ERISA.
5
<PAGE>
"EVENT OF DEFAULT" means any of the events specified in Section 7.1,
provided that the requirements, if any, for the giving of notice, the lapse
of time, or both, or any other condition specified in Section 7.1 have been
satisfied.
"EXCHANGE ACT" means the Securities Exchange Act of 1974, as amended.
"EXISTING CREDIT AGREEMENT" means that certain Credit Agreement dated
February 23, 1998 by and between Frontier Natural Gas Corporation, which was
succeeded to by the Borrower by merger, and Lender as amended by that certain
Ratification and Assumption Agreement dated May 29, 1998 by and between the
Borrower and the Lender.
"EXISTING PROSPECTS" means all of the Borrower's undivided interests,
whether now owned or hereafter acquired, in certain oil gas prospects which
are more particularly described on Exhibit III attached hereto and any
interest in any other Oil and Gas Property or associated Right which the
Borrower may acquire in any of the areas outlined on the plats attached
hereto behind each respective Existing Prospect.
"FACILITY RATE" means a varying rate of interest per annum equal to the
Prime Rate, from time to time in effect, plus four percent (4%).
"FINANCIAL STATEMENTS" means statements of financial condition, as at
the point in time and for the period indicated, and consisting of at least a
balance sheet and related statements of operations, stockholders' equity and
cash flows and, when audited, accompanied by the certification of independent
certified public accountants, and footnotes to any of the foregoing.
"420 ENERGY INVESTMENTS DEBT" means the Debt of the Borrower owed 420
Energy Investments, Inc., a Delaware corporation, which is governed by that
certain Loan Agreement dated as of March 1, 1996 as amended by that certain
First Amendment to Loan Agreement dated effective September 1, 1996 between
the Borrower and 420 Energy Investments, Inc.
"GAAP" means, generally accepted accounting principles established by
the Financial Accounting Standards Board and in effect in the United States
from time to time during the term of this Agreement and applied on a basis
consistent with that adopted in the Financial Statements of the Borrower to
be delivered to the Lender.
6
<PAGE>
"GROUP" means a "group" for purposes of Section 13(d) of the Exchange
Act.
"HAZARDOUS SUBSTANCES" means any flammables, explosives, radioactive
materials, hazardous wastes, asbestos or any material containing asbestos,
polychlorinated biphenyls (PCB's), toxic substances or related materials,
petroleum and petroleum products and associated oil or natural gas
exploration, production and development wastes or any substances defined as
"hazardous substances," "hazardous materials," "hazardous wastes" or "toxic
substance" under the Comprehensive Environmental Response, Compensation and
Liability Act, as amended; the Superfund Amendments and Reauthorization Act,
as amended; the Hazardous Materials Transportation Act, as amended; the
Resource Conservation and Recovery Act, as amended; the Toxic Substances
Control Act, as amended; or any other law, statute, ordinance, rule,
regulation or order now or hereafter enacted or promulgated by any
governmental authority with jurisdiction and relating to the protection of
the environment.
"HIGHEST LAWFUL RATE" means the maximum rate (or, if the context so
permits or requires, an amount calculated at such rate) of interest (if any)
that, at the time in question, would not cause the interest charged on the
Obligations owed to the Lender to exceed the maximum amount that the Lender
would be allowed to contract for, charge, take, reserve or receive under
applicable Law after taking into account, to the extent required by
applicable Law, all relevant payments and charges under the Loan Documents.
"INTERCREDITOR AGREEMENT" means that certain Collateral Agency and
Intercreditor Agreement dated of even date herewith by and among Bank of
America, the Lender, the Borrower and the Subsidiaries of the Borrower.
"INVESTMENT" in any Person means any stock, bond, note or other
evidence of Debt or any other security (other than current trade and customer
accounts) of, investment or partnership interest in or loan to, such Person.
"LAWS" means all applicable statutes, laws, ordinances, rules, rulings,
interpretations, regulations, judgments, requirements, governmental
authorizations (including licenses, permits, franchises and other
governmental consents necessary for the ownership or operation of Property),
orders, writs, injunctions or decrees (or interpretations of any of the
foregoing) of any political subdivision, state, commonwealth, nation,
country, territory, possession, county, parish, municipality or Tribunal.
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<PAGE>
"LENDER" has the meaning indicated in the opening paragraph hereof.
"LIEN" means any lien, charge, claim, restriction, mortgage, mechanic's
lien, materialmen's lien, pledge, hypothecation, inchoate lien, assignment,
deposit arrangement, conditional sale or other title retention agreement,
financing lease, security interest, security agreement or other encumbrance,
whether arising by contract or under Law, and includes reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
leases and other title exceptions and the filing of any financing statement
under the Uniform Commercial Code of the State of Texas or comparable Law of
any jurisdiction.
"LIMITATION PERIOD" means any period during which the calculation of
interest as provided in any of the Loan Documents would result in interest
exceeding the Highest Lawful Rate.
"LIQUID INVESTMENTS" means Investments in (a) United States government
issued securities, obligations of the United States government or any agency
thereof and any obligations guaranteed by the United States government with
maturities of no more than one year, (b) certificates of deposit or
repurchase agreements issued by the Lender, (c) certificates of deposit, in
an aggregate amount not to exceed $1,000,000.00 at any one time as to any one
issuer, issued by other banks or financial institutions organized under the
Laws of the United States or any state thereof, having capital surplus and
undivided profits aggregating at least $100,000,000.00 and with deposits
insured by the Federal Deposit Insurance Corporation, and (d) commercial
paper with a rating by Moody's Investor Service, Inc. of no less than A and
with maturities of no more than nine months from the date of acquisition
thereof.
"LITIGATION" means any proceeding, claim, lawsuit, and/or investigation
conducted, or threatened and known to the Person in question, by or before
any Tribunal.
"LOAN DOCUMENTS" means this Agreement, the Note, the Security
Documents, the Intercreditor Agreement and all other notes, deeds of trust,
restatements, ratifications and amendments of deeds of trust, financing
statements, guaranties, security agreements, pledge agreements, documents,
instruments and other agreements now or hereafter delivered pursuant to the
terms of, or in connection with, this Agreement, the Obligations and/or the
8
<PAGE>
Collateral, and all renewals, extensions and restatements of, and amendments
and supplements to any or all of the foregoing.
"LOANS" means the loans and extensions of credit by the Lender to or
for the account of the Borrower pursuant to this Agreement.
"MATERIAL ADVERSE EFFECT" means any material and adverse effect on (a)
the assets, liabilities, financial condition, business or operations of the
Borrower that are material to the business or financial condition of the
Borrower, or (b) the ability of any of the Borrower to meet its Obligations
under any of the Loan Documents on a timely basis as provided herein or
therein.
"MORTGAGED PROPERTIES" shall mean Oil and Gas Properties of the
Borrower subject to the Liens of the Security Documents from time to time to
secure the Debt evidenced by the Note.
"MULTI-EMPLOYER PLAN" means a Plan described in Section 4001(9)(3) of
ERISA which covers employees of the Borrower or any ERISA Affiliate.
"NET REVENUE INTEREST" means that proportionate portion of production
attributable to the owner of an undivided interest in and to any Oil and Gas
Property after deduction for royalty burdens, overriding royalty burdens or
other burdens on production, if any, except severance, production, windfall
profits and other similar taxes.
"NEW PROSPECTS" means any interest which from time to time the Borrower
may acquire in any oil and gas prospects in any county set forth on Exhibit
IV attached hereto, other than Existing Prospects.
"NOTE" means that certain promissory note in the face amount of
$9,000,000.00 dated of even date herewith made by the Borrower to the order
of the Lender, in the form attached hereto as Exhibit I, together with all
deferrals, renewals or extensions thereof, which promissory note shall
evidence the Advances made to the Borrower by the Lender pursuant to Section
2.1 and funds advanced and applied pursuant to Section 2.8.
"OBLIGATIONS" means all present and future loans, advances,
indebtedness, obligations, covenants, duties and liabilities, and all
renewals for any period, increases and extensions thereof, or any part
thereof, now or hereafter owing to the Lender by the Borrower or the
Guarantors arising from
9
<PAGE>
or pursuant to any of the Loan Documents, together with all interest accruing
thereon, and costs, expenses, and attorneys' fees incurred in the enforcement
or collection thereof, whether such indebtedness, obligations, and
liabilities are direct, indirect, fixed, contingent, liquidated,
unliquidated, joint, several, or joint and several, and all other
indebtedness or obligations of any type whatsoever now or hereafter owing to
the Lender by the Borrower, whether or not in connection with any of the Loan
Documents.
"OIL AND GAS PROPERTIES" means fee, leasehold or other interests in or
under mineral estates or oil, gas and other liquid or gaseous hydrocarbon
leases with respect to properties situated in the United States, including,
without limitation, overriding royalty and royalty interests, leasehold
estate interests, net profits interests, production payment interests and
mineral fee interests, together with contracts executed in connection
therewith and all tenements, hereditaments, appurtenances and properties,
real or personal, appertaining, belonging, affixed or incidental thereto.
"OVERRIDE FUTURE REVENUES" means the projections of future net income
to be derived from reserves of hydrocarbons classified as "proved producing",
"proved shut-in" or "proved behind pipe", and based on projections of (a)
future production from the indicated Oil and Gas Properties and (b) a pricing
assumption (i) for oil of the 12 Months Futures Strip Price for light sweet
crude oil adjusted for location and grade and (ii) for gas of the 12 Months
Futures Strip Price for natural gas adjusted for location and grade.
"OVERRIDE WELL" means the Well Area established for any oil and gas
well drilled on a Prospect, spudded after the date of this Agreement and
prior to December 31, 2005, and completed as an oil and gas well capable of
producing in paying quantities.
"OVERRIDING ROYALTY INTERESTS" means the overriding royalty interests
in each of the Override Wells conveyed to the Lender by the Borrower pursuant
to Subsection 2.6(a).
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereof, established pursuant to Subtitle A of Title IV of ERISA.
"PERMITTED LIENS" means: (a) Liens for Taxes, not yet due or which are
being Contested in Good Faith; (b) Liens in connection with workers'
compensation, unemployment insurance or other social security (other than
Liens created by Section 4068 of ERISA), old age pension or public liability
10
<PAGE>
obligations which are not yet due or which are being Contested in Good Faith;
(c) vendors', carriers', warehousemen's, repairmen's, mechanics', workmen's,
materialmen's, construction or other similar Liens arising by operation of
Law in the ordinary course of business or incident to the construction or
improvement of any Property in respect of obligations which are not yet due
or which are being Contested in Good Faith; (d) Liens to operators and
nonoperators under joint operating agreements arising in the ordinary course
of business to secure amounts owing, which amounts are not yet due or are
being Contested in Good Faith; (e) Liens under production sales agreements,
division orders, operating agreements and other agreements customary in the
oil and gas business for processing, producing and selling hydrocarbons; (f)
Liens created in favor of the Lender securing Obligations hereunder and other
Liens expressly permitted under the Security Documents; (g) easements,
rights-of-way, restrictions and other similar encumbrances, and minor defects
in the chain of title which are customarily accepted in the oil and gas
financing industry, none of which interfere with the ordinary conduct of the
business of the owner of the Property or materially detract from the value or
use of the Property to which they apply; (h) Liens of record under terms and
provisions of the leases, unit agreements, assignments and other transfer of
title documents in the chain of title under which the owner of the relevant
Property acquired such Property; (i) Liens securing the purchase price or
existing under conditional sale of title retention contracts for equipment
purchased in the normal course of business of the Borrower, provided that
such Lien shall not extend to or cover any other Property of the Borrower;
(j) Liens securing the Debt governed by the Bank of America Credit Agreement,
provided, however, all of such Liens encumbering any Oil and Gas Properties
(and all related Property) of the Borrower or any of its Subsidiaries shall
secure the Debt governed by this Agreement and the enforcement of such Liens
and distribution of proceeds realized from such Liens shall be governed by
the Intercreditor Agreement and (k) Liens securing the 420 Energy Investments
Debt provided that such Liens shall not extend to or cover any other Property
of the Borrower except as set forth on Exhibit VII attached hereto.
"PERSON" means any individual, sole proprietorship, firm, corporation,
trust, association, institution, partnership, joint venture, Tribunal or
other entity.
"PLAN" means any pension plan that is covered by Title IV of ERISA and
maintained by the Borrower or any such plan to which the Borrower is required
to contribute.
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<PAGE>
"PRIME RATE" means at any time the "prime rate" then most recently
published in the "Money Rates" or equivalent section of the WALL STREET
JOURNAL, provided that if a "prime rate" range is published by the WALL
STREET JOURNAL, then the middle of that range will be the "Prime Rate".
"PROPERTY" means any interest in any kind of property or asset, whether
real, personal or mixed, tangible or intangible.
"PROSPECTS" means the Existing Prospects and the New Prospects.
"PROSPECT DEVELOPMENT COSTS" means amounts owed to other Persons not an
Affiliate of the Borrower and incurred by the Borrower after November 12,
1998 with respect to any of the Prospects for seismic options, seismic
permits, options to acquire Oil and Gas Properties, Oil and Gas Properties,
recording fees, title examination, lease broker fees and expenses, all other
amounts owed other Persons to obtain or maintain Rights in the Prospects
necessary or advisable for exploration and development of hydrocarbons on
such Prospects, seismic data, interpretation of seismic data, all other
geologic and geophysical costs related to the exploration and development of
hydrocarbons on such Prospects, and the drilling, testing, logging,
completing, equipping for production or plugging and abandoning any oil and
gas well located on such Prospects.
"RESERVOIR" means a separate, identifiable underground accumulation of
oil, gas and/or associated hydrocarbons segregated from other such
accumulations and characterized by a single pressure system.
"REPORTABLE EVENT" and "PROHIBITED TRANSACTION" have the meanings given
to those terms under ERISA.
"RIGHTS" means rights, remedies, powers and privileges.
"SECTION" or "SUBSECTION" means a section or subsection in this
Agreement unless specified otherwise.
"SECURITY DOCUMENTS" means the documents described in Subsection
3.1(a)(7) of this Agreement and all other documents now or hereafter existing
which provide the Lender with Collateral, as the same may be amended or
restated from time to time.
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"SUBSIDIARY" of any Person means any corporation of which an aggregate
of fifty percent (50%) or more of the stock of any class or classes is
owned of record or beneficially, directly or indirectly, by such Person, if
the holders of the stock of such class or classes are ordinarily entitled to
vote for the election of a majority of the directors (or individuals
performing similar functions) of such corporation (irrespective of whether,
at the time in question, stock of any other class or classes of such
corporation shall have or might have voting power by reason of the happening
of any contingency).
"SWAPS" means, with respect to any Person, foreign exchange
transactions and commodity, currency and interest rate swaps, floors, caps,
collars, forward sales, options, other similar transactions and combinations
of the foregoing.
"TAXES" means all taxes, assessments, filing or other fees, levies,
imposts, duties, deductions, withholdings, stamp taxes, interest equalization
taxes, capital transaction taxes, foreign exchange taxes or charges, or other
charges of any nature whatsoever from time to time or at any time imposed by
any Law or Tribunal.
"THRESHOLD AMOUNT" means when the Lender realizes a forty-five percent
(45%) internal rate of return. A forty-five percent (45%) internal rate of
return shall be deemed to have occurred on the first date when (x) the sum of
(i) the net present value of all principal payments received by the Lender in
respect of the Loans and applied against the Debt evidenced by the Note,
discounted at forty-five percent (45%) per annum; plus (ii) the net present
value of all interest payments received by the Lender in respect of the Loans
and applied against the Debt evidenced by the Note, discounted at forty-five
percent (45%) per annum; plus (iii) the net present value of proceeds
received by the Lender from the Overriding Royalty Interests in the Threshold
Override Wells, discounted at forty-five percent (45%) per annum; minus (y)
the net present value of all Loans made subsequent to the first Loan made
hereunder, discounted at forty-five percent (45%) per annum is equal to the
amount of the first Loan made hereunder. For purposes of this calculation,
net present values shall be calculated as of the date of the first Loan. The
Lender shall make this calculation using the following formula:
Omega
Sigma ( P(t) ) +
---------------------------
(1.45) to the power of t/365
t=0
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<PAGE>
Omega
Sigma ( I(t) ) +
---------------------------
(1.45) to the power of t/365
t=0
Omega
Sigma ( ORRI(t) ) -
---------------------------
(1.45) to the power of t/365
t=0
Omega
Sigma ( L(t) ) =L(0)
---------------------------
(1.45) to the power of t/365
t=1
where: P(t) = the principal payment received by the Lender t
days after the date of the first Loan in respect
of the Loans and applied against the Debt
evidenced by the Note,
I(t) = the interest payment received by the Lender t days
after the date of the first Loan in respect of the
Loans applied against the Debt evidenced by the
Note,
ORRI(t) = the amounts received by the Lender t days after
the date of the first Loan in respect of the
Overriding Royalty Interests in the Threshold
Override Wells,
L(t) = the Loans made hereunder by the Lender t days
after the date of the first Loan,
L(0) = the amount of the first Loan made hereunder, and
t = the number of days from the date of the first
Loan made hereunder until each respective
principal payment, interest payment, receipt of
proceeds attributable to the Overriding Royalty
Interests in the Threshold Override Wells, or
subsequent Loan.
"THRESHOLD OVERRIDE WELL" means any Override Well other than any oil
and gas well that was defined as an Override Well pursuant to the terms of
the Existing Credit Agreement without giving effect to the amendment of the
Existing Credit Agreement pursuant to Section 2.10 of this Agreement.
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<PAGE>
"TRIBUNAL" means any court, governmental department or authority,
commission, board, bureau, agency, arbitrator or instrumentality of any
state, political subdivision, commonwealth, nation, territory, county,
parish or municipality, whether now or hereafter existing, having
jurisdiction over the Lender, the Borrower or any of their respective
Property.
"12 MONTHS FUTURES STRIP PRICE" means for light sweet crude oil or
natural gas, as the case may be, (a) in the case of the purchase of the
Overriding Royalty Interests by the Borrower pursuant to Subsection 2.6(b),
the average of the high and low prices on the New York Mercantile Exchange
for each month from and including February 2006 through and including January
2007 as reported in the "Futures Prices" section of the WALL STREET JOURNAL
published on January 2, 2006 or the first day thereafter the WALL STREET
JOURNAL is published and (b) in the case of the purchase of the Overriding
Royalty Interests by the Borrower pursuant to Subsection 2.6(c), the average
of the high and low prices on the New York Mercantile Exchange for each of
the immediately succeeding twelve (12) months following the effective date of
such purchase as reported in the "Futures Prices" section of the WALL STREET
JOURNAL published on the effective date of such purchase or the first day
thereafter the WALL STREET JOURNAL is published.
"UNMATURED EVENT OF DEFAULT" means any event or occurrence which solely
with the lapse of time or the giving of notice or both will ripen into an
Event of Default.
"UNRELATED PERSON" means any Person other than any Person who is the
owner as of the date of this Agreement of five percent (5%) or more of the
total of all common stock of the Borrower.
"WELL AREA" means, with respect to any oil and gas well, the area
within a particular Reservoir that can, as determined by statute and/or the
appropriate governmental authority having jurisdiction, be efficiently and
economically drained by such well. For purposes of the foregoing: (a) as to
any particular well located in the States of Texas, the Well Area for such
well shall be (i) the proration unit, if any, from time to time allocated by
the governmental authority having jurisdiction to such well for the Reservoir
to which such well is completed, or (ii) in the absence of such a proration
unit, the spacing unit from time to time established for the Reservoir to
which such well is completed by statute or by rule, regulation or order
issued by the governmental authority having jurisdiction, and (b) as to any
particular well located in a State other than Texas, the Well Area for such
well shall be the drilling unit, spacing
15
<PAGE>
unit or proration unit, as the case may be, from time to time established
for the Reservoir to which such well is completed by statute or by rule,
regulation or order issued by the governmental authority having
jurisdiction. In the absence of an applicable statute or an applicable rule
or special order issued by a governmental authority having jurisdiction
establishing the area within a particular Reservoir that can be efficiently
and economically drained by a particular well, the Well Area within such
Reservoir for such well shall be (a) 160 acres, in the event such oil and
gas well is drilled and completed as a gas well in such Reservoir, and (b)
40 acres, in the event such oil and gas well is drilled and completed as an
oil well in such Reservoir.
1.2 ACCOUNTING TERMS. All accounting and financial terms used in any of the
Loan Documents and the compliance with each covenant contained in the Loan
Documents that relates to financial matters shall be determined in accordance
with GAAP, except to the extent that a deviation therefrom is expressly stated
in such Loan Documents.
1.3 NUMBER AND GENDER OF WORDS. Whenever the singular number is used in any
Loan Document, the same shall include the plural where appropriate, and VICE
VERSA; words of any gender in any Loan Document shall include each other gender
where appropriate; and the words "herein," "hereof," "hereunder" and other words
of similar import refer to the relevant Loan Document as a whole and not to any
particular part, section or subdivision thereof.
ARTICLE 2
TERMS OF FACILITY
2.1 ADVANCING COMMITMENT. (a) Contemporaneously with the execution and
delivery of this Agreement, but subject to the terms and conditions (including,
without limitation, the rights of the Lender to terminate the Commitment
hereunder upon an Event of Default or Unmatured Event of Default) and relying on
the representations and warranties contained in this Agreement and the other
Loan Documents, the Lender agrees to make an Advance to the Borrower in the
amount of $5,500,000.00 which will be used by the Borrower to pay for Prospect
Development Costs relating to the development of the Prospects.
(b) Subject to the terms and conditions (including, without
limitation, the right of the Lender to terminate the Commitment hereunder upon
an Event of Default or Unmatured Event of Default) and relying on the
representations and warranties contained in this Agreement and the other Loan
Documents, from time to time until April 30, 1999, the Lender agrees to make
Advances to the Borrower following receipt by the Lender of a Borrowing Request
on or before 10:00 a.m. Mountain Standard or Daylight Savings Time,
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<PAGE>
as the case may be, five (5) Business Days prior to the date of the requested
Advance, in such amounts as the Borrower may request, provided, however, that
each Advance shall be in an amount not less than $100,000.00, be an integral
multiple of $10,000.00, no Advance shall be made which will cause the sum of all
Advances made pursuant to Subsection 2.1(a) and this Subsection 2.1(b) to
exceed, either singularly or cumulatively, $9,000,000.00, and the proceeds of
all such Advances shall be used by the Borrower to pay Prospect Development
Costs relating to the Prospects. The Borrower may transmit Borrowing Requests to
the Lender by mail, personal delivery, telefacsimile, telex or other method; but
the Lender shall not be obligated to make Advances on the requested date unless
the Lender has received, on or before 10:00 a.m. Mountain Standard or Daylight
Savings Time, as the case may be, the relevant Borrowing Request five (5)
Business Days prior to such requested date.
(c) Subject to the terms and conditions (including, without
limitation, the right of the Lender to terminate the Commitment hereunder upon
an Event of Default or Unmatured Event of Default) and relying on the
representations and warranties contained in this Agreement and the other Loan
Documents, from time to time until July 31, 1999, the Lender agrees to make
Advances to the Borrower following receipt by the Lender of a Borrowing Request
on or before 10:00 a.m. Mountain Standard or Daylight Savings Time, as the case
may be, five (5) Business Days prior to the date of the requested Advance, in
such amounts as the Borrower may request, provided, however, that each Advance
shall be in an amount not less than $100,000.00, be an integral multiple of
$10,000.00, no Advance shall be made which will cause the sum of all Advances
made pursuant to this Subsection 2.1(c) to exceed, either singularly or
cumulatively, the difference, if positive, between $8,070,000.00 and the sum of
all Advances made pursuant to Subsections 2.1 (a) and (b), and the proceeds of
all such Advances shall be used by the Borrower to pay Prospect Development
Costs relating to the Prospects. The Borrower may transmit Borrowing Requests to
the Lender by mail, personal delivery, telefacsimile, telex or other method; but
the Lender shall not be obligated to make Advances on the requested date unless
the Lender has received, on or before 10:00 a.m. Mountain Standard or Daylight
Savings Time, as the case may be, the relevant Borrowing Request five (5)
Business Days prior to such requested date.
(d) Subject to the terms and conditions (including, without
limitation, the right of the Lender to terminate the Commitment hereunder upon
an Event of Default or Unmatured Event of Default) and relying on the
representations and warranties contained in this Agreement and the other Loan
Documents, from time to time until October 31, 1999, the Lender agrees to make
Advances to the Borrower following receipt by the Lender of a Borrowing Request
on or before 10:00 a.m. Mountain Standard or Daylight Savings Time, as the case
may be, five (5) Business Days prior to the date of the requested Advance, in
such amounts as the Borrower may request, provided, however, that each Advance
shall be in an amount not less than $100,000.00, be an integral multiple of
$10,000.00, no Advance shall
17
<PAGE>
be made which will cause the sum of all Advances made pursuant to this Section
2.1 to exceed, either singularly or cumulatively, the difference, if positive,
between $7,140,000.00 and the sum of all Advances made pursuant to Subsections
2.1 (a), (b) and (c), and the proceeds of all such Advances shall be used by the
Borrower to pay Prospect Development Costs relating to the Prospects. The
Borrower may transmit Borrowing Requests to the Lender by mail, personal
delivery, telefacsimile, telex or other method; but the Lender shall not be
obligated to make Advances on the requested date unless the Lender has received,
on or before 10:00 a.m. Mountain Standard or Daylight Savings Time, as the case
may be, the relevant Borrowing Request five (5) Business Days prior to such
requested date.
(e) Subject to the terms and conditions (including, without
limitation, the right of the Lender to terminate the Commitment hereunder upon
an Event of Default or Unmatured Event of Default) and relying on the
representations and warranties contained in this Agreement and the other Loan
Documents, from time to time until January 31, 2000, the Lender agrees to make
Advances to the Borrower following receipt by the Lender of a Borrowing Request
on or before 10:00 a.m. Mountain Standard or Daylight Savings Time, as the case
may be, five (5) Business Days prior to the date of the requested Advance, in
such amounts as the Borrower may request, provided, however, that each Advance
shall be in an amount not less than $100,000.00, be an integral multiple of
$10,000.00, no Advance shall be made which will cause the sum of all Advances
made pursuant to this Section 2.1 to exceed, either singularly or cumulatively,
the difference, if positive, between $6,120,000.00 and the sum of all Advances
made pursuant to Subsections 2.1 (a), (b), (c) and (d), and the proceeds of all
such Advances shall be used by the Borrower to pay Prospect Development Costs
relating to the Prospects. The Borrower may transmit Borrowing Requests to the
Lender by mail, personal delivery, telefacsimile, telex or other method; but the
Lender shall not be obligated to make Advances on the requested date unless the
Lender has received, on or before 10:00 a.m. Mountain Standard or Daylight
Savings Time, as the case may be, the relevant Borrowing Request five (5)
Business Days prior to such requested date.
(f) Subject to the terms and conditions (including, without
limitation, the right of the Lender to terminate the Commitment hereunder upon
an Event of Default or Unmatured Event of Default) and relying on the
representations and warranties contained in this Agreement and the other Loan
Documents, from time to time until April 30, 2000, the Lender agrees to make
Advances to the Borrower following receipt by the Lender of a Borrowing Request
on or before 10:00 a.m. Mountain Standard or Daylight Savings Time, as the case
may be, five (5) Business Days prior to the date of the requested Advance, in
such amounts as the Borrower may request, provided, however, that each Advance
shall be in an amount not less than $100,000.00, be an integral multiple of
$10,000.00, no Advance shall be made which will cause the sum of all Advances
made pursuant to this Section 2.1 to exceed, either singularly or cumulatively,
the difference, if positive, between $5,280,000.00 and the sum of all Advances
made pursuant to Subsections 2.1 (a), (b), (c), (d) and (e), and
18
<PAGE>
the proceeds of all such Advances shall be used by the Borrower to pay Prospect
Development Costs relating to the Prospects. The Borrower may transmit Borrowing
Requests to the Lender by mail, personal delivery, telefacsimile, telex or other
method; but the Lender shall not be obligated to make Advances on the requested
date unless the Lender has received, on or before 10:00 a.m. Mountain Standard
or Daylight Savings Time, as the case may be, the relevant Borrowing Request
five (5) Business Days prior to such requested date.
(g) Subject to the terms and conditions (including, without
limitation, the right of the Lender to terminate the Commitment hereunder upon
an Event of Default or Unmatured Event of Default) and relying on the
representations and warranties contained in this Agreement and the other Loan
Documents, from time to time until July 31, 2000, the Lender agrees to make
Advances to the Borrower following receipt by the Lender of a Borrowing Request
on or before 10:00 a.m. Mountain Standard or Daylight Savings Time, as the case
may be, five (5) Business Days prior to the date of the requested Advance, in
such amounts as the Borrower may request, provided, however, that each Advance
shall be in an amount not less than $100,000.00, be an integral multiple of
$10,000.00, no Advance shall be made which will cause the sum of all Advances
made pursuant to this Section 2.1 to exceed, either singularly or cumulatively,
the difference, if positive, between $4,350,000.00 and the sum of all Advances
made pursuant to Subsections 2.1 (a), (b), (c), (d), (e) and (f), and the
proceeds of all such Advances shall be used by the Borrower to pay Prospect
Development Costs relating to the Prospects. The Borrower may transmit Borrowing
Requests to the Lender by mail, personal delivery, telefacsimile, telex or other
method; but the Lender shall not be obligated to make Advances on the requested
date unless the Lender has received, on or before 10:00 a.m. Mountain Standard
or Daylight Savings Time, as the case may be, the relevant Borrowing Request
five (5) Business Days prior to such requested date.
(h) The Advances made by the Lender to the Borrower pursuant to the
Commitment shall be made at the office of the Lender at 370 Seventeenth Street,
Suite 900, Denver, Colorado, 80202 and shall be evidenced by the Note.
2.2 ADVANCES AND PAYMENTS UNDER THE NOTE. The Lender is authorized by the
Borrower to attach to and to make a part of the Note a ledger (and continuations
thereto, if necessary) reflecting the amount of all Advances made by the Lender
and each payment made by the Borrower. Each time such an Advance is made against
or payment (including a prepayment) is made on the Note, the Lender is
authorized but not required to make a notation on the ledger forming a part
thereof reflecting the amount advanced or paid and the date thereof; provided,
however, that the failure of the Lender to do so shall not relieve the Borrower
of its liability hereunder or under the Note.
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The aggregate unpaid amount of such Advances reflected by the notations
by the Lender on its records or the ledger sheets affixed to the Note shall be
deemed rebuttably presumptive evidence of the principal amounts owing on the
Note. The liability for payment of principal and interest evidenced by the Note
shall be limited to principal amounts actually advanced and outstanding pursuant
to this Agreement and the other Loan Documents and interest accrued on such
amounts calculated in accordance with this Agreement.
2.3 REPAYMENT PROVISIONS. (a) All outstanding principal Debt for all
Advances evidenced by the Note shall be repayable:
(i) if the outstanding principal Debt evidenced by the Note on April
30, 1999 (inclusive of any Advance made upon such date pursuant Section 2.1)
is greater than $8,070,000.00, in an installment due and payable on May 1,
1999 equal to the difference between the outstanding principal Debt evidenced
by the Note on April 30, 1999 (inclusive of any Advance made upon such date
pursuant Section 2.1) and $8,070,000.00;
(ii) if the outstanding principal Debt evidenced by the Note on July
31, 1999 (inclusive of any Advance made upon such date pursuant Section 2.1)
is greater than $7,140,000.00, in an installment due and payable on August 1,
1999 equal to the difference between the outstanding principal Debt evidenced
by the Note on July 31, 1999 (inclusive of any Advance made upon such date
pursuant Section 2.1) and $7,140,000.00;
(iii) if the outstanding principal Debt evidenced by the Note on
October 31, 1999 (inclusive of any Advance made upon such date pursuant
Section 2.1) is greater than $6,210,000.00, in an installment due and payable
on November 1, 1999 equal to the difference between the outstanding principal
Debt evidenced by the Note on October 31, 1999 (inclusive of any Advance made
upon such date pursuant Section 2.1) and $6,210,000.00;
(iv) if the outstanding principal Debt evidenced by the Note on
January 31, 2000 (inclusive of any Advance made upon such date pursuant
Section 2.1) is greater than $5,280,000.00, in an installment due and payable
on February 1, 2000 equal to the difference between the outstanding principal
Debt evidenced by the Note on January 31, 2000 (inclusive of any Advance made
upon such date pursuant Section 2.1) and $5,280,000.00;
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(v) if the outstanding principal Debt evidenced by the Note on April
30, 2000 (inclusive of any Advance made upon such date pursuant Section 2.1)
is greater than $4,350,000.00, in an installment due and payable on May 1,
2000 equal to the difference between the outstanding principal Debt evidenced
by the Note on April 30, 2000 (inclusive of any Advance made upon such date
pursuant Section 2.1) and $4,350,000.00; and
(vi) in an installment due and payable on August 1, 2000 equal to all
of the outstanding principal Debt evidenced by the Note.
(b) Notwithstanding anything to the contrary above, if the Borrower
ever makes any repayment of any advance or portion thereof under the Bank of
America Tranche B other than an Allowed Bank of America Tranche B Repayment, the
Borrower shall simultaneously make an additional repayment of principal
evidenced by the Note equal to (i) the ratio of the principal amount outstanding
evidenced by the Note immediately prior to such repayment of any advance or
portion thereof under the Bank of America Tranche B to the amount of all
outstanding principal amount of loans under the Bank of America Tranche B
immediately prior to such repayment of any advance or portion thereof under the
Bank of America Tranche B times (ii) the amount of repayment of any advance or
portion thereof under the Bank of America Tranche B.
(c) Interest as it accrues on principal amounts evidenced by the
Note and calculated as provided herein and in the Note shall be due and payable
(a) monthly commencing on the first day of March, 1999, and continuing
thereafter on the first day of each succeeding calendar month while any amount
remains owing on the Note and (b) on the date the principal Debt evidenced by
the Note is paid in full, the interest payment in each instance to be that which
has been earned and remains unpaid.
(d) All payments required pursuant to this Agreement or the Note
shall be made in immediately available funds; shall be deemed received by the
Lender on the next Business Day following receipt if such receipt is after
2:00 p.m. on any Business Day; and shall be made at the offices of the Lender
at 370 Seventeenth Street, Suite 900, Denver, Colorado 80202, provided, however,
the Lender may, upon notice to the Borrower, designate a different place of
payment. With each payment of principal, interest or other amount made to the
Lender, the Borrower will on the same day notify the Lender Attn: Jeffrey B.
Goodman by facsimile (713) 627-6271 of the details of such payment.
(e) Certain of the Security Documents contain an assignment unto and
in favor of Bank of America as collateral agent for the Lender and Bank of
America of all oil, gas and other minerals produced and to be produced from or
attributable to the Mortgaged
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Properties together with all of the revenues and proceeds attributable to such
production, and such Security Documents further provide that all such revenues
and proceeds which may be so collected by Bank of America as collateral agent
for the Lender and Bank of America pursuant to such assignment shall be applied
to the payment of the Note and the satisfaction of all other Debt to be secured
by such Security Documents. The Lender and the Borrower expressly acknowledge
and agree that so long as no Event of Default shall have occurred and be
continuing, Bank of America as collateral agent for the Lender and Bank of
America shall be entitled only to payment on the Note as set forth above, and
the Borrower, to the extent of its rights apart from this Agreement, shall be
entitled to receive all proceeds of production directly from the relevant
purchasers or parties accounting for proceeds from the sale of production. In
connection with the rights of Bank of America as collateral agent for the Lender
or the Lender to all proceeds or production upon the occurrence and continuation
of an Event of Default, the Borrower hereby grants the Lender a power of
attorney, which power is coupled with an interest and is irrevocable, to
complete in all respects and deliver to the addressee the letter transfer orders
executed in connection with the Security Instruments upon the occurrence and
continuance of an Event of Default.
2.4 FACILITY FEE. As consideration for the Commitment, the Borrower shall
pay to the Lender a facility fee equal to $25,000.00 within two (2) Business
Days of receipt from the Lender of an invoice for such fee.
2.5 INTEREST RATES. Principal amounts outstanding under the Note shall bear
interest at the Facility Rate (but in no event greater than the Highest Lawful
Rate) per annum, calculated on the basis of a year consisting of a three hundred
sixty day (360) year and twelve (12) 30-day months as provided by Article
5069-1H.003 Vernon's TEXAS CIVIL STATUTES, as amended. Should default occur in
the payment of the Note and collection proceedings be instituted, all past due
interest and principal under the Note shall bear interest at the lesser of the
Highest Lawful Rate or the Default Rate per annum, calculated on the basis of a
year consisting of a three hundred sixty day (360) year and twelve (12) 30-day
months as provided by Article 5069-1H.003 Vernon's TEXAS CIVIL STATUTES, as
amended and if no Highest Lawful Rate exists, all past due interest and
principal under the Note shall bear interest at the Default Rate, calculated on
the basis of a year consisting of a three hundred sixty day (360) year and
twelve (12) 30-day months as provided by Article 5069-1H.003 Vernon's TEXAS
CIVIL STATUTES, as amended.
2.6 OVERRIDING ROYALTY INTERESTS. (a) As consideration for the Commitment
by the Lender and in addition to interest accruing on principal evidenced by the
Note, the Borrower agrees to convey to the Lender, as an additional charge, an
overriding royalty interest in the Oil and Gas Properties owned by the Borrower
in each Override Well. For each Override Well such conveyance of such overriding
royalty interests (i) shall equal (x) four hundred ninety three one thousandths
of one percent (0.493%) times (y) the Net Revenue Interest that the Borrower
owns in such Override Well on the date such Override
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Well was spudded, (ii) shall be effective as of the first day of the calendar
month such Override Well was completed, (iii) shall be substantially in the form
of Exhibit V attached hereto and (iv) shall be executed and delivered by the
Borrower to the Lender promptly after the completion of such Override Well.
(b) After March 15, 2006 and on or before April 1, 2006 the Borrower
has the option to purchase all of the Overriding Royalty Interests from the
Lender effective as of January 1, 2006 at a price equal to the present worth,
discounted at the rate of ten percent (10%) per annum of Override Future
Revenues attributable to the Overriding Royalty Interests in all of the Override
Wells. The basis for such determination shall be the reserve report dated
effective January 1, 2006 submitted to the Lender by the Borrower pursuant to
Section 5.5.
(c) Notwithstanding anything to the contrary in Subsections 2.6(a)
or (b), upon the Lender's receipt of proceeds from the Overriding Royalty
Interests in the Threshold Override Wells which, when aggregated with all
amounts received by the Lender as interest (including, without limitation, the
facility fee received pursuant to Section 2.4 and interest on past due principal
or interest) on the Advances made pursuant to Section 2.1 and other Loans made
pursuant to Section 2.8 equals the Threshold Amount, the Borrower has the right
at any time within ninety (90) days from the date the Threshold Amount is
reached to purchase all of the Overriding Royalty Interests in all of the
Override Wells from the Lender in an amount equal to the present worth,
discounted at a rate of ten percent (10%) per annum, of Override Future Revenues
attributable to all of the Overriding Royalty Interests in all of the Override
Wells as of the date the Threshold Amount is reached. The basis for such
determination shall be the most recent reserve report submitted to the Lender by
the Borrower pursuant to Section 5.5, adjusted for cumulative production since
the effective date of such reserve report. If either the Borrower or the Lender
in good faith determines that the most recent reserve report does not accurately
reflect the value of the Override Wells, then the Borrower shall obtain from the
independent firm of petroleum engineers who prepared the Borrower's most recent
reserve report or another firm of independent petroleum engineers acceptable to
the Lender, an updated reserve report effective through the date the Threshold
Amount is reached. If the Borrower purchases all of the Overriding Royalty
Interests from the Lender pursuant to this Subsection 2.6(c), the Borrower will
no longer be obligated to make any conveyance to the Lender pursuant to
Subsection 2.6(a).
(d) The Borrower shall pay, or reimburse the Lender for, all cost
and expense of the preparation, execution, delivery and recording of any
conveyance of Overriding Royalty Interest, whether from the Borrower to the
Lender or the Lender to the Borrower.
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2.7 GENERAL PROVISIONS RELATING TO INTEREST. It is the intention of the
parties hereto to comply strictly with the applicable usury Laws as in effect
from time to time; and in this connection, there shall never be taken, reserved,
contracted for, collected, charged or received on any Loan or any other
Obligation interest in excess of that which would accrue at the Highest Lawful
Rate. For purposes of Articles 5069-1D and 5069-1H, Vernon's TEXAS CIVIL
STATUTES, as amended, the Borrower agrees that the Highest Lawful Rate shall be
the "weekly rate ceiling" as defined in such article, provided that the Lender
may also rely, to the extent permitted by applicable Laws, on alternative
maximum rates of interest under such other applicable Laws, if greater.
Notwithstanding anything herein or in the Note or the other Loan
Documents to the contrary, if during any Limitation Period the calculation of
interest at the rate otherwise due to the Lender would result in interest in
excess of that which would accrue at the Highest Lawful Rate, then during such
Limitation Period, the interest rate to be charged on the Obligations shall be
the Highest Lawful Rate, and the requirement of the Borrower for the payment of
other amounts, if any, constituting interest, shall be suspended only to the
extent that such fees are, when added to interest accruing on the Note and other
Obligations, if any, in excess of the Highest Lawful Rate. During any period of
time following a Limitation Period, to the extent permitted by Laws applicable
to the Lender, the interest rate to be charged on the Obligations shall remain
at the Highest Lawful Rate until such time as there has been paid to the Lender:
(a) the amount of interest in excess of the amount accruing at the Highest
Lawful Rate that the Lender would have received during the Limitation Period if
the otherwise applicable rate had been in effect at all times and (b) all
interest and fees otherwise payable to the Lender hereunder as if the otherwise
applicable rate had been in effect at all times during such Limitation Period.
If under any circumstances the aggregate amount paid on the Obligations
includes amounts that are by Law deemed to be interest which exceed the Highest
Lawful Rate (the "EXCESS INTEREST"), the Borrower stipulates that such payment
and collection will have been and will be deemed to have been, to the fullest
extent permitted by applicable Laws, the result of mathematical error on the
part of the Borrower and the Lender, and the Lender shall promptly credit the
amount of such excess interest on the principal amount of the outstanding
Obligations, or if the principal amount of the Obligations shall have been paid
in full, refund the excess interest to the Borrower. In the event that the
maturity of the Note is accelerated by reason of an election of the Lender
resulting from any Event of Default or by reason of operation of Subsection
7.3(a), or in the event of any prepayment, then such consideration that
constitutes interest under Laws applicable to the Lender may never exceed the
Highest Lawful Rate, and excess interest, if any, provided for in the Note, this
Agreement or otherwise shall be cancelled automatically by the Lender as of the
date of such acceleration or prepayment and, if theretofore paid, shall be
credited by the Lender on
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the principal amount of the Obligations, or if the principal amount of the
Obligations shall have been paid in full, refunded by the Lender to the
Borrower.
All sums paid, or agreed to be paid, to the Lender for the use,
forbearance, and detention of the proceeds of the Loans shall, to the extent
permitted by applicable Law, be amortized, prorated, allocated, and spread
throughout the full term of the Obligations until paid in full so that the
actual rate of interest is uniform, but does not exceed the Highest Lawful Rate,
throughout the full term hereof.
2.8 LOANS TO SATISFY OBLIGATIONS. The Lender may, but shall not be
obligated to, make Loans and apply proceeds thereof to the satisfaction of any
warranty, representation, covenant or other Obligation of the Borrower contained
in this Agreement or the other Loan Documents and which are necessary, in the
good faith opinion of the Lender, to enforce its Rights, protect or preserve the
Collateral or the Liens thereon in favor of the Lender and the priorities
thereof, or avoid a Material Adverse Effect, and contemporaneously with so
doing, the Lender shall furnish the Borrower written notice as to the amount and
date of any such Loan. The Lender shall not advance funds pursuant to this
Section without notifying the Borrower of the warranty, representation, covenant
or other Obligation to be satisfied by such proposed advance of funds and shall
give the Borrower five (5) Business Days from the date of such notice to satisfy
such warranty, representation, covenant or other Obligation. Any funds so
advanced and applied shall be evidenced by the Note, shall be payable on demand
and shall bear interest at the Default Rate from the time of the making of such
Loan until the time of repayment.
2.9 VOLUNTARY PREPAYMENT. The Borrower shall have the right and option to
prepay, at any time without premium or penalty, all or any part of the balance
outstanding on the Note. Any such prepayments of Debt evidenced by the Note
shall be applied first to the payment of accrued and unpaid interest thereon and
then to the reduction of principal.
2.10 AMENDMENT TO EXISTING CREDIT AGREEMENT. The Borrower and the Lender
hereby amend the Existing Credit Agreement to provide that a Phantom Override,
as defined in the Existing Credit Agreement, shall be payable to the Lender by
the Borrower only on Override Wells, as defined in the Existing Credit
Agreement, which were spudded after February 23, 1998 and before the date of
this Agreement. The Borrower shall remain responsible for paying the Lender all
additional charges set forth in Section 2.5 of the Existing Credit Agreement
attributable to such Override Wells, as defined in the Existing Credit
Agreement, which were spudded after February 23, 1998 and before the date of
this Agreement.
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ARTICLE 3
CONDITIONS PRECEDENT
3.1 CONDITIONS OF LENDER. The execution and delivery of this Agreement by
the Lender and the making of the Advance to or for the benefit of the Borrower
as set forth in Subsection 2.1(a) is subject to the fulfillment of the
following conditions precedent, with all documents to be delivered to the Lender
to be in form and substance satisfactory to the Lender:
(a) The Lender shall have received the following documents,
appropriately executed and acknowledged and in multiple counterparts as
requested by the Lender:
(1) This Agreement and the Note executed by the Borrower;
(2) Certificates of the appropriate Tribunals of the State of
Delaware, dated reasonably near the Closing Date, to the effect that
attached thereto are the articles of incorporation of the Borrower and
all amendments thereto, and that it is duly incorporated and in good
standing with respect to the payment of all franchise or similar Taxes;
(3) A copy of the bylaws of the Borrower and all amendments thereto,
accompanied by a certificate issued by its secretary or assistant
secretary that such copies are correct and complete;
(4) Certificates of the appropriate Tribunals of the States where the
Prospects are located, dated reasonably near the Closing Date, to the
effect that it is duly qualified to transact business in such
jurisdictions and is in good standing with respect to the payment of
franchise and similar Taxes;
(5) Certificate of incumbency and signatures of all officers of the
Borrower who will be authorized to execute the Loan Documents on its
behalf, executed by the president or vice president and the secretary
or an assistant secretary;
(6) A copy of the corporate resolutions of the Borrower approving the
Loan Documents and authorizing the transactions
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contemplated therein, duly adopted by its board of directors and
accompanied by a certificate of the secretary or an assistant
secretary that such copy is a true and correct copy of resolutions
duly adopted by written consent or at a meeting of the board of
directors, that such resolutions constitute all the resolutions
adopted with respect to such transactions, and that such resolutions
have not been amended, modified or revoked in any respect, and are in
full force and effect as of the Closing Date;
(7) The following documents creating, evidencing and perfecting Liens
to secure the Obligations:
(i) First Amended and Restated Mortgage, Deed of Trust,
Assignment, Security Agreement, Financing Statement and Fixture
Filing from the Borrower and Frontier Acquisition Corporation in
favor of Bank of America as collateral agent for Bank of America
and the Lender encumbering those Oil and Gas Properties of the
Borrower and Frontier Acquisition currently encumbered in favor
of Bank of America;
(ii) financing statement amendments associated with the
instrument described in (i) above;
(iii) Mortgage, Deed of Trust, Assignment, Security
Agreement, Financing Statement and Fixture Filing from Borrower
and Frontier Acquisition Corporation in favor of Bank of America
as collateral agent for Bank of America and the Lender and
encumbering those Prospects set forth on Exhibit X attached
hereto;
(iv) financing statements associated with the instrument
described in (iii) above;
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(v) First Amendment to Security Agreement between the
Borrower and Bank of America as collateral agent for Bank of
America and the Lender;
(vi) financing statement amendments associated with (v)
above;
(vii) First Amendment to Security Agreement between Frontier
Acquisition Corporation and Bank of America as collateral agent
for Bank of America and the Lender; and
(viii) financing statement amendments associated with (vii)
above].
(8) The Intercreditor Agreement executed by all of the parties
thereto;
(9) The opinion of legal counsel to the Borrower, which opinion shall
be accompanied by such supporting documentation as the Lender or its
legal counsel may reasonably require; and
(10) Such other agreements, documents, instruments, opinions,
certificates, waivers, consents, and evidence as the Lender may
reasonably request in compliance with or to accomplish the terms and
provisions of any of the Loan Documents;
(b) The representations and warranties contained in Article 4 shall
be true and correct in all material respects on the date of execution of this
Agreement;
(c) No Event of Default or Unmatured Event of Default shall have
occurred and be continuing;
(d) The Lender shall have approved in all respects, at its
discretion, the Mortgaged Properties existing as of the date of this
Agreement, including, without limitation, title to and the environmental
status of such Mortgaged Properties;
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(e) The Borrower shall have executed and delivered the letter
agreement with Duke Energy Field Services, Inc. relating to the gathering,
processing, marketing and transporting of hydrocarbons for certain of the
Prospects, a copy of which is attached hereto as Exhibit VI;
(f) The Prospects are free and clear of all sales contracts,
preferential purchase rights, rights of first refusal, rights to match or any
other restrictions upon any Right of the Borrower to gather, process, market
and transport hydrocarbons produced therefrom, except as set forth on Exhibit
VIII attached hereto; and
(g) All legal matters incident to the execution of this Agreement
shall be satisfactory to the firm of Henderson & Hammon, L.L.P., special
counsel for the Lender.
3.2 FURTHER CONDITIONS TO EACH ADVANCE PURSUANT TO SUBSECTION 2.1(b). The
obligation of the Lender to make any Advance pursuant to Subsection 2.1(b) is
subject to the fulfillment of the following further conditions precedent:
(a) The representations and warranties contained in Article 4 shall
be true and correct in all material respects as of the date of Advance;
(b) No Event of Default or Unmatured Event of Default shall have
occurred and be continuing or will have occurred at the completion of making
the Advance;
(c) No Material Adverse Effect shall have occurred since the Closing
Date;
(d) The Lender shall have received a Borrowing Request;
(e) The Lender shall have received with the Borrowing Request a list
in reasonable detail of the Prospect Development Costs to be paid with the
proceeds of such Advance and be accompanied by evidence of such Prospect
Development Costs, as is requested by the Lender; and
(f) All legal matters incident to the consummation of such Loan shall
be satisfactory to the then special counsel for the Lender.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES
To induce the Lender to enter into this Agreement and to make the Loans
hereunder, the Borrower represents and warrants to the Lender (which
representations and warranties shall survive the delivery of the Note and the
making of the Loans) that:
4.1 EXISTENCE AND GOOD STANDING. The Borrower is a corporation, duly
organized, legally existing and in good standing under the Laws of the State of
Delaware and is duly qualified and in good standing as a foreign corporation in
all jurisdictions where any Prospect is located.
4.2 DUE AUTHORIZATION. The execution and delivery by the Borrower of this
Agreement and the borrowings hereunder, the execution and delivery by the
Borrower of the Note and the other Loan Documents, the repayment of the Loans
and interest and fees provided in the Note and this Agreement and the
performance of all Obligations of the Borrower under this Agreement and the
other Loan Documents, are within the corporate power of the Borrower, have been
duly authorized by all necessary corporate action on behalf of the Borrower and
do not (a) require the consent of any Tribunal or other Person which has not
been obtained, (b) contravene or conflict with any provision of applicable Law
or the charter or bylaws of the Borrower, (c) contravene, conflict with or
result in a default under any indenture, instrument, contract or other agreement
to which the Borrower is a party or by which its Properties may be presently
bound or encumbered, or (d) result in or require the creation or imposition of
any Lien upon any of the Property of the Borrower, other than Permitted Liens.
4.3 VALID AND BINDING OBLIGATIONS. This Agreement and the other Loan
Documents constitute valid and binding obligations of the Borrower, enforceable
in accordance with their respective terms, except as limited by Debtor Relief
Laws.
4.4 SCOPE AND ACCURACY OF FINANCIAL STATEMENTS. The Financial Statements of
the Borrower as of September 30, 1998, including any schedules and notes
pertaining thereto, which have been delivered to the Lender have been prepared
in accordance with GAAP and fairly and accurately present the financial
condition and the results of the operations thereof in all material respects, as
of the dates and for the periods stated therein.
4.5 LIABILITIES AND LITIGATION. Except for (a) liabilities shown in the
Financial Statements of the Borrower as of September 30, 1998 and furnished to
the Lenders, (b) Debt governed by the Bank of America Credit Agreement and (c)
liabilities incurred in the ordinary course of business since the date of such
Financial Statements, the Borrower does
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not have any material liabilities of any nature, direct or contingent; and the
Borrower is not in default with respect to any such material liabilities or any
material agreements by which it is bound.
There is no judgment against the Borrower, nor, except as set forth on
Exhibit IX attached hereto, is there any Litigation or other action of any
nature pending before any Tribunal or, to the knowledge of the Borrower,
threatened against or affecting the Borrower or its Property.
4.6 TITLE TO ASSETS. The Borrower has indefeasible title to all of its
Property, free and clear of all Liens, except for Permitted Liens. All of the
Borrower Prospects are free and clear of all sales contracts, preferential
purchase rights, rights of first refusal, rights to market or any other
restrictions upon any Right of Borrower to gather, process, market or transport
hydrocarbons produced therefrom, except as set forth on Exhibit VIII attached
hereto.
4.7 AUTHORIZATIONS AND CONSENTS. Except for certain oil and gas leases
which contain limitations on assignability of such oil and gas lease or portion
thereof and for which consents to the Security Documents are being obtained, no
authorization, consent, approval, exemption, franchise, permit or license of, or
filing (except for filings required to perfect and maintain perfection of the
Liens created by the Security Documents) with, any Tribunal or any third Person
is required to authorize, or is otherwise required in connection with, the valid
execution, delivery and performance by the Borrower of this Agreement, the other
Loan Documents or any other agreement contemplated hereby or the repayment by
the Borrower of the Obligations.
4.8 COMPLIANCE WITH LAWS. Neither the business nor any of the activities of
the Borrower as presently conducted violates any applicable Law, the result of
which violation would have a Material Adverse Effect. The Borrower possesses all
licenses, approvals, registrations, permits and other authorizations necessary
to enable it to carry on its businesses in all material respects as now
conducted. All such licenses, approvals, registrations, permits and other
authorizations are in full force and effect. Furthermore, the Borrower does not
have any reason to believe that it will be unable to obtain the renewal of any
such licenses, approvals, registrations, permits and other authorizations in due
course.
4.9 PROPER FILING OF TAX RETURNS AND PAYMENT OF TAXES Due. The Borrower has
duly and properly filed all Tax returns which are required to be filed and has
paid all Taxes due pursuant to such returns or pursuant to any assessment
received, except such Taxes, if any, as are being Contested in Good Faith. The
charges and reserves on the Borrower's books with respect to any Taxes are
adequate, and the Borrower does not owe any deficiency or additional assessment
in a material amount in connection with Taxes.
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4.10 ERISA COMPLIANCE. The Borrower does not currently contribute to, or has
any obligation to contribute to, and has not at any time contributed to, or had
an obligation to contribute to, any Multi-employer Plan. The Borrower will not,
during the term of this Agreement, assume an obligation, or acquire any entity
or the assets of any entity which has at any time had an obligation, to
contribute to any Multi-employer Plan. Since the effective date of ERISA, no
Reportable Event or Prohibited Transaction has occurred with respect to any Plan
of the Borrower. Each Plan established or maintained by the Borrower meets the
minimum funding standards of Section 302 of ERISA and otherwise is in compliance
with all applicable provisions of ERISA. The Borrower has filed all reports
required by ERISA and required to be filed with respect to each Plan. The
Borrower does not have any knowledge of any event that could result in any
material liability of the Borrower to the PBGC. The Borrower has met all
requirements with respect to funding the Plans imposed by ERISA or the PBGC.
Since the effective date of Title IV of ERISA, there have not been any nor are
there now existing any events or conditions that would permit any Plan to be
terminated under circumstances that would cause the lien provided under Section
4068 of ERISA to attach to the assets of the Borrower. The value of the Plans'
benefits guaranteed under Title IV of ERISA on the date hereof does not exceed
the value of such Plans' assets allocable to such benefits as of the date of
this Agreement and shall not be permitted to do so hereafter.
4.11 INVESTMENT COMPANY ACT COMPLIANCE. The Borrower is not an "investment
company" or directly or indirectly controlled by or acting on behalf of any
Person which is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
4.12 PUBLIC UTILITY HOLDING COMPANY ACT COMPLIANCE. The Borrower is not
subject to the provisions of the Public Utility Holding Company Act of 1935, as
amended.
4.13 LIEN PRIORITY. The Liens created in favor of the Lender and Bank of
America under the Security Documents constitute and shall remain first priority
Liens to secure the Obligations, subject only to Permitted Liens.
4.14 USE OF PROCEEDS. All proceeds of Advances made pursuant to this
Agreement shall be used generally as set forth in Section 2.1 of this Agreement
and specifically as represented by the Borrower in each Borrowing Request.
4.15 FULL DISCLOSURE. All of the Loan Documents and all written statements
furnished by the Borrower in connection with the consummation of the
transactions contemplated by this Agreement, when taken together, do not contain
any untrue statement
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of a material fact or omit to state a material fact necessary to make the
statements contained herein or therein not misleading as of the date made or
deemed made.
4.16 PLACES OF BUSINESS. The chief executive office and principal place of
business of the Borrower is 500 N. Water Street, Suite 1100, Corpus Christi,
Texas 78471.
4.17 SUBSIDIARIES. The Borrower owns all of the issued and outstanding
capital stock of Frontier Acquisition Corporation, an Oklahoma corporation,
Frontier, Inc., an Oklahoma corporation, and Frontier Exploration & Production
Corporation, an Oklahoma corporation. The Borrower is in the process of
statutorily merging Frontier, Inc. and Frontier Exploration and Production
Corporation into the Borrower. Frontier Acquisition Corporation owns all of the
issued and outstanding capital stock of Petroleum Acquisition Corporation, a
Delaware corporation. The Borrower has no other Subsidiaries.
ARTICLE 5
AFFIRMATIVE COVENANTS
So long as any Debt evidenced by the Note remains unpaid or the Lender
remains obligated to make Advances, and in absence of written consent of the
Lender to the contrary:
5.1 MAINTENANCE AND ACCESS TO RECORDS. The Borrower will keep adequate
records, in accordance with GAAP or other established industry practices, of all
of its transactions so that at any time, and from time to time, its true and
complete financial condition may be readily determined and, at the Lender's
reasonable request, make all such records available for the Lender's inspection
and permit the Lender to make and take away copies thereof.
5.2 QUARTERLY FINANCIAL STATEMENTS. The Borrower will deliver to the
Lender, as soon as available but in no event later than sixty (60) days after
the end of each of the first three fiscal quarters of the Borrower, the
unaudited Financial Statements of the Borrower and all of its Subsidiaries
reflecting the financial condition and results of operations of the Borrower and
all of its Subsidiaries on a consolidated and consolidating basis as at the end
of such period and from the beginning of such fiscal year to the end of such
period, as applicable. Such Financial Statements shall be certified by the chief
financial officer of the Borrower as having been prepared in accordance with
GAAP and presenting the financial condition and the results of the operations of
the Borrower and all of its Subsidiaries on a consolidated and consolidating
basis subject to changes resulting from year-end audit adjustments.
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5.3 ANNUAL FINANCIAL STATEMENTS. The Borrower will deliver to the Lender,
as soon as available but in no event later than one hundred five (105) days
after the close of each fiscal year of the Borrower, annual audited Financial
Statements of the Borrower and all of its Subsidiaries reflecting the financial
condition of the Borrower and all of its Subsidiaries on a consolidated and
consolidating basis, together with a report and opinion on such Financial
Statements issued by a nationally recognized firm of independent certified
public accountants or another firm of independent certified public accountants
satisfactory to the Lender.
5.4 COMPLIANCE CERTIFICATES. The Borrower will deliver to the Lender with
each Financial Statement delivered pursuant to Sections 5.2 or 5.3 a duly
executed Compliance Certificate.
5.5 RESERVE REPORT. The Borrower will deliver to the Lender promptly after
March 1 of each year, commencing March 1, 1999, and in any event prior to April
1, 1998 of each such year, (a) a report, in form and substance satisfactory to
the Lender, prepared by a nationally recognized firm of independent petroleum
engineers, which report shall set forth, as of January 1 of the appropriate
year, projections of future net income from hydrocarbons classified as "proved
producing", "proved shut-in", "proved behind pipe"and "proved undeveloped"
attributable to all of the Oil and Gas Properties of the Borrower and (b) such
other information concerning the Oil and Gas Properties of the Borrower as the
Lender may reasonably request, including, without limitation, engineering,
geological and performance data.
The Borrower will deliver to the Lender promptly after receipt thereof,
any other reserve report prepared for or on behalf of the Borrower by an
independent firm of independent petroleum engineers, setting forth projections
of future net income from hydrocarbons classified as "proved producing", "proved
shut-in", "proved behind pipe" and "proved undeveloped" attributable to any of
the Oil and Gas Properties of the Borrower.
5.6 PROSPECT REPORT. Commencing February 10, 1999, the Borrower will
deliver to the Lender promptly and in any event within ten (10) days after the
end of each calendar month, with respect to each of the Prospects a report, in
form and substance satisfactory to the Lender, prepared by the Borrower and
setting forth the activities of the Borrower with respect to the seismic
programs, seismic interpretation, land acquisition and exploration and
development for each of such Prospects during the previous month. Such report
shall be certified by the president of the Borrower as being true and correct in
all material respects.
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5.7 QUARTERLY MEETINGS. Commencing February 16, 1999, the Borrower will
meet with the Lender on the third Tuesday of each calendar quarter (or such
other date as is mutually agreeable) at a time and place mutually agreeable to
review with respect to each of the Prospects (a) the activities of the Borrower,
costs and timing of seismic programs, seismic interpretation, land acquisition
and exploration and development which has occurred since the last meeting, (b)
the plans of the Borrower, including, without limitation, a projected budget,
for the next fiscal quarter for seismic programs, seismic interpretation, land
acquisition and exploration and development and (c) such other matters at the
Lenders request.
5.8 PROSPECT INFORMATION. The Borrower will provide access to the Lender,
promptly upon the Lender's written request from time to time to such information
relating to any of the Prospects, including, without limitation, (a) all seismic
options, seismic permits, options to acquire Oil and Gas Properties, Oil and Gas
Properties and all other contracts relating to such Prospects, (b) detailed maps
of such Prospects, (c) title materials relating to such Prospects, (d) seismic
data and interpretations relating to such Prospects and (e) AFEs, drilling
reports, logs, side wall cores, well tests, formation tests or completion
reports relating to any oil and gas wells located on such Prospects. Promptly
upon the Lender's written request, the Borrower will furnish copies of any such
information to the extent that it is reasonable do so.
5.9 SALES AND PRODUCTION REPORTS. The Borrower will deliver to the Lender,
as soon as available and in any event within sixty (60) days after the end of
each calendar month, a report summarizing, as requested by the Lender, (a) the
gross volume of sales and actual production during such month from all of the
Oil and Gas Properties of the Borrower and current prices being received for
such production, (b) the related severance, gross production, occupation,
excise, sales, recording, ad valorem, gathering and other similar taxes, if any,
deducted from gross proceeds during such month and (c) leasehold operating
expenses and drilling expenditures attributable thereto and incurred during such
month.
5.10 ADDITIONAL LIENS. (a) Each calendar quarter the Borrower will execute
and deliver documentation in form and substance acceptable to the Lender, at its
reasonable discretion, granting a first priority Lien in favor of Bank of
America as collateral agent for the Lender and Bank of America against all Oil
and Gas Properties in any Prospect the Borrower intends to drill or otherwise
develop in the next four (4) calendar quarters (other than any such Oil and Gas
Properties the Lender notifies the Borrower that the Lender does not want a Lien
upon pursuant to a written notice).
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(b) Without in any manner limiting the obligation of the Borrower set
forth in Subsection 5.10(a), within five (5) Business Days of the written
request of the Lender, the Borrower will execute and deliver documentation, in
form and substance acceptable to the Lender at its reasonable discretion,
granting a first priority Lien in favor of the Lender and Bank of America
against any Oil and Gas Properties, other Property or Rights owned by the
Borrower in or relating to any Prospect to secure repayment of the Debt
evidenced by the Note.
5.11 STATEMENT OF MATERIAL ADVERSE EFFECT. The Borrower will deliver to the
Lender, promptly upon any officer of the Borrower having knowledge of any Event
of Default or event or condition (except for events or conditions as to the
economy of the United States as a whole or the oil and gas industry as a whole)
causing or likely to cause a Material Adverse Effect, a statement of the
president of the Borrower, setting forth the Event of Default or event or
condition causing or likely to cause a Material Adverse Effect and the steps
being taken with respect thereto.
5.12 TITLE DEFECTS. Other than Permitted Liens, the Borrower will clear any
title defects to the Oil and Gas Properties of the Borrower material in value,
in the sole reasonable opinion of the Lender, and, in the event any such title
defects are not cured in a timely manner, pay all related costs and fees
incurred by the Lender to do so.
5.13 ADDITIONAL INFORMATION. The Borrower will furnish to the Lender,
promptly upon the Lender's request from time to time, such additional financial
or other information concerning the assets, liabilities, operations and
transactions of the Borrower, as the Lender may reasonably request.
5.14 COMPLIANCE WITH LAWS AND PAYMENT OF TAXES. The Borrower will comply in
all material respects with all Laws and pay all Taxes, claims for labor,
supplies, rent and other obligations which, if unpaid, might become a Lien
against any of the its Oil and Gas Properties, except any of the foregoing being
Contested in Good Faith.
5.15 MAINTENANCE OF EXISTENCE AND GOOD STANDING. The Borrower will maintain
its corporate existence or qualification and good standing in its jurisdiction
of incorporation and in all jurisdictions where a Prospect is located.
5.16 FURTHER ASSURANCES. The Borrower will promptly cure any defects, errors
or omissions in the execution and delivery of the Loan Documents and, upon
notice, take such other action and immediately execute and deliver to the Lender
all such other and further instruments as may be reasonably required or desired
by the Lender from time to time in compliance with the covenants and agreements
made in this Agreement and the other Loan
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Documents, including, without limitation, taking such action as may be required
to cure or correct any defects in title to any Oil and Gas Property (other than
such defects in title which are Permitted Liens) and to create, perfect and
maintain Liens on the Collateral and all other Property intended as security for
the Obligations.
5.17 INITIAL EXPENSES OF THE LENDER. The Borrower will pay all reasonable
third party fees and expenses of the Lender incurred in connection with the
preparation and negotiation of the Loan Documents, the satisfaction of the
conditions precedent set forth in Article 3 and the consummation for the
transactions contemplated herein, including attorneys' fees.
5.18 SUBSEQUENT EXPENSES OF THE LENDER. Upon request, the Borrower will
promptly reimburse the Lender for all amounts reasonably expended, advanced or
incurred by the Lender in connection with the preparation of any assignments of,
renewals of and amendments to any of the Loan Documents. Upon request, the
Borrower will promptly reimburse the Lender for all amounts reasonably expended,
advanced or incurred by the Lender to collect the Note or to enforce the Rights
of the Lender under this Agreement or any of the other Loan Documents, all of
which amounts shall be deemed compensatory in nature and liquidated as to amount
upon notice to the Borrower by the Lender and which amounts will include, but
not be limited to, (i) all court costs, (ii) attorneys' fees, (iii) fees of
auditors and accountants, (iv) investigation expenses, (v) fees and expenses
incurred in connection with the Lender's participation as a member of the
creditors' committee in a case commenced under any Debtor Relief Laws, (vi) fees
and expenses incurred in connection with lifting the automatic stay prescribed
in 11 U.S.C. ss.362, and (vii) fees and expenses incurred in connection with any
action pursuant to 11 U.S.C. ss.1129 incurred by the Lender in connection with
the collection of any sums due under this Agreement or the other Loan Documents,
together with interest at the Default Rate, calculated on a per diem basis of a
year of 365 days, on each such amount from the date of notification to the
Borrower that the same was expended, advanced or incurred by the Lender until
the date it is repaid to the Lender, with the Obligations under this Section
surviving the non-assumption of this Agreement in a case commenced under any
Debtor Relief Laws and being binding upon the Borrower, any guarantor or a
trustee, receiver or liquidator of any such party appointed in any such case.
5.19 MAINTENANCE OF TANGIBLE PROPERTY. The Borrower will maintain, or to the
extent that the right of operating is vested in others, will exercise its best
efforts to require the operator to maintain, all of the its producing Oil and
Gas Properties in good repair and working order and make all necessary
replacements thereof and operate such Property in a good and workmanlike manner,
unless the failure to do so would not have a Material Adverse Effect.
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5.20 MAINTENANCE OF INSURANCE. The Borrower will maintain insurance with
respect to its Oil and Gas Properties and business against such liabilities,
casualties, risks and contingencies and in such amounts as are customarily
maintained in the industry, and furnish to the Lender, on the Closing Date and
annually thereafter, certificates evidencing such insurance.
5.21 RIGHT OF INSPECTION. The Borrower will permit any authorized
representative of the Lender at its sole risk and expense to visit and inspect
any Collateral and any other Property of the Borrower at such reasonable times
and as often as the Lender may request.
5.22 COMPLIANCE WITH ERISA. The Borrower will furnish to the Lender (a)
promptly after the filing thereof with the United States Secretary of Labor or
the PBGC, copies of each annual and other report with respect to each Plan or
any trust created thereunder and (b) immediately upon becoming aware of the
occurrence of any Reportable Event or Prohibited Transaction in connection with
any Plan or any trust created thereunder, a written notice specifying the nature
thereof, what action is being taken or proposed to be taken with respect
thereto, and, when known, any action taken by the Internal Revenue Service or
any other Tribunal with respect thereto. The Borrower will fund all current
service pension liabilities as they are incurred under the provisions of all
Plans from time to time in effect and timely file all reports required by ERISA
and required to be filed with respect to each Plan.
5.23 NOTICE. The Borrower will immediately notify the Lender of (a) the
receipt of any notice from, or the taking of any action by, the holder of any
promissory note or other evidence of Debt of the Borrower with respect to a
claimed default, together with a statement specifying the notice given or other
action taken by such holder and what action the Borrower is taking or proposes
to take with respect thereto; (b) any legal, judicial or regulatory proceedings
affecting the Borrower in which the amount involved is material and is not
covered by insurance or that would, if adversely determined, have a Material
Adverse Effect; (c) any dispute between the Borrower and any Tribunal or any
Person that would, if adversely determined, have a Material Adverse Effect; (d)
information that in any way relates to or affects the filing of any financing
statement or other security instrument for the purpose of perfecting or
continuing a Lien on the Collateral; (e) any event that materially and adversely
affects the Collateral or the Rights of the Lender with respect to such
Collateral; (f) the occurrence of any Event of Default; and (g) any event or
condition (except for events or conditions to the economy of the United States
as a whole or the oil and gas industry as a whole) which could reasonably be
expected to cause a Material Adverse Effect.
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5.24 HAZARDOUS SUBSTANCES INDEMNIFICATION. The Borrower indemnifies and
holds the Lender, its officers, employees, agents, shareholders and Affiliates
(each an "INDEMNIFIED PERSON") harmless from and against any and all claims,
losses, damages, liabilities, fines, penalties, charges, administrative and
judicial proceedings and orders, judgments, remedial actions, requirements and
enforcement actions of any kind, and all costs and expenses incurred in
connection therewith (including, without limitation, attorneys' fees and
expenses), arising directly or indirectly, in whole or in part, from (a) the
presence of any Hazardous Substances on, under or from its Oil and Gas
Properties, whether prior to or during the term hereof, (b) any activity carried
on or undertaken on or off its Oil and Gas Properties, whether prior to or
during the term hereof, and whether by the Borrower or any predecessor in title
or any employees, agents, contractors or subcontractors of the Borrower or any
predecessor in title, or any third persons at any time occupying or present on
its Oil and Gas Properties in connection with the handling, treatment, removal,
storage, decontamination, cleanup, transport or disposal of any Hazardous
Substances at any time located or present on or under its Oil and Gas
Properties, or (c) any residual contamination on or under its Oil and Gas
Properties or affecting any natural resources in, on or under its Oil and Gas
Properties, or any contamination of any of the property or natural resources
arising in connection with the generation, use, handling, storage, transport or
disposal of any Hazardous Substance by the Borrower or any employee, agent,
contractor or subcontractor of the Borrower irrespective of whether any of such
activities were or will be undertaken in accordance with applicable laws,
regulations, codes and ordinances. WITHOUT LIMITING ANY PROVISION OF THIS
AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS, IT IS THE EXPRESS INTENTION
OF THE PARTIES THAT EACH INDEMNIFIED PERSON SHALL BE INDEMNIFIED AND HELD
HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DEFICIENCIES,
JUDGMENTS AND REASONABLE EXPENSES ARISING OUT OF OR RESULTING FROM THE ORDINARY
NEGLIGENCE (WHETHER SOLE OR CONTRIBUTORY) OR STRICT LIABILITY OF SUCH
INDEMNIFIED PERSON. Notwithstanding anything to the contrary in this Agreement,
such indemnity shall survive repayment of the Debt evidenced by the Note.
ARTICLE 6
NEGATIVE COVENANTS
So long as any Debt evidenced by the Note remains unpaid or the Lender
remains obligated to make Advances, and in the absence of written consent of the
Lender to the contrary:
6.1 OTHER DEBT OF BORROWER. The Borrower will not incur, create, assume or
suffer to exist any Debt aggregating in excess of $500,000.00 except: (a) Loans
hereunder, (b)
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unsecured current accounts payable incurred in the ordinary course of business,
provided such accounts are paid within sixty (60) days of the due date or are
being Contested in Good Faith, or paid pursuant to other terms agreed to between
the Borrower and the account creditor, (c) Debt governed by the Bank of America
Credit Agreement, (d) Swaps permitted by the Bank of America Credit Agreement,
(e) other Debt that constitutes financing for the purchase by the Borrower of
Property, which Debt is not a general obligation of the Borrower and is secured
only by such purchased Property, or (f) the Aspect Debt.
6.2 GUARANTY OF PAYMENT OR PERFORMANCE. The Borrower will not guarantee any
contract or otherwise be or become liable in connection with any obligation of
any Person, except that the foregoing restriction shall not apply to
endorsements of instruments for collection in the ordinary course of business.
6.3 LOANS, ADVANCES OR INVESTMENTS. The Borrower will not make or agree to
make or allow to remain outstanding any Investment, including, without
limitation, any loans or advances or the purchase (for cash or securities) of
all or a substantial part of the Property or capital stock of any Person, except
(a) advances or extensions of credit in the form of accounts receivable incurred
in the ordinary course of business and upon terms common in the industry for
such accounts receivable or (b) Liquid Investments.
6.4 MORTGAGES OR PLEDGES OF ASSETS. The Borrower will not create, incur,
assume or permit to exist any Lien on any of its Property (now owned or
hereafter acquired), except (a) Permitted Liens or (b) Liens encumbering the
Property purchased and securing the financing described in clause (e) of Section
6.1.
6.5 CANCELLATION OF INSURANCE. The Borrower will not allow any insurance
policy required to be carried hereunder to be terminated or lapse or expire
without provision for adequate renewal or replacement thereof.
6.6 SALES OF PROPERTY. Other than sales of Oil and Gas Properties in order
to comply with the covenant of the Borrower set forth in Section 8.1.3 of the
Bank of America Credit Agreement, the Borrower will not sell, transfer or
otherwise dispose of, in one or any series of transactions, any of its Oil and
Gas Properties if such sale, transfer or disposition (a) transfers or disposes
of greater than an undivided ten percent (10%) of the undivided interest of the
Borrower in any Oil and Gas Property, (b) exceeds $250,000.00 per transaction or
(c) exceeds $1,000,000.00 in the aggregate for any twelve month period. Nothing
in this Section shall be construed that the Lender is obligated to release its
Liens on any of the Oil and Gas Properties sold unless all proceeds from such
sale are used to repay the Debt evidenced by the Note and the outstanding
advances under the Bank of America Tranche B and interest thereon on a pro rata
basis calculated on the amount of outstanding
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principal Debt evidenced by the Note and the outstanding advances under the Bank
of America Tranche B at the time of such sale.
6.7 SALE AND LEASEBACK. The Borrower will not enter into any arrangement
with any Person providing for the leasing by the Borrower of Property which has
been or is to be sold or transferred by the Borrower to such Person or to any
other Person to whom funds have been or are to be advanced by such Person on the
security of such Property or rental obligations of the Borrower.
6.8 DIVIDENDS AND DISTRIBUTIONS. The Borrower will not declare, pay or
make, whether in cash or other Property, any dividend or distribution on, or
purchase, redeem or otherwise acquire for value, any share of any class of its
capital stock.
6.9 CHANGES IN CORPORATE STRUCTURE. The Borrower will not enter into any
transaction of consolidation, merger or amalgamation unless the Borrower is the
surviving entity and the Borrower does not assume any Debt pursuant to such
consolidation, merger or amalgamation; liquidate, wind up or dissolve (or suffer
any liquidation or dissolution); or convey, sell, lease, assign, transfer or
otherwise dispose of all or substantially all of its Property or business.
6.10 PAYMENT OF ACCOUNTS PAYABLE. The Borrower will not allow any account
payable to be in excess of sixty (60) days past due, except such as are being
Contested in Good Faith.
6.11 TRANSACTIONS WITH AFFILIATES. The Borrower will not directly or
indirectly, enter into any transaction (including the sale, lease or exchange of
Property or the rendering of service) with any of its Affiliates, other than
upon fair and reasonable terms no less favorable than could be obtained in an
arm's length transaction with a Person which was not an Affiliate.
6.12 LIMITATION ON NEGATIVE PLEDGE CLAUSES. Except as provided in the Bank
of America Credit Agreement, the Borrower will not enter into any agreement with
any Person other than the Lender which prohibits or limits the ability of the
Borrower to create, incur, assume or suffer to exist any Lien upon any of its
Property, whether now owned or hereafter acquired. Nothing in this Section 6.12
shall prohibit the Borrower from obtaining any oil and gas lease which contains
limitations on the assignability of such oil and gas lease or a portion thereof.
6.13 NATURE OF BUSINESS. The Borrower will not make any material change in
the character of its business as carried on at the date hereof.
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6.14 NO SUBSIDIARIES. The Borrower will not own any Subsidiaries other than
those set forth in Section 4.17.
6.15 ASPECT DEBT. The Borrower will not use proceeds from any Advance to
repay all or any portion of the Aspect Debt.
6.16 AMENDMENT TO BANK OF AMERICA CREDIT. The Borrower will not amend or
consent to any amendment of any of the provisions of the Bank of America Credit
Agreement or any definition of any term used therein, or amend any of the other
covenants or provisions of the Bank of America Credit Agreement or the Loan
Documents, as defined in the Bank of America Credit Agreement, as applicable, or
enter into any other agreement (or amendment thereto) with Bank of America or
its successor, if the effect thereof is to impose any further affirmative or
negative covenants or events of default on the Borrower or any of its
Subsidiaries or to make more restrictive or burdensome with respect to the
Borrower or any of its Subsidiaries any affirmative or negative covenant or
event of default contained therein. The covenant of the Borrower set forth above
shall not prohibit any waiver or amendment of any term or provision of the Bank
of America Credit Agreement or the Loan Documents, as defined in the Bank of
America Credit Agreement, if the effect of such waiver or amendment is to make
any such term or provision less restrictive or burdensome on the Borrower or any
of its Subsidiaries or to relieve the Borrower or any of its Subsidiaries from
the burden of compliance with such term or provision or to waive the failure to
comply with such term or provision.
The Borrower will not amend or consent to any amendment of the
provisions of the Bank of America Credit Agreement or enter into any other
agreement with Bank of America or its successor that would have the effect of
(i) increasing the rate of or changing the due dates of payment of interest
payable with respect to any liability of the Borrower or any of its Subsidiaries
under any Loan Document, as defined in the Bank of America Credit Agreement, or
the amount of any fees payable under any Loan Document, as defined in the Bank
of America Credit Agreement, or require the Borrower or any of its Subsidiaries
to pay any additional fees under or with respect to any Loan Document, as
defined in the Bank of America Credit Agreement, (other than ordinary and
customary fees in connection with giving effect to amendments and waivers
otherwise permitted hereof), (ii) shorten the maturity of or require the earlier
payment of any principal of any loan made pursuant to the Bank of America
Tranche A or the Bank of America Tranche B, (iii) impose any additional
prepayment obligations on the Borrower with respect to any loan made pursuant to
the Bank of America Tranche A or the Bank of America Tranche B or (iv) cause the
sum (without duplication) of the aggregate principal amount of all loans made
pursuant to the Bank of America Tranche B to exceed $5,000,000.00.
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ARTICLE 7
EVENTS OF DEFAULT
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall
constitute an Event of Default:
(a) The Borrower shall fail to pay when due any installment of
principal or interest on the Note or any charge payable under this Agreement;
(b) Default shall occur in the due observance or performance of any
affirmative covenant required in this Agreement, the Note, any of the
Security Documents or any of the other Loan Documents, and such default shall
remain unremedied for in excess of twenty (20) days after the earlier of (i)
notice given by the Lender, or (ii) actual knowledge thereof by the Borrower;
(c) Default shall occur in the due observance or performance of any
negative covenant required in this Agreement, the Note, any of the Security
Documents or any of the other Loan Documents;
(d) The occurrence of an Event of Default as defined in the Bank of
America Agreement;
(e) Any Financial Statement, representation, warranty or certificate
made or furnished by or on behalf of the Borrower to the Lender in connection
with this Agreement or other Loan Document, or as an inducement to the Lender
to enter into this Agreement, or in any instrument furnished in compliance
with or in reference to this Agreement or any other Loan Document, shall be
materially false, incorrect, or incomplete at or as of the time made;
(f) Default shall be made by the Borrower (as principal or guarantor
or other surety) in payment or performance of any bond, debenture, note or
other evidence of Debt for borrowed money having an outstanding principal
amount in excess of $50,000.00, or under any credit agreement, loan
agreement, indenture, promissory note or similar agreement or instrument
executed in connection with any of the foregoing, and such default shall
remain unremedied for in excess of the period of grace, if any, with respect
thereto, with the effect of accelerating the maturity of any such Debt or
establishing a right to accelerate the maturity of such Debt;
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(g) The Borrower shall file a petition seeking relief for itself
under Debtor Relief Laws, or file an answer consenting to, admitting the
material allegations of or otherwise not controverting, or fail timely to
controvert a petition filed against it seeking relief under Debtor Relief
Laws;
(h) An order for relief shall be entered against the Borrower under
any Debtor Relief Laws, which order is not stayed, or upon the entry of an
order, judgment or decree by operation of Law or by a court of competent
jurisdiction which is not stayed, ordering relief against the Borrower under,
or approving as properly filed, a petition seeking relief against any such
Person under the provisions of any Debtor Relief Laws, or appointing a
receiver, liquidator, assignee, sequestrator, trustee or custodian of the
Borrower or of any substantial part of its Property, or ordering the
reorganization, winding up or liquidation of any the Borrower's affairs, or
upon the expiration of sixty (60) days after the filing of any involuntary
petition against the Borrower seeking any of the relief specified in the
preceding Subsection or this Subsection without the petition being dismissed
prior to that time;
(i) The Borrower shall (i) make a general assignment for the benefit
of its creditors, (ii) consent to the appointment of or taking possession by
a receiver, liquidator, assignee, sequestrator, trustee or custodian of the
Borrower or any substantial part of its Property, (iii) admit insolvency or
inability to pay its debts generally as such debts become due, (iv) fail
generally to pay its debts as such debts become due, or (v) take any action
(or an action shall be taken by its directors or majority stockholders)
looking to the dissolution or liquidation of the Borrower;
(j) Final judgment for the payment of money in excess of $50,000.00
shall be rendered against the Borrower and such judgment shall remain
undischarged for a period of thirty (30) days during which execution shall
not be effectively stayed;
(k) The Security Documents shall for any reason, except to the extent
permitted by the terms thereof, cease to be in full force and effect and
valid, binding and enforceable in accordance with their terms, cease to
create a valid Lien of the priority required thereby on any of the Collateral
purported to be covered thereby, or, upon perfection, cease to be a perfected
Lien on any of the Collateral purported to be covered thereby, or the
Borrower or any other Person who may have granted or purported to grant such
Lien shall so state in writing;
44
<PAGE>
(l) A judgment creditor of any Person who is the owner of any of the
Collateral shall obtain possession of any of the Collateral by any means,
including, without limitation, levy, attachment or self help;
(m) The validity or enforceability of any of the Loan Documents shall
be contested by the Borrower or the Borrower shall deny that it has any or
further liability or Obligation under any of the Loan Documents or allege
that any of the Loan Documents shall be construed or enforced other than in
accordance with their terms;
(n) The Borrower shall have concealed, removed, or permitted to be
concealed or removed, any part of its Property with the intent to hinder,
delay or defraud its creditors or any of them, or made or suffered a transfer
of any of its Property which is fraudulent under any Debtor Relief Laws
(except for such transfers in favor of the Lender); or shall have made any
transfer (other than in the ordinary course of business) of its Property to
or for the benefit of a creditor at a time when other creditors similarly
situated have not been paid;
(o) Either of Alex M. Cranberg or Michael E. Johnson shall cease to
be directors of the Borrower unless replaced by a director satisfactory to
the Lender;
(p) Aspect Resources, LLC, a Colorado limited liability company,
shall own less than eighteen percent (18%) of all of the shares of all
classes of capital stock of the Borrower entitled to vote generally in the
election of directors of the Borrower;
(q) Esenjay Petroleum Corporation, a Texas corporation, shall own
less than twenty-two percent (22%) of all of the shares of all classes of
capital stock of the Borrower entitled to vote generally in the election of
directors of the Borrower; or
(r) (i) Any Unrelated Person or any Unrelated Persons acting together
which would constitute a Group, together with any Affiliates thereof, shall
acquire direct or indirect beneficial ownership (as defined in Rule 13d-3 of
the Exchange Act) of twenty-five percent (25%) or more of the total voting
power of all classes of capital stock of the borrower entitled to vote
generally in the election of directors of the Borrower or (ii) the election
of a sufficient number of nominees to the board of directors of the Borrower
that were proposed by any Unrelated Person or Group (other than such nominees
45
<PAGE>
proposed by the board of directors acting in that capacity) such that such
nominees, when added to any existing directors remaining on the board of
directors after such election who may be Affiliates of such Unrelated Person
or Group, shall constitute a majority of such board of directors.
7.2 RIGHTS UPON OCCURRENCE OF UNMATURED EVENT OF DEFAULT. At any time that
there exists an Unmatured Event of Default, any obligation of the Lender
hereunder to make Advances to or for the benefit of the Borrower shall be
suspended unless and until the Lender shall reinstate the same in writing, the
Unmatured Event of Default shall have been waived by the Lender or the relevant
Unmatured Event of Default shall have been remedied prior to the ripening into
an Event of Default.
7.3 RIGHTS UPON OCCURRENCE OF AN EVENT OF DEFAULT.
(a) Upon the occurrence of any Event of Default specified in
Subsections (g), (h), (i) or (n) of Section 7.1, immediately and without
notice, (i) all Obligations evidenced by the Note shall immediately become
due and payable without presentment, demand, protest, notice of protest or
dishonor, notice of intent to accelerate, notice of acceleration or other
notice of any kind, all of which are expressly waived by the Borrower and
(ii) all obligations of the Lender, if any, under this Agreement shall
immediately and automatically cease and terminate unless and until the Lender
shall reinstate any such obligation in writing.
(b) Upon the occurrence and at any time during the continuance of any
other Event of Default, (i) all obligations of the Lender, if any, under this
Agreement shall immediately and automatically cease and terminate unless and
until the Lender shall reinstate any such obligation in writing and (ii) the
Lender may by written notice to the Borrower declare all Obligations
evidenced by the Note to be immediately due and payable without presentment,
demand, protest, notice of protest or dishonor, notice of intention to
accelerate, notice of acceleration or other notice of any kind, all of which
are expressly waived by the Borrower.
(c) The Borrower acknowledges and understands that under the Laws of
the State of Texas, unless waived, the Borrower has the right to notice of
the Lender's intent to accelerate the Obligations evidenced by the Note, the
right to notice of the actual acceleration of the Obligations evidenced by
the Note, and the right to presentment of the Note by the Lender's demand for
payment. The Borrower acknowledges that it understands that it can waive
46
<PAGE>
these rights and by the Borrower's execution of this Agreement it agrees to
waive its right to notice of intent to accelerate, its right to notice of
acceleration, and its right to presentment or other demand for payment.
(d) In addition to the foregoing, upon the occurrence of any Event of
Default, the Lender may exercise any or all of the Rights provided in any or
all of the Loan Documents.
ARTICLE 8
MISCELLANEOUS
8.1 NOTICES. Any notice required or permitted to be given under or in
connection with this Agreement or any of the other Loan Documents (except as may
otherwise be expressly required therein) shall be in writing and shall be mailed
by certified mail, return receipt requested, postage prepaid, or sent by telex,
telegram, telecopy or other similar form of rapid transmission confirmed by
mailing (by certified mail, return receipt requested, postage prepaid) written
confirmation at substantially the same time as such rapid transmission, or
personally delivered to an officer of the receiving party. All such
communications shall be mailed, sent or delivered,
(a) if to the Borrower, to Esenjay Exploration, Inc., 500 N. Water
Street, Suite 1200, Corpus Christi, Texas 78471, Attn: Michael E. Johnson and
Esenjay Exploration, Inc., 500 Dallas, Suite 2920, Houston, Texas 77002,
Attn: David B. Christofferson, or to such other address or to such
individual's or department's attention as the Borrower may have furnished the
Lender in writing; or
(b) if to the Lender, to Duke Energy Financial Services, Inc., 5718
Westheimer, Suite 2000, Houston, Texas 77057, Attn: Jeffrey B. Goodman, or to
such other address or to such individual's or department's attention as the
Lender may have furnished the Borrower in writing.
Any communication so addressed and mailed shall be deemed to be given when so
mailed, and any notice so sent by rapid transmission is acknowledged, and any
communication so delivered in person shall be deemed to be given when receipted
for or actually received by an authorized officer of the Borrower or the Lender,
as the case may be.
8.2 AMENDMENTS AND WAIVERS. Any provision of this Agreement or any of the
other Loan Documents may be amended or waived if, but only if, such amendment or
waiver is in writing and is signed by the Borrower and the Lender (and/or any
other Person which
47
<PAGE>
is a party to any Loan Document being amended or with respect to which a waiver
is being obtained).
8.3 INVALIDITY. In the event that any one or more of the provisions
contained in this Agreement or any of the other Loan Documents shall for any
reason be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Agreement or any other Loan Document.
8.4 SURVIVAL OF AGREEMENTS. All representations and warranties of the
Borrower herein or in the other Loan Documents and all covenants and agreements
not fully performed before the effective date or dates of this Agreement or the
other Loan Documents shall survive such date or dates.
8.5 SUCCESSORS AND ASSIGNS. All covenants and agreements by or on behalf of
the Borrower in this Agreement and all of the other Loan Documents shall bind
its legal representatives, successors and assigns and shall inure to the benefit
of the Lender and its legal representatives, successors and assigns.
The Borrower may not assign its respective Rights or Obligations
hereunder or under the Note without the prior consent of the Lender.
Prior to any acceleration of the Debt evidenced by the Note or all of
such Debt otherwise being due and payable, the Lender, without the consent of
the Borrower, may not assign any portion of the Loans, the Note or the
Commitment.
After any acceleration of the Debt evidenced by the Note or all of such
Debt otherwise being due and payable, the Lender, without the consent of the
Borrower, may assign all or any portion of the Loans, the Note, or the
Commitment.
Notwithstanding anything to the contrary above, the Lender, without the
consent of the Borrower, may at any time assign all or any portion of the Loans,
the Note or the Commitment to or at the direction of a governmental authority or
agency.
8.6 RENEWAL, EXTENSION OR REARRANGEMENT. All provisions of this Agreement
and of any other Loan Documents, as presently existing or as they may hereafter
be amended, relating to the Note or other Obligations shall apply with equal
force and effect to each and all promissory notes hereinafter executed which in
whole or in part represent a renewal, extension for any period, increase or
rearrangement of any part of the Obligations originally evidenced by the Note or
of any part of such other Obligations.
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<PAGE>
8.7 WAIVERS. No waiver by the Lender of any of its Rights under this
Agreement, the other Loan Documents or otherwise shall be considered a waiver of
any other or subsequent Right. No course of dealing on the part of the Lender,
its officers, employees, consultants or agents, nor any failure or delay by the
Lender with respect to exercising any Right under any of the Loan Documents
shall operate as a waiver thereof.
8.8 CUMULATIVE RIGHTS. The Rights of the Lender under the Note, this
Agreement and each other Loan Document shall be cumulative, and the exercise or
enforcement of any such Right shall not preclude the exercise or enforcement of
any other Right.
8.9 TAXES, ETC. Any Taxes (excluding income taxes), together with interest
and penalties, if any, payable or ruled payable by federal or state authority in
respect of the Note, this Agreement or the other Loan Documents shall be paid by
the Borrower.
8.10 EXHIBITS; CONFLICTS. The exhibits attached to this Agreement are
incorporated herein and shall be considered a part of this Agreement for the
purposes stated herein. In the event of any direct conflict between any of the
provisions of such exhibits or any of the other Loan Documents and the
provisions of this Agreement, the provisions of this Agreement shall prevail.
8.11 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS. All titles or heading to
articles, Sections, Subsections or other divisions of this Agreement or the
exhibits hereto are only for the convenience of the parties and shall not be
construed to have any effect or meaning with respect to the other content of
such articles, Sections, Subsections or other divisions, such other content
being controlling as to the agreement between the parties hereto.
8.12 JURISDICTION. All actions or proceedings with respect to the Note, this
Agreement or any of the other Loan Documents may be instituted in the courts of
the State of Texas, the United States District Court for the Southern District
of Texas. By execution and delivery of this Agreement, the Borrower irrevocably
and unconditionally submits to the jurisdiction (both subject matter and
personal) of each such court, and irrevocably and unconditionally waives (a) any
objection it may now or hereafter have to the laying of venue in any of such
courts and (b) any claim that any action or proceeding brought in any of such
courts has been brought in an inconvenient forum. The choice of forum and laying
of venue as set forth in this Section 8.12 was negotiated in good faith by the
Borrower and the Lender and is a significant term of the bargain between the
Borrower and the Lender governed by this Agreement. The Borrower and the Lender
further agree that service of process, summons, notice of document by U.S.
registered mail to the address of each set forth above shall be effective
service of process for any action, suit or proceeding brought against the other
in any such court.
49
<PAGE>
8.13 JURY TRIAL WAIVED. THE BORROWER AND THE LENDER HEREBY AGREE THAT THEY
SHALL AND HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM,
WHETHER AT LAW OR IN EQUITY, BROUGHT BY EITHER OF THEM, OR IN ANY MATTER
WHATSOEVER WHICH ARISES OUT OF OR IS CONNECTION IN ANY WAY WITH THIS AGREEMENT.
8.14 COUNTERPARTS. This Agreement may be executed in two or more
counterparts and multiple originals of such counterparts, and it shall not be
necessary that the signatures of all parties hereto be contained on any one
counterpart hereof. Any executed Agreement or any counterpart thereof shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
8.15 EFFECTIVENESS. This Agreement shall not be effective until delivered
to, accepted and executed by the Lender and the Borrower.
8.16 DOCUMENTS. All Loan Documents and any other certificate, agreement or
other document provided or to be provided under the terms hereof shall be in
form and substance satisfactory to the Lender.
8.17 RIGHTS OF THIRD PERSON. All provisions of this Agreement are imposed
solely and exclusively for the benefit of the Lender and the Borrower. No other
Person shall have standing to require satisfaction for such provisions in
accordance with their terms or be entitled to assume that the Lender will refuse
to perform its obligations hereunder in the absence of strict compliance with
any or all thereof, and any or all of such provisions may be freely waived in
whole or in part by the Lender at any time if in its sole discretion it deems it
advisable to do so.
8.18 ANNOUNCEMENTS. Each party covenants and agrees with the other that,
subject to applicable law, each party shall promptly advise and consult with the
other and obtain the other's written consent before issuing any press release
with respect to this Agreement or the transactions described herein.
Notwithstanding the above, the Borrower may issue a press release with respect
to this Agreement or the transactions described herein if the Lender is not
identified by its name, any Affiliate of the Lender is not identified by its
name or the Lender or any Affiliate of the Lender is otherwise not identified
and a Law requires the Borrower to issue such press release.
8.19 CONFIDENTIALITY. In connection with the negotiation and administration
of this Agreement and the other Loan Documents, the Borrower has furnished and
from time to time will furnish the Lender written information or the Borrower
has provided and from time to time will provide access to information which is
identified to the Lender in writing as
50
<PAGE>
confidential (such information, other than any such information which (i) was
publicly available, or otherwise known to the Lender, at the time of disclosure,
(ii) subsequently becomes publicly available other than through any act or
omission by the Lender or (iii) otherwise subsequently becomes known to the
Lender, being hereinafter referred to as "CONFIDENTIAL INFORMATION"). The Lender
will use reasonable efforts to maintain the confidentiality of any Confidential
Information. The Lender will not use any of the Confidential Information to
compete with the Borrower in the exploration and production business. It is
understood, however, that the foregoing will not restrict the Lender's ability
to freely exchange such Confidential Information with current or prospective
investors, assignees and advisors who obligate themselves to the terms of this
Section 8.19 and who further agree not to use any of the Confidential
Information to compete with the Borrower in the exploration and production
business. It is further understood that the foregoing will not prohibit the
disclosure of any or all Confidential Information if and to the extent that such
disclosure may be required or requested (w) by a Governmental Authority, (x)
pursuant to court order, subpoena or other legal process in connection with any
pending or threatened litigation hereunder, (y) otherwise as required by law, or
(z) in order to protect their interests or their rights or remedies hereunder or
under the other Loan Documents; in the event of any required disclosure under
clause (w), (x), or (y) above, the Lender agrees to use reasonable efforts to
inform the Borrower as promptly as practicable.
8.20 SURVIVAL OF CERTAIN COVENANTS. The covenants of the Borrower set forth
in Sections 5.5 and 5.10 shall survive repayment of the Debt evidenced by the
Note and shall continue until all of the additional charges payable by the
Borrower to the Lender pursuant to Section 2.6 have been satisfied.
8.21 GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE UNITED STATES OF
AMERICA AND THE STATE OF TEXAS (EXCEPT TO THE EXTENT THE LOCATION OR NATURE OF
THE COLLATERAL REQUIRES THE APPLICATION OF THE LAWS OF OTHER JURISDICTIONS TO BE
APPLIED AS TO MATTERS OF CREATION, PERFECTION AND PRIORITY OF LIENS AND THE
RIGHTS OF THE LENDER UPON DEFAULT).
51
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed effective as of the date first above written.
ESENJAY EXPLORATION, INC.
By: /s/ Michael E. Johnson
------------------------------
Printed Name: Michael E. Johnson
--------------------
Title: President
--------------------------
DUKE ENERGY FINANCIAL
SERVICES, INC.
By: /s/ Jeffrey B. Goodman
------------------------------
Jeffrey B. Goodman
Vice President
52
<PAGE>
Exhibit 11
EXHIBIT 11 TO FORM 10-KSB
COMPUTATION OF EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
BASIC EARNINGS PER SHARE
Weighted average common shares outstanding 9,882,227 1,646,311
------------ ------------
------------ ------------
Basic loss per share $ (2.97) $ (3.07)
------------ ------------
------------ ------------
DILUTED EARNINGS PER SHARE
Weighted average common shares outstanding 9,882,227 1,646,311
Share issuable from assumed conversion of
common share options and warrants -- 1,338
------------ ------------
Weighted average common shares outstanding, as adjusted 9,882,227 1,647,649
------------ ------------
------------ ------------
Diluted loss per share $ (2.97) $ (3.07)
------------ ------------
------------ ------------
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Net income $(29,321,347) $ (4,953,803)
Preferred shares dividend (48,138) (103,153)
------------ ------------
Net income to common shareholders (basic and diluted
earnings per share computation) $(29,369,485) $ (5,056,956)
------------ ------------
------------ ------------
</TABLE>
This calculation is submitted in accordance with Regulation S-K; although it is
contrary to paragraphs 13 through 16 of the Financial Accounting Standards
Board's Statement of Financial Standard No. 128, because it produces an
antidilutive result.
<PAGE>
Exhibit 21
EXHIBIT 21 TO FORM 10-KSB
The subsidiaries of the Registrant are:
<TABLE>
<CAPTION>
Name State of Incorporation
- ---- ----------------------
<S> <C>
Frontier Acquisition Corp. Oklahoma
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 646,200
<SECURITIES> 0
<RECEIVABLES> 3,558,617
<ALLOWANCES> (348,984)
<INVENTORY> 0
<CURRENT-ASSETS> 4,941,955
<PP&E> 70,044,882
<DEPRECIATION> (15,517,656)
<TOTAL-ASSETS> 59,916,272
<CURRENT-LIABILITIES> 15,898,490
<BONDS> 7,500,000
0
0
<COMMON> 157,849
<OTHER-SE> 35,164,739
<TOTAL-LIABILITY-AND-EQUITY> 59,916,272
<SALES> 1,372,002
<TOTAL-REVENUES> 1,716,473
<CGS> 0
<TOTAL-COSTS> 3,417,699
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 620,121
<INCOME-PRETAX> (29,321,347)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,321,347)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,321,347)
<EPS-PRIMARY> (2.97)
<EPS-DILUTED> (2.97)
</TABLE>
