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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For Annual and Transition Reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-21841
3DX TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0386601
(State of Incorporation) (IRS Employer Identification Number)
12012 WICKCHESTER, SUITE 250, HOUSTON, TEXAS 77079\
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (281) 579-3398
Securities registered pursuant to Section 12(b) of the Exchange Act:
(None)
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the registrant was approximately $7.6 million on March 13, 1998 based upon the
closing sale price of common stock on such date of $1.625 per share on the
NASDAQ National Market. As of March 13, 1998, the registrant had 7,260,993
shares of common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference to
the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission on
or before April 30, 1998.
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TABLE OF CONTENTS
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PART I
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ITEM 1. BUSINESS..........................................................................1
ITEM 2. PROPERTIES........................................................................8
ITEM 3. LEGAL PROCEEDINGS................................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.................................................................14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS ....................................................14
ITEM 6. SELECTED FINANCIAL DATA..........................................................14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............................20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............................21
ITEM 11. EXECUTIVE COMPENSATION...........................................................21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K................ 21
SIGNATURES................................................................................................23
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and section
21E of the Securities Exchange Act of 1934, as amended. Because such statements
include risks and uncertainties, actual results, events and circumstances could
differ materially from those expressed in or implied by such statements due to
various factors. Such factors include the possibility that the drilling of wells
in projects in which the Company has a working interest may be delayed or
abandoned, actual rates of production may not reach anticipated levels and
opportunities for the Company to acquire future working interests in additional
projects may be limited or unavailable, changing economic, regulatory and
competitive conditions, other technological developments and other risks and
uncertainties, including those set forth herein. The Company's future financial
results will depend primarily on: (i) the Company's ability to continue to
source and screen potential projects; (ii) the Company's ability to discover
commercial quantities of hydrocarbons; (iii) the market price for oil and gas;
and (iv) the Company's ability to obtain additional sources of funding to fully
implement its exploration and development program. There can be no assurance
that the Company will be successful in any of these respects or that the prices
of oil and gas prevailing at the time of production will be at a level allowing
for profitable production.
PART I
ITEM 1. BUSINESS.
OVERVIEW
3DX Technologies Inc. ("the Company") is a knowledge-based oil and gas
exploration company whose core competence and strategic focus is the utilization
of 3-D seismic imaging and other advanced technologies in the search for
commercial quantities of hydrocarbons. The Company enters into arrangements that
enable it to combine its expertise and exploration capabilities with the
operating skills of other oil and gas companies. The Company participates in
selected exploration projects as a non-operating working interest owner, sharing
both risks and rewards with its partners. The Company commenced operations in
January 1993 to take advantage of perceived opportunities emerging from changes
in the domestic oil and gas industry, including the divestiture of domestic oil
and gas properties, advances in technology and the outsourcing of specialized
technical capabilities. By reducing drilling risk through 3-D imaging and
analysis, the Company seeks to improve the expected return on investment in its
oil and gas projects.
The Company has developed a screening process that it applies to all
projects that it considers. The screening process, adapted continually to
incorporate the Company's ongoing experience, is designed to produce a balanced
portfolio of projects that have reliable and experienced operating partners, are
conducive to the application of advanced 3-D technology, have significant upside
potential and may be extended into exploration trends.
STRATEGY
The Company's goal is to increase its proved reserves, production and
cash flow by quickly, accurately and economically locating commercial quantities
of hydrocarbons for itself and its partners. To reach its goal, the Company is
pursuing a business strategy that includes the following principal elements:
Focusing Operational Efforts Exclusively on the Company's Expertise in
3-D Imaging and Analysis. The Company focuses all of its technical resources on
obtaining the best possible subsurface image and on identifying the most
effective location and target depth for each prospective well. To allow it to
focus its efforts exclusively on 3-D imaging and analysis, the Company relies on
its project partners to undertake the
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project's other operating functions, including land acquisition, drilling and
marketing. Although 3-D seismic technology is now routinely used in oil and gas
exploration projects, the Company believes that its focus, experience and
innovative methods of applying the technology provide it with advantages in
extracting useful information from seismic and other data.
Developing and Supporting a Team of Technologically Sophisticated
Explorationists. The quality of information obtained from the application of 3-D
imaging is dependent to a large extent on the Company's ability to capitalize on
the intelligence, acquired knowledge and creativity of the experienced
geoscientists and engineers it employs. To allow the Company to capitalize fully
on the intellectual resources offered by such experts, the Company's
administrative operations and infrastructure are directed toward providing tools
and support to the Company's technical specialists. To continue its ability to
recruit, retain and motivate such experts, the Company is committed to providing
its oil and gas geoscientists and engineers with the most advanced imaging and
analytical technology commercially available and awards options to purchase
common stock to each of its experts and other employees.
Maintaining a Research Program to Develop Innovative Application
Techniques Involving Advanced Exploration Technology. The Company relies upon
its ongoing applied research effort to continually develop and adapt technology
that will enable it to retain its position as a leading high technology
exploration company. For example, through its research efforts, the Company has
developed the 3DXpress process. The Company's 3DXpress process is an innovative
technique used in exploration that improves the quality of seismic data and
significantly compresses the time frame traditionally required for acquisition,
processing, imaging and analysis. This process allows analysis of 3-D data while
the survey is being conducted, giving the Company's explorationists the ability
to ensure data quality and steer data collection toward areas where prospects
are more likely to exist. Utilizing this technology, the Company believes it has
been able to image and analyze a larger number of projects concurrently and
identify potential drilling sites more rapidly and accurately than with
traditional methods. The Company also believes that the application of emerging
technologies, such as migration velocity analysis and depth migration
technology, provides the Company with a competitive advantage in its efforts to
effectively and efficiently locate commercial quantities of hydrocarbons.
Pursuing a Disciplined Approach to Selective Project Participation,
Partnering and Drilling Efforts. The Company adheres to a disciplined screening
process and, based on its experience, continually adapts the criteria to select
projects which are likely to maximize the return on its capital investment. The
Company's selection criteria favor projects which (i) are managed by reliable
and successful operating partners; (ii) are located on properties to which 3-D
imaging can be effectively applied to evaluate the primary geologic risk; (iii)
have high upside potential; (iv) may be extended into trend plays; and (v) have
projected rates of return which make the production of hydrocarbons economically
attractive.
Actively Managing the Company's Portfolio of Oil and Gas Projects. The
Company has developed and actively manages a portfolio of partners, projects and
producing assets having a diverse range of risk/reward ratios. Active portfolio
management enables the Company to reduce its exposure to non-geologic project
risks such as land acquisition, operator performance and drilling operations
that are not mitigated by the application of 3-D imaging and analysis
technologies. In addition, the Company believes that aggressive management of
its portfolio enables it to make more efficient use of available capital by
limiting the Company's exposure to any individual exploration project and by
allowing it to focus its resources toward trend play opportunities arising from
carefully selected projects.
PROJECT SELECTION AND MANAGEMENT METHODOLOGY
Successful application of the Company's business plan is dependent upon
the Company's participation as an active working interest partner in select high
quality projects. The working interest acquired by the Company in any project is
determined through negotiation among the Company and its prospective partners
prior to the Company's commitment to participate. The percentage working
interest which the Company seeks to acquire varies with each project and is
dependent upon the project's anticipated costs, risk and potential return.
During the course of the project, the Company's working interest is subject to
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change as a result of negotiated cost and working interest sharing arrangements,
the terms of which are negotiated by the Company prior to its commitment to
participate. To identify these projects, the Company undertakes a rigorous
evaluation of the numerous projects proposed to it by its existing partners and
other project generators. The Company engages in the following steps to
evaluate, identify and manage high quality projects in which the Company
participates.
o Initial Screening. Prior to committing technical resources to the
evaluation of a potential project, the Company's business development
team reviews both the potential project and its partners to determine
if they satisfy certain initial business criteria. To evaluate a
potential project, the Company considers geographic location, scale,
geological model, anticipated drilling prospects, number of pay zones,
trend potential and expected project economics. To evaluate a potential
partner, the Company considers that partner's financial stability,
reputation and record of success in exploration and production
activities.
o Technical Evaluation. If the potential project and partner satisfies
the Company's initial business screening criteria, the project is then
evaluated by a multidisciplinary team of the Company's technical
experts. Such technical evaluation allows the Company to analyze and
evaluate further the basic geological model, determine the seismic
character of reservoirs within the project site, determine if the
application of 3-D imaging technology will adequately address the
primary geologic risk, investigate local and regional production trends
for target reservoirs, refine its evaluation of project economics and
determine if the capital required conforms to the Company's investment
guidelines. If the project meets these criteria, the Company will
participate in the project, committing its capital, technological
resources and 3-D imaging and analytical expertise.
o Earth Imaging. Once a project is approved for investment, the project
team, led by one of the Company's geoscientists or engineers and
including representatives of all or substantially all of the project's
partners, commences its efforts to create the most accurate subsurface
image possible. By integrating 3-D seismic data with other geologic and
engineering data, the project team uses the derived subsurface image to
model the potential reservoirs within the project's area. The seismic
data collection, processing and analysis are usually managed by the
Company to assure its integrity and consistency.
o Drilling Decision. After the project team completes the earth imaging
and analysis of a selected project, the project team determines if the
applicable data identify economically attractive drilling
opportunities. The economic return expected from drilling must satisfy
certain criteria and must be commensurate with the perceived risk.
Thereafter, the project team makes recommendations to the partnership
regarding drill sites and target depths.
o Post-Drilling Appraisal. Subsequent to the drilling of each well in a
project, the Company integrates the information it has acquired in the
drilling phase with its earth model, enabling it to enhance the model
based on the best available data and knowledge. As a result, the
Company builds an increasing base of knowledge upon which to make
future drilling decisions with respect to each project.
As a working interest partner, the Company shares all project costs in
proportion to its working interest percentage. In instances in which exploration
and development activities are unsuccessful, the Company incurs an economic loss
equal to its proportionate share of project costs prior to the time the project
is abandoned. Similarly, the Company incurs an economic loss if the Company's
proportionate share of revenue generated from production is insufficient to
cover the Company's share of project costs.
PROJECT GENERATION AND SIGNIFICANT BUSINESS RELATIONSHIPS
By its participation in multiple projects, many with multiple partners,
the Company seeks to demonstrate its ability to improve project economics. Its
current partners are its best resource for future high
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quality projects. The Company believes that its existing partners, which have
benefited from the Company's ability to improve project economics by reducing
primary geologic risk, will seek such benefits with respect to future projects
and will therefore solicit the Company's involvement in such new projects. By
participating in projects with partners who possess experience and knowledge in
exploration operations that are complementary to the Company's imaging and
analytical focus area, the Company believes that it and each project partner
receive the benefit of the other's knowledge and expertise while achieving
results that are greater than any particular partner might be able to achieve
independently. The Company further believes that establishing long-term partner
relationships will enhance the flow of prospective opportunities and the quality
and stability of the business relationship, as well as reduce significant risks,
such as the partner's operating capabilities and financial stability.
As of December 31, 1997, the Company's active exploration portfolio
consisted of 25 projects and included 12 operator partners, as reflected in the
table below:
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OPERATOR PARTNER OFFICE LOCATION AREA OF ACTIVITY
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Alta Mesa Resources, Inc. Houston, TX Louisiana Gulf Coast Onshore
Aspect Resources LLC Denver, CO Texas Gulf Coast Onshore
Esenjay Petroleum Corporation Corpus Christi, TX Gulf Coast Onshore (TX,MS,AL)
Genesis Producing Company Corpus Christi, TX Texas Gulf Coast Onshore
Louisiana Land & Exploration New Orleans, LA Louisiana Gulf Coast Onshore
Phillips Petroleum Company Houston, TX Texas Onshore and Offshore
Plains Resources, Inc. Houston, TX Florida Sunniland Trend
PrimeEnergy Corporation Stamford, CT Texas Gulf Coast Onshore
Rutherford Oil Corporation Houston, TX Texas Gulf Coast Onshore
Santa Fe Energy Resources, Inc. Houston, TX West Africa and Deep Water
Sue Ann Production Company Houston, TX Texas Gulf Coast Onshore
Union Gas Corporation Houston, TX Texas Gulf Coast Onshore
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The Company's strategy is to enter into long-term joint ventures and
alliances with high quality operator partners to enhance the flow of
opportunities presented to the Company and to assure consistent quality of
operations. As part of this strategy, the Company attempts to convert successful
relationships on individual projects with quality partners into long-term
strategic alliances.
3-D IMAGING TECHNOLOGY
The Company's oil and gas exploration capabilities are dependent upon
the effective application of 3-D imaging technologies. Although the initial
application of 3-D imaging technology began in the late 1960's, its cost through
the 1970s justified use only in deep offshore applications and other
environments with substantial drilling costs and risk. During the latter half of
the 1980's, 3-D imaging was a principal tool used in exploration activities in
both the North Sea and the Gulf of Mexico. Advances in technology during the
1980's made the use of 3-D imaging more cost-effective and more readily
available for use onshore.
In general, 3-D imaging technology provides an "image" of the
subsurface geology by collecting seismic data along multiple parallel lines and
creating a cube of information which is spatially sampled throughout. The data
acquired by use of 3-D imaging technology is of significantly higher quality and
provides significantly better information than the data acquired by 2-D seismic
technology. The higher fidelity and resolution of 3-D data results in more
accurate images than are possible using 2-D seismic and other conventional
methods. The productive application of 3-D imaging technology requires the
skills of highly trained experts.
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The Company maintains an extensive computer facility to support its
oil-finding activities. A Silicon Graphics Power Challenge provides the
large-scale computing capacity to support real-time data processing and depth
migration. A network of eight Sun Sparc and Ultra Sparc workstations,
functioning in a client-server environment, provides the framework for synthesis
of the geological, geophysical and engineering data into an integrated image of
the subsurface. The principal supplier of the software used by the Company for
both processing and data interpretation is Landmark Graphics Corporation and its
subsidiaries. In addition, the Company maintains licenses for certain complex
geological and geophysical applications from Hampson-Russell Software Inc.,
Paradigm Geophysical, Inc., and Petrosoft Inc.
GEOLOGIC, GEOPHYSICAL AND ENGINEERING EXPERTISE
The Company has assembled a group of talented and experienced
geologists, geophysicists and engineers that work in multidisciplinary teams to
enable the Company to exploit fully the advantages afforded by 3-D imaging
technologies. As of December 31, 1997, the Company employed 17 full-time experts
who design and manage the process of seismic data acquisition, processing,
imaging and analysis and drill site selection using computer systems and
software owned or licensed by the Company. The majority of these geoscientists
and engineers have between five to 20 years of experience involving the
utilization of seismic data imaging and analysis, and they have extensive
experience with 3-D seismic projects in diverse geologic trends throughout the
world. If a project requires technical expertise not available from the
Company's or project partners' personnel, the Company's project manager will
identify and recruit an industry expert to join the project team. By assembling
in-house technical expertise, the Company is able to manage fully and
effectively the imaging and analytical phase of the projects in which it
participates. The Company provides its technical expertise exclusively to those
projects in which it participates as a working interest partner.
RESEARCH AND DEVELOPMENT
The Company believes that it possesses a competitive advantage over
other oil and gas companies by utilizing the experience of its in-house
scientific experts to continually develop innovative techniques and tools to
optimize the Company's utilization of 3-D imaging technologies. The Company's
ongoing research and development and its continuous accumulation of knowledge
have resulted in technical improvements and innovations that the Company
believes provide it with significant competitive advantages. The Company
enhances its ongoing research program by forging strategic alliances with select
suppliers of hardware and software which have demonstrated foresight in the
science of earth imaging. The Company believes that its strategy of applied
research and development will allow it to remain at the forefront of oil and gas
exploration technology.
The Company has been able to adapt and refine concurrent imaging
methods to create the Company's 3DXpress process through the effective
application of its applied research and development strategy. In its first
commercial application of the 3DXpress process, the Company commenced and
completed a project's imaging and analysis phase in a four week period.
Thereafter, the project operator successfully drilled and completed seven of the
eight resulting wells in a complex geologic setting relying upon the Company's
drill site and target depth recommendations.
Other innovations and improvements to the imaging process resulting
from the Company's ongoing research include the use of digital orthomaps for
survey planning and control, the use of GPS locators on seismic vibrators for
positioning control, application of AVO, inversion and geostatistics to the
process of reservoir characterization and the application of interactive
migration velocity analysis and depth migration to achieve superior image
reconstruction. Many of these innovations and improvements are the result of
strategic alignments with pioneering technology suppliers such as GPS
Technologies, Inc., Hampson-Russell Software, Inc., Landmark Graphics
Corporation and Paradigm Geophysical, Inc.
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REGULATION
The Company's operations are subject to numerous federal, state and
local laws and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection. Public interest
in the protection of the environment has increased dramatically in recent years.
Offshore drilling in certain areas has been opposed by environmental groups and,
in certain areas, has been restricted. The Company believes that the trend of
more expansive and stricter environmental legislation and regulations will
continue. To the extent laws are enacted or other governmental action is taken
which prohibit or restrict onshore and offshore drilling or impose environmental
protection requirements that result in increased costs to the oil and gas
industry in general, the business and prospects of the Company could be
adversely affected.
The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder
impose a variety of requirements on "responsible parties" related to the
prevention of oil spills and liability for damages resulting from such spills in
United States waters. A "responsible party" includes the owner or operator of a
facility or vessel, or the lessee or permittee of the area in which an offshore
facility is located. The OPA assigns liability to each responsible party for oil
removal costs and a variety of public and private damages including natural
resource damages. While liability limits apply in some circumstances, a party
cannot take advantage of liability limits if the spill was caused by gross
negligence or willful misconduct or resulted from violation of a federal safety,
construction or operating regulation. If the party fails to report a spill or to
cooperate fully in the cleanup, liability limits likewise do not apply. Few
defenses exist to the liability imposed by the OPA.
Under the OPA and regulations promulgated thereunder, owners and
operators of "offshore facilities" must satisfy certain financial assurance
requirements to evidence their ability to cover potential environmental cleanup
and restoration costs. In projects in which the Company has a participating
working interest, the operator partner is responsible for all demonstrations of
financial responsibility including the posting of any indemnity bonds which are
required by applicable governmental regulations. The expenses incurred in the
operator partner's demonstration of financial responsibility are expenses which
are allocated to each project partner based on the respective partner's working
interest.
The OPA also imposes other requirements, such as the preparation of an
oil spill contingency plan. The Company has such a plan in place. Failure to
comply with ongoing requirements or inadequate cooperation during a spill event
may subject a responsible party to civil or criminal enforcement actions.
To complement the OPA, the State of Texas enacted the Oil Spill
Prevention and Response Act (OSPRA). The Texas General Land Office (GLO) is the
lead agency for carrying out OSPRA, and to that end the GLO has promulgated
regulations affecting anyone who owns or operates a vessel or facility that
stores or transfers oil in areas where a spill could reach Texas coastal waters.
In addition, the Outer Continental Shelf Lands Act ("OCSLA") authorizes
regulations relating to safety and environmental protection applicable to
lessees and permittees operating on the Outer Continental Shelf (the "OCS").
Specific design and operational standards may apply to OCS vessels, rigs,
platforms, vehicles and structures. Violations of lease conditions or
regulations issued pursuant to the OCSLA can result in substantial civil and
criminal penalties, as well as potential court injunctions curtailing operations
and the cancellation of leases. Such enforcement liabilities can result from
either governmental or private prosecution.
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The Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. Persons who are or were responsible for releases of hazardous substances
under CERCLA may be subject to joint and several liability for the costs of
cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources. Additionally, it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the hazardous substances
released into the environment. Further, certain oilfield wastes are subject to
the Resource Conservation & Reservation Act ("RCRA") with respect to the
regulation of hazardous wastes. The RCRA regulates the generation,
transportation and disposal of hazardous wastes.
The Texas Railroad Commission has issued rules for management of
certain types of hazardous waste generated in the oilfield. However, until
delegation of the RCRA program to the Railroad Commission, hazardous wastes
generated in the oilfield are regulated by the Texas Natural Resources
Conservation Commission. The Texas Railroad Commission regulates pollution of
groundwater and surface water resulting from exploration, production and
development of oil and natural gas resources.
The Clean Water Act (CWA) and regulations promulgated thereunder
prohibit the discharge of pollutants into waters of the United States without a
permit pursuant to the National Pollutant Discharge Elimination System (NPDES)
provisions. The CWA also requires reporting of oil spills to the National
Response Center. The United States Environmental Protection Agency (EPA) has
issued general NPDES permits for oil and gas platforms in the Gulf of Mexico,
which permits impose limits on discharges of such things as oil, grease,
produced water and drilling fluids. Onshore platforms may also be subject to the
requirement for NPDES permits for both production discharges and for discharges
of stormwater. In Louisiana, the NPDES permit program has recently been
delegated to the State of Louisiana. In Texas, the NPDES permit program is
administered by the EPA. Failure to obtain the proper permit may result in both
civil and criminal penalties as well as an order to cease discharges, which in
effect is an order to shut down production.
Management believes that the Company is in substantial compliance with
current applicable environmental laws and regulations. Compliance with such laws
and regulations has not historically represented a significant expense for the
Company and management does not foresee the need for material expenditures to
ensure continued compliance with currently existing laws and regulations. Laws
and regulations in these areas are, however, subject to change and there can be
no assurance that future laws or regulations will not have a material adverse
effect on the Company.
OPERATING HAZARDS AND INSURANCE
The oil and gas business involves a variety of operating risks,
including the risk of fire, explosions, blow-out, pipe failure, casing collapse,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, ruptures and 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, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations. In addition
to the foregoing, offshore operations are subject to the additional hazards of
marine operations, such as capsizing, collision and adverse weather and sea
conditions.
The Company maintains insurance coverage, both directly for its own
account and indirectly through its operator partners, against some, but not all,
operating risks. The insurance maintained by project operator partners generally
does not cover claims relating to failure of title to oil and gas leases,
trespass during 3-D survey acquisition or surface damage attributable to seismic
operations, business interruption nor does it protect against loss of revenues
due to well failure. There can be no assurance that any insurance obtained
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by the Company or its project operator partners covering claims related to
worker's compensation, comprehensive general liability for bodily injury and
property damage, comprehensive automobile liability and pollution, cleanup,
underground blowout and evacuation will be adequate to cover any losses or
liabilities which may be incurred within projects in which the Company
participates. The Company is an additional named insured on the insurance
policies procured and maintained by operator partners. The Company cannot
predict the continued availability of insurance coverage or the availability of
insurance at premium levels that justify its purchase. If the Company or any
project operator partner were unable to procure insurance at an acceptable cost
with respect to each of the projects in which the Company participates, the
occurrence of significant adverse events not fully insured or indemnified
against could materially and adversely affect the Company's financial condition
and operations.
COMPETITION
Competition in the oil and gas industry is intense, particularly with
respect to the acquisition of acreage and capital. The Company's competitors in
the provision of seismic imaging, analytical and other related services and in
the exploration for oil and gas include numerous major and independent oil and
gas companies, smaller, technology-driven service companies, individual
proprietors, drilling and income programs and partnerships. Many of the
Company's competitors possess and employ financial and personnel resources
substantially in excess of those available to the Company and may, therefore, be
able to define, evaluate, bid for and participate in a greater number of oil and
gas properties than the Company. The Company believes that technology,
experience and reliability are the primary elements upon which the Company
competes in the industry, as oil and gas exploration companies demand higher
quality seismic data delivered and analyzed in increasingly shorter time frames
and greater assurances that the interests of such company are respected and
advanced. Although the Company believes that it competes effectively in each of
these areas, there can be no assurance that the Company's ability to attract and
invest in high quality projects will not be adversely affected if its current
competitors or new market entrants introduce new services with better quality
technology than those offered by the Company.
EMPLOYEES AND INDEPENDENT CONSULTANTS
As of December 31, 1997, the Company had 23 full-time employees
including 17 explorationists. The Company believes that its relationship with
its employees is good. None of the Company's employees is covered by a
collective bargaining agreement. The Company expects to continue a program,
which it commenced in August 1996, to hire recent college graduates and advanced
degree holders.
ITEM 2. PROPERTIES
SIGNIFICANT PROJECTS AND PROPERTIES
The Company's exploration activities are primarily focused in the
onshore Gulf Coast region of the United States, principally in Texas, but also
include projects in Louisiana, Mississippi, Alabama and Florida. Additionally,
the Company has active exploration projects offshore in the Gulf of Mexico and
internationally in West Africa, offshore both The Republic of Cote d'Ivoire and
Ghana.
3-D seismic imaging is an effective tool to identify the structural and
stratigraphic features in the Gulf Coast region and provides the Company with an
ability to identify hydrocarbon potential in and around existing fields that
could not be detected with 2-D seismic and earlier exploration techniques. Due
to geologic complexities within this region, it may be possible to identify
multiple prospects within a single project. These prospects typically offer
multiple drilling opportunities with individual wells capable of penetrating
multiple reservoirs.
The extensive drilling history within Gulf Coast trends provides a
powerful subsurface and production database to which seismic data can be
calibrated. This data provides the foundation required to design a
-8-
<PAGE> 11
seismic program that optimizes resolution at targeted reservoirs. This
subsurface information, when combined with 3-D seismic data, provides a more
accurate assessment of reservoir quality, productivity, reserve potential and,
in some instances, fluid type.
As demonstrated by its election to participate in projects located in
The Republic of Cote d'Ivoire and Ghana, the Company believes it can extend its
trend strategy into other select geographic areas where the application of 3-D
imaging technology can be utilized to reduce the primary geological risks prior
to drilling.
The major producing areas in which the Company holds an interest are
reflected in the table below as of and for the year ended December 31, 1997:
<TABLE>
<CAPTION>
Proved Reserves 1997 Production
--------------- ----------------
Gas Oil Gas Oil
Area/Trend Mmcf Mbo Mmcf Mbo
- ---------- --------------- ----------------
<S> <C> <C>
Miocene Trend 1,498 -- 777 --
Ramrod Deep Frio 1,047 24 -- --
Offshore Gulf of Mexico 639 1 242 --
Geronimo Area 449 12 36 2
Other Properties 299 52 77 12
------ ------ ------ -----
3,932 89 1,132 14
====== ====== ====== =====
</TABLE>
GULF COAST AREA
Of the 23 wells which were evaluated in 1997 and in which the Company
held an interest, 21 were in the Gulf Coast area, including 16 in Texas, 3 in
Mississippi and Alabama, and 2 in Louisiana. All of the Company's 11 successful
wells in 1997 were in the Gulf Coast area.
TEXAS GULF COAST. This trend area includes both onshore and near-shore
properties and generally extends along the Texas coast for a distance of
approximately 100 miles inland from the coastline. Prospective geology in the
trend is characterized by numerous stacked sand formations that were deposited
continuously by river channels and deltas. The trend's primary oil and gas
producing formations include the Miocene, Frio, Vicksburg, Yegua, and Wilcox.
The Company has active exploration projects targeting each of these oil and gas
formations from depths of 3,000' to 15,000'. Of the Company's 25 active
exploration projects, 15 are in the Texas Gulf Coast area. The Company completed
eight major 3-D seismic shoots in the Texas Gulf Coast region during 1997,
covering over 350 square miles. Below is a discussion of certain of the active
exploration projects in this area:
Miocene Trend. The Company currently has nine producing gas wells in
the Miocene Trend area in Calhoun and Matagorda Counties, Texas, at
depths between 3,000' and 6,000'. The Company owns working interests
ranging from 20% to 40% in these wells, which are operated by Prime
Operating Company, a subsidiary of PrimeEnergy Corporation. The Miocene
Trend projects in which the Company currently owns an interest are
considered to be substantially developed and the Company does not plan
to drill any additional wells on these projects in 1998. However, the
Company may continue to pursue additional opportunities in this trend
area.
Geronimo and Geronimo Extension. The Company completed acquisition of a
total of 115 square miles of 3-D seismic data in 1996 and 1997
utilizing the 3DXPRESS process on these projects which are located in
San Patricio County, Texas. Primary target formations include the Frio
and Vicksburg sands. The Company spudded four wells on these projects
in 1997, two of which were successful, one of which was lost due to
mechanical failure, and the fourth of which was drilling at December
31, 1997. The well which was lost did not fully evaluate the target
formation and is expected to be
-9-
<PAGE> 12
redrilled in 1998. The Company owns working interests ranging from 11%
to 22% in these projects, which are operated by Esenjay Petroleum
Corporation.
Ramrod. The Company completed acquisition of 34 square miles of 3-D
seismic data in early 1997 on this project, which targeted both Miocene
and Frio potential. The Company owns a 40% working interest and
together with its partner, PrimeEnergy Corporation, drilled 5 wells on
this project in 1997, all of which were successful. Four of the wells
were Miocene wells. The fifth well drilled was the St. George #1, which
made a potentially significant discovery in the deeper section of the
Frio. This well was tested subsequent to December 31, 1997 at rates
exceeding 10 Mmcf of gas and 200 barrels of condensate per day with a
flowing tubing pressure of almost 9,000 psi. The Company plans to
produce this first well for a period of at least three months before
continuing with development plans for the field. Because this well is a
new field wildcat without nearby analogs, the estimate of proved
reserves assigned to it by the Company's independent reservoir
engineers was very conservative.
Hall Ranch. The Company has a 25% working interest in the Hall Ranch
prospect, which is located in Karnes County, Texas. Esenjay Petroleum
is the operator of the project. The partnership completed a 42 square
mile 3-D seismic survey on this project in the second quarter of 1997.
The primary objective in the area is the lower Wilcox formation at
depths of 10,000' to 13,000'. The Company drilled one well on this
prospect in 1997 which experienced mechanical difficulties and had to
be plugged and abandoned prior to evaluating the objective formation.
The redrill of this well and an additional well in a separate fault
block are planned for drilling in the first half of 1998.
Galveston Bay Area. The Company has two major projects in the Galveston
Bay area. This area targets potential production in the upper and lower
sections of the Frio formation and the Vicksburg formation. There has
been extensive recent exploration activity in this area and several
significant discoveries have been announced by other companies within
the industry. The first Company project at Smith Point, onshore in
Chambers County, Texas, contains 40,000 acres under lease or option.
The Company, which owns a 15% working interest in this project,
completed an 80 square mile 3-D survey during 1997 and has developed
four drilling locations for 1998, with further evaluation continuing.
The operator of this project is Rutherford Oil Corporation. The second
project, Gillock, which is located in Galveston County, Texas, was
generated by Aspect Resources LLC. The Company owns a 15% working
interest in this project. A 60 square mile 3-D seismic survey is
planned for the second quarter of 1998 on this project.
Wilcox Trend. The Company has two projects in the counties of Lavaca
and Dewitt, Texas. This area contains production primarily from the
Upper and Middle Wilcox formations. The first project, Matthews, is
operated by Union Gas Corporation. 3DX has a 20% working interest in
this project. A 19 square mile 3-D seismic survey was completed in the
third quarter of 1997 and the Company plans to drill its first well in
the second quarter of 1998. The other project, Thomaston, is operated
by Phillips Petroleum Company and represents one of the first projects
in what the Company seeks to be a continuing strategic alliance with
Phillips. A 65 square mile 3-D seismic survey was completed on this
project in the fourth quarter of 1997 and was acquired and processed
using the Company's 3DXpress process for real-time seismic acquisition
and processing.
LOUISIANA. The Company has two active exploration projects in
Louisiana. The Four Isle Dome prospect in Terrebonne Parish, operated by
Louisiana Land and Exploration, targets Miocene-age sands at depths up to
15,000'. The Company has a 5% working interest in Four Isle Dome. The Hayes
prospect, in Calcasieu and Jefferson Davis Parishes, targets Miocene age sands
at depths up to 14,000'. The Company has a 10% working interest in this project.
The Company intends to drill wells on both of these projects in 1998.
-10-
<PAGE> 13
MISSISSIPPI/ALABAMA. This area includes onshore properties and
generally extends across a seven-county area from Newton County in Southern
Mississippi eastward through Southern Alabama to the Florida border. Prospective
geology in the trend is characterized by discrete occurrences of basement and
salt-related features that deform shallower sand formations to create potential
structural traps for oil and gas. The primary historical oil and gas producing
formations in the trend have been the Cotton Valley, Lower Haynesville,
Smackover and Norphlet. The Company drilled three wells during 1997 on its
Lipsmacker project in this area, each of which was unsuccessful. The Company has
identified two additional drilling locations on the Lipsmacker project which it
intends to drill in 1998.
FLORIDA. The Company has an active exploration effort in the Sunniland
trend area in Florida, which is operated by Plains Resources, Inc. ("Plains").
Prospective geology in the trend is characterized by carbonate reefs and shoals.
The primary oil and gas producing formation is the Cretaceous-age Sunniland
formation, which extends from south of Ft. Myers, Florida to northwest of Miami,
Florida. In 1998, the Company plans to drill a well on a prospect that may
confirm an extension of the Raccoon Point Field. Cumulative production from this
field, located in Collier County, Florida, has exceeded 9.5 MMBOE. The Company
and Plains are exploring other project opportunities within the Sunniland trend
by acquiring, reprocessing and analyzing 2-D seismic data along with other
exploration techniques. The Company holds an 8% working interest in this
exploration project.
OTHER PROJECTS
OFFSHORE GULF OF MEXICO. The Company has two producing properties and
three active exploratory projects offshore in the Gulf of Mexico. The two
producing properties, the Cove project at Matagorda Island Block 487-L and the
Hollywood project at East Cameron Block 42, are at this time considered to be
fully developed. The Company owns a 7% and 5% working interest in these
projects, respectively. One of the exploratory projects is part of the Company's
initial joint venture with Phillips Petroleum which commenced in July 1997. On
this project, the Company committed to conduct a field study on an existing
producing block in the Gulf of Mexico with the objective of identifying
additional exploratory or exploitation opportunities. The Company has the right
to participate as a 5% working interest partner in future drilling on this
block. The other exploratory projects consist of two deep water projects in the
flex trend of the Gulf of Mexico. These projects have eight-year lease terms
which expire in March 2005. The Company does not currently plan to drill wells
on either of these projects during 1998. A third deep water block was also
acquired in 1997. The Company participated in the drilling of an exploration
well on this block in 1997 which was unsuccessful.
WEST AFRICA. The Company joined its partner, Santa Fe Energy Resources
(Cote d'Ivoire) Ltd., in January 1997 to evaluate Block CI-24 which consists of
190,000 acres located in the offshore waters of The Republic of Cote d'Ivoire.
Pursuant to a production sharing contract, the Company and its partner purchased
and reprocessed existing seismic data, which includes an 81 square mile 3-D
seismic survey, and completed an engineering and economic study. The partnership
plans to drill the first exploratory well on this project in 1998. The Company
owns a 10% working interest in the project. During 1997, the Company and Santa
Fe acquired an additional project offshore Cote d'Ivoire, Block CI-202. Late in
1997, the partnership began work on a 400 square kilometer 3-D seismic survey,
which was completed during the first quarter of 1998. The Company holds a 10%
working interest in Block CI-202. Also during 1997, the Company and Santa Fe
acquired a concession offshore Ghana covering a total area of almost 3 million
acres. The Company's working interest in the project, which is in the early
stage of exploration, ranges from 5% to 10%.
OIL AND GAS RESERVES
All of the Company's proved reserves described below are located
onshore and offshore Texas and in the Federal waters offshore Louisiana. All of
the Company's proved reserves reflected in the table are proved developed
reserves. The reserve estimates as of December 31, 1995 were based on estimates
prepared by the Company, while the reserve estimates subsequent to that date
were prepared by the independent engineering consulting firm Ryder Scott Company
Petroleum Engineers. In accordance with
-11-
<PAGE> 14
applicable requirements of the Securities and Exchange Commission, the estimated
discounted future net revenues from estimated proved reserves are based on
prices and costs as of the date of the estimate unless such prices or costs are
contractually determined at such date. The Company has not provided any
estimates of total proved reserves, comparable to those disclosed herein, in any
reports filed with federal authorities or agencies other than the Securities and
Exchange Commission.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C>
Estimated Net Proved Reserves Data:
Gas (Mmcf) 3,932 2,464 443
Oil and condensate (Mbbl) 89 32 41
Total equivalent, converted at 6:1 (Mmcfe) 4,466 2,656 689
Pre-tax present value of proved reserves discounted at 10%
(in thousands) $7,048 $6,623 $771
Standardized Measure of Discounted Future Net Cash Flows (in
thousands) (1) $7,048 $6,623 $771
- --------------
</TABLE>
(1) In accordance with statutory requirements of the Securities and
Exchange Commission, these amounts represent the present value of
estimated future net revenues after income taxes discounted at 10%. The
present value amounts are the same before taxes and after projected
income taxes as a result of the Company's substantial net operating
loss carryforwards.
The process of estimating proved developed and proved undeveloped oil
and gas reserves is very complex, requiring significant subjective decisions in
the evaluation of available geologic, engineering and economic data for each
reservoir. The data for a given reservoir may change over time as a result of
additional development activity, production history and viability of production
under varying economic conditions. The actual production, revenues, severance
taxes, development and operating expenditures with respect to the Company's
reserves will likely vary from such estimates, and such variances could be
material.
PRODUCTIVE WELLS
At December 31, 1997, 1996 and 1995, the Company held interests in the
following productive wells:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------
1997 1996 1995
----------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ----
Oil Wells 9 0.54 8 0.31 7 0.16
Gas Wells 21 4.49 11 1.71 5 0.74
----- ---- ----- ---- ----- ----
Total Wells 30 5.03 19 2.02 12 0.90
===== ==== ===== ==== ===== ====
</TABLE>
The number of gross wells equals the total number of wells in which the
Company owns a working interest. The number of net wells equals the sum of the
Company's fractional working interests owned in gross wells.
OIL AND GAS DRILLING ACTIVITIES
The following table sets forth the gross and net number of productive,
dry and total exploratory and development wells that the Company drilled in each
of 1997, 1996 and 1995:
-12-
<PAGE> 15
<TABLE>
<CAPTION>
GROSS WELLS NET WELLS
--------------------------- -----------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
---------- --- ----- ---------- --- -----
<S> <C> <C> <C> <C> <C> <C>
EXPLORATORY WELLS
Year ended December 31, 1997 11 9 20 2.98 1.83 4.81
Year ended December 31, 1996 7 7 14 0.74 0.84 1.58
Year ended December 31, 1995 2 - 2 0.28 - 0.28
DEVELOPMENT WELLS
Year ended December 31, 1997 - 3 3 - 0.48 0.48
Year ended December 31, 1996 3 - 3 0.60 - 0.60
Year ended December 31, 1995 - - - - - -
</TABLE>
As of December 31, 1997, the Company was participating in 2 gross (0.32
net) exploratory wells.
PRODUCTION
The following table summarizes the net volumes of oil and gas produced
and sold and the average prices received with respect to such sales from all
properties in which the Company held an interest during 1997, 1996 and 1995,
respectively.
<TABLE>
<CAPTION>
GAS OIL
----------------------- ------------------------
NET AVERAGE NET AVERAGE
PRODUCTION SALES PRODUCTION SALES
(MMCF) PRICE/MCF (MMCF) PRICE/BBL
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1997 1,131.8 2.46 14.1 18.54
Year ended December 31, 1996 271.2 2.50 8.5 20.43
Year ended December 31, 1995 97.1 1.59 6.7 17.89
</TABLE>
Average oil and gas operating expenses per Mcfe including severance and
ad valorem taxes, were $0.36, $0.33, and $0.57 for 1997, 1996 and 1995,
respectively.
ACREAGE
The following table sets forth the developed and undeveloped oil and
gas acreage in which the Company held an interest as of December 31, 1997.
Undeveloped acreage consists of those lease acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether or not such acreage contains
proved reserves.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
----------------------- -----------------------
GROSS NET GROSS NET
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Texas ........................... 6,627 1,822 69,769 14,542
Louisiana ....................... 267 13 23,733 1,387
Mississippi ..................... -- -- 3,922 981
Offshore Federal ................ 1,440 72 32,054 2,917
Cote d'Ivoire ................... -- -- 359,537 35,954
Ghana ........................... -- -- 2,594,345 172,952
--------- --------- --------- ---------
Total ....................... 8,334 1,907 3,083,360 228,733
========= ========= ========= =========
</TABLE>
In addition to the above acreage, as of December 31, 1997, the Company
had agreements, options or farm-ins to acquire leases on 149,319 gross (31,493
net) acres of undeveloped land located in Florida, Mississippi and Texas.
-13-
<PAGE> 16
ITEM 3. LEGAL PROCEEDINGS
The Company has not been the subject of any legal proceedings since its
organization. There can be no assurance, however, that the Company will not in
the future be involved in litigation incidental to the conduct of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded over the counter on the NASDAQ
National Market under the symbol "TDXT". The following table sets forth, on a
per share basis for the periods indicated, the high and low prices as quoted by
the NASDAQ National Market since the shares became publicly traded on December
26, 1996. As of January 23, 1998 there were approximately 580 record holders of
the common stock.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1997
Fourth Quarter ended December 31, 1997 $ 9.25 $ 2.25
Third Quarter ended September 30, 1997 12.50 8.00
Second Quarter ended June 30, 1997 10.50 7.75
First Quarter ended March 31, 1997 13.13 10.00
1996
Fourth Quarter ended December 31, 1996 $ 11.25 $ 10.88
</TABLE>
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its common
stock since its formation. The Company's current credit agreement prohibits the
payment of cash dividends. The Company does not anticipate paying cash dividends
on its common stock in the foreseeable future. The Company currently intends to
retain any future earnings to finance the expansion and continued development of
its business.
ITEM 6. SELECTED FINANCIAL DATA
The financial information set forth below for the years ended December
31, 1997, 1996, 1995 and 1994 and for the period from inception of operations on
January 6, 1993 through December 31, 1993 is derived from the financial
statements of the Company, which were audited by Arthur Andersen LLP. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the financial
statements of the Company, the notes related thereto and other financial data
included elsewhere in this Form 10-K.
-14-
<PAGE> 17
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA: YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993(A)
-------- -------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues (b):
Oil and gas .............................. $ 3,046 $ 852 $ 275 $ 304 $ --
Interest and other ....................... 585 248 236 53 8
-------- -------- -------- -------- --------
Total revenues ........................ 3,631 1,100 511 357 8
-------- -------- -------- -------- --------
Costs and expenses:
Total lease operating .................... 437 107 79 34 --
Impairment of oil and gas properties ..... 9,061 1,477 1,627 -- --
Depletion, depreciation & amortization ... 2,636 423 158 91 --
General and administrative (b) ........... 2,533 1,828 1,135 617 623
-------- -------- -------- -------- --------
Total costs and expenses ................ 14,667 3,835 2,999 742 623
-------- -------- -------- -------- --------
Net loss from operations ................... (11,036) (2,735) (2,488) (385) (615)
Dividends and accretion on preferred stock .
- (941) (1,108) (452) (67)
-------- -------- -------- -------- --------
Net loss from operations applicable to
common stockholders ..................... $(11,036) $ (3,676) $ (3,596) $ (837) $ (682)
======== ======== ======== ======== ========
Basic and diluted net loss per common share
as previously reported .................. $ (1.53) $ (1.16) $ (1.14) $ (0.33) $ (0.59)
Retroactive effect of change in accounting
principle (c) ........................... -- (0.05) (0.06) (0.02) (0.10)
-------- -------- -------- -------- --------
Basic and diluted net loss per common share
$ (1.53) $ (1.21) $ (1.20) $ (0.35) $ (0.69)
======== ======== ======== ======== ========
Weighted average number of common shares
outstanding ............................. 7,194 3,042 2,988 2,373 993
======== ======== ======== ======== ========
STATEMENT OF CASH FLOW DATA:
Net cash provided by (used in) operating
activities .............................. $ 1,430 $ 615 $ (503) $ 16 $ 619
Net cash used by investing activities ...... 21,187 5,022 4,113 2,018 401
Net cash provided by financing activities .. 3,803 16,225 7,876 2,515 2,950
BALANCE SHEET DATA: AS OF DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
Working capital.............................. $ (632) $15,987 $ 7,265 $2,103 $2,003
Property and equipment, net.................. 18,372 8,576 2,935 2,669 636
Total assets................................. 21,310 26,827 10,451 5,197 2,792
Series B preferred stock..................... -- -- 6,278 5,452 2,631
Series C preferred stock..................... -- -- 7,904 -- --
Stockholders' equity (deficit)............... $17,818 $24,574 $(4,240) $ (674) $ 16
</TABLE>
(a) Period from inception of operations, January 6, 1993, through December 31,
1993.
(b) As discussed in Note 2 to the financial statements, rental income has been
reflected as a reduction of general and administrative expenses in all
periods presented.
(c) As discussed in Note 2 to the financial statements, earnings per share for
periods prior to the Company's initial public offering have been restated
to retroactively reflect the effect of SAB No. 98.
-15-
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the three years ended December 31, 1997, 1996 and
1995. This discussion should be read in conjunction with the financial
statements of the Company, the notes thereto and the other financial data
included elsewhere in this Annual Report on Form 10-K.
Overview
The Company is a knowledge-based oil and gas exploration company whose
core competence and strategic focus is the utilization of 3-D imaging and other
advanced technologies in the search for commercial quantities of hydrocarbons.
The Company enters into arrangements that enable it to combine its expertise and
exploration capabilities with the operating skills of other oil and gas
companies. The Company participates in selected exploration projects as a
non-operating working interest owner, sharing both risks and rewards with its
partners. The Company commenced operations in January 1993 to take advantage of
perceived opportunities emerging from changes in the domestic oil and gas
industry, including the divestiture of domestic oil and gas properties, advances
in technology and the outsourcing of specialized technical capabilities. By
reducing drilling risk through 3-D imaging and analysis, the Company seeks to
improve the expected return on investment in its oil and gas projects.
As a working interest partner, the Company shares all project costs in
proportion to its working interest percentage. In instances in which exploration
and development activities are unsuccessful, the Company incurs an economic loss
equal to its proportionate share of project costs prior to the time the project
is abandoned. Similarly, the Company incurs economic loss if the Company's
proportionate share of revenue generated from production is insufficient to
cover the Company's share of project costs.
The Company's future financial results will depend primarily on: (i)
the Company's ability to continue to source and screen potential projects; (ii)
the Company's ability to discover commercial quantities of hydrocarbons; (iii)
the market price for oil and gas; and (iv) the Company's ability to fully
implement its exploration and development program, which is dependent on the
availability of capital resources. There can be no assurance that the Company
will be successful in any of these respects, that the prices of oil and gas
prevailing at the time of production will be at a level allowing for profitable
production, or that the Company will be able to obtain additional funding to
increase its currently limited capital resources.
The Company recorded a valuation allowance against the estimated amount
of deferred tax assets for which realization is uncertain. The Company reviews
the valuation allowance at the end of each quarter and makes adjustments, as
necessary, if it is determined that it is more likely than not that the deferred
tax assets will be realized. As of December 31, 1997, the Company had tax net
operating loss carryforwards ("NOL's") of approximately $11.2 million which
begin to expire in 2008. As a result of the recent stock transactions, including
the initial public offering, there is a yearly limitation placed on the
Company's utilization of its NOL's under Section 382 of the Internal Revenue
Code of 1986, as amended. See Note 3 to the financial statements of the Company
included elsewhere herein.
-16-
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth certain operating information of the
Company during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
PRODUCTION:
Gas (MMcf) 1,131.8 271.2 97.1
Oil and condensate (Mbbls) 14.1 8.5 6.7
Total equivalent, converted at 6:1 (Mmcfe) 1,216.2 322.2 137.3
AVERAGE SALES PRICE:
Gas (per Mcf) $ 2.46 $ 2.50 $ 1.59
Oil and condensate (per Bbl) 18.54 20.43 17.89
AVERAGE EXPENSES (per Mcfe):
Lease operating (1) $ 0.36 $ 0.33 $ 0.57
Depletion of oil and gas properties 2.17 1.31 1.15
</TABLE>
- -------------
(1) Includes all lease operating expenses and taxes attributable to the
Company's properties, including production and ad valorem taxes.
Oil and Gas Revenues. Oil and gas revenues increased to $3,045,447 for the year
ended December 31, 1997 (the "1997 period") from $851,827 for the year ended
December 31, 1996 (the "1996 period"). This increase was primarily attributable
to higher oil and gas production levels. Production increased by over 277% to
1,216.2 Mmcfe for the 1997 period, from 322.2 Mmcfe for the 1996 period. The
increased production resulted from successful wells drilled during the last
three months of 1996 and throughout the year in 1997. The number of productive
wells in which the Company owned an interest increased to 30 (5.03 net) at the
end for the 1997 period from 19 (2.02 net) at the end of the 1996 period. The
average sales price for natural gas, which accounted for 93% of equivalent
production during the 1997 period, decreased by 2% to $2.46 per Mcf from $2.50
per Mcf for the 1996 period. The average sales price for oil decreased to $18.54
during the 1997 period versus $20.43 per barrel for the 1996 period.
Oil and gas revenues increased to $851,827 for the 1996 period from
$274,511 for the 1995 period. This increase was attributable to both higher oil
and gas production levels and a significant increase in the average price for
both natural gas and oil. Production increased by over 135% to 322.2 Mmcfe for
the 1996 period, from 137.3 Mmcfe for the 1995 period. The increased production
resulted from successful wells drilled during the last six months of 1995 and
throughout the year in 1996. The average sales price for natural gas, which
accounted for 84% of equivalent production during the 1996 period, increased by
57% to $2.50 per Mcf for the 1996 period from $1.59 per Mcf for the 1995 period.
The average sales price for oil increased to $20.43 during the 1996 period
versus $17.89 for the 1995 period.
Lease Operating Expenses. Total lease operating expenses, including production
taxes, increased to $436,243 for the 1997 period from $107,676 for the 1996
period. This increase was primarily attributable to the additional costs of
operating new producing wells drilled during the last three months of 1996 and
throughout the year in 1997 and is comparable to the increase in production
during the corresponding periods. Lease operating expenses per Mcfe of
production increased slightly to $0.36 per Mcfe for the 1997 period from $0.33
per Mcfe for the 1996 period.
Total lease operating expenses, including production taxes, increased
to $107,676 for the 1996 period from $78,533 for the 1995 period. Lease
operating expenses per Mcfe decreased to $0.33 for the 1996 period from $0.57
per Mcfe for the 1995 period. Substantially all of this decrease in lease
operating expenses per Mcfe was the result of lower lease operating expenses per
Mcfe for certain wells completed during the 1996 period. These wells were
producing at relatively high rates from onshore, shallow, highly permeable gas
-17-
<PAGE> 20
sands and produce relatively small amounts of water, so there are negligible
treating or disposal costs associated with such wells. These wells require no
artificial lift or compression so the power and maintenance costs associated
with such wells are minimal. Additionally, the highly permeable nature of the
producing zones resulted in relatively high production rates, which lowered the
operating expenses associated with production from these wells on a per Mcfe
basis.
Depletion, Depreciation and Amortization Expense. Depletion of oil and gas
properties for the 1997 period increased to $2,636,305 from $422,839 for the
1996 period. The increase in depletion of oil and gas properties resulted from
both the increase in oil and gas production during the 1997 period, as discussed
above, and an increase in the depletion rate for this period. Depletion of oil
and gas properties per Mcfe for the 1997 period increased to $2.17 per Mcfe, or
66%, from the rate of $1.31 per Mcfe in the corresponding period in 1996. The
increase in the rate resulted from greater additions to evaluated oil and gas
property costs than the additions to oil and gas reserves relative to the
existing depletion rate per Mcfe. This was principally the result of the costs
of unsuccessful wells drilled in 1997.
Depletion of oil and gas properties for the 1996 period increased to
$422,839 from $158,336 for the 1995 period. The increase in depletion of oil and
gas properties resulted from both the increase in oil and gas production during
the 1996 period and a 14% increase in the depletion rate. Depletion of oil and
gas properties per Mcfe for the 1996 period increased to $1.31 per Mcfe over the
rate of $1.15 per Mcfe in the corresponding period in 1995. The increase in the
rate resulted from greater additions to evaluated oil and gas property costs
than the additions to oil and gas reserves relative to the existing depletion
rate per Mcfe.
Impairment of Oil and Gas Properties. Under the rules of the full-cost
accounting method as prescribed by the Securities and Exchange Commission, the
Company is required to compare the net costs of its evaluated properties to the
net present value of its proved reserves, using prices and costs in effect at
the end of each quarterly period. If such evaluated costs, net of accumulated
depreciation, depletion and amortization exceed the present value of proved
reserves, an impairment charge is required to writedown those excess costs. Oil
and gas impairment charges recorded during 1997 were $9,061,240, all of which
were attributable to the fourth quarter ended December 31, 1997. This writedown
results principally from three factors: (1) the significant decline in oil and
gas prices being received by the Company on December 31, 1997 as compared to
September 30, 1997, (2) a relatively large investment in three unsuccessful
exploratory wells all of which were evaluated in fourth quarter of 1997, and (3)
a conservative estimate of proved reserves on a potentially significant
discovery on the Ramrod prospect, as discussed in Item 2, "Properties."
Impairments recorded during 1996 and 1995 totaled $1,476,690, and $1,627,321,
respectively, primarily as a result of the evaluated costs of prospects which
had poor drilling results during those periods.
General and Administrative Expense. General and administrative expense, net of
costs capitalized to exploration and development projects, increased 39% to
$2,532,957 for the 1997 period from $1,827,946 for the 1996 period. The increase
is primarily a result of personnel costs associated with hiring which occurred
during 1997 and increased professional fees and other costs associated with
being a public company offset by a decrease in the amount of $390,616 relating
to the amortization of deferred compensation expense. The 1996 amount
represented a 61% increase from $1,134,882 incurred during the year ended
December 31, 1995. This increase was primarily attributable to the amortization
of deferred compensation expense recognized in connection with stock options
granted within one year of the filing of the registration statement for the
initial public offering, which expense is based on the difference between the
option price and the initial $11.00 per share initial public offering price of
the common stock.
Interest and Other Income. Interest and other income increased 136% to
approximately $585,154 for the 1997 period from approximately $247,960 for the
comparable period during 1996. This increase reflects interest income on the
higher level of short-term investments during 1997 as a result of investment of
the proceeds of the Company's initial public offering. The 1996 amount
represents a 5% increase from $236,186 earned during the comparable 1995 period,
as a result of interest income attributable to short-term investment of the
proceeds of the Series C preferred stock.
-18-
<PAGE> 21
Net Loss. As a result of the foregoing, the Company's net loss increased to
approximately $11.0 million for the 1997 period from approximately $2.7 million
for the 1996 period. The most significant factor which caused the increase in
net loss was the impairment of oil and gas properties recorded under full-cost
accounting rules. The net loss for 1996 increased slightly from the net loss of
$2.5 million in 1995, as a result of all of the foregoing.
LIQUIDITY AND CAPITAL RESOURCES
To date, net cash provided by operating activities has been limited and
the Company has funded its oil and gas exploration activities principally
through cash provided by the sale of equity securities. On December 26, 1996,
the Company consummated an initial public offering of common stock which
provided approximately $23.6 million in proceeds, net of offering expenses. In
January 1997, the Company's underwriters exercised their over-allotment option
to purchase 375,000 additional shares of common stock, resulting in additional
net proceeds to the Company of approximately $3.8 million. Approximately $7.5
million of the proceeds of the initial public offering was used to redeem all
the issued and outstanding shares of the Series B preferred stock and to pay
accrued dividends on the issued and outstanding Series C preferred stock. The
balance of the net proceeds were designated to fund the Company's exploration
and development capital expenditures and for general corporate purposes,
including expenses associated with hiring additional personnel.
The Company's business requires substantial oil and gas capital
expenditures. To achieve its near-term goals, the Company has been and will be
required to make oil and gas capital expenditures substantially in excess of its
net cash flow from operations in order to acquire, explore and develop oil and
gas properties. Capital expenditures for oil and gas exploration and development
activities during the years ended December 31, 1997, 1996, and 1995, were $19.9
million, $6.2 million and $2.2 million, respectively. The Company has not set a
final capital expenditure budget for 1998, but has opportunities to invest in
excess of $10 million in exploration and development projects in which the
Company currently owns an interest. The Company continues to define new
opportunities on both its active exploration projects and new projects. However,
the level of capital spending in 1998 is dependent upon the Company's ability
to obtain additional sources of funding.
As of December 31, 1997, the Company had a deficit in working capital
of approximately $632,000. On December 18, 1997, the Company executed a credit
agreement with a commercial bank. The credit agreement provided borrowing
capacity of $3.0 million at December 31, 1997. Such borrowing capacity is a
function of the value of the Company's proved oil and gas reserves, and is
redetermined on a quarterly basis. The bank is currently conducting a schedule
redetermination. Based of preliminary indications from the bank, the Company
expects the revised borrowing base to be between $2.0 and $3.0 million. The
credit agreement is secured by substantially all of the Company's oil and gas
properties and contains restrictions on dividends and additional liens and
indebtedness and requires the maintenance of a minimum current ratio and net
worth, each as defined in the credit agreement. There were no borrowings under
the credit agreement during 1997. The Company prefers to use debt only to fund
development drilling and not to finance exploration costs. However, the Company
expects to use funds available under the credit agreement as a source of
financing to fund both exploration and development activities until additional
equity or other sources of permanent funding are obtained.
As a result of the Company's periodic review of each of its oil and gas
exploration and development properties and its available capital, the Company
has on two occasions sold partial interests in specific oil and gas projects to
other investors to reduce its total investment commitment to such projects. No
gain or loss was recognized on either transaction. The Company is currently
reviewing its portfolio and has identified one property in which it intends to
sell the majority of its interests to provide additional capital for its
exploration program. Such interests consist of both producing wells and future
drilling locations. The Company may identify additional properties for sale in
the course of its continuing review. There can be no assurance, however, that
the Company will be able to sell any such interests, or that the terms of such
sale will be acceptable to the Company.
The Company expects that its projected cash flows from currently
producing properties will be sufficient to fund its cash general and
administrative costs for the next twelve months, including technical employee
and related costs which are capitalized under full-cost accounting, and will
also provide limited funding for its capital program. The Company's projections
of cash flows from currently producing properties are dependent on the following
assumptions: (i) there are no significant declines in oil and gas prices below
-19-
<PAGE> 22
current levels or anticipated seasonal lows, and (ii) there are no significant
declines in oil and gas production from existing properties other than declines
in production currently anticipated based on engineering estimates of the
decline curves associated with such properties.
To enable it to continue to take advantage of oil and gas exploration
and development opportunities, the Company intends to seek additional financing
in 1998 to satisfy its capital requirements. The Company is currently evaluating
alternatives to obtain additional equity financing, which include sales of
common or preferred stock. The Company anticipates funding its short-term
capital spending from a combination of expected cash flow generated from
operations, borrowings under the credit agreement and proceeds from the sale of
oil and gas properties. In the absence of additional financing, the Company
could be required to modify the implementation and timing of its oil and gas
exploration and development capital spending for 1998, which modification could
have a material adverse effect on the Company. No assurance can be given that
the Company will be able to obtain additional financing on terms which would be
acceptable to the Company, if at all.
EFFECTS OF INFLATION AND CHANGES IN PRICE
The Company's results of operations and cash flows are affected by
changing oil and gas prices. If the price of oil and gas increases (decreases),
there could be a corresponding increase (decrease) in the operating cost that
the Company is required to bear for operations, as well as an increase
(decrease) in revenues. Historically, general price inflation has had a minimal
effect on the Company.
OTHER
In connection with stock options granted within one year prior to the
initial filing of the registration statement relating to the initial public
offering, the Company recorded deferred compensation expense based on the
difference between the option exercise price and the fair value of the Company's
common stock at the date of grant, using the $11.00 per share initial public
offering price as an estimate of the fair value. Such deferred compensation is
being amortized as additional compensation expense over the vesting period for
the options. As of December 31, 1997, the Company had unamortized deferred
compensation of $512,132 which will be charged to expense during the next three
years. The Company has elected not to adopt the fair value accounting of SFAS
No. 123 for employees and continues to account for these plans under APB Opinion
No. 25.
The Company has assessed the expected impact of the date change in the
Year 2000 on the software programs used in its operations. The majority of the
Company's technical applications are not date sensitive. The applications that
do have date sensitive aspects, including the Company's accounting software,
have either been updated to compensate for the date change in the Year 2000 or
are currently being updated by the software vendors. Based on this assessment,
the Company does not expect to have any significant operational issues or
material costs related to the Year 2000 software issue.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are incorporated under
Item 14 in Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-20-
<PAGE> 23
PART III
ITEMS 10 TO 13 INCLUSIVE.
These items have been omitted in accordance with the general
instructions to Form 10-K Annual Report. The Registrant will file with the
Securities and Exchange Commission in April 1998, pursuant to Regulation 14A, a
definitive proxy statement that will involve the election of directors. The
information required by these items will be included in such proxy statement and
are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(A)(1) FINANCIAL STATEMENTS:
<S> <C>
INDEX TO FINANCIAL STATEMENTS PAGE
Report Of Independent Public Accountants.................................................... F-1
Balance Sheets as of December 31, 1997 and 1996................................... F-2
Statements of Operations for the three years ended December 31, 1997.............. F-3
Statements of Changes in Common Stockholders' Equity for the three
years ended December 31, 1997................................................ F-4
Statements of Cash Flows for the three years ended December 31, 1997.............. F-5
Notes to Financial Statements..................................................... F-6
Supplementary Information - Unaudited............................................. F-16
(A)(2) FINANCIAL STATEMENT SCHEDULES:
Not applicable
</TABLE>
-21-
<PAGE> 24
(a)(3)EXHIBITS:
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- -----------------------
<S> <C>
3.1(i) Sixth Restated Certificate of Incorporation of the Company (incorporated by reference to
Exhibit 3.1(i)(d) to the Company's Amendment No. 2 to the Registration Statement on Form S-1
(No. 333-14473), filed December 16, 1996).
3.1(ii) Second Amended and Restated Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.1 to
the Form 10-Q for the period ended June 30, 1997).
4.1 Form of Specimen Stock Certificate, incorporated by reference to Exhibit 4.1 to the Company's
Amendment No. 1 to Registration Statement on Form S-1 (No. 333-14473), filed November 27, 1996.
10.1 Technical Services Agreement between Landmark Graphics Corporation and Novera Energy Inc.
dated January 1993 (incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (No. 333-14473), filed October 18, 1996
10.2 * Credit Agreement with NationsBank of Texas dated December 18, 1997
10.3 1994 Stock Option Plan (incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (No. 333-14473), filed October 18, 1996 +
10.4 Stock Purchase Agreement among the Company, C. Eugene Ennis, Douglas C. Nester, Peter M. Duncan
and the Investors named therein dated November 9, 1993 (incorporated by reference to Exhibit
10.2 to the Company's Registration Statement on Form S-1 (No. 333-14473), filed October 18, 1996).
10.5 Series C Preferred Stock Purchase Agreement among the Company, C. Eugene Ennis, Douglas C. Nester,
Peter M. Duncan and the Investors named therein dated July 26, 1995 (incorporated by reference
to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (No. 333-14473), filed October
18, 1996).
10.6 Lease Contract dated January 22, 1995 between the Company and The Penn Mutual Life Insurance
Company and Letter dated March 1, 1995 from Trammell Crow Houston, Inc. (incorporated by reference
to Exhibit 10.8 to the Company's Registration Statement of Form S-1 (No. 333-14473), filed October
18, 1996).
11.1 * Computation of Earnings per Share
23.1 * Consent of Arthur Andersen LLP
23.2 * Consent of Ryder Scott Company
24.1 * Power of Attorney (included on signature page)
27.1 * Financial Data Schedule for December 31, 1997
27.2 * Financial Data Schedule for December 31, 1996 (restated)
27.3 * Financial Data Schedule for December 31, 1995 (restated)
</TABLE>
---------------
* filed herewith
+ management contract or compensating plan
(b) REPORTS ON FORM 8-K:
There were no Current Reports on Form 8-K filed during the quarter
ended December 31, 1997 and through the date hereof.
-22-
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
3DX TECHNOLOGIES INC.
By: /s/ Randall D. Keys
--------------------------------
Vice President, Finance, Chief Financial Officer
and Secretary
Know All Men By These Presents, that each individual whose signature
appears below hereby constitutes and appoints C. Eugene Ennis, Randall D. Keys
and Peter M. Duncan and each of them individually, his true and lawful agent,
proxy and attorney-in-fact, with full power of substitution and resubstitution,
for him in his name, place and stead, in any and all capacities, to (i) act on,
sign and file with the Securities and Exchange Commission any and all amendments
to this report together with all schedules and exhibits thereto, (ii) act on,
sign and file with the Securities and Exchange Commission any exhibits to this
report, (iii) act on, sign and file such certificates, instruments, agreements
and other documents as may be necessary or appropriate in connection therewith
and (iv) take any and all actions which may be necessary or appropriate in
connection therewith, granting unto such agents, proxies and attorneys-in-fact
and each of them individually, full power and authority to do and perform each
and every act and thing necessary or appropriate to be done, as fully for all
intents and purposes as he might or could do in person, hereby approving,
ratifying and confirming all that such agents, proxies and attorneys-in-fact,
any of them or any of his or their substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
DATE SIGNATURE TITLE(S)
---- --------- --------
<S> <C> <C>
March 27, 1998 /s/ C. Eugene Ennis President, Chief Executive Officer; Director
--------------------------------------- (Principal Executive Officer)
C. Eugene Ennis
March 27, 1998 /s/ Randall D. Keys Vice President, Finance, Chief Financial
--------------------------------------- Officer and Secretary (Principal Financial
Randall D. Keys and Accounting Officer)
March 27, 1998 /s/ Peter M. Duncan Vice President, Chief Geophysicist and
--------------------------------------- Treasurer
Peter M. Duncan
</TABLE>
-23-
<PAGE> 26
<TABLE>
<S> <C> <C>
March 27, 1998 /s/ Douglas C. Nester Vice President and Chief Geologist
---------------------------------------
Douglas C. Nester
March 27, 1998 /s/ Ronald P. Nowak Vice President, Exploration
---------------------------------------
Ronald P. Nowak
March 27, 1998 /s/ Robert J. Bacon, Jr. Vice President, Joint Ventures
---------------------------------------
Robert J. Bacon, Jr.
March 27, 1998 /s/ Joseph Schuchardt, III Vice President, Business Development
---------------------------------------
Joseph Schuchardt, III
March 27, 1998 /s/ Jon W. Bayless Director
---------------------------------------
Jon W. Bayless
March 27, 1998 /s/ Charles E. Edwards Director
---------------------------------------
Charles E. Edwards
March 27, 1998 /s/ C.D. Gray Director
---------------------------------------
C.D. Gray
March 27, 1998 /s/ Douglas C. Williamson Director
---------------------------------------
Douglas C. Williamson
</TABLE>
-24-
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of 3DX Technologies Inc.:
We have audited the accompanying balance sheets of 3DX Technologies
Inc. (a Delaware corporation) as of December 31, 1997 and 1996, and the related
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of 3DX Technologies
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Houston, Texas
February 25, 1998 ARTHUR ANDERSEN LLP
F-1
<PAGE> 28
3DX TECHNOLOGIES INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 1,568,091 $ 17,521,745
Accounts receivable ................................................. 1,181,083 554,210
Prepaid expenses..................................................... 110,681 165,095
------------ ------------
Total current assets............................................... 2,859,855 18,241,050
------------ ------------
Propery and equipment:
Oil and gas properties, full-cost method:
Evaluated.......................................................... 22,521,673 7,164,397
Unevaluated........................................................ 10,098,698 4,403,165
Technical interpretation equipment................................... 2,605,439 1,505,534
Other property and equipment......................................... 273,780 205,531
------------ ------------
35,499,590 13,278,627
Less accumulated depletion, depreciation and amortization.......... (17,127,846) (4,702,296)
------------ ------------
18,371,744 8,576,331
Other assets............................................................ 78,041 9,808
------------ ------------
$ 21,309,640 $ 26,827,189
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 1,713,209 $ 1,960,984
Accrued liabilities ................................................. 1,778,543 292,581
------------ ------------
Total current liabilities ......................................... 3,491,752 2,253,565
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued ..................................................... -- --
Common stock, $.01 par value, 20,000,000 shares authorized, 7,225,462
and 6,841,177 shares issued and outstanding, respectively
72,255 68,412
Paid-in capital ..................................................... 38,085,357 34,189,700
Deferred compensation ............................................... (512,132) (893,040)
Accumulated deficit ................................................. (19,827,592) (8,791,448)
------------ ------------
Total stockholders' equity ........................................ 17,817,888 24,573,624
------------ ------------
$ 21,309,640 $ 26,827,189
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 29
3DX TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Oil and gas ........................................ $ 3,045,447 $ 851,827 $ 274,511
Interest and other ................................. 585,154 247,960 236,186
------------ ------------ ------------
Total revenues ................................... 3,630,601 1,099,787 510,697
------------ ------------ ------------
Costs and expenses:
Lease operating .................................... 257,291 49,016 60,877
Production taxes ................................... 178,952 58,660 17,656
Impairment of oil and gas properties ............... 9,061,240 1,476,690 1,627,321
Depletion, depreciation, and amortization .......... 2,636,305 422,839 158,336
General and administrative ......................... 2,532,957 1,827,946 1,134,882
------------ ------------ ------------
Total costs and expenses ......................... 14,666,745 3,835,151 2,999,072
------------ ------------ ------------
Net loss .............................................. (11,036,144) (2,735,364) (2,488,375)
Dividends on preferred stock .......................... -- (520,393) (1,058,956)
Redemption premium on Series B preferred stock ........ -- (365,810) --
Accretion on preferred stock .......................... -- (54,844) (48,408)
------------ ------------ ------------
Net loss applicable to common stockholders ............ $(11,036,144) $ (3,676,411) $ (3,595,739)
============ ============ ============
Basic and diluted net loss per common share ........... $ (1.53) $ (1.21) $ (1.20)
============ ============ ============
Weighted average number of common shares outstanding... 7,193,837 3,042,466 2,987,908
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 30
3DX TECHNOLOGIES INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK STOCK
----------------- PAID-IN DEFERRED ACCUMULATED SUBSCRIPTIONS
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT RECEIVABLE TOTAL
------ ------ ------- ------------ ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994. 2,987,908 $29,879 $ 841,604 $ - $ (1,519,298) $(26,157) $ (673,972)
Principal collections........ - - - - - 36,156 36,156
Shares issued during 1995.... - - - - - (57,755) (57,755)
Accrual of dividends......... - - - - (1,058,956) - (1,058,956)
Accretion on preferred stock. - - - - (48,408) - (48,408)
Deferred compensation
related to certain stock
options................... - - 888,855 (888,855) - - -
Compensation expense related
to certain stock options.. - - - 50,991 - - 50,991
Net loss..................... - - - - (2,488,375) - (2,488,375)
---------- -------- ------------ ----------- ------------ ---------- -----------
Balance at December 31, 1995. 2,987,908 29,879 1,730,459 (837,864) (5,115,037) (47,756) (4,240,319)
Principal collections........ - - - - - 47,756 47,756
Shares issued upon exercise
of stock options.......... 3,124 31 573 - - - 604
Accrual of dividends......... - - - - (520,393) - (520,393)
Accretion on preferred stock. - - - - (54,844) - (54,844)
Deferred compensation
related to certain stock
options................... - - 922,806 (922,806) - - -
Compensation expense related
to certain stock options.. - - - 867,630 - - 867,630
Shares issued in Initial
Public Offering (net of
offering costs)........... 2,400,000 24,000 23,539,064 - - - 23,563,064
Conversion of Series C
preferred to common stock. 1,450,145 14,502 7,996,798 - - - 8,011,300
Redemption of Series B
preferred stock........... - - - - (365,810) - (365,810)
Net loss..................... - - - - (2,735,364) - (2,735,364)
---------- -------- ------------ ----------- ------------ ---------- -----------
Balance at December 31, 1996. 6,841,177 68,412 34,189,700 (893,040) (8,791,448) - 24,573,624
Shares issued for
over-allotment............ 375,000 3,750 3,796,396 - - - 3,800,146
Shares issued for exercise
of stock options.......... 9,285 93 3,155 - - 3,248
Deferred compensation
related to certain stock
options................... - - 96,106 (96,106) - - -
Compensation expense related
to certain stock options.. - - - 477,014 - - 477,014
Net loss..................... - - - - (11,036,144) - (11,036,144)
---------- -------- ------------ ----------- ------------- -------------- ------------
Balance at December 31, 1997. 7,225,462 $ 72,255 $ 38,085,357 $ (512,132) $ (19,827,592) $ - $ 17,817,888
========== ======== ============ =========== ============= ============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 31
3DX TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. $(11,036,144) $ (2,735,364) $ (2,488,375)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depletion, depreciation and amortization ........ 3,366,242 883,962 446,350
Compensation expense related to certain stock
options ...................................... 477,014 867,630 50,991
Impairment of oil and gas properties ............ 9,061,240 1,476,690 1,627,321
Increase in accounts receivable ................. (626,873) (440,506) (45,485)
(Increase) decrease in prepaid expenses ......... 54,414 (79,309) (76,188)
Increase (decrease) in accounts payable ......... (107,291) 388,767 (3,005)
Increase (decrease) in accrued liabilities ...... 240,963 253,415 (14,540)
------------ ------------ ------------
Net cash provided by (used in) operating activities .. 1,429,565 615,285 (502,931)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties .................. (19,948,293) (6,166,219) (2,185,804)
Sales of oil and gas properties ...................... -- -- 480,931
Purchases of technical and other equipment ........... (1,168,154) (456,264) (800,573)
Proceeds from (purchases of) securities held to
maturity .......................................... -- 1,595,167 (1,595,167)
Other ................................................ (70,166) 5,000 (12,886)
------------ ------------ ------------
Net cash used in investing activities ................ (21,186,613) (5,022,316) (4,113,499)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock proceeds, net of issuance costs ......... 3,803,394 23,563,668 --
Series B preferred stock proceeds, net of issuance
costs............................................... -- -- 25,297
Series C preferred stock proceeds, net of issuance
costs .............................................. -- 143,843 7,851,133
Redemption of Series B preferred stock ............... -- (6,687,100) --
Payment of Series C preferred stock dividends ........ -- (795,649) --
------------ ------------ ------------
Net cash provided by financing activities ............ 3,803,394 16,224,762 7,876,430
------------ ------------ ------------
Net change in cash and cash equivalents ................. (15,953,654) 11,817,731 3,260,000
Cash and cash equivalents at beginning of year .......... 17,521,745 5,704,014 2,444,014
------------ ------------ ------------
Cash and cash equivalents at end of the year ............ $ 1,568,091 $ 17,521,745 $ 5,704,014
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
NON-CASH TRANSACTIONS:
Dividends declared but not paid .................... $ -- $ -- $ 275,256
Accretion on preferred stock ....................... -- 54,844 48,408
Redemption premium on Series B preferred stock ..... -- 365,810 --
Stock dividend on Series B preferred stock ......... -- -- 783,700
Sale of Series C preferred stock in exchange for
promissory notes ............................... -- -- 57,755
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 32
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
3DX Technologies Inc. ("3DX" or the "Company") began operations in
January 1993 to offer 3-D seismic imaging and computer-aided exploration
capabilities as a partner to experienced oil and gas operators. The Company
combines its 3-D imaging capabilities with the operator's local knowledge and
infrastructure to evaluate and exploit drilling opportunities. The Company
primarily invests in prospects in the Gulf Coast region of the U.S., where 3-D
seismic evaluation and interpretation is expected to reduce drilling risk.
Working interests in major prospects have ranged from 5% to 40% in property
investments to date.
The Company was initially funded by its three founding stockholders and
by Landmark Graphics Corporation (Landmark), a Houston company which is a
leading supplier of interactive computer-aided exploration systems used by
geoscientists to analyze subsurface data in the process of exploring for and
producing petroleum reserves. The three founding stockholders of 3DX were
formerly employed by Landmark.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Oil and Gas Properties
3DX accounts for its oil and gas properties using the full-cost method.
All costs associated with the acquisition, exploration and development of oil
and gas properties, including such costs as leasehold acquisition costs,
geological and geophysical expenditures, dry hole costs and tangible and
intangible development costs, are capitalized as incurred. Included in
capitalized costs for 1997, 1996 and 1995 are general and administrative costs
of $1,962,691, $1,146,722, and $618,614, respectively. Such capitalized costs
include payroll and related costs of exploration department personnel which are
directly attributable to the Company's current exploration and development
activities. Other costs, such as office and facilities costs, technical
equipment maintenance, depreciation and support and communication costs are also
capitalized to the extent they are attributed to the Company's oil and gas
property acquisition and exploration activities and would not otherwise be
incurred if such activities were not being undertaken.
Dispositions of proved oil and gas properties are reported as
adjustments to capitalized costs, with gains and losses not recognized unless
such adjustments would significantly alter the relationship between capitalized
costs and estimated proved oil and gas reserves.
The evaluated costs of oil and gas properties plus estimated future
development and dismantlement costs (including plugging, abandonment and
site-restoration costs) are charged to operations as depreciation, depletion,
and amortization using the unit-of-production method based on the ratio of
current production to estimated proved recoverable oil and gas reserves. The
Company excludes unevaluated property costs from the depreciation, depletion and
amortization calculations until proved reserves have been discovered or a
determination of impairment has been made. Unevaluated properties are evaluated
for impairment on a property-by-property basis.
Impairment of capitalized costs of oil and gas properties is determined
for each cost center on a country-by-country basis. For each cost center, to the
extent that capitalized costs of oil and gas properties, net of related
accumulated depreciation, depletion and amortization and any related deferred
income taxes, exceed the future net revenues of estimated proved oil and gas
reserves, discounted at 10% and net of any income tax effects, plus the lower of
cost or fair value of unevaluated properties, such excess costs are charged to
operations as an impairment of oil and gas properties. Writedowns of $9,061,240,
$1,476,690 and $1,627,321 were recorded during 1997, 1996 and 1995,
respectively.
F-6
<PAGE> 33
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Other property and equipment, consisting of technical interpretation
equipment and related software and office furniture, equipment and leasehold
improvements are recorded at cost. Depreciation is determined on a straight-line
basis over the estimated useful lives of the assets, which range from three to
five years. Depreciation of other property and equipment totaled $728,005,
$459,189 and $288,014 for 1997, 1996 and 1995, respectively, and is included in
general and administrative expenses.
Accounting for Income Taxes
The Company provides deferred income taxes at the balance sheet date
for the estimated tax effects of differences in the tax basis of assets and
liabilities and their financial statement carrying amounts.
Natural Gas Revenues
Natural gas revenues are recorded using the sales method, whereby the
Company recognizes natural gas revenues based on the amount of gas sold to
product purchasers on its behalf. The Company has no material gas imbalances.
Rental Income
The Company has an informal income-sharing arrangement with a seismic
processing company whereby the Company receives a percentage of the seismic
processing company's gross billings in exchange for office space and the use of
technical equipment provided by the Company. The Company's share of billings
under this arrangement amounted to $264,651, $229,556, and $58,195 in 1997, 1996
and 1995, respectively, and is reflected as a reduction of the Company's general
and administrative expenses.
Net Loss per Common Share
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," which establishes new computation, presentation, and disclosure
requirements for earnings per share for public companies. The statement is
effective for financial statements issued for periods ending after December 15,
1997. In connection with this new statement, the Securities and Exchange
Commission issued Staff Accounting Bulletin (SAB) No. 98, which prescribes a new
accounting treatment for the impact on earnings per share of "nominal issuances"
of common stock and common stock options issued within one year prior to the
filing of a registration statement for an initial public offering of common
stock. Under the prior rules, common stock options having a nominal exercise
price issued within one year of an initial public offering were required to be
reflected retroactively in the computation of earnings per share for all periods
even if the effect was antidilutive. Under SAB No. 98, these common stock
options are only required to be reflected in earnings per share if the effect is
dilutive. The Company has restated all prior periods to reflect this change in
accounting principle. The effect of this change is presented in the following
table:
F-7
<PAGE> 34
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Basic and diluted net loss per common share, as
previously reported .............................. $ (1.53) $ (1.16) $ (1.14)
Retroactive effect of change in accounting
principle ........................................ -- (0.05) (0.06)
----- ----- -----
Basic and diluted net loss per common share ........ $ (1.53) $ (1.21) $ (1.20)
===== ===== =====
</TABLE>
The computation of basic and diluted net loss per common share was
based entirely on the weighted average common shares outstanding. Stock options
which are potentially dilutive were excluded from the net loss per common share
calculation in each of the years presented as the effect would have been
antidilutive. See Note 7 for the number of stock options outstanding.
Statements of Cash Flows
For the purposes of the statements of cash flows, the Company considers
all highly liquid investments purchased with original maturities of three months
or less to be cash equivalents.
Concentration of Credit Risk
All of the Company's receivables are due from oil and gas producing
companies located in the United States. The Company has not experienced any
significant credit losses related to its receivables.
Major Customers
Operators for producing oil and gas wells in which the Company holds
working interests sold the Company's share of oil and gas production to three
major customers during the years ended December 31, 1997, 1996 and 1995. Sales
to one customer represented 63% and 58% of oil and gas revenues in 1997 and
1996, respectively. During 1995, sales to two customers represented 79% of oil
and gas revenues.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
account payable and accrued liabilities are short-term in nature and approximate
fair value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Oil and
gas reserve estimates, which are the basis for units-of-production depletion and
impairment of oil and gas properties, are inherently imprecise and are expected
to change as future information becomes available.
F-8
<PAGE> 35
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Prior Year Reclassifications
Certain prior year amounts have been reclassified to conform with the
current presentation.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS 130 establishes
standards for reporting and displaying of comprehensive income and its
components. SFAS No. 131 establishes standards for the way that public
enterprises report information about operating segments and related information
in interim and annual financial statements. SFAS 130 and 131 are effective for
periods beginning after December 15, 1997. These two statements will not have
any effect on the Company's 1997 financial position or results of operations.
Management is presently evaluating what, if any, additional disclosures may be
required when these two statements are implemented.
3. INCOME TAXES
Significant components of the Company's deferred tax liabilities and
assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Deferred tax liability:
Exploration and development expenditures
deducted for tax and capitalized
for books ................................ $ 981,479 $ (325,812)
Other items, net .......................... (70,968) (54,872)
----------- -----------
Total deferred tax liability ........ 910,511 (380,684)
----------- -----------
Deferred tax assets:
Net operating loss carryforwards .......... 3,803,419 2,039,546
Other items, net .......................... 836,151 126,517
----------- -----------
Total deferred tax assets ........... 4,639,570 2,166,063
Less: Valuation allowance ................. (5,550,081) (1,785,379)
----------- -----------
Net deferred tax assets ..................... (910,511) 380,684
----------- -----------
Net deferred tax liability .................. $ -- $ --
=========== ===========
</TABLE>
The Company did not record any current or deferred income tax provision
or benefit in any of the periods presented. The Company's provision for income
taxes differs from the amount computed by applying the statutory rate due
principally to the valuation allowance recorded against its deferred tax asset
account relating to net operating tax loss carryforwards. Management believes
that such allowance is necessary until there is greater assurance that the net
operating tax loss carryforwards can be utilized.
The Company has recorded a valuation allowance against its deferred tax
assets in each year to reflect the estimated portion for which realization is
uncertain. As of December 31, 1997, the Company had tax net operating loss
carryforwards of approximately $11.2 million which begin to expire in 2008. As a
result of recent stock transactions, including the initial public offering, the
Company's utilization of its net operating losses under Section 382 of the
Internal Revenue Code is limited.
F-9
<PAGE> 36
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. CREDIT AGREEMENT
On December 18, 1997, the Company executed a credit agreement with a
commercial bank. The credit agreement expires on June 30, 2002 and provides for
total borrowings of $25 million, subject to availability under a borrowing base
calculation which is redetermined on a quarterly basis. The credit agreement,
which is secured by substantially all of the Company's producing oil and gas
properties, had a current availability of $3.0 million under Tranche A of the
agreement as of December 31, 1997. There was no availability under Tranche B.
Tranche A advances carry an interest rate, at the Company's option, of either
the London Interbank Offered Rate ("LIBOR") plus 2% or the lender's prime rate.
Tranche B advances carry an interest rate of either LIBOR plus 4% or the
lender's prime rate plus 2%. The credit agreement contains restrictions on
dividends and additional liens and indebtedness and requires the maintenance of
a minimum current ratio and net worth, each as defined in the credit agreement.
There were no borrowings under the credit agreement during the year ended
December 31, 1997.
5. MANDATORILY REDEEMABLE PREFERRED STOCK
Series B
In November 1993, the Company issued 29,000 Series B equity units at
$100 per unit, for total proceeds before offering costs of $2,900,000. In
October 1994, the Company issued 25,000 additional Series B equity units at $100
per unit, for total proceeds before offering costs of $2,500,000. Each equity
unit consisted of one share of redeemable Series B preferred stock, par value
$.01 per share ("Series B Preferred Stock"), at $94.1558 per share and 30.215
shares of common stock, par value $.01 per share, at $0.19 per share. The Series
B Preferred Stock carried a redemption value of $100 per share. The difference
between the sales price and the redemption value was subject to pro-rata
accretion which was charged to retained earnings, such that the book value of
each share of Series B Preferred Stock would equal $100 at the required
mandatory redemption in two installments commencing in November 2002. The Series
B Preferred Stock also carried a cumulative annual dividend, payable on December
31 of each year, of $12.50 per share if paid in cash or .13276 shares of Series
B Preferred Stock if paid in stock. All dividends were paid in additional shares
of Series B Preferred Stock. Series B equity units totaling $1,025,000, or 19%
of the total proceeds of the offering, were sold to related parties, consisting
of officers of the Company, consultants and Landmark. Additionally, units
totaling $3,032,000, or 56%, were sold to two investors and their affiliates,
each of which required the right to designate one member of the Board of
Directors of the Company.
In connection with the initial public offering which was completed on
December 26, 1996 (see Note 6), all of the issued and outstanding shares of
Series B Preferred Stock were redeemed. The unamortized redemption premium of
$365,810 was charged to the Company's accumulated deficit.
Series C
During the period from July 26, 1995 through September 25, 1995, the
Company sold a total of 2,662,241 shares of senior redeemable convertible Series
C preferred stock, par value $.01 per share ("Series C Preferred Stock"), at
$3.00 per share, for total proceeds before offering costs of $7,986,723. The
Series C Preferred Stock carried a cumulative dividend at an annual rate of $.24
per share if paid in cash or .08 shares of Series C Preferred Stock if paid in
stock, payable or accruing quarterly, commencing on December 31, 1995. Unpaid
dividends earned interest at an annual interest rate of 8%. During the year
ended December 31, 1996, the Company paid accrued dividends on Series C
Preferred Stock of $795,649. Shares totaling $925,515, or 12% of the total
proceeds, were sold to related parties, including consultants to and officers of
the Company, as well as two directors and their affiliates. Additionally, one
investor purchased
F-10
<PAGE> 37
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
shares totaling $3,999,999, or 50% of the offering, on the condition that it
be given the right to designate one member of the Company's Board of
Directors.
Each share of Series C Preferred Stock was convertible into one share
of common stock. Subsequent to the reverse stock split in October 1996, each
share was convertible into .517 shares of common stock. The Series C Preferred
Stock could be automatically converted to common stock upon the occurrence of
certain conversion events, including the successful completion of an initial
public offering of the Company's common stock if certain pricing and other
criteria were met. The Series C preferred stock also contained a
mandatory-redemption feature under which the stock could be redeemed, at the
option of at least 67% of the holders, at the $3.00 per share liquidation value
in two installments commencing in November 2002.
In October 1995, the Board of Directors granted the holder of each
share of Series C Preferred Stock a warrant to purchase additional shares equal
to 10% of the shares owned by such holder, at an exercise price of $3.00 per
share. Such shares were exercisable at any time until the earlier of (a) five
years from the date of issuance and (b) the effective date of an initial public
offering of the Company's securities. No value was assigned to these warrants as
the computed value of the warrants using the Black-Scholes model was zero.
In connection with the Initial Public Offering which was completed on
December 26, 1996, all of the issued and outstanding shares of Series C
Preferred Stock, and all outstanding Series C Preferred Stock warrants were
converted into common stock.
Stock Subscriptions Receivable
Certain officers and directors of the Company purchased Series B equity
units and Series C Preferred Stock for promissory notes, which are reflected as
an offset to equity in the accompanying financial statements. The promissory
notes were full recourse and carried interest at a fixed rate of 6% per annum.
The notes from the Company's officers were collateralized by certain vested
stock options the individuals held from their former employer. The principal and
accrued interest on all notes for the purchase of equity securities of the
Company were paid off as of December 31, 1996.
F-11
<PAGE> 38
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes the 1996 and 1995 activity of Series B
and Series C Preferred Stock:
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK
--------------------------
SERIES B SERIES C
----------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ -------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 ...... 59,034 $ 5,451,522 -- $ --
Shares issued during 1995 ......... -- -- 2,662,241 7,986,723
Offering costs .................... -- (860) -- (87,834)
Accrual of dividends .............. 7,837 783,700 -- --
Accretion to redemption value ..... -- 43,464 -- 4,944
--------- ----------- ----------- -----------
Balance at December 31, 1995 ....... 66,871 6,277,826 2,662,241 7,903,833
Accretion to redemption value ...... -- 43,464 -- 11,380
Redemption premium ................. -- 365,810
Redemption of Series B preferred ... (66,871) (6,687,100) -- --
Exercise of outstanding warrants
For cash ....................... -- -- 32,029 96,087
Under cashless tender .......... -- -- 110,653 --
Conversion to common stock ......... -- -- (2,804,923) (8,011,300)
--------- ----------- ----------- -----------
Balance at December 31, 1996 ....... -- $ -- $ -- $ --
========= =========== =========== ===========
</TABLE>
6. STOCKHOLDERS' EQUITY
In May 1995, the stockholders approved a 10-for-1 stock split of the
Company's common stock. In October 1996, the stockholders approved a reverse
stock split whereby holders of common stock received .517 shares of common stock
for every share previously owned. All references in this report to number of
common shares outstanding reflect stock splits retroactively to inception of the
Company.
On December 26, 1996, the Company completed an initial public offering
for the sale of 2,400,000 shares of common stock at $11.00 per share, less
offering costs. In January 1997, the Company's underwriters exercised their
30-day over-allotment option to purchase 375,000 additional shares of common
stock at the offering price of $11.00 per share, less underwriting discounts and
commissions. Total proceeds to the Company from the initial public offering, net
of offering costs, were approximately $27.4 million.
F-12
<PAGE> 39
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. STOCK OPTIONS
In June 1994, the Board of Directors approved the 1994 Stock Option
Plan (the "Plan") for employees, officers, directors and certain consultants of
the Company. The ten year options vest over four years for employees (25% at the
end of each of the first two years and monthly over the last 24 months. For
directors and consultants, the options vest 50% at the end of the first year and
25% at the end of the second and third years. Certain of these options are
eligible for accelerated vesting upon a change of control of the Company. The
Company has reserved a total of 2,004,937 shares of common stock for issuance
under this Plan, of which 611,778 shares were available for grant as of December
31, 1997. The following table summarizes option balances and activity for the
Plan:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
<S> <C> <C>
--------------------------------------------------- -------------- -------------
Options outstanding, December 31, 1994........... 438,783 $ 0.22
Granted.......................................... 248,160 0.56
Exercised........................................ -- --
Canceled......................................... -- --
--------------------------------------------------- -------------- -------------
Options outstanding, December 31, 1995........... 686,943 0.34
Granted.......................................... 267,806 1.52
Exercised........................................ (3,124) 0.19
Canceled......................................... (157,146) 0.57
--------------------------------------------------- -------------- -------------
Options outstanding, December 31, 1996........... 794,479 0.70
Granted.......................................... 628,656 10.33
Exercised........................................ (9,285) 0.35
Canceled......................................... (33,100) 5.03
--------------------------------------------------- -------------- -------------
Options outstanding, December 31, 1997.......... 1,380,750 $ 4.98
--------------------------------------------------- -------------- -------------
Exercisable options -
December 31, 1995............................ 109,696 $0.22
December 31, 1996............................ 344,396 0.28
December 31, 1997............................ 554,183 0.56
--------------------------------------------------- -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
RANGE OF OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/97 LIFE (YRS) PRICE AT 12/31/97 PRICE
-------------------- ----------------- -------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$0.19 to $0.58 734,693 7.02 $ 0.37 537,897 $ 0.32
$7.79 to $11.88 646,057 9.40 $ 10.23 16,286 $ 8.30
Total 1,380,750 8.14 $ 4.98 554,183 $ 0.56
</TABLE>
F-13
<PAGE> 40
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
In connection with stock options granted within one year of the initial
public offering, the Company recorded deferred compensation as additional paid
in capital with a corresponding offset to stockholders' equity. The amount of
deferred compensation is based on the difference between the option exercise
price and the $11.00 per share initial public offering common stock price for
those options. Deferred compensation is being amortized as compensation expense
over the option vesting period, and totaled $477,014, $867,630 and $50,991
during the years ended December 31, 1997, 1996 and 1995, respectively.
Unamortized deferred compensation as of December 31, 1997 amounted to $512,132.
In October 1995, the FASB issued SFAS No. 123. SFAS No. 123 is a new
standard of accounting for stock-based compensation and establishes a fair value
method of accounting for awards granted after December 31, 1995 under stock
compensation plans. The Company has elected to continue accounting for employee
stock options under Accounting Principles Board Opinion No. 25. Had the Company
elected to apply SFAS No. 123, the estimated effects on net income and earnings
per share resulting from grants made after December 31, 1994 would have been as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss attributable to common stockholders:
As reported................................. $(11,036,144) $(3,676,411) $(3,595,739)
Pro forma................................... (11,587,856) (3,391,345) (3,588,257)
Basic and diluted earnings per share:
As reported................................. $ (1.53) $ (1.21) $ (1.20)
Pro forma................................... (1.61) (1.11) (1.20)
---------------------------------------------------------------------------------------------------
Pro forma assumptions:
Risk free interest rate:
Maximum.................................. 6.72% 6.68% 5.98%
Minimum.................................. 5.91% 5.35% 5.59%
Expected option life:
Maximum.................................. 4.5 years 4.5 years 5.0 years
Minimum.................................. 3.7 years 3.7 years 4.6 years
---------------------------------------------------------------------------------------------------
Weighted average fair value of options granted
during the year............................. $6.39 $8.95 $3.72
---------------------------------------------------------------------------------------------------
Volatility factor................................ .703 - -
---------------------------------------------------------------------------------------------------
</TABLE>
Volatility was not considered in the calculation of option values prior
to December 26, 1996, as the Company was not publicly traded.
8. SAVINGS PLAN
The Company's employees participated, prior to January 1, 1998, in
Landmark's 401-K employee savings plan (the Plan), which became effective upon
inception of the Company. The Plan covers substantially all employees and
entitles them to contribute up to 16% of their annual compensation, subject to
limitations imposed by the Internal Revenue Code. The Company did not make any
contributions to the Plan on behalf of employees during any of the years
presented. Effective January 1, 1998, the Company established a separate
employee savings plan exclusively for its employees with substantially the same
terms and provisions as the previous Plan.
F-14
<PAGE> 41
3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
9. RELATED PARTIES
Prior to the Company's initial public offering of common stock in
December 1996, Landmark was the beneficial owner of greater than 5% of the
issued and outstanding Common Stock and was considered a related party. In
connection with its initial capitalization, the Company entered into a Technical
Services Agreement with Landmark pursuant to which Landmark agreed to grant to
the Company ongoing licenses to use Landmark software as Landmark first made
such software available to its customers. In addition, the agreement provides
for a strategic alliance between Landmark and the Company, which enables the
Company to request, and requires Landmark to deliver, enhancements and
modifications to existing Landmark software and, in certain instances, to
develop new software for use in the Company's oil and gas exploration efforts.
In exchange for such rights, the Company has agreed to serve as an alpha test
site for software developed by Landmark. During 1997, 1996 and 1995, the Company
purchased technical equipment and software, supplies and hardware maintenance
from Landmark in the amounts of $645,109, $267,007 and $521,128, respectively.
In addition, the Company and Landmark were also parties to an informal
arrangement pursuant to which the Company's employees participated in Landmark's
medical insurance plan, life insurance plans and 401(k) employee savings plan.
The Company reimburses Landmark for the costs of providing these benefits,
together with an administrative fee. Effective January 1, 1998, the Company
ceased to participate in this informal arrangement and established separate
benefit plans exclusively for its employees.
In April 1995, the Company sold 66.67% of its working interest in the
Double Diamond Jones Ranch prospect to a group of individual investors who are
stockholders in the Company through a limited partnership. Proceeds from the
sale, which represented both the estimated fair market value of the interest
sold as well as 3DX's proportionate cost to date on the prospect, amounted to
$480,931. No gain or loss was recorded on this transaction.
10. COMMITMENTS
In March 1995, the Company entered into a 5-year office lease
agreement. Future minimum payments under this non-cancelable office lease are as
follows at December 31, 1997:
<TABLE>
<S> <C>
1998..................................... $ 94,633
1999..................................... 94,633
2000..................................... 15,772
--------
Total minimum lease payments............. $205,038
========
</TABLE>
Rental expense under this office lease amounted to $94,633, $94,633 and
$83,919 during the years ended December 31, 1997, 1996 and 1995, respectively.
F-15
<PAGE> 42
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION - UNAUDITED
QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below sets forth selected unaudited quarterly financial
information for 1997 and 1996:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
QUARTER ENDED:
--------------------------------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997:
Revenues (a)...................... $ 839,273 $ 890,846 $ 840,705 $ 1,059,777
Net loss (b)...................... (40,458) (460,474) (590,225) (9,944,987)
Net loss applicable to common
stockholders.................. (40,458) (460,474) (590,225) (9,944,987)
Basic and diluted net loss per
common share (c).............. (0.01) (0.06) (0.08) (1.38)
1996:
Revenues (a)...................... $ 183,310 $ 169,041 $ 273,786 $ 473,650
Net loss (b)...................... (453,139) (1,372,840) (445,590) (463,795)
Net loss applicable to common
stockholders.................... (638,434) (1,554,939) (624,496) (858,542)
Basic and diluted net loss per
common share as reported........ (0.20) (0.49) (0.20) (0.26)
Retroactive effect of change in
accounting principle (d)........ (0.01) (0.03) (0.01) (0.01)
------ ------ ------ ------
Basic and diluted net loss per
common share (c)................ (0.21) (0.52) (0.21) (0.27)
====== ====== ====== ======
</TABLE>
(a) As discussed in Note 2, rental income has been reflected as a reduction of
general and administrative expense in all periods presented.
(b) As discussed in Note 2, the Company recorded a writedown of oil and gas
properties of $19,061,240 in the fourth quarter of 1997, and writedowns
totaling $1,476,690 in 1996, including $1,090,718 in the second quarter of
1996.
(c) Net loss per common share are computed independently for each of the
quarters presented and therefore may not sum to the totals for the year.
(d) As discussed in Note 2, earnings per share amounts for periods prior to the
Company's initial public offering have been restated to retroactively
reflect the effect of SAB No. 98.
F-16
<PAGE> 43
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION - UNAUDITED
(Continued)
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
The following table sets forth the Company's results of operations for
oil and gas producing activities for the years ended December 31, 1997, 1996 and
1995.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Oil and gas revenues ........................ $ 3,045,447 $ 851,827 $ 274,511
Lease operating costs ....................... 257,291 49,016 60,877
Production taxes ............................ 178,952 58,660 17,656
Impairment of oil and gas properties ........ 9,061,240 1,476,690 1,627,321
Depletion, depreciation and amortization .... 2,636,305 422,839 158,336
----------- ----------- -----------
Loss before income taxes .................... (9,088,341) (1,155,378) (1,589,679)
Income tax expense (credit) ................. -- -- --
----------- ----------- -----------
Net loss .................................... $(9,088,341) $(1,155,378) $(1,589,679)
=========== =========== ===========
Amortization per physical unit of production
(equivalent Mcf of gas, converted at
6 to 1) .................................... $ 2.17 $ 1.31 $ 1.15
=========== =========== ===========
</TABLE>
The results of operations from oil and gas producing activities were
determined in accordance with Statement of Financial Accounting Standards No.
69, "Disclosures About Oil and Gas Producing Activities" ("SFAS No. 69") and,
therefore, do not include corporate overhead, interest and other general income
and expense items.
COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
The aggregate amounts of capitalized costs relating to the Company's
oil and gas producing activities and the related accumulated depletion,
depreciation, and amortization and impairment at December 31, 1997, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Evaluated oil and gas properties................. $ 22,521,673 $ 7,164,397 $ 2,648,724
Unevaluated oil and gas properties............... 10,098,698 4,403,165 1,375,145
------------ ----------- -----------
Total capitalized costs.......................... 32,620,371 11,567,562 4,023,869
Less-accumulated depletion, depreciation and
amortization and impairments................. (15,473,403) (3,775,858) (1,876,329)
------------ ----------- -----------
$ 17,146,968 $ 7,791,704 $ 2,147,540
============ =========== ===========
</TABLE>
The costs of unevaluated oil and gas properties consists of projects
which at each date were undergoing exploration or development activities or were
projects on which the Company planned to commence such exploration activities in
the future. The Company will begin to amortize these costs when proved reserves
are established or impairment is determined. The Company believes that
substantially all of the unevaluated properties at December 31, 1997 will be
fully evaluated within the succeeding two-year period.
F-17
<PAGE> 44
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION - UNAUDITED
(Continued)
The following table represents an analysis of remaining unevaluated oil
and gas property costs at December 31, 1997 according to the years in which they
were incurred:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Acquisition costs............... $3,145,580 $ 219,748 $ 21,525
Exploration costs............... 5,459,965 1,251,881 --
---------- ---------- ----------
Total...................... $8,605,545 $1,471,629 $ 21,525
========== ========== ==========
</TABLE>
The following table sets forth the costs incurred in the Company's oil
and gas property acquisition, exploration and development activities for the
years presented:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Property acquisition costs-
Proved .................... $ 70,000 $ -- $ --
Unproved .................. 4,794,238 1,171,217 490,141
Exploration costs ............. 15,654,152 6,269,266 1,611,192
Development costs ............. 534,419 103,210 --
----------- ----------- -----------
$21,052,809 $ 7,543,693 $ 2,101,333
=========== =========== ===========
</TABLE>
OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
RESERVES
The process of estimating proved developed and proved undeveloped oil
and gas reserves is very complex, requiring significant subjective decisions in
the evaluation of available geologic, engineering and economic data for each
reservoir. The data for a given reservoir may change over time as a result of,
among other things, additional development activity, production history and
viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates may occur in the future.
Although every reasonable effort is made to ensure that reserve estimates are
based on the most accurate and complete information possible, the significance
of the subjective decisions required and variances in available data for various
reservoirs make these estimates generally less precise than other estimates
presented in connection with financial statement disclosures.
The following information regarding estimates of the Company's proved
oil and gas reserves, all located in the United States, is based on reports
prepared on behalf of the Company by the Company's independent petroleum
engineers. The following table sets forth the changes in the Company's total
proved reserves for the years ended December 31, 1997, 1996 and 1995. All of the
reserve quantities reflected in the table below are proved developed reserves.
F-18
<PAGE> 45
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION - UNAUDITED
(Continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
OIL (BBLS)
----------
<S> <C> <C> <C>
Proved reserves at the beginning of the
year ................................... 32,428 41,193 39,886
Extensions, discoveries, and other
additions .............................. 43,497 9,797 26,000
Revisions of previous estimates ............ 5,489 (10,079) (18,000)
Purchases of reserves in place ............. 21,405 -- --
Production ................................. (14,068) (8,483) (6,693)
---------- ---------- ----------
Proved reserves at the end of the year ..... 88,751 32,428 41,193
========== ========== ==========
GAS (MCF)
---------
Proved reserves at the beginning of the
year ................................... 2,463,736 442,795 1,236,915
Extensions, discoveries, and other
additions .............................. 2,546,337 2,284,482 104,000
Revisions of previous estimates ............ 53,855 7,661 (801,000)
Purchases of reserves in place ............. -- -- --
Production ................................. (1,131,819) (271,202) (97,120)
---------- ---------- ----------
Proved reserves at the end of the year ..... 3,932,109 2,463,736 442,795
========== ========== ==========
</TABLE>
Standardized Measures of Discounted Future Net Cash Flows
The Company's standardized measure of discounted future net cash flows,
and changes therein, related to proved oil and gas reserves are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Future cash inflow .................................... $ 10,427 $ 9,354 $ 1,405
Future production, development and abandonment costs .. (2,195) (1,430) (329)
-------- -------- --------
Future cash flows before income taxes ................. 8,232 7,924 1,076
Future income taxes ................................... -- -- --
-------- -------- --------
Future net cash flows ................................. 8,232 7,924 1,076
10% Discount factor ................................... (1,184) (1,301) (305)
-------- -------- --------
Standardized measure of discounted future net cash
flow .............................................. $ 7,048 $ 6,623 $ 771
======== ======== ========
</TABLE>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS:
<TABLE>
<S> <C> <C> <C>
Sales of oil, gas and natural gas liquids, net of production
costs .................................................. $(2,609) $ (744) $ (196)
Extensions, discoveries and other additions ................ 4,737 6,594 349
Revisions of previous quantity estimates ................... 124 (200) (1,280)
Net changes in prices and production costs ................. (2,468) 173 (71)
Accretion of discount ...................................... 662 77 161
Changes in future development costs ........................ 60 (82) 103
Purchases of reserves in place ............................. 109 -- --
Changes in production rates (timing) and other ............. (190) 34 99
------- ------- -------
Net change ................................................. $ 425 $ 5,852 $ (835)
======= ======= =======
</TABLE>
F-19
<PAGE> 46
3DX TECHNOLOGIES INC.
SUPPLEMENTARY INFORMATION - UNAUDITED
(Continued)
Estimated future cash inflows are computed by applying year-end prices
of oil and gas to year-end quantities of proved reserves. Future price changes
are considered only to the extent provided by contractual arrangements.
Estimated future development and production costs are determined by estimating
the expenditures to be incurred in developing and producing the proved oil and
gas reserves at the end of the year, based on year-end costs and assuming
continuation of existing economic conditions. Estimated future income tax
expense is calculated by applying year-end statutory tax rates to estimated
future pretax net cash flows related to proved oil and gas reserves, less the
tax basis (including net operating loss carryforwards projected to be usable) of
the properties involved.
These estimates were determined in accordance with SFAS No. 69. Because
of unpredictable variances in expenses and capital forecasts, crude oil and gas
prices and oil and gas reserve volume estimates, as well as the statutory
pricing and discounting assumptions used in these cash flow estimates,
management believes the usefulness of this data is limited. These estimates of
future net cash flows do not necessarily represent management's assessment of
estimated fair market value, future profitability or future cash flow to the
Company. Management's investment and operating decisions are based upon reserve
estimates that include proved as well as probable reserves and upon different
price and cost assumptions from those used herein.
The future cash flows presented in the "Standardized Measures of
Discounted Future Net Cash Flows" are based on year-end oil and gas prices for
oil and gas reserves which as of December 31, 1997 were approximately $16.17 per
barrel of oil and approximately $2.29 per Mcf of gas. The Company does not have
oil and gas reserves which are committed under long-term oil and gas sales or
hedging contracts.
F-20
<PAGE> 47
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- -----------------------
<S> <C>
3.1(i) Sixth Restated Certificate of Incorporation of the Company (incorporated by reference to
Exhibit 3.1(i)(d) to the Company's Amendment No. 2 to the Registration Statement on Form S-1
(No. 333-14473), filed December 16, 1996).
3.1(ii) Second Amended and Restated Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.1 to
the Form 10-Q for the period ended June 30, 1997).
4.1 Form of Specimen Stock Certificate, incorporated by reference to Exhibit 4.1 to the Company's
Amendment No. 1 to Registration Statement on Form S-1 (No. 333-14473), filed November 27, 1996.
10.1 Technical Services Agreement between Landmark Graphics Corporation and Novera Energy Inc.
dated January 1993 (incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (No. 333-14473), filed October 18, 1996
10.2 * Credit Agreement with NationsBank of Texas dated December 18, 1997
10.3 1994 Stock Option Plan (incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (No. 333-14473), filed October 18, 1996 +
10.4 Stock Purchase Agreement among the Company, C. Eugene Ennis, Douglas C. Nester, Peter M. Duncan
and the Investors named therein dated November 9, 1993 (incorporated by reference to Exhibit
10.2 to the Company's Registration Statement on Form S-1 (No. 333-14473), filed October 18, 1996).
10.5 Series C Preferred Stock Purchase Agreement among the Company, C. Eugene Ennis, Douglas C. Nester,
Peter M. Duncan and the Investors named therein dated July 26, 1995 (incorporated by reference
to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (No. 333-14473), filed October
18, 1996).
10.6 Lease Contract dated January 22, 1995 between the Company and The Penn Mutual Life Insurance
Company and Letter dated March 1, 1995 from Trammell Crow Houston, Inc. (incorporated by reference
to Exhibit 10.8 to the Company's Registration Statement of Form S-1 (No. 333-14473), filed October
18, 1996).
11.1 * Computation of Earnings per Share
23.1 * Consent of Arthur Andersen LLP
23.2 * Consent of Ryder Scott Company
24.1 * Power of Attorney (included on signature page)
27.1 * Financial Data Schedule for December 31, 1997
27.2 * Financial Data Schedule for December 31, 1996 (restated)
27.3 * Financial Data Schedule for December 31, 1995 (restated)
</TABLE>
---------------
* filed herewith
+ management contract or compensating plan
<PAGE> 1
EXHIBIT 10.2
================================================================================
$25,000,000.00
CREDIT AGREEMENT
Among
3DX TECHNOLOGIES INC.
as Borrower,
THE FINANCIAL INSTITUTIONS
NAMED IN THIS CREDIT AGREEMENT
as Banks,
and
NATIONSBANK OF TEXAS, N.A.
as Agent
December 18, 1997
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS
Section 1.01. Certain Defined Terms . . . . . . . . . . . . . . . . . . . 1
Section 1.02. Computation of Time Periods . . . . . . . . . . . . . . . . 15
Section 1.03. Accounting Terms; Changes in GAAP . . . . . . . . . . . . . 15
Section 1.04. Types of Advances . . . . . . . . . . . . . . . . . . . . . 15
Section 1.05. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE II CREDIT FACILITIES
Section 2.01. Commitment for Advances . . . . . . . . . . . . . . . . . . 16
Section 2.02. Borrowing Bases . . . . . . . . . . . . . . . . . . . . . . 17
Section 2.03. Method of Borrowing . . . . . . . . . . . . . . . . . . . . 19
Section 2.04. Prepayment of Advances . . . . . . . . . . . . . . . . . . 21
Section 2.05. Repayment of Advances . . . . . . . . . . . . . . . . . . . 24
Section 2.06. Letters of Credit . . . . . . . . . . . . . . . . . . . . . 24
Section 2.07. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 2.08. Interest . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 2.09. Payments and Computations . . . . . . . . . . . . . . . . . 32
Section 2.10. Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . 33
Section 2.11. Breakage Costs . . . . . . . . . . . . . . . . . . . . . . 33
Section 2.12. Increased Costs . . . . . . . . . . . . . . . . . . . . . . 34
Section 2.13. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE III CONDITIONS OF LENDING
Section 3.01. Conditions Precedent to Credit Agreement . . . . . . . . . 39
Section 3.02. Conditions Precedent to All Borrowings . . . . . . . . . . 40
ARTICLE IV REPRESENTATIONS AND WARRANTIES
Section 4.01. Corporate Existence; Subsidiaries . . . . . . . . . . . . . 40
Section 4.02. Corporate Power . . . . . . . . . . . . . . . . . . . . . . 41
Section 4.03. Authorization and Approvals . . . . . . . . . . . . . . . . 41
Section 4.04. Enforceable Obligations . . . . . . . . . . . . . . . . . . 41
Section 4.05. Financial Statements . . . . . . . . . . . . . . . . . . . 42
Section 4.06. True and Complete Disclosure . . . . . . . . . . . . . . . 42
Section 4.07. Litigation . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 4.08. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 4.09. Investment Company Act . . . . . . . . . . . . . . . . . . 43
Section 4.10. Public Utility Holding Company Act . . . . . . . . . . . . 43
Section 4.11. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 4.12. Pension Plans . . . . . . . . . . . . . . . . . . . . . . . 43
Section 4.13. Condition of Property; Casualties . . . . . . . . . . . . . 44
Section 4.14. No Burdensome Restrictions; No Defaults . . . . . . . . . . 44
Section 4.15. Environmental Condition . . . . . . . . . . . . . . . . . . 44
Section 4.16. Permits, Licenses, Etc. . . . . . . . . . . . . . . . . . . 45
Section 4.17. Gas Contracts . . . . . . . . . . . . . . . . . . . . . . . 45
ARTICLE V AFFIRMATIVE COVENANTS
Section 5.01. Compliance with Laws, Etc. . . . . . . . . . . . . . . . . 46
Section 5.02. Maintenance of Insurance . . . . . . . . . . . . . . . . . 46
Section 5.03. Preservation of Corporate Existence, Etc. . . . . . . . . . 46
Section 5.04. Payment of Taxes, Etc. . . . . . . . . . . . . . . . . . . 47
Section 5.05. Visitation Rights . . . . . . . . . . . . . . . . . . . . . 47
Section 5.06. Reporting Requirements . . . . . . . . . . . . . . . . . . 47
Section 5.07. Maintenance of Property . . . . . . . . . . . . . . . . . . 51
Section 5.08. New Subsidiaries . . . . . . . . . . . . . . . . . . . . . 51
ARTICLE VI NEGATIVE COVENANTS
Section 6.01. Liens, Etc. . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 6.02. Debts, Guaranties, and Other Obligations . . . . . . . . . 54
Section 6.03. Agreements Restricting Liens and Distributions . . . . . . 54
Section 6.04. Merger or Consolidation; Asset Sales . . . . . . . . . . . 55
Section 6.05. Restricted Payments . . . . . . . . . . . . . . . . . . . . 56
Section 6.06. Investments . . . . . . . . . . . . . . . . . . . . . . . . 56
Section 6.07. Limitation on Speculative Hedging . . . . . . . . . . . . . 56
Section 6.08. Affiliate Transactions . . . . . . . . . . . . . . . . . . 56
Section 6.09. Compliance with ERISA . . . . . . . . . . . . . . . . . . . 57
Section 6.10. Maintenance of Ownership of Subsidiaries . . . . . . . . . 57
Section 6.11 Sale-and-Leaseback . . . . . . . . . . . . . . . . . . . . 57
Section 6.12. Change of Business . . . . . . . . . . . . . . . . . . . . 57
Section 6.13. Current Ratio . . . . . . . . . . . . . . . . . . . . . . . 58
Section 6.14. Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . 58
ARTICLE VII REMEDIES
Section 7.01. Events of Default . . . . . . . . . . . . . . . . . . . . . 58
Section 7.02. Optional Acceleration of Maturity . . . . . . . . . . . . . 61
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 7.03. Automatic Acceleration of Maturity . . . . . . . . . . . . 62
Section 7.04. Right of Set-off . . . . . . . . . . . . . . . . . . . . . 62
Section 7.05. Actions Under Credit Documents . . . . . . . . . . . . . . 62
Section 7.06. Non-exclusivity of Remedies . . . . . . . . . . . . . . . . 63
ARTICLE VIII THE AGENT AND THE ISSUING BANK
Section 8.01. Authorization and Action . . . . . . . . . . . . . . . . . 63
Section 8.02. Agent's Reliance, Etc. . . . . . . . . . . . . . . . . . . 63
Section 8.03. The Agent and Its Affiliates . . . . . . . . . . . . . . . 64
Section 8.04. Bank Credit Decision . . . . . . . . . . . . . . . . . . . 64
Section 8.05. Indemnification . . . . . . . . . . . . . . . . . . . . . . 64
Section 8.06. Successor Agent and Issuing Bank . . . . . . . . . . . . . 65
ARTICLE IX MISCELLANEOUS
Section 9.01. Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . 66
Section 9.02. Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . 66
Section 9.03. No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . 66
Section 9.04. Costs and Expenses . . . . . . . . . . . . . . . . . . . . 67
Section 9.05. Binding Effect . . . . . . . . . . . . . . . . . . . . . . 67
Section 9.06. Bank Assignments and Participations . . . . . . . . . . . . 67
Section 9.07. Indemnification . . . . . . . . . . . . . . . . . . . . . . 70
Section 9.08. Execution in Counterparts . . . . . . . . . . . . . . . . . 70
Section 9.09. Survival of Representations, Etc . . . . . . . . . . . . . 70
Section 9.10. Severability . . . . . . . . . . . . . . . . . . . . . . . 71
Section 9.11. Business Loans . . . . . . . . . . . . . . . . . . . . . . 71
Section 9.12. Governing Law . . . . . . . . . . . . . . . . . . . . . . . 71
Section 9.13. Confidentiality . . . . . . . . . . . . . . . . . . . . . . 71
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<CAPTION>
EXHIBITS:
<S> <C> <C>
Exhibit A - Form of Assignment and Acceptance
Exhibit B - Form of Compliance Certificate
Exhibit C - Form of Guaranty
Exhibit D-1 - Form of Revolving A Note
Exhibit D-2 - Form of Revolving B Note
Exhibit E - Form of Notice of Borrowing
Exhibit F - Form of Notice of Conversion or Continuation
Exhibit G - Form of Letter of Credit Application
Exhibit H - Form of Borrower's Counsel Opinion
SCHEDULES:
Schedule 1 - Borrower, Agent, and Bank Information
Schedule 4.07 - Existing Litigation
Schedule 4.15(a) - Existing Environmental Concerns
Schedule 4.15(b) - Designated Environmental Sites
Schedule 6.01 - Permitted Existing Liens
Schedule 6.02 - Permitted Existing Debt
Schedule 6.08 - Affiliated Transactions
</TABLE>
-iv-
<PAGE> 6
CREDIT AGREEMENT
This Credit Agreement dated as of December 18, 1997 is among 3DX
Technologies Inc., a Delaware corporation, the Banks (as defined below), and
NationsBank of Texas, N.A., as Agent for the Banks.
The Borrower, the Banks, and the Agent agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
Section 1.01. Certain Defined Terms. As used in this Agreement,
the following terms shall have the following meanings (unless otherwise
indicated, such meanings to be equally applicable to both the singular and
plural forms of the terms defined):
"Acceptable Security Interest" means a Lien which (a) exists in favor
of the Agent for the benefit of the Agent and the Banks and (b) is superior to
all Liens or rights of any other Person in the Property encumbered thereby,
except to the extent that the rights of another Person are permitted hereunder.
"Adjusted Base Rate" means, for any day, the fluctuating rate per
annum of interest equal to the greater of (a) the Base Rate in effect on such
day and (b) the Federal Funds Rate in effect on such day plus 1.00%.
"Adjusted Net Income" means, for any Person and for any period of its
determination, the Adjusted Net Income of such Person determined in accordance
with GAAP consistently applied, but excluding any gains and losses on sales and
retirements of assets and any noncash write-down of assets.
"Advances" means any Revolving A Advance or Revolving B Advance.
"Affiliate" means, as to any Person, any other Person that, directly
or indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such Person or any Subsidiary of such Person.
The term "control" (including the terms "controlled by" or "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 a Person,
whether through ownership of Voting Securities, by contract, or otherwise.
<PAGE> 7
"Agent" means NationsBank of Texas, N.A., in its capacity as an agent
pursuant to Article VIII and any successor agent pursuant to Section 8.06.
"Agent's Fee Letter" has the meaning specified in Section 2.07(b).
"Agreement" means this Credit Agreement, as the same may be amended,
supplemented, and otherwise modified from time to time.
"Applicable Lending Office" means, with respect to each Bank, such
Bank's Domestic Lending Office in the case of a Base Rate Advance and such
Bank's Eurodollar Lending Office in the case of a Eurodollar Rate Advance.
"Applicable Margin" means the following percentages for the following
Classes and Types of Advances:
<TABLE>
<CAPTION>
Applicable Margin Applicable Margin
Base Rate Advances Eurodollar Rate Advances
------------------ ------------------------
<S> <C> <C>
Revolving A Advances 0.00% 2.00%
Revolving B Advances 2.00% 4.00%
</TABLE>
"Assignment and Acceptance" means an assignment and acceptance entered
into by a Bank and an Eligible Assignee, and accepted by the Agent, in
substantially the form of the attached Exhibit A.
"Banks" means the lenders listed on the signature pages of this
Agreement and each Eligible Assignee that shall become a party to this
Agreement pursuant to Section 9.06.
"Base Rate" means a fluctuating interest rate per annum as shall be in
effect from time to time equal to the rate of interest publicly announced by
NationsBank of Texas, N.A., as its base rate, whether or not the Borrower has
notice thereof.
"Base Rate Advance" means an Advance which bears interest as provided
in Section 2.08(a).
"Borrower" means 3DX Technologies Inc., a Delaware corporation.
"Borrowing" means any Revolving A Borrowing or Revolving B Borrowing.
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"Borrowing Bases" means the Revolving A Borrowing Base and the
Revolving B Borrowing Base.
"Business Day" means a day of the year on which banks are not required
or authorized to close in Dallas, Texas and, if the applicable Business Day
relates to any Eurodollar Rate Advances, on which dealings are carried on by
banks in the London interbank market.
"Capital Leases" means, as applied to any Person, any lease of any
Property by such Person as lessee which would, in accordance with GAAP, be
required to be classified and accounted for as a capital lease on the balance
sheet of such Person.
"Cash Collateral Account" means a special interest bearing cash
collateral account pledged to the Agent for the ratable benefit of the Banks
containing cash deposited pursuant to Section 2.04(b) or (c), 2.05(b), 7.02(b),
or 7.03(b) to be maintained at the Agent's office in accordance with Section
2.06(h) and bear interest or be invested in the Agent's reasonable discretion.
"CERCLA" means the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, state and local analogs, and all rules
and regulations and requirements thereunder in each case as now or hereafter in
effect.
"Class" has the meaning set forth in Section 1.04.
"Code" means the Internal Revenue Code of 1986, as amended, and any successor
statute.
"Commitments" means, as to any Bank, its Revolving A Commitment and
its Revolving B Commitment.
"Compliance Certificate" means a compliance certificate in the form of
the attached Exhibit B signed by a Responsible Officer of the Borrower.
"Controlled Group" means all members of a controlled group of
corporations and all trades (whether or not incorporated) under common control
which, together with the Borrower, are treated as a single employer under
Section 414 of the Code.
"Convert," "Conversion," and "Converted" each refers to a conversion
of Advances of one Type into Advances of another Type pursuant to Section
2.03(b).
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"Credit Documents" means this Agreement, the Notes, the Letter of
Credit Documents, the Guaranties, the Security Documents, any Hedge Agreements
entered into with a Bank, and each other agreement, instrument, or document
executed at any time in connection with this Agreement.
"Debt," for any Person, means without duplication:
(a) indebtedness of such Person for borrowed money, including,
without limitation, obligations under letters of credit and agreements relating
to the issuance of letters of credit or acceptance financing;
(b) obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments;
(c) obligations of such Person to pay the deferred purchase price
of property or services;
(d) obligations of such Person as lessee under Capital Leases;
(e) obligations of such Person under direct or indirect guaranties
in respect of, and obligations (contingent or otherwise) of such Person to
purchase or otherwise acquire, or otherwise to assure a creditor against loss
in respect of, indebtedness or obligations of others of the kinds referred to
in clauses (a) through (d) above;
(f) indebtedness or obligations of others of the kinds referred to
in clauses (a) through (e) secured by any Lien on or in respect of any Property
of such Person; and
(g) all liabilities of such Person in respect of unfunded vested
benefits under any Plan.
"Default" means (a) an Event of Default or (b) any event or condition
which with notice or lapse of time or both would, unless cured or waived,
become an Event of Default.
"Dollar Equivalent" means for all purposes of this Agreement, the
equivalent in another currency of an amount in Dollars to be determined by
reference to the rate of exchange quoted by NationsBank of Texas, N.A., at
10:00 a.m. (Dallas, Texas, time) on the date of determination, for the spot
purchase in the foreign exchange market of such amount of Dollars with such
other currency.
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"Dollars" and "$" mean lawful money of the United States of America.
"Domestic Lending Office" means, with respect to any Bank, the office
of such Bank specified as its "Domestic Lending Office" opposite its name on
Schedule 1 or such other office of such Bank as such Bank may from time to time
specify to the Borrower and the Agent.
"Effective Date" means the date on which each of the conditions
precedent in Section 3.01 have been met or waived.
"Eligible Assignee" means any commercial bank organized under the laws
of any country which is a member of the Organization for Economic Cooperation
and Development and having primary capital (or its equivalent) of not less than
$250,000,000.00 (or its Dollar Equivalent) and approved by the Agent in its
sole discretion and the Borrower, which approval by the Borrower will not be
unreasonably withheld.
"Environment" shall have the meanings set forth in 43 U.S.C. Section
9601(8).
"Environmental Claim" means any third party (including governmental
agencies and employees) action, lawsuit, claim, demand, regulatory action or
proceeding, order, decree, consent agreement or notice of potential or actual
responsibility or violation (including claims or proceedings under the
Occupational Safety and Health Acts or similar laws or requirements relating to
health or safety of employees) which seeks to impose liability under any
Environmental Law.
"Environmental Law" means all Legal Requirements arising from,
relating to, or in connection with the Environment, health, or safety,
including without limitation CERCLA, relating to (a) pollution, contamination,
injury, destruction, loss, protection, cleanup, reclamation or restoration of
the Environment or other natural resources; (b) solid, gaseous or liquid waste
generation, treatment, processing, recycling, reclamation, cleanup, storage,
disposal or transportation; (c) exposure to pollutants, contaminants,
hazardous, or toxic substances, materials or wastes; (d) the safety or health
of employees; or (e) the manufacture, processing, handling, transportation,
distribution in commerce, use, storage or disposal of hazardous, or toxic
substances, materials or wastes.
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"Environmental Permit" means any permit, license, order, approval or
other authorization issued under an Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Eurocurrency Liabilities" has the meaning assigned to that term in
Regulation D of the Federal Reserve Board (or any successor), as in effect from
time to time.
"Eurodollar Lending Office" means, with respect to any Bank, the
office of such Bank specified as its "Eurodollar Lending Office" opposite its
name on Schedule 1 (or, if no such office is specified, its Domestic Lending
Office) or such other office of such Bank as such Bank may from time to time
specify to the Borrower and the Agent.
"Eurodollar Rate" means, for the Interest Period for each Eurodollar
Rate Advance, the interest rate per annum (rounded upward to the nearest 1/100
of 1% per annum) appearing on Telerate Page 3750 (or any successor page) as the
London interbank offered rate for deposits in Dollars at approximately 11:00
a.m. (London time) two Business Days before the first day of such Interest
Period for a term comparable to such Interest Period. If for any reason such
rate is not available, the term "Eurodollar Rate" shall mean, for the Interest
Period for each Eurodollar Rate Advance, the interest rate per annum (rounded
upward to the nearest 1/100 of 1% per annum) appearing on Reuters Screen LIBO
page as the London interbank offered rate for deposits in Dollars at
approximately 11:00 a.m. (London time) two Business Days before the first day
of such Interest Period for a term comparable to such Interest Period;
provided, however, if more than one rate is specified on Reuters Screen LIBO
page, the applicable rate shall be the arithmetic mean of all such rates.
"Eurodollar Rate Advance" means an Advance which bears interest as
provided in Section 2.08(b).
"Eurodollar Rate Reserve Percentage" of any Bank for the Interest
Period for any Eurodollar Rate Advance means the reserve percentage applicable
during such Interest Period (or if more than one such percentage shall be so
applicable, the daily average of such percentages for those days in such
Interest Period during which any such percentage shall be so applicable) under
regulations issued from time to time by the Federal Reserve Board for
determining the maximum reserve requirement (including, without limitation, any
emergency, supplemental or other marginal reserve requirement) for such Bank
with respect to liabilities or assets consisting of or including Eurocurrency
Liabilities having a term equal to such Interest Period.
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"Event of Default" has the meaning specified in Section 7.01.
"Expiration Date" means, with respect to any Letter of Credit, the
date on which such Letter of Credit will expire or terminate in accordance with
its terms.
"Federal Funds Rate" means, for any period, a fluctuating interest
rate per annum equal for each day during such period to the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day
(or, if such day is not a Business Day, for the next preceding Business Day) by
the Federal Reserve Bank of New York, or, if such rate is not so published for
any day which is a Business Day, the average of the quotations for any such day
on such transactions received by the Agent from three Federal funds brokers of
recognized standing selected by it.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System or any of its successors.
"Financial Statements" means the balance sheet and statements of
income, retained earnings and cash flow dated December 31, 1996 referred to in
Section 4.05, copies of which have been delivered to the Agent and the Banks.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time, applied on a basis consistent with the
requirements of Section 1.03.
"Governmental Authority" means any foreign governmental authority, the
United States of America, any state of the United States of America and any
subdivision of any of the foregoing, and any agency, department, commission,
board, authority or instrumentality, bureau or court having jurisdiction over
any Bank, the Borrower, or the Borrower's Subsidiaries or any of their
respective Properties.
"Guaranties" means each Guaranty in favor of the Agent for the ratable
benefit of the Banks in the form of the attached Exhibit C executed by a
Guarantor as required by Section 5.08, as the same may be amended,
supplemented, or otherwise modified from time to time.
"Guarantors" means each of the Borrower's Subsidiaries who hereafter
executes a Guaranty under Section 5.08.
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<PAGE> 13
"Hazardous Substance" means the substances identified as such pursuant
to CERCLA and those regulated as such under any other Environmental Law,
including without limitation pollutants, contaminants, petroleum, petroleum
products, radionuclides, radioactive materials, and medical and infectious
waste.
"Hazardous Waste" means the substances regulated as such pursuant to
any Environmental Law.
"Hedge Agreement" means (a) an interest hedge, rate swap, or cap, or
similar arrangement between the Borrower or any of its Subsidiaries and a
financial institution providing for the exchange of nominal interest
obligations or the cap of the interest rate on the Advances made under this
Agreement or (b) any forward sales arrangement, call, option, price swap, or
other similar transaction entered into by the Borrower or any of its
Subsidiaries to protect against fluctuations in prices or rates.
"Interest Period" means, for each Eurodollar Rate Advance comprising
part of the same Borrowing, the period commencing on the date of such Advance
or the date of the Conversion of any Base Rate Advance into such an Advance and
ending on the last day of the period selected by the Borrower pursuant to the
provisions below or by Section 2.03 and, thereafter, each subsequent period
commencing on the last day of the immediately preceding Interest Period and
ending on the last day of the period selected by the Borrower pursuant to the
provisions below or by Section 2.03. The duration of each such Interest Period
shall be one, two, three, or six months, in each case as the Borrower may, upon
notice received by the Agent not later than 10:00 a.m. (Dallas, Texas, time)
on, the third Business Day prior to the first day of such Interest Period
select; provided, however, that:
(a) the Borrower may not select any Interest Period for any
Advance which ends after the Maturity Date;
(b) the Borrower may not select any Interest Period after the
Termination Date which ends after any principal repayment date unless, after
giving effect to such selection, the aggregate unpaid principal amount of the
Advances that are Base Rate Advances and that are Eurodollar Rate Advances
having Interest Periods which end on or before such principal repayment date
shall be at least equal to the amount of Advances due and payable on or before
such date;
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<PAGE> 14
(c) Interest Periods commencing on the same date for Advances
comprising part of the same Borrowing shall be of the same duration;
(d) whenever the last day of any Interest Period would otherwise
occur on a day other than a Business Day, the last day of such Interest Period
shall be extended to occur on the next succeeding Business Day, provided that
if such extension would cause the last day of such Interest Period to occur in
the next following calendar month, the last day of such Interest Period shall
occur on the next preceding Business Day; and
(e) any Interest Period which begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period) shall end on the last
Business Day of the calendar month in which it would have ended if there were a
numerically corresponding day in such calendar month.
"Interim Financial Statements" means the unaudited balance sheet and
statements of income and cash flow dated as of September 30, 1997, referred to
in Section 4.05.
"Issuing Bank" means NationsBank of Texas, N.A., and any successor
issuing bank pursuant to Section 8.06.
"Legal Requirement" means any law, statute, ordinance, decree,
requirement, order, judgment, rule, regulation (or official interpretation of
any of the foregoing) of, and the terms of any license or permit issued by, any
Governmental Authority, including, but not limited to, Regulations G, T, U, and
X.
"Letter of Credit" means, individually, any letter of credit issued by
the Issuing Bank which is subject to this Agreement and "Letters of Credit"
means all such letters of credit collectively.
"Letter of Credit Application" means the Issuing Bank's standard form
letter of credit application for either a commercial or standby letter of
credit, as the case may be, which has been executed by the Borrower and
accepted by the Issuing Bank in connection with the issuance of a Letter of
Credit, which form or forms as of the date of this Agreement are in the form of
the attached Exhibit G, as the same may be amended, supplemented, and otherwise
modified from time to time.
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<PAGE> 15
"Letter of Credit Documents" means all Letters of Credit, Letter of
Credit Applications, and agreements, documents, and instruments entered into in
connection with or relating thereto.
"Letter of Credit Exposure" means, at any time, the sum of (a) the
aggregate undrawn maximum face amount of each Letter of Credit at such time
plus (b) the aggregate unpaid amount of all Reimbursement Obligations at such
time.
"Letter of Credit Obligations" means any obligations of the Borrower
under this Agreement in connection with the Letters of Credit, including the
Reimbursement Obligations.
"Lien" means any mortgage, lien, pledge, charge, deed of trust,
security interest, or encumbrance to secure or provide for the payment of any
obligation of any Person, whether arising by contract, operation of law, or
otherwise (including, without limitation, the interest of a vendor or lessor
under any conditional sale agreement, Capital Lease, or other title retention
agreement).
"Liquid Investments" means:
(a) debt securities issued or directly and fully guaranteed or
insured by the United States government or any agency or instrumentality
thereof, with maturities of no more than one year from the date of acquisition;
(b) commercial paper of a domestic issuer rated at the date of
acquisition not less than P1 by Moody's Investor Service, Inc., or A1 by
Standard & Poor's Corporation;
(c) certificates of deposit, demand deposits, Eurodollar time
deposits, overnight bank deposits, and bankers' acceptances, with maturities of
no more than 180 days from the date of acquisition, issued by any Bank or any
bank or trust company organized under the laws of the United States or any
state thereof whose deposits are insured by the Federal Deposit Insurance
Corporation, and having capital and surplus aggregating at least
$500,000,000.00;
(d) repurchase agreements secured by debt securities of the type
described in part (a) above, the market value of which, including accrued
interest, is not less than 100% of the amount of the repurchase agreement, with
maturities of no more than one year from the date of acquisition, issued by or
acquired from or through any Bank or any bank or trust company organized under
the laws of the United States or any state thereof and having capital and
surplus aggregating at least $500,000,000.00; and
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<PAGE> 16
(e) the Merrill Lynch Institutional Fund or other similar
institutional money market mutual fund having total assets in excess of
$1,000,000,000.00.
"Majority Banks" means, at any time, Banks holding at least 66-2/3% of
the then aggregate unpaid principal amount of the Notes held by the Banks and
the Letter of Credit Exposure of the Banks at such time, but in no event less
than two Banks at any time when there are three or more Banks; provided that if
no such principal amount or Letter of Credit Exposure is then outstanding,
"Majority Banks" shall mean Banks having at least 66-2/3% of the aggregate
amount of the Revolving Commitments at such time, but in no event less than two
Banks at any time when there are three or more Banks.
"Material Adverse Change" means (a) a material adverse change in the
business, financial condition, or results of operations of the Borrower and its
Subsidiaries (taken as a whole), or (b) the occurrence and continuance of any
event or circumstance which could reasonably be expected (i) to have a material
adverse effect on the Borrower's or any Guarantor's ability to perform its
obligations under this Agreement, any Note, any Guaranty, or any other Credit
Document or (ii) to cause a Default.
"Material Contracts" means, with respect to any Oil and Gas Property,
all of the material contracts affecting the maintenance and operation of, or
the Borrower or its Subsidiaries' title to such Oil and Gas Properties,
including all operating agreements and all farm-out or farm-in agreements.
"Maturity Date" means the earlier of (a) June 30, 2002 or (b) the
earlier termination in whole of the Revolving Commitments pursuant to Section
2.01(e) or Article VII.
"Maximum Rate" means the maximum nonusurious interest rate under
applicable law.
"Mortgages" means any mortgages, deeds of trust, or other security
instruments granting or purporting to grant Acceptable Security Interests in
the Oil and Gas Properties of the Borrower and its Subsidiaries, as the same
may be amended, supplemented, or otherwise modified from time to time.
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"Multiemployer Plan" means a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA.
"Net Worth" means, for any Person that is a corporation and as of any
date of its determination, the consolidated total assets of such Person less
the total liabilities of such Person, determined in accordance with GAAP
consistently applied.
"Note" means a Revolving A Note or a Revolving B Note.
"Notice of Borrowing" means a notice of borrowing in the form of the
attached Exhibit E signed by a Responsible Officer of the Borrower.
"Notice of Conversion or Continuation" means a notice of conversion or
continuation in the form of the attached Exhibit F signed by a Responsible
Officer of the Borrower.
"Obligations" means all principal, interest, fees, reimbursements,
indemnifications, and other amounts payable by the Borrower to the Agent or the
Banks under the Credit 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 or offshore
from any state of the United States, including 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 incidental rights belonging thereto.
"Oil and Gas Reserve Report" means each engineering report covering
the Borrower's consolidated Oil and Gas Properties provided to the Agent
pursuant to Section 5.06(c).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permitted Liens" means the Liens permitted to exist pursuant to
Section 6.01.
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, limited liability corporation or company,
limited liability partnership, trust, unincorporated association, joint venture
or other entity, or a government or any political subdivision or agency thereof
or any trustee, receiver, custodian or similar official.
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<PAGE> 18
"Plan" means an employee benefit plan (other than a Multiemployer
Plan) maintained for employees of the Borrower or any member of the Controlled
Group and covered by Title IV of ERISA or subject to the minimum funding
standards under Section 412 of the Code.
"Property" of any Person means any property or assets (whether real,
personal, or mixed, tangible or intangible) of such Person.
"Pro Rata Share" means, with respect to any Bank, either (a) the ratio
(expressed as a percentage) of such Bank's Commitments at such time to the
aggregate Commitments at such time or (b) if the Commitments have been
terminated, the ratio (expressed as a percentage) of such Bank's aggregate
outstanding Advances and Letter of Credit Exposure at such time to the
aggregate outstanding Advances and Letter of Credit Exposure of all the Banks
at such time.
"Register" has the meaning set forth in paragraph (c) of Section 9.06.
"Regulations G, T, U, and X" mean Regulations G, T, U, and X of the
Federal Reserve Board, as the same is from time to time in effect, and all
official rulings and interpretations thereunder or thereof.
"Reimbursement Obligations" means all of the obligations of the
Borrower to reimburse the Issuing Bank for amounts paid by the Issuing Bank
under Letters of Credit as established by the Letter of Credit Applications and
Section 2.06(d).
"Release" shall have the meaning set forth in CERCLA or under any
other Environmental Law.
"Reportable Event" shall have the meaning set forth in Title IV of
ERISA.
"Response" shall have the meaning set forth in CERCLA or under any
other Environmental Law.
"Responsible Officer" means, with respect to any Person, such Person's
Chief Executive Officer, President, Chief Financial Officer, Chief Accounting
Officer, and Vice Presidents.
"Restricted Payment" means, with respect to any Person, any dividends
or other distributions (in cash, property, or otherwise) on, or any payment for
the purchase,
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<PAGE> 19
redemption, or other acquisition of, any shares of any capital stock of such
Person, other than dividends payable in such Person's stock.
"Revolving A Advance" means any advance by a Bank to the Borrower as
part of a Revolving A Borrowing and refers to a Base Rate Advance or a
Eurodollar Rate Advance.
"Revolving B Advance" means any advance by a Bank to the Borrower as
part of a Revolving B Borrowing and refers to a Base Rate Advance or a
Eurodollar Rate Advance.
"Revolving A Borrowing" means, subject to Sections 2.03(c)(ii) and
2.04(e), a borrowing consisting of simultaneous Revolving A Advances of the
same Type made by each Bank pursuant to Section 2.03(a), continued by each Bank
pursuant to Section 2.03(b), or Converted by each Bank to Revolving A Advances
of a different Type pursuant to Section 2.03(b).
"Revolving B Borrowing" means, subject to Sections 2.03(c)(ii) and
2.04(e), a borrowing consisting of simultaneous Revolving B Advances of the
same Type made by each Bank pursuant to Section 2.03(a), continued by each Bank
pursuant to Section 2.03(b), or Converted by each Bank to Revolving B Advances
of a different Type pursuant to Section 2.03(b).
"Revolving A Borrowing Base" means, for any date of its determination
by the Majority Banks or all of the Banks, as the case may be, in accordance
with Section 2.02, the lending value of the Borrower's and its Subsidiaries'
Oil and Gas Properties as of such date, allocated to the Revolving A Borrowing
Base pursuant to Section 2.02(g).
"Revolving B Borrowing Base" means, for any date of its determination
by the Majority Banks or all of the Banks, as the case may be, in accordance
with Section 2.02, the lending value of the Borrower's and its Subsidiaries'
Oil and Gas Properties as of such date, allocated to the Revolving B Borrowing
Base pursuant to Section 2.02(g).
"Revolving A Commitment" means, for any Bank, the amount set opposite
such Bank's name on the signature pages hereof as its Revolving A Commitment,
or if such Bank has entered into any Assignment and Acceptance, as set forth
for such Bank as its Revolving A Commitment in the Register maintained by the
Agent pursuant to Section 9.06(c), as such amount may be reduced or terminated
pursuant to Article VII.
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<PAGE> 20
"Revolving B Commitment" means, for any Bank, the amount set opposite
such Bank's name on the signature pages hereof as its Revolving B Commitment,
or if such Bank has entered into any Assignment and Acceptance, as set forth
for such Bank as its Revolving B Commitment in the Register maintained by the
Agent pursuant to Section 9.06(c), as such amount may be reduced or terminated
pursuant to Article VII.
"Revolving A Note" means a promissory note of the Borrower payable to
the order of any Bank, in substantially the form of the attached Exhibit D-1,
evidencing indebtedness of the Borrower to such Bank resulting from Revolving A
Advances owing to such Bank.
"Revolving B Note" means a promissory note of the Borrower payable to
the order of any Bank, in substantially the form of the attached Exhibit D-2,
evidencing indebtedness of the Borrower to such Bank resulting from Revolving B
Advances owing to such Bank.
"Security Documents" means the Mortgages and any other documents
creating or purporting to create Liens in favor of the Agent securing the
repayment of the Obligations.
"Subsidiary" of a Person means any corporation or other entity of
which more than 50% of the outstanding capital stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or similar governing body of such corporation or other entity
(irrespective of whether at such time capital stock or other ownership
interests of any other class or classes of such corporation or other entity
shall or might have voting power upon the occurrence of any contingency) is at
the time directly or indirectly owned by such Person, by such Person and one or
more Subsidiaries of such Person or by one or more Subsidiaries of such Person.
"Tax Group" has the meaning set forth in Section 4.11.
"Termination Date" means December 31, 2000.
"Termination Event" means (a) a Reportable Event described in Section
4043 of ERISA and the regulations issued thereunder (other than a Reportable
Event not subject to the provision for 30-day notice to the PBGC under such
regulations), (b) the withdrawal of the Borrower or any of its Affiliates from
a Plan during a plan year in
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<PAGE> 21
which it was a "substantial employer" as defined in Section 4001(a)(2) of
ERISA, (c) the filing of a notice of intent to terminate a Plan or the
treatment of a Plan amendment as a termination under Section 4041(c) of ERISA,
(d) the institution of proceedings to terminate a Plan by the PBGC, or (e) any
other event or condition which constitutes grounds under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any
Plan.
"Type" has the meaning set forth in Section 1.04.
"Voting Securities" means with respect to any corporation, capital
stock of the corporation having general voting power under ordinary
circumstances to elect directors of such corporation (irrespective of whether
at the time stock of any other class or classes shall have or might have
special voting power or rights by reason of the happening of any contingency).
Section 1.02. Computation of Time Periods. In this Agreement in
the computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each means "to but excluding".
Section 1.03. Accounting Terms; Changes in GAAP.
(a) All accounting terms not specifically defined in this
Agreement shall be construed in accordance with GAAP applied on a consistent
basis with those applied in the preparation of the Financial Statements.
(b) Unless otherwise indicated, all financial statements of the
Borrower, all calculations for compliance with covenants in this Agreement and
all calculations of any amounts to be calculated under the definitions in
Section 1.01 shall be based upon the consolidated accounts of the Borrower and
its Subsidiaries in accordance with GAAP (or in compliance with the regulations
promulgated by the United States Securities and Exchange Commission regarding
financial reporting) and consistent with the principles applied in preparing
the Financial Statements.
Section 1.04. Types of Advances. Advances are distinguished by
"Type." The "Type" of an Advance refers to the determination whether such
Advance is a Eurodollar Rate Advance or Base Rate Advance. Borrowings and
Advances are also distinguished by "Class." The "Class" of a Borrowing or an
Advance refers to the determination whether such Borrowing or Advance is a
Revolving A Borrowing or a Revolving B Borrowing or a Revolving A Advance or a
Revolving B Advance, as applicable.
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Section 1.05. Miscellaneous. Article, Section, Schedule, and
Exhibit references are to Articles and Sections of and Schedules and Exhibits
to this Agreement, unless otherwise specified.
ARTICLE II
CREDIT FACILITIES
Section 2.01. Commitment for Advances.
(a) Revolving A Advances. Each Bank severally agrees, on the
terms and conditions set forth in this Agreement, to make Revolving A Advances
to the Borrower from time to time on any Business Day during the period from
the date of this Agreement until the Termination Date in an aggregate
outstanding amount up to but not to exceed an amount equal to the lesser of
(i)(A) such Bank's Revolving A Commitment minus (B) the outstanding principal
amount of such Bank's Revolving B Advances minus (C) such Bank's Pro Rata Share
of the Letter of Credit Exposure and (ii)(A) such Bank's Pro Rata Share of the
Revolving A Borrowing Base minus (B) such Bank's Pro Rata Share of the Letter
of Credit Exposure.
(b) Revolving B Advances. Each Bank severally agrees, on the
terms and conditions set forth in this Agreement, to make Revolving B Advances
to the Borrower from time to time on any Business Day during the period from
the date of this Agreement until the Termination Date in an aggregate
outstanding amount up to but not to exceed an amount equal to the lesser of
(i)(A) such Bank's Revolving B Commitment minus (B) the outstanding principal
amount of such Bank's Revolving A Advances minus (C) such Bank's Pro Rata Share
of the Letter of Credit Exposure and (ii) such Bank's Pro Rata Share of the
Revolving B Borrowing Base.
(c) Amount of Borrowing. Each Borrowing shall, in the case of
Borrowings consisting of Base Rate Advances, be in an aggregate amount not less
than $200,000.00 and in integral multiples of $100,000.00 in excess thereof,
and in the case of Borrowings consisting of Eurodollar Rate Advances, be in an
aggregate amount not less than $200,000.00 or in integral multiples of
$100,000.00 in excess thereof, and in each case shall consist of Advances of
the same Type made on the same day by the Banks ratably according to their
respective Commitments.
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(d) Reborrowing. Within the limits of each Bank's Commitment, and
subject to the terms of this Agreement, the Borrower may from time to time
borrow, prepay, and reborrow Advances.
(e) Reduction of Commitment. The Borrower shall have the right,
upon at least three Business Days' irrevocable notice to the Agent, to
terminate in whole or reduce ratably in part the unused portion of the
Revolving A Commitments or the Revolving B Commitments from time to time;
provided that each partial reduction of the Revolving A Commitments or the
Revolving B Commitments shall be in the aggregate amount of $2,500,000.00 or in
integral multiples of $500,000.00 in excess thereof. Any reduction or
termination of the Revolving A Commitments or Revolving B Commitments pursuant
to this Section 2.01(e) shall be permanent, with no obligation of the Banks to
reinstate such Commitments.
(f) Notes. The indebtedness of the Borrower to each Bank
resulting from the Revolving A Advances owing to such Bank shall be evidenced
by a Revolving A Note of the Borrower in the maximum principal amount of such
Bank's Revolving A Commitment. The indebtedness of the Borrower to each Bank
resulting from the Revolving B Advances owing to such Bank shall be evidenced
by a Revolving B Note of the Borrower in the maximum principal amount of such
Bank's Revolving B Commitment.
Section 2.02. Borrowing Bases.
(a) The Revolving A Borrowing Base as of the date of this
Agreement has been set by the Majority Banks and acknowledged by the Borrower
as $3,000,000.00.
(b) The Revolving B Borrowing Base as of the date of this
Agreement has been set by the Majority Banks and acknowledged by the Borrower
as $2,000,000.00.
(c)(i) From the date hereof through the Maturity Date, so long as the
Majority Banks have allocated any value to the Revolving B Borrowing
Base, and subject to the further provisions of this Section 2.02, the
Borrowing Bases shall be subject to a quarterly redetermination by the
Majority Banks within 30 days after the receipt of each Oil and Gas
Reserve Report scheduled to be provided to the Agent pursuant to
Sections 5.06(c)(i) and (c)(ii)(A) on the basis of information,
including such Oil and Gas Reserve Reports, supplied by Borrower
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in compliance with the provisions of this Agreement, including such
additional data concerning pricing, quantities of production,
purchasers of production, and other information and engineering and
geological data with respect thereto as the Agent or any Bank may
reasonably request, together with all other information then available
to the Agent and the Banks.
(ii) If the Majority Banks have not allocated any value to
the Revolving B Borrowing Base, the Revolving A Borrowing Base shall
be subject to a semi-annual redetermination by the Majority Banks
within 30 days after the receipt of each Oil and Gas Reserve Report
scheduled to be provided to the Agent pursuant to Sections 5.06(c)(i)
and (c)(ii)(B) on the basis of information, including such Oil and Gas
Reserve Reports, supplied by Borrower in compliance with the
provisions of this Agreement, including such additional data
concerning pricing, quantities of production, purchasers of
production, and other information and engineering and geological data
with respect thereto as the Agent or any Bank may reasonably request,
together with all other information then available to the Agent and
the Banks.
(iii) Notwithstanding the foregoing, the Majority Banks
may, in the exercise of their good faith discretion, make
redeterminations of the Borrowing Bases from time to time on the basis
of information then available to the Agent and the Banks regarding the
Borrower's Oil and Gas Properties, but only one such redetermination
may be made during any fiscal year.
(d) The Borrower may request the Majority Banks to redetermine the
Borrowing Bases by providing a written request to the Agent, but only one such
request may be made during any fiscal year of the Borrower. In connection with
any such request, the Borrower shall provide the Agent and the Banks with an
interim reserve report prepared by the Borrower together with such other
information, including additional data concerning pricing, quantities of
production, purchasers of production, and other information and engineering and
geological data, as the Agent or any Bank may reasonably request. Within 30
days following the receipt of such interim reserve report and other
information, the Majority Banks shall make a redetermination of the Borrowing
Bases.
(e) Upon its redetermination of the Borrowing Bases, each Bank
shall notify the Agent in writing of the Revolving A Borrowing Base and
Revolving B Borrowing Base it has approved, and the Agent shall in turn notify
the Borrower of such redetermination. Until the Borrower receives such
notification from the Agent, the
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most recently established Revolving A Borrowing Base and Revolving B Borrowing
Base shall remain in effect, and thereafter the new Revolving A Borrowing Base
and Revolving B Borrowing Base as set forth in such notification shall be in
effect.
(f) The Borrowing Bases shall represent the determination by the
Majority Banks in their sole discretion, of the loan value of the Borrower's
and its Subsidiaries' Oil and Gas Properties subject to an Acceptable Security
Interest and the allocation between the Revolving A Borrowing Base and the
Revolving B Borrowing Base of such loan values, but the Majority Banks shall
make their determination in accordance with the applicable definitions and
provisions herein contained, each such Bank's standard policies regarding
energy lending, industry lending practices, consultation with the Agent and the
other Banks (but without requiring the approval thereof), and consideration for
the nature of the facilities established hereunder. The Borrower acknowledges
that the determination of the Borrowing Bases contains an equity cushion
(market value in excess of loan value), which is acknowledged by Borrower to be
essential for the adequate protection of the Agent and the Banks.
(g) The Borrower shall also have the right to reduce either or
both of the Borrowing Bases once during the period from October 1 to March 31
and once during the period from April 1 to September 30 during each year by
providing the Agent 30 days advance written notice of such reduction. The
Agent shall promptly send to each Bank a copy of such notice and such reduction
shall be effective on the date of the Agent's receipt of such notice.
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Section 2.03. Method of Borrowing.
(a) Notice. Each Borrowing shall be made pursuant to a Notice of
Borrowing (or by telephone notice promptly confirmed in writing by a Notice of
Borrowing), given not later than 10:00 a.m. (Dallas, Texas, time) (i) on the
third Business Day before the date of the proposed Borrowing, in the case of a
Eurodollar Rate Borrowing or (ii) on the Business Day of the proposed
Borrowing, in the case of a Base Rate Borrowing, by the Borrower to the Agent,
which shall in turn give to each Bank prompt notice of such proposed Borrowing
by telecopier or telex. Each Notice of a Borrowing shall be given by
telecopier or telex, confirmed immediately in writing specifying the
information required therein. In the case of a proposed Borrowing comprised of
Eurodollar Rate Advances, the Agent shall promptly notify each Bank of the
applicable interest rate under Section 2.08(b). Each Bank shall, before 10:00
a.m. (Dallas, Texas, time) on the date of such Borrowing, make available for
the account of its Applicable Lending Office to the Agent at its address
referred to in Section 9.02, or such other location as the Agent may specify by
notice to the Banks, in same day funds, such Bank's Pro Rata Share of such
Borrowing. After the Agent's receipt of such funds and upon fulfillment of the
applicable conditions set forth in Article III, the Agent shall make such funds
available to the Borrower at its account with the Agent.
(b) Conversions and Continuations. The Borrower may elect to
Convert or continue any Borrowing under this Section 2.03 by delivering an
irrevocable Notice of Conversion or Continuation to the Agent at the Agent's
office no later than 10:00 a.m. (Dallas, Texas, time) (i) on the date which is
at least three Business Days in advance of the proposed Conversion or
continuation date in the case of a Conversion to or a continuation of a
Borrowing of the same Class comprised of Eurodollar Rate Advances and (ii) on
the Business Day of the proposed conversion date in the case of a Conversion to
a Borrowing of the same Class comprised of Base Rate Advances. Each such
Notice of Conversion or Continuation shall be in writing or by telex or
telecopier confirmed immediately in writing specifying the information required
therein. Promptly after receipt of a Notice of Conversion or Continuation
under this Section, the Agent shall provide each Bank with a copy thereof and,
in the case of a Conversion to or a Continuation of a Borrowing comprised of
Eurodollar Rate Advances, notify each Bank of the applicable interest rate
under Section 2.08(b).
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(c) Certain Limitations. Notwithstanding anything in paragraphs
(a) and (b) above:
(i) at no time shall there be more than five Interest
Periods applicable to outstanding Eurodollar Rate Advances;
(ii) if any Bank shall, at least one Business Day before
the date of any requested Borrowing, Conversion, or continuation,
notify the Agent that the introduction of, any change in, or any
change in the interpretation of any law or regulation makes it
unlawful, or that any central bank or other Governmental Authority
asserts that it is unlawful, for such Bank or its Eurodollar Lending
Office to perform its obligations under this Agreement to make
Eurodollar Rate Advances or to fund or maintain Eurodollar Rate
Advances, the right of the Borrower to select Eurodollar Rate Advances
from such Bank shall be suspended until such Bank shall notify the
Agent that the circumstances causing such suspension no longer exist,
and the Advance made by such Bank in respect of such Borrowing,
Conversion, or continuation shall be a Base Rate Advance;
(iii) if the Agent is unable to determine the Eurodollar
Rate for Eurodollar Rate Advances comprising any requested Borrowing,
the right of the Borrower to select Eurodollar Rate Advances for such
Borrowing or for any subsequent Borrowing shall be suspended until the
Agent shall notify the Borrower and the Banks that the circumstances
causing such suspension no longer exist, and each Advance comprising
such Borrowing shall be a Base Rate Advance;
(iv) if the Majority Banks shall, at least one Business
Day before the date of any requested Borrowing, notify the Agent that
the Eurodollar Rate for Eurodollar Rate Advances comprising such
Borrowing will not adequately reflect the cost to such Banks of making
or funding their respective Eurodollar Rate Advances, as the case may
be, for such Borrowing, the right of the Borrower to select Eurodollar
Rate Advances for such Borrowing or for any subsequent Borrowing shall
be suspended until the Agent shall notify the Borrower and the Banks
that the circumstances causing such suspension no longer exist, and
each Advance comprising such Borrowing shall be a Base Rate Advance;
and
(v) if the Borrower shall fail to select the duration or
continuation of any Interest Period for any Eurodollar Rate Advances
in accordance with the
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provisions contained in the definition of "Interest Period" in Section
1.01 and paragraph (b) above, the Agent shall forthwith so notify the
Borrower and the Banks and such Advances shall be made available to
the Borrower on the date of such Borrowing as Base Rate Advances or,
if an existing Advance, Convert into Base Rate Advances.
(d) Notices Irrevocable. Each Notice of Borrowing and Notice of
Conversion or Continuation shall be irrevocable and binding on the Borrower.
In the case of any Borrowing which the related Notice of Borrowing specifies is
to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each
Bank against any loss, out-of-pocket cost, or expense incurred by such Bank as
a result of any failure by the Borrower to fulfill on or before the date
specified in such Notice of Borrowing for such Borrowing the applicable
conditions set forth in Article III including, without limitation, any loss
(including any loss of anticipated profits), cost, or expense incurred by
reason of the liquidation or reemployment of deposits or other funds acquired
by such Bank to fund the Advance to be made by such Bank as part of such
Borrowing when such Advance, as a result of such failure, is not made on such
date.
(e) Agent Reliance. Unless the Agent shall have received notice
from a Bank before the date of any Borrowing that such Bank shall not make
available to the Agent such Bank's Pro Rata Share of such Borrowing, the Agent
may assume that such Bank has made its Pro Rata Share of such Borrowing
available to the Agent on the date of such Borrowing in accordance with
paragraph (a) of this Section 2.03 and the Agent may, in reliance upon such
assumption, make available to the Borrower on such date a corresponding amount.
If and to the extent that such Bank shall not have so made its Pro Rata Share
of such Borrowing available to the Agent, such Bank and the Borrower severally
agree to immediately repay to the Agent on demand such corresponding amount,
together with interest on such amount, for each day from the date such amount
is made available to the Borrower until the date such amount is repaid to the
Agent, at (i) in the case of the Borrower, the interest rate applicable on such
day to Advances comprising such Borrowing and (ii) in the case of such Bank,
the Federal Funds Rate for such day. If such Bank shall repay to the Agent
such corresponding amount and interest as provided above, such corresponding
amount so repaid shall constitute such Bank's Advance as part of such Borrowing
for purposes of this Agreement even though not made on the same day as the
other Advances comprising such Borrowing.
(f) Bank Obligations Several. The failure of any Bank to make the
Advance to be made by it as part of any Borrowing shall not relieve any other
Bank of its obligation, if any, to make its Advance on the date of such
Borrowing. No Bank shall
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be responsible for the failure of any other Bank to make the Advance to be made
by such other Bank on the date of any Borrowing.
Section 2.04. Prepayment of Advances.
(a) Optional. The Borrower may prepay Advances, after giving by
10:00 a.m. (Dallas, Texas, time) (i) in the case of Eurodollar Rate Advances,
at least two Business Days' or (ii) in the case of Base Rate Advances, same
Business Day's, irrevocable prior written notice to the Agent stating the
proposed date and aggregate principal amount of such prepayment. If any such
notice is given, the Borrower shall prepay Advances comprising part of the same
Borrowing in whole or ratably in part in an aggregate principal amount equal to
the amount specified in such notice, together with accrued interest to the date
of such prepayment on the principal amount prepaid and amounts, if any,
required to be paid pursuant to Section 2.11 as a result of such prepayment
being made on such date; provided, however, that each partial prepayment with
respect to: (A) any Borrowing comprised of Base Rate Advances shall be made in
$100,000.00 multiples and in an aggregate principal amount such that after
giving effect thereto such Borrowing shall have a principal amount outstanding
of at least $200,000.00 and (B) any Borrowing comprised of Eurodollar Rate
Advances shall be made in $100,000.00 multiples and in an aggregate principal
amount such that after giving effect thereto such Borrowing shall have a
principal amount outstanding of at least $200,000.00. Full prepayments of any
Borrowing are permitted without restriction of amounts. Optional prepayments
shall be first applied to reduce the aggregate unpaid principal amount of
Revolving B Advances and, after the Revolving B Advances have been repaid in
full, to reduce the aggregate unpaid principal amount of the Revolving A
Advances.
(b) Borrowing Base Deficiency. (i) If the aggregate outstanding
amount of Revolving A Advances plus the Letter of Credit Exposure ever exceeds
the Revolving A Borrowing Base or (ii) if the aggregate outstanding amount of
Revolving B Advances ever exceeds the Revolving B Borrowing Base, the Borrower
shall, within ten days after receipt of written notice of such condition from
the Agent, elect by written notice to the Agent to take one or more of the
following actions to remedy the Borrowing Base deficiency:
(i) prepay the applicable Advances and, in the case of a
Revolving A Borrowing Base deficiency, if the Revolving A Advances
have been repaid in full, make deposits into the Cash Collateral
Account to provide cash collateral for the Letter of Credit Exposure,
such that the applicable Borrowing Base deficiency is cured within ten
days after the Borrower's written election;
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(ii) add additional Oil and Gas Properties subject to an
Acceptable Security Interest acceptable to the Majority Banks to the
Borrowing Bases such that the applicable Borrowing Base deficiency is
cured within 30 days after the Borrower's written election ; or
(iii) pay the deficiency in six equal monthly installments
in amounts sufficient for the prepayment of applicable Advances and,
in the case of a Revolving A Borrowing Base deficiency, if the
Advances have been repaid in full, make deposits into the Cash
Collateral Account to provide cash collateral for the Letter of Credit
Exposure such that the Revolving A Borrowing Base deficiency is
eliminated in a period satisfactory to the Majority Banks, but in no
event to exceed six months, by irrevocably dedicating an amount of the
monthly cash flow from the Borrower's and its Subsidiaries' Oil and
Gas Properties to the prepayment of the applicable Advances and, if
applicable, cash collateralization of the Letter of Credit Exposure.
Each prepayment pursuant to this Section 2.04(b) shall be accompanied by
accrued interest on the amount prepaid to the date of such prepayment and
amounts, if any, required to be paid pursuant to Section 2.11 as a result of
such prepayment being made on such date.
(c) Reduction of Commitments. On the date of each reduction of
the aggregate Commitments pursuant to Section 2.01(e), the Borrower agrees to
make a prepayment in respect of the outstanding amount of the Advances and the
Letter of Credit Exposure to the extent, if any, that the aggregate unpaid
principal amount of all Advances plus the Letter of Credit Exposure exceeds the
Commitments, as so reduced. Any amount paid under the preceding sentence in
respect of Letter of Credit Exposure shall be held as cash collateral under
Section 2.06(g). Each prepayment pursuant to this Section 2.04(c) shall be
accompanied by accrued interest on the amount prepaid to the date of such
prepayment and amounts, if any, required to be paid pursuant to Section 2.11 as
a result of such prepayment being made on such date.
(d) Equity Issuances. The Borrower shall repay the Revolving B
Advances by an amount equal to 75% of the net cash proceeds (after offering
expenses) received by the Borrower from the sale of any of the Borrower's
capital stock (other than any common stock sold in connection with sales to its
consultants, employees or directors pursuant to any employee or director stock
option plan, employee compensation
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arrangement, or other employee benefit plan), upon receipt of such proceeds,
whether at closing of such sale or thereafter. Each prepayment pursuant to
this Section 2.04(d) shall be accompanied by accrued interest on the amount
prepaid to the date of such prepayment and amounts, if any, required to be paid
pursuant to Section 2.11 as a result of such prepayment being made on such
date.
(e) Illegality. If any Bank shall notify the Agent and the
Borrower that the introduction of, any change in, or any change in the
interpretation of any law or regulation makes it unlawful, or that any central
bank or other governmental authority asserts that it is unlawful for such Bank
or its Eurodollar Lending Office to perform its obligations under this
Agreement to maintain any Eurodollar Rate Advances of such Bank then
outstanding hereunder, (i) the Borrower shall, no later than 10:00 a.m.
(Dallas, Texas, time), (A) if not prohibited by law, on the last day of the
Interest Period for each outstanding Eurodollar Rate Advance made by such Bank
or (B) if required by such notice, on the second Business Day following its
receipt of such notice, prepay all of the Eurodollar Rate Advances made by such
Bank then outstanding, together with accrued interest on the principal amount
prepaid to the date of such prepayment and amounts, if any, required to be paid
pursuant to Section 2.11 as a result of such prepayment being made on such
date, (ii) such Bank shall simultaneously make a Base Rate Advance to the
Borrower on such date in an amount equal to the aggregate principal amount of
the Eurodollar Rate Advances prepaid to such Bank, and (iii) the right of the
Borrower to select Eurodollar Rate Advances from such Bank for any subsequent
Borrowing shall be suspended until such Bank giving notice referred to above
shall notify the Agent that the circumstances causing such suspension no longer
exist; provided that, each Bank represents and warrants to the Borrower that as
of the later of (i) the Closing Date or (ii) the date on which it shall have
executed an Assignment and Acceptance pursuant to Section 9.06(a), it has no
knowledge that it would be unlawful for such Bank or its Eurodollar Lending
Office to make Eurodollar Rate Advances as contemplated by this Agreement.
(f) No Additional Right; Ratable Prepayment. The Borrower shall
have no right to prepay any principal amount of any Advance except as provided
in this Section 2.04, and all notices given pursuant to this Section 2.04 shall
be irrevocable and binding upon the Borrower. Each payment of any Advance
pursuant to this Section 2.04 shall be made in a manner such that all Advances
comprising part of the same Borrowing are paid in whole or ratably in part.
(g) Application. Each prepayment of Advances after the
Termination Date shall be applied to the scheduled principal installments in
the inverse order of their maturity.
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Section 2.05. Repayment of Advances.
(a) The Borrower shall repay to the Agent for the ratable benefit
of the Banks the outstanding principal amount of each Advance on the Maturity
Date.
(b) After the Termination Date, the Borrower shall repay to the
Agent for the ratable benefit of the Banks the outstanding principal amount of
the Revolving A Advances and Revolving B Advances pro rata based on the
outstanding principal amount of the Revolving A Advances and Revolving B
Advances on the Termination Date or, if the Advances have been repaid in full
and any Letters of Credit remain outstanding, provide cash collateral for the
Letter of Credit Exposure in equal installments equal to 1/6 of the outstanding
principal amount of the Advances on the Termination Date. Each of the first
five of such installments shall be due on the last Business Day of each fiscal
quarter beginning with the fiscal quarter ending December 31, 2000 and the last
installment shall be due on the Maturity Date.
Section 2.06. Letters of Credit.
(a) Commitment. (i) From time to time from the date of this
Agreement until the Termination Date, at the request of the Borrower, the
Issuing Bank shall, on the terms and conditions hereinafter set forth, issue,
increase, or extend the expiration date of Letters of Credit for the account of
the Borrower on any Business Day, and (ii) from the Termination Date until
three months before the Maturity Date, at the request of the Borrower, the
Issuing Bank shall, on the terms and conditions hereinafter set forth, extend
the expiration date of Letters of Credit for the account of the Borrower on any
Business Day.
(b) Certain Requirements. No Letter of Credit shall be issued,
increased, or extended:
(i) unless such issuance, increase, extension or
conversion would not cause the Letter of Credit Exposure to exceed the
lesser of (A) $1,000,000.00 or (B) the lesser of (1) the aggregate
Revolving A Commitments less the aggregate outstanding principal
amount of all Advances or (2) the Revolving A Borrowing Base less the
aggregate outstanding principal amount of all Revolving A Advances;
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(ii) unless such Letter of Credit has an Expiration Date
not later than the earlier of (A) 12 months after the date of issuance
thereof (or, if extendable beyond such period, unless such Letter of
Credit is cancelable upon at least 30 days' notice given by the
Issuing Bank to the beneficiary of such Letter of Credit) or (B) the
Maturity Date;
(iii) unless such Letter of Credit Documents are in form
and substance acceptable to the Issuing Bank in its sole discretion;
(iv) unless such Letter of Credit is a standby letter of
credit not supporting the repayment of indebtedness for borrowed money
of any Person; and
(v) unless the Borrower has delivered to the Issuing Bank
a completed and executed Letter of Credit Application.
(c) Participations. Upon the date of the issuance or increase of
a Letter of Credit, the Issuing Bank shall be deemed to have sold to each other
Bank and each other Bank shall have been deemed to have purchased from the
Issuing Bank a participation in the related Letter of Credit Obligations equal
to such Bank's Pro Rata Share at such date, and such sale and purchase shall
otherwise be in accordance with the terms of this Agreement. The Issuing Bank
shall promptly notify each such participant Bank by telex, telephone, or
telecopy of each Letter of Credit issued, increased, or extended and the actual
dollar amount of such Bank's participation in such Letter of Credit.
(d) Issuing. Each Letter of Credit shall be issued, increased, or
extended pursuant to a Letter of Credit Application (or by telephone notice
promptly confirmed in writing by a Letter of Credit Application), given not
later than 10:00 a.m. (Dallas, Texas, time) on the fifth Business Day before
the date of the proposed issuance, increase, or extension of the Letter of
Credit, and the Agent shall give to each Bank prompt notice of thereof by
telex, telephone, or telecopy. Each Letter of Credit Application shall be
given by telecopier or telex, confirmed immediately in writing, specifying the
information required therein. After the Agent's receipt of such Letter of
Credit Application and upon fulfillment of the applicable conditions set forth
in Article III, the Agent shall issue, increase, or extend such Letter of
Credit for the account of the Borrower. Each Letter of Credit Application
shall be irrevocable and binding on the Borrower.
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(e) Reimbursement. The Borrower hereby agrees to pay on demand to
the Issuing Bank an amount equal to any amount paid by the Issuing Bank under
any Letter of Credit. In the event the Issuing Bank makes a payment pursuant
to a request for draw presented under a Letter of Credit and such payment is
not promptly reimbursed by the Borrower upon demand, the Issuing Bank shall
give the Agent notice of the Borrower's failure to make such reimbursement and
the Agent shall promptly notify each Bank of the amount necessary to reimburse
the Issuing Bank. Upon such notice from the Agent, each Bank shall promptly
reimburse the Issuing Bank for such Bank's Pro Rata Share of such amount. To
the extent that the Revolving A Borrowing Base exceeds the sum of all
outstanding Revolving A Advances, such reimbursement shall be deemed for all
purposes of this Agreement to be a Revolving A Advance to the Borrower
transferred at the Borrower's request to the Issuing Bank; then, the remainder
of such reimbursement shall be deemed for all purposes of this Agreement to be
a Revolving B Advance to the Borrower transferred at the Borrower's request to
the Issuing Bank. If such reimbursement is not made by any Bank to the Issuing
Bank on the same day on which the Agent notifies such Bank to make
reimbursement to the Issuing Bank hereunder, such Bank shall pay interest on
its Pro Rata Share thereof to the Issuing Bank at a rate per annum equal to the
Federal Funds Rate. The Borrower hereby unconditionally and irrevocably
authorizes, empowers, and directs the Agent and the Banks to record and
otherwise treat such reimbursements to the Issuing Bank as Base Rate Advances
under a Borrowing requested by the Borrower to reimburse the Issuing Bank which
have been transferred to the Issuing Bank at the Borrower's request.
(f) Obligations Unconditional. The obligations of the Borrower
under this Agreement in respect of each Letter of Credit shall be unconditional
and irrevocable, and shall be paid strictly in accordance with the terms of
this Agreement under all circumstances, including, without limitation, the
following circumstances:
(i) any lack of validity or enforceability of any Letter
of Credit Documents;
(ii) any amendment or waiver of, or any consent to,
departure from any Letter of Credit Documents;
(iii) the existence of any claim, set-off, defense, or
other right which the Borrower may have at any time against any
beneficiary or transferee of such Letter of Credit (or any Persons for
whom any such beneficiary or any such transferee may be acting), the
Issuing Bank, or any other person or entity,
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whether in connection with this Agreement, the transactions
contemplated in this Agreement or in any Letter of Credit Documents, or
any unrelated transaction;
(iv) any statement or any other document presented under
such Letter of Credit proving to be forged, fraudulent, invalid, or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect to the extent the Issuing Bank would not be
liable therefor pursuant to the following paragraph (g); or
(v) payment by the Issuing Bank under such Letter of
Credit against presentation of a draft or certificate which does not
comply with the terms of such Letter of Credit;
provided, however, that nothing contained in this paragraph (f) shall be deemed
to constitute a waiver of any remedies of the Borrower in connection with the
Letters of Credit or the Borrower's rights under Section 2.06(g) below.
(g) Liability of Issuing Bank. The Borrower assumes all risks of
the acts or omissions of any beneficiary or transferee of any Letter of Credit
with respect to its use of such Letter of Credit. Neither the Issuing Bank nor
any of its officers or directors shall be liable or responsible for:
(i) the use which may be made of any Letter of Credit or
any acts or omissions of any beneficiary or transferee in connection
therewith;
(ii) the validity, sufficiency, or genuineness of
documents, or of any endorsement thereon, even if such documents
should prove to be in any or all respects invalid, insufficient,
fraudulent, or forged;
(iii) payment by the Issuing Bank against presentation of
documents which do not comply with the terms of a Letter of Credit,
including failure of any documents to bear any reference or adequate
reference to the relevant Letter of Credit; or
(iv) any other circumstances whatsoever in making or
failing to make payment under any Letter of Credit (INCLUDING THE
ISSUING BANK'S OWN NEGLIGENCE),
except that the Borrower shall have a claim against the Issuing Bank, and the
Issuing
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Bank shall be liable to the Borrower, to the extent of any direct, as
opposed to consequential, damages suffered by the Borrower which the Borrower
proves were caused by (A) the Issuing Bank's willful misconduct or gross
negligence in determining whether documents presented under a Letter of Credit
comply with the terms of such Letter of Credit or (B) the Issuing Bank's
willful failure to make lawful payment under any Letter of Credit after the
presentation to it of a draft and certificate strictly complying with the terms
and conditions of such Letter of Credit. In furtherance and not in limitation
of the foregoing, the Issuing Bank may accept documents that appear on their
face to be in order, without responsibility for further investigation,
regardless of any notice or information to the contrary.
(h) Cash Collateral Account.
(i) If the Borrower is required to deposit funds in the
Cash Collateral Account pursuant to Section 2.04(b) or (c), 2.05(b),
7.02(b), or 7.03(b), then the Borrower and the Agent shall establish
the Cash Collateral Account and the Borrower shall execute any
documents and agreements, including the Agent's standard form
assignment of deposit accounts, that the Agent requests in connection
therewith to establish the Cash Collateral Account and grant the Agent
a first priority security interest in such account and the funds
therein. The Borrower hereby pledges to the Agent and grants the
Agent a security interest in the Cash Collateral Account, whenever
established, all funds held in the Cash Collateral Account from time
to time, and all proceeds thereof as security for the payment of the
Obligations.
(ii) So long as no Event of Default exists, (A) the Agent
may apply the funds held in the Cash Collateral Account only to the
reimbursement of any Letter of Credit Obligations and (B) the Agent
shall release to the Borrower at the Borrower's written request any
funds held in the Cash Collateral Account in an amount up to but not
exceeding the excess, if any (immediately prior to the release of any
such funds), of the total amount of funds held in the Cash Collateral
Account over the Letter of Credit Exposure. During the existence of
any Event of Default, the Agent may apply any funds held in the Cash
Collateral Account to the Obligations in any order determined by the
Agent, regardless of any Letter of Credit Exposure which may remain
outstanding. The Agent may in its sole discretion at any time release
to the Borrower any funds held in the Cash Collateral Account.
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(iii) The Agent shall exercise reasonable care in the
custody and preservation of any funds held in the Cash Collateral
Account and shall be deemed to have exercised such care if such funds
are accorded treatment substantially equivalent to that which the
Agent accords its own property, it being understood that the Agent
shall not have any responsibility for taking any necessary steps to
preserve rights against any parties with respect to any such funds.
Section 2.07. Fees.
(a) Commitment Fees.
(i) Subject to the following clause (ii), the Borrower
agrees to pay to the Agent for the account of each Bank a commitment
fee of .50% per annum on the average daily amount by which (A) (1) the
lesser of (I) such Bank's Pro Rata Share of the Revolving A Borrowing
Base and (II) such Bank's Commitment exceeds (2) the sum of (I) such
Bank's outstanding Revolving A Advances and (II) such Bank's Pro Rata
Share of the Letter of Credit Exposure and (B) (1) the lesser of (I)
such Bank's Pro Rata Share of the Revolving B Borrowing Base and (II)
such Bank's Revolving B Commitment exceeds (2) the outstanding
Revolving B Advances, from the Effective Date until the Termination
Date.
(ii) The Borrower may from time to time designate by
written notice to the Agent a portion of either Borrowing Base or
portions of both Borrowing Bases as inactive. The commitment fee for
the portion or portions declared inactive shall be .25% per annum;
provided that, if the Borrower at any time requests a Borrowing that
would use a portion of the Borrowing Bases designated as inactive, the
Borrower shall pay on the date of such Borrowing to the Agent for the
ratable benefit of the Banks, a fee equal to (A) .25% per annum times
(B) (1) the lesser of (I) 90 and (II) the number of days the portion
of the Borrowing Bases used as part of such Borrowing was designated
as inactive times (C) an amount equal to the portion of the inactive
Borrowing Bases used as part of such Borrowing.
(iii) The commitment fees shall be due and payable
quarterly in arrears on the last day of each March, June, September,
and December during the term of this Agreement and on the Termination
Date.
(b) Arrangement Fees. The Borrower agrees to pay to the Agent for
the benefit of the Agent the arrangement fee described in the letter dated
October 24, 1997, from the Agent to the Borrower (the "Agent's Fee Letter").
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(c) Engineering Fees. The Borrower agrees to pay to the Agent an
engineering fee of $5,000.00 on the date of each delivery of information
required under Section 5.06(c).
(d) Letter of Credit Fees. The Borrower agrees to pay to the
Agent for the pro rata benefit of the Banks a fee for each Letter of Credit
issued hereunder equal to 1.00% per annum on the face amount of such Letter of
Credit, but with minimum annual fee of $750.00 on each Letter of Credit. Each
such fee shall be payable annually in advance on the date of the issuance,
increase or extension of the Letter of Credit, but, in the case of an increase
or extension only, on the amount of such increase or for the period of such
extension.
Section 2.08. Interest. The Borrower shall pay interest on the
unpaid principal amount of each Advance made by each Bank from the date of such
Advance until such principal amount shall be paid in full, at the following
rates per annum:
(a) Base Rate Advances. If such Advance is a Base Rate Advance, a
rate per annum equal at all times to the Adjusted Base Rate in effect from time
to time plus the Applicable Margin in effect from time to time, payable in
arrears on the last day of March, June, September, and December and on the date
such Base Rate Advance shall be paid in full, provided that any amount of
principal which is not paid when due (whether at stated maturity, by
acceleration, or otherwise) shall bear interest from the date on which such
amount is due until such amount is paid in full, payable on demand, at a rate
per annum equal at all times to the Adjusted Base Rate in effect from time to
time plus the Applicable Margin plus 3.00% per annum.
(b) Eurodollar Rate Advances. If such Advance is a Eurodollar
Rate Advance, a rate per annum equal at all times during the Interest Period
for such Advance to the Eurodollar Rate for such Interest Period plus the
Applicable Margin in effect from time to time, payable on the last day of such
Interest Period, and, in the case of six-month Interest Periods, on the day
which occurs during such Interest Period three months from the first day of
such Interest Period, provided that any amount of principal which is not paid
when due (whether at stated maturity, by acceleration, or otherwise) shall bear
interest from the date on which such amount is due until such amount is paid in
full, payable on demand, at a rate per annum equal at all times to the Adjusted
Base Rate in effect from time to time plus the Applicable Margin plus 3.00% per
annum.
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(c) Additional Interest on Eurodollar Rate Advances. The Borrower
shall pay to each Bank, so long as any such Bank shall be required under
regulations of the Federal Reserve Board to maintain reserves with respect to
liabilities or assets consisting of or including Eurocurrency Liabilities,
additional interest on the unpaid principal amount of each Eurodollar Rate
Advance of such Bank, from the effective date of such Advance until such
principal amount is paid in full, at an interest rate per annum equal at all
times to the remainder obtained by subtracting (A) the Eurodollar Rate for the
Interest Period for such Advance from (B) the rate obtained by dividing such
Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve
Percentage of such Bank for such Interest Period, payable on each date on which
interest is payable on such Advance. Such additional interest payable to any
Bank shall be determined by such Bank and notified to the Borrower through the
Agent (such notice to include the calculation of such additional interest,
which calculation shall be conclusive in the absence of manifest error).
(d) Usury.
(i) If, with respect to any Bank, the effective rate of
interest contracted for under the Credit Documents, including the
stated rates of interest and fees contracted for hereunder and any
other amounts contracted for under the Credit Documents which are
deemed to be interest, at any time exceeds the Maximum Rate, then the
outstanding principal amount of the loans made by such Bank hereunder
shall bear interest at a rate which would make the effective rate of
interest for such Bank under the Credit Documents equal the Maximum
Rate until the difference between the amounts which would have been
due at the stated rates and the amounts which were due at the Maximum
Rate (the "Lost Interest") has been recaptured by such Bank.
(ii) If, when the loans made hereunder are repaid in full,
the Lost Interest has not been fully recaptured by such Bank pursuant
to the preceding paragraph, then, to the extent permitted by law, for
the loans made hereunder by such Bank the interest rates charged under
Section 2.08 hereunder shall be retroactively increased such that the
effective rate of interest under the Credit Documents was at the
Maximum Rate since the effectiveness of this Agreement to the extent
necessary to recapture the Lost Interest not recaptured pursuant to
the preceding sentence and, to the extent allowed by law, the Borrower
shall pay to such Bank the amount of the Lost Interest remaining to be
recaptured by such Bank.
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(iii) NOTWITHSTANDING the foregoing or any other term in
this Agreement and the Credit Documents to the contrary, it is the
intention of each Bank and the Borrower to conform strictly to any
applicable usury laws. Accordingly, if any Bank contracts for,
charges, or receives any consideration which constitutes interest in
excess of the Maximum Rate, then any such excess shall be canceled
automatically and, if previously paid, shall at such Bank's option be
applied to the outstanding amount of the loans made hereunder by such
Bank or be refunded to the Borrower.
Section 2.09. Payments and Computations.
(a) Payment Procedures. The Borrower shall make each payment
under this Agreement and under the Notes not later than 10:00 a.m. (Dallas,
Texas, time) on the day when due in Dollars to the Agent at 901 Main Street,
49th Floor, Dallas, Texas 75202 (or such other location as the Agent shall
designate in writing to the Borrower), in same day funds. The Agent shall
promptly thereafter cause to be distributed like funds relating to the payment
of principal, interest or fees ratably (other than amounts payable solely to
the Agent, the Issuing Bank, or a specific Bank pursuant to Section 2.07(b),
2.08(c), 2.11, 2.12, 2.13, 8.05, or 9.07, but after taking into account
payments effected pursuant to Section 9.04) to the Banks for the account of
their respective Applicable Lending Offices, and like funds relating to the
payment of any other amount payable to any Bank or the Issuing Bank to such
Bank for the account of its Applicable Lending Office, in each case to be
applied in accordance with the terms of this Agreement.
(b) Computations. All computations of interest based on the Base
Rate shall be made by the Agent on the basis of a year of 365 or 366 days, as
the case may be, and all computations of interest based on the Eurodollar Rate
and the Federal Funds Rate and of fees shall be made by the Agent, on the basis
of a year of 360 days, in each case for the actual number of days (including
the first day, but excluding the last day) occurring in the period for which
such interest or fees are payable. Each determination by the Agent of an
interest rate or fee shall be conclusive and binding for all purposes, absent
manifest error.
(c) Non-Business Day Payments. Whenever any payment shall be
stated to be due on a day other than a Business Day, such payment shall be made
on the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of payment of interest or fees, as the case
may be; provided, however,
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that if such extension would cause payment of interest on or principal of
Eurodollar Rate Advances to be made in the next following calendar month, such
payment shall be made on the next preceding Business Day.
(d) Agent Reliance. Unless the Agent shall have received written
notice from the Borrower prior to the date on which any payment is due to the
Banks that the Borrower shall not make such payment in full, the Agent may
assume that the Borrower has made such payment in full to the Agent on such
date and the Agent may, in reliance upon such assumption, cause to be
distributed to each Bank on such date an amount equal to the amount then due
such Bank. If and to the extent the Borrower shall not have so made such
payment in full to the Agent, each Bank shall repay to the Agent forthwith on
demand such amount distributed to such Bank, together with interest, for each
day from the date such amount is distributed to such Bank until the date such
Bank repays such amount to the Agent, at the Federal Funds Rate for such day.
Section 2.10. Sharing of Payments, Etc. If any Bank shall obtain
any payment (whether voluntary, involuntary, through the exercise of any right
of set-off, or otherwise) on account of the Advances or Letter of Credit
Obligations made by it in excess of its Pro Rata Share of payments on account
of the Advances or Letter of Credit Obligations obtained by all the Banks, such
Bank shall notify the Agent and forthwith purchase from the other Banks such
participations in the Advances made by them or Letter of Credit Obligations
held by them as shall be necessary to cause such purchasing Bank to share the
excess payment ratably with each of them; provided, however, that if all or any
portion of such excess payment is thereafter recovered from such purchasing
Bank, such purchase from each Bank shall be rescinded and such Bank shall repay
to the purchasing Bank the purchase price to the extent of such Bank's ratable
share (according to the proportion of (a) the amount of the participation sold
by such Bank to the purchasing Bank as a result of such excess payment to (b)
the total amount of such excess payment) of such recovery, together with an
amount equal to such Bank's ratable share (according to the proportion of (a)
the amount of such Bank's required repayment to the purchasing Bank to (b) the
total amount of all such required repayments to the purchasing Bank) of any
interest or other amount paid or payable by the purchasing Bank in respect of
the total amount so recovered. The Borrower agrees that any Bank so purchasing
a participation from another Bank pursuant to this Section 2.10 may, to the
fullest extent permitted by law, exercise all its rights of payment (including
the right of set-off) with respect to such participation as fully as if such
Bank were the direct creditor of the Borrower in the amount of such
participation.
Section 2.11. Breakage Costs. If (a) any payment of principal of
any Eurodollar Rate Advance is made other than on the last day of the Interest
Period for
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such Advance, whether as a result of any payment pursuant to Section 2.04, the
acceleration of the maturity of the Notes pursuant to Article VII, or
otherwise, or (b) the Borrower fails to make a principal or interest payment
with respect to any Eurodollar Rate Advance on the date such payment is due and
payable, the Borrower shall, within 10 days of any written demand sent by any
Bank to the Borrower through the Agent accompanied by the certificate described
below, pay to the Agent for the account of such Bank any amounts required to
compensate such Bank for any additional losses, out-of-pocket costs or expenses
which it may reasonably incur as a result of such payment or nonpayment,
including, without limitation, any loss (including loss of anticipated
profits), cost or expense incurred by reason of the liquidation or reemployment
of deposits or other funds acquired by any Bank to fund or maintain such
Advance. Any Bank demanding payment under this Section 2.11 shall deliver to
the Borrower and the Agent a statement reasonably setting forth the amount and
manner of determining such loss, cost or expense, which statement shall be
conclusive and binding for all purposes, absent manifest error.
Section 2.12. Increased Costs.
(a) Eurodollar Rate Advances. If, due to either (i) the
introduction of, any change (other than any change by way of imposition or
increase of reserve requirements included in the Eurodollar Rate Reserve
Percentage) in, or any change in the interpretation of any law or regulation or
(ii) the compliance with any law or regulation or any guideline or request from
any central bank or other Governmental Authority (whether or not having the
force of law), there shall be any increase in the cost to any Bank of agreeing
to make or making, funding, or maintaining Eurodollar Rate Advances (other than
any increase in income, profits or franchise taxes), then the Borrower shall
from time to time, within 10 days after written demand by such Bank accompanied
by the below-described certificate (with a copy of such demand to the Agent),
immediately pay to the Agent for the account of such Bank additional amounts
sufficient to compensate such Bank for such increased cost. The Borrower will
not be responsible for paying any amounts pursuant to this Section 2.12(a)
accruing prior to 180 days prior to the receipt by the Borrower of the
certificate referred to in the preceding sentence; provided that if any law,
rule or regulation or any interpretation or administration thereof, or any
request or directive giving rise to such Bank's right to compensation under
this paragraph has retroactive effect, such Bank shall be entitled to claim
compensation under this paragraph for the period commencing on such date of
retroactive effect through the date of adoption or change or promulgation
thereof without regard to the foregoing limitation. A certificate identifying
with reasonable specificity the basis for and the amount of such increased cost
and detailing the
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calculation of such cost submitted to the Borrower and the Agent by such Bank
shall be conclusive and binding for all purposes, absent manifest error. Any
Bank claiming any additional amounts pursuant to this Section 2.12 shall use
its commercially reasonable efforts (consistent with its internal policies and
legal and regulatory restrictions) to avoid or minimize any additional amounts
that otherwise would be payable pursuant to this Section, including changing
the jurisdiction of its Applicable Lending Office if such change would
eliminate the amount of any such additional amounts which may thereafter
accrue; provided that no such change or action shall be required to be made or
taken if, in the reasonable judgment of such Bank, such change would be
disadvantageous to such Bank.
(b) Capital Adequacy. If any Bank or the Issuing Bank determines
in good faith that compliance with any law or regulation or any guideline or
request from any central bank or other Governmental Authority (whether or not
having the force of law) affects or would affect the amount of capital required
or expected to be maintained by such Bank or the Issuing Bank or any
corporation controlling such Bank or the Issuing Bank and that the amount of
such capital is increased by or based upon the existence of such Bank's
commitment to lend or the Issuing Bank's commitment to issue the Letters of
Credit and other commitments of this type, then, upon 30 days' prior written
notice by such Bank or the Issuing Bank accompanied by the below-described
certificate (with a copy of any such demand to the Agent), the Borrower shall
immediately pay to the Agent for the account of such Bank or to the Issuing
Bank, as the case may be, from time to time as specified by such Bank or the
Issuing Bank, additional amounts sufficient to compensate such Bank or the
Issuing Bank, in light of such circumstances, (i) with respect to such Bank, to
the extent that such Bank reasonably determines such increase in capital to be
allocable to the existence of such Bank's commitment to lend under this
Agreement and (ii) with respect to the Issuing Bank, to the extent that the
Issuing Bank reasonably determines such increase in capital to be allocable to
the issuance or maintenance of the Letters of Credit. The Borrower will not be
responsible for paying any amounts pursuant to this Section 2.12(a) accruing
prior to 180 days prior to the receipt by the Borrower of the certificate
referred to in the preceding sentence; provided that if any law, rule or
regulation or any interpretation or administration thereof, or any request or
directive giving rise to such Bank's right to compensation under this paragraph
has retroactive effect, such Bank shall be entitled to claim compensation under
this paragraph for the period commencing on such date of retroactive effect
through the date of adoption or change or promulgation thereof without regard
to the foregoing limitation. A certificate as to such amounts and detailing
the calculation of such amounts submitted to the Borrower by such Bank or the
Issuing Bank shall be conclusive and binding for all purposes, absent manifest
error.
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(c) Letters of Credit. If any change in any law or regulation or
in the interpretation thereof by any court or administrative or Governmental
Authority charged with the administration thereof shall either (i) impose,
modify, or deem applicable any reserve, special deposit, or similar requirement
against letters of credit issued by, or assets held by, or deposits in or for
the account of, the Issuing Bank or (ii) impose on the Issuing Bank any other
condition regarding the provisions of this Agreement relating to the Letters of
Credit or any Letter of Credit Obligations, and the result of any event
referred to in the preceding clause (i) or (ii) shall be to increase the cost
to the Issuing Bank of issuing or maintaining any Letter of Credit (which
increase in cost shall be determined by the Issuing Bank's reasonable
allocation of the aggregate of such cost increases resulting from such event),
then, within 10 days after written demand by the Issuing Bank accompanied by
the below-described certificate, the Borrower shall pay to the Issuing Bank,
from time to time as specified by the Issuing Bank, additional amounts which
shall be sufficient to compensate the Issuing Bank for such increased cost.
The Borrower will not be responsible for paying any amounts pursuant to this
Section 2.12(a) accruing prior to 180 days prior to the receipt by the Borrower
of the certificate referred to in the preceding sentence; provided that if any
law, rule or regulation or any interpretation or administration thereof, or any
request or directive giving rise to such Bank's right to compensation under
this paragraph has retroactive effect, such Bank shall be entitled to claim
compensation under this paragraph for the period commencing on such date of
retroactive effect through the date of adoption or change or promulgation
thereof without regard to the foregoing limitation. A certificate as to such
increased cost incurred by the Issuing Bank, as a result of any event mentioned
in clause (i) or (ii) above, and detailing the calculation of such increased
costs submitted by the Issuing Bank to the Borrower, shall be conclusive and
binding for all purposes, absent manifest error.
Section 2.13. Taxes.
(a) No Deduction for Certain Taxes. Any and all payments by the
Borrower shall be made, in accordance with Section 2.09, free and clear of and
without deduction for any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding, in the case of each Bank, the Issuing Bank, and the Agent, taxes
imposed on its income, and franchise taxes imposed on it, by the jurisdiction
under the laws of which such Bank, the Issuing Bank, or the Agent (as the case
may be) is organized or any political subdivision of the jurisdiction (all such
non-excluded taxes, levies, imposts, deductions, charges,
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withholdings and liabilities being hereinafter referred to as "Taxes") and, in
the case of each Bank and the Issuing Bank, Taxes by the jurisdiction of such
Bank's Applicable Lending Office or any political subdivision of such
jurisdiction. If the Borrower shall be required by law to deduct any Taxes
from or in respect of any sum payable to any Bank, the Issuing Bank, or the
Agent, (i) the sum payable shall be increased as may be necessary so that,
after making all required deductions (including deductions applicable to
additional sums payable under this Section 2.13), such Bank, the Issuing Bank,
or the Agent (as the case may be) receives an amount equal to the sum it would
have received had no such deductions been made; provided, however, that if the
Borrower's obligation to deduct or withhold Taxes is caused solely by such
Bank's, the Issuing Bank's, or the Agent's failure to provide the forms
described in paragraph (d) of this Section 2.13 and such Bank, the Issuing
Bank, or the Agent could have provided such forms, no such increase shall be
required; (ii) the Borrower shall make such deductions; and (iii) the Borrower
shall pay the full amount deducted to the relevant taxation authority or other
authority in accordance with applicable law.
(b) Other Taxes. In addition, within 10 days after written
demand, the Borrower agrees to pay any present or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies which
arise from any payment made or from the execution, delivery or registration of,
or otherwise with respect to, this Agreement, the Notes, or the other Credit
Documents (hereinafter referred to as "Other Taxes").
(c) Indemnification. THE BORROWER INDEMNIFIES EACH BANK, THE
ISSUING BANK, AND THE AGENT FOR THE FULL AMOUNT OF TAXES OR OTHER TAXES
(INCLUDING, WITHOUT LIMITATION, ANY TAXES OR OTHER TAXES IMPOSED BY ANY
JURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 2.13) PAID BY SUCH BANK, THE
ISSUING BANK, OR THE AGENT (AS THE CASE MAY BE) AND ANY LIABILITY (INCLUDING
INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT THERETO, WHETHER OR
NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLY ASSERTED. EACH PAYMENT
REQUIRED TO BE MADE BY THE BORROWER IN RESPECT OF THIS INDEMNIFICATION SHALL BE
MADE TO THE AGENT FOR THE BENEFIT OF ANY PARTY CLAIMING SUCH INDEMNIFICATION
WITHIN 30 DAYS FROM THE DATE THE BORROWER RECEIVES WRITTEN DEMAND THEREFOR FROM
THE AGENT ON BEHALF OF ITSELF AS AGENT, THE ISSUING BANK, OR ANY SUCH BANK. IF
ANY BANK, THE AGENT, OR THE ISSUING BANK RECEIVES A REFUND IN
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RESPECT OF ANY TAXES PAID BY THE BORROWER UNDER THIS PARAGRAPH (C), SUCH BANK,
THE AGENT, OR THE ISSUING BANK, AS THE CASE MAY BE, SHALL PROMPTLY PAY TO THE
BORROWER THE BORROWER'S SHARE OF SUCH REFUND.
(d) Foreign Bank Withholding Exemption. Each Bank and Issuing
Bank that is not incorporated under the laws of the United States of America or
a state thereof agrees that it shall deliver to the Borrower and the Agent (i)
two duly completed copies of United States Internal Revenue Service Form 1001
or 4224 or successor applicable form, as the case may be, certifying in each
case that such Bank is entitled to receive payments under this Agreement and
the Notes payable to it, without deduction or withholding of any United States
federal income taxes, (ii) if applicable, an Internal Revenue Service Form W-8
or W-9 or successor applicable form, as the case may be, to establish an
exemption from United States backup withholding tax, and (iii) any other
governmental forms which are necessary or required under an applicable tax
treaty or otherwise by law to reduce or eliminate any withholding tax, which
have been reasonably requested by the Borrower. Each Bank which delivers to
the Borrower and the Agent a Form 1001 or 4224 and Form W-8 or W-9 pursuant to
the next preceding sentence further undertakes to deliver to the Borrower and
the Agent two further copies of the said letter and Form 1001 or 4224 and Form
W-8 or W-9, or successor applicable forms, or other manner of certification, as
the case may be, on or before the date that any such letter or form expires or
becomes obsolete or after the occurrence of any event requiring a change in the
most recent letter and form previously delivered by it to the Borrower and the
Agent, and such extensions or renewals thereof as may reasonably be requested
by the Borrower and the Agent certifying in the case of a Form 1001 or 4224
that such Bank is entitled to receive payments under this Agreement without
deduction or withholding of any United States federal income taxes. If an
event (including without limitation any change in treaty, law or regulation)
has occurred prior to the date on which any delivery required by the preceding
sentence would otherwise be required which renders all such forms inapplicable
or which would prevent any Bank from duly completing and delivering any such
letter or form with respect to it and such Bank advises the Borrower and the
Agent that it is not capable of receiving payments without any deduction or
withholding of United States federal income tax, and in the case of a Form W-8
or W-9, establishing an exemption from United States backup withholding tax,
such Bank shall not be required to deliver such letter or forms. The Borrower
shall withhold tax at the rate and in the manner required by the laws of the
United States with respect to payments made to a Bank failing to timely provide
the requisite Internal Revenue Service forms.
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Section 2.14. Replacement of Bank. If at any time (a) any of the
provisions of Sections 2.11, 2.12 or 2.13 become applicable to and are utilized
by any Bank so as to cause the Borrower to pay any material amount to such Bank
under any such Section, (b) any Bank gives a notice pursuant to Section
2.03(c)(i) or 2.03(c)(iv), or (c) a Bank becomes a Nonconsenting Bank (as
hereinafter defined), the Borrower shall have the right to replace such Bank
with another Person; provided that (i) such new Person shall be acceptable to
the Agent and such new Person shall execute an Assignment and Acceptance, (ii)
the Borrower shall have no right to replace the Agent in its capacity as a
Bank, (iii) neither the Agent, nor any Bank, shall have any obligation to the
Borrower to find such other Person, and (iv) in the event of a replacement of a
Nonconsenting Bank or a Bank utilizing Section 2.03, 2.11, 2.12 or 2.13, in
order for the Borrower to be entitled to replace such a Bank, such replacement
must take place no later than 180 days after (A) the date the Nonconsenting
Bank shall notify Borrower and the Agent of its failure to agree to any
requested consent, waiver or other modification, (B) the Bank demanded payment
under Section 2.11, 2.12 or 2.13, as applicable, or (C) the Bank gave notice
under Section 2.03. Each Bank (other than the Agent) agrees to its replacement
at the option of the Borrower pursuant to this Section 2.14 and in accordance
with Section 9.06; provided that the successor Bank shall purchase without
recourse such Bank's interest in the Obligations of the Borrower to such Bank
for cash in an aggregate amount equal to aggregate unpaid principal thereof,
all unpaid interest accrued thereon, all unpaid commitment fees accrued for the
account of such Bank, any breakage costs incurred by the selling Bank because
of the prepayment of any Eurodollar Rate Advances, all other fees (if any)
applicable thereto and all other amounts then owing to such Bank hereunder or
under any other Credit Document and the Borrower and its Subsidiaries shall
execute a release addressed to such Bank releasing such Bank from all claims
arising in connection with the Credit Documents. In the event that (x) the
Borrower or Agent has requested a Bank to consent to a departure or waiver of
any of the provisions of the Credit Documents or to agree to any other
modification thereto, (y) the consent, waiver or other modification in question
requires the agreement of the Majority Banks or Banks, as the case may be, in
accordance with the terms of Section 9.01 and (z) Banks holding at least 80% of
the unpaid principal amounts outstanding under the Notes (or if no such amounts
are outstanding, 80% of the Pro Rata Percentages) have agreed to such consent,
waiver or other modification, then any Bank who does not agree to such consent,
waiver or other modification shall be deemed a Nonconsenting Bank.
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ARTICLE III
CONDITIONS OF LENDING
Section 3.01. Conditions Precedent to Credit Agreement. The
obligation of each Bank to make its initial Advance as part of the initial
Borrowing and of the Issuing Bank to issue the initial Letters of Credit are
subject to the conditions precedent that:
(a) Documentation. On or before the day on which the initial
Borrowing is made or the initial Letters of Credit are issued, the Agent shall
have received the following duly executed by all the parties thereto, in form
and substance satisfactory to the Agent and the Banks, and, where applicable,
in sufficient copies for each Bank:
(i) This Agreement and the Notes;
(ii) A favorable opinion of the Borrower's counsel, dated
as of the Effective Date and substantially in the form of the attached
Exhibit H covering the matters discussed in such Exhibit and such
other matters as any Bank through the Agent may reasonably request;
(iii) A certificate of the Secretary or an Assistant
Secretary of the Borrower certifying the existence of the Borrower, a
certificate of good standing for the Borrower, the certificate of
incorporation of the Borrower, the bylaws of the Borrower, the
resolutions of the Board of Directors of the Borrower authorizing this
Agreement and related transactions, and the incumbency and signatures
of the officers of the Borrower authorized to execute this Agreement
and related documents;
(iv) Mortgages, deeds of trust, financing statements, or
other security instruments granting an Acceptable Security Interest in
the Borrower's and its Subsidiaries' Oil and Gas Properties with a
loan value of at least 80% of the Borrowing Bases;
(v) Title opinions prepared by counsel approved by the
Agent in form and substance satisfactory to the Agent evidencing that
the Borrower's and its Subsidiaries' Oil and Gas Properties with a
loan value of at least 90% of the Borrowing Bases and are unencumbered
except for title exceptions approved by the Agent;
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(vi) All Material Contracts affecting any of the Oil and
Gas Properties described in the foregoing clauses (iv) and (v); and
(vii) Such other documents, certificates, letters in lieu
of transfer orders, opinions of Borrower's counsel, agreements, and
lien searches as the Agent may reasonably request.
(b) Payment of Fees. On the date of this Agreement, the Borrower
shall have paid the fees required by Section 2.07(b) and (c) and all costs and
expenses which have been invoiced and are payable pursuant to Section 9.04.
Section 3.02. Conditions Precedent to All Borrowings. The
obligation of each Bank to make an Advance on the occasion of each Borrowing
and of the Issuing Bank to issue, increase, or extend any Letter of Credit
shall be subject to the further conditions precedent that on the date of such
Borrowing or the issuance, increase, or extension of such Letter of Credit the
following statements shall be true (and each of the giving of the applicable
Notice of Borrowing or Letter of Credit Application and the acceptance by the
Borrower of the proceeds of such Borrowing or the issuance, increase, or
extension of such Letter of Credit shall constitute a representation and
warranty by the Borrower that on the date of such Borrowing, the issuance,
increase, or extension of such Letter of Credit, such statements are true):
(a) the representations and warranties contained in Article IV,
the Security Documents, and the Guaranties are correct in all material respects
on and as of the date of such Borrowing or the date of the issuance, increase,
or extension of such Letter of Credit, before and after giving effect to such
Borrowing or to the issuance, increase, or extension of such Letter of Credit
and to the application of the proceeds from such Borrowing, as though made on
and as of such date and
(b) no Default has occurred and is continuing or would result from
such Borrowing or from the application of the proceeds therefrom, from the
issuance, increase, or extension of such Letter of Credit.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants as follows:
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Section 4.01. Corporate Existence; Subsidiaries. The Borrower is a
corporation duly organized, validly existing, and in good standing under the
laws of Delaware and in good standing and qualified to do business in each
jurisdiction where its ownership or lease of property or conduct of its
business requires such qualification and where a failure to be qualified could
reasonably be expected to cause a Material Adverse Change. Each Guarantor is a
corporation duly organized, validly existing, and in good standing under the
laws of its jurisdiction of incorporation and in good standing and qualified to
do business in each jurisdiction where its ownership or lease of property or
conduct of its business requires such qualification and where a failure to be
qualified could reasonably be expected to cause a Material Adverse Change. The
Borrower has no Subsidiaries other than Subsidiaries which have executed a
Guaranty in compliance with Section 5.08.
Section 4.02. Corporate Power. The execution, delivery, and
performance by the Borrower of this Agreement, the Notes, and the other Credit
Documents to which it is a party and by the Guarantors of the Guaranties and
the consummation of the transactions contemplated hereby and thereby (a) are
within the Borrower's and the Guarantor's corporate powers, (b) have been duly
authorized by all necessary corporate action, (c) do not contravene (i) the
Borrower's or any Guarantor's certificate or articles, as the case may be, of
incorporation or by-laws or (ii) any law or any contractual restriction binding
on or affecting the Borrower or any Guarantor, and (d) will not result in or
require the creation or imposition of any Lien prohibited by this Agreement.
At the time of each Borrowing, such Borrowing and the use of the proceeds of
such Borrowing will be within the Borrower's corporate powers, will have been
duly authorized by all necessary corporate action, (a) will not contravene (i)
the Borrower's certificate of incorporation or by-laws or (ii) any law or any
contractual restriction binding on or affecting the Borrower and (b) will not
result in or require the creation or imposition of any Lien prohibited by this
Agreement.
Section 4.03. Authorization and Approvals. Except for the
recording and filing of the instruments identified in Section 3.01(a)(iv), no
authorization or approval or other action by, and no notice to or filing with,
any Governmental Authority is required for the due execution, delivery, and
performance by the Borrower of this Agreement, the Notes, or the other Credit
Documents to which the Borrower is a party or by each Guarantor of its Guaranty
or the consummation of the transactions contemplated thereby. At the time of
each Borrowing, no authorization or approval or other action by, and no notice
to or filing with, any Governmental Authority will be required for such
Borrowing or the use of the proceeds of such Borrowing.
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Section 4.04. Enforceable Obligations. This Agreement, the Notes,
and the other Credit Documents to which the Borrower is a party have been duly
executed and delivered by the Borrower and the Guaranties have been duly
executed and delivered by the Guarantors. Each Credit Document is the legal,
valid, and binding obligation of the Borrower and each Guarantor which is a
party to it enforceable against the Borrower and each such Guarantor in
accordance with its terms, except as such enforceability may be limited by any
applicable bankruptcy, insolvency, reorganization, moratorium, or similar law
affecting creditors' rights generally and by general principles of equity.
Section 4.05. Financial Statements. The audited consolidated
balance sheet of the Borrower and its Subsidiaries as at December 31, 1996, and
the related audited consolidated statements of income, cash flow, and retained
earnings of the Borrower and its Subsidiaries for the fiscal year then ended,
copies of which have been furnished to each Bank, and the consolidated balance
sheet of the Borrower and its Subsidiaries as at September 30, 1997, and the
related consolidated statements of income and cash flow of the Borrower and its
Subsidiaries for the nine months then ended, copies of which have been
furnished to the Agent, fairly present, subject, in the case of the balance
sheet as at September 30, 1997, and said statements of income and cash flow for
the nine months then ended, to year-end audit adjustments, the consolidated
financial condition of the Borrower and its Subsidiaries as at such dates and
the consolidated results of the operations of the Borrower and its Subsidiaries
for the periods ended on such dates, and such consolidated balance sheets and
consolidated statements of income, cash flow, and retained earnings were
prepared in accordance with GAAP (or in compliance with the regulations
promulgated by the United States Securities and Exchange Commission). Since
the date of the Financial Statements, no Material Adverse Change has occurred.
Section 4.06. True and Complete Disclosure. All factual
information (excluding estimates, projections and pro forma financial
information) heretofore or contemporaneously furnished by or on behalf of the
Borrower or any of its Subsidiaries in writing to any Bank or the Agent for
purposes of or in connection with this Agreement, any other Credit Document or
any transaction contemplated hereby or thereby is (taken as a whole) true and
accurate in all material respects on the date as of which such information is
dated or certified and does not contain any untrue statement of a material fact
or omit to state any material fact necessary to make the statements contained
therein not misleading as of the date of this Agreement. All projections,
estimates, and pro forma financial information furnished by the Borrower were
prepared on the basis of assumptions, data, information, tests, or conditions
believed to be reasonable at the time such projections, estimates, and pro
forma financial information were furnished. This Section 4.06 shall supersede
paragraph 3 of the Agent's Fee Letter.
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Section 4.07. Litigation. Set forth on Schedule 4.07 is an
accurate description of all of the Borrower's and its Subsidiaries' pending
litigation existing on the date of this Agreement which could reasonably be
expected to cause a Material Adverse Change. There is no pending or, to the
best knowledge of the Borrower, threatened action or proceeding against the
Borrower or any of its Subsidiaries before any court, Governmental Authority or
arbitrator, which could reasonably be expected to cause a Material Adverse
Change or which purports to affect the legality, validity, binding effect, or
enforceability of this Agreement, any Note, or any other Credit Document.
Section 4.08. Use of Proceeds. All Advances and Letters of Credit
shall be used to finance the exploration for, and development and production
of, of oil and gas properties and for general corporate purposes of the
Borrower and its Subsidiaries, but in no event for the payment of dividends or
other distributions or advances to the shareholders of the Borrower. The
Borrower is not engaged in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulation U). No
proceeds of any Advance will be used to purchase or carry any margin stock in
violation of Regulation G, T, U or X.
Section 4.09. Investment Company Act. Neither the Borrower nor any
of its Subsidiaries is an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
Section 4.10. 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 4.11. Taxes. Proper and accurate (in all material
respects) federal, state, local, and foreign tax returns, reports and
statements required to be filed (after giving effect to any extension granted
in the time of filing) by or on behalf of the Borrower, its Subsidiaries, or
any member of the Controlled Group (hereafter collectively called the "Tax
Group") have been duly filed on a timely basis or appropriate extensions have
been obtained with appropriate governmental agencies in all jurisdictions in
which such returns, reports, and statements are required to be filed, except
where the failure to so file would not be reasonably expected to cause a
Material Adverse Change; and all taxes (which are material in amount) and other
impositions due and payable have been timely
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paid prior to the date on which any fine, penalty, interest, late charge, or
loss may be added thereto for non-payment thereof, except where contested in
good faith by appropriate proceedings. The reserves for accrued taxes reflected
in the financial statements delivered to the Banks under this Agreement are
adequate in the aggregate for the payment of all unpaid taxes, whether or not
disputed, for the period ended as of the date thereof and for any period prior
thereto, and for which the Tax Group may be liable in its own right, as
withholding agent or as a transferee of the assets of, or successor to, any
Person, except for such taxes or reserves therefor, the failure to pay or
provide for which does not and could not cause a Material Adverse Change. Timely
payment of all material sales and use taxes required by applicable law has been
made by the Borrower and all other members of the Tax Group.
Section 4.12. Pension Plans. All Plans are in compliance with all
applicable provisions of ERISA and the Code, except to the extent any
noncompliance would not result in a Material Adverse Change. No Termination
Event has occurred with respect to any Plan. No "accumulated funding
deficiency" (as defined in Section 302 of ERISA) has occurred with respect to
any Plan. Neither the Borrower nor any member of the Controlled Group has had
a complete or partial withdrawal from any Multiemployer Plan for which there is
any withdrawal liability that could reasonably be expected to cause a Material
Adverse Change. As of the most recent valuation date applicable thereto,
neither the Borrower nor any member of the Controlled Group would become
subject to any liability under ERISA if the Borrower or any member of the
Controlled Group has received notice that any Multiemployer Plan is insolvent
or in reorganization.
Section 4.13. Condition of Property; Casualties. The Borrower and
each of the Guarantors has good and marketable title to all of its material
Properties as is customary in the oil and gas industry in all material
respects, free and clear of all Liens except for Permitted Liens. The material
Properties used or to be used in the continuing operations of the Borrower and
each of its Subsidiaries are in good repair, working order and condition,
ordinary wear and tear excepted. Since the date of the Financial Statements,
neither the business nor the material properties of the Borrower and each of
its Subsidiaries, taken as a whole, has been materially and adversely affected
as a result of any fire, explosion, earthquake, flood, drought, windstorm,
accident, strike or other labor disturbance, embargo, requisition or taking of
property or cancellation of contracts, permits, or concessions by a
Governmental Authority, riot, activities of armed forces, or acts of God or of
any public enemy.
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Section 4.14. No Burdensome Restrictions; No Defaults. Neither the
Borrower nor any of its Subsidiaries is a party to any indenture, loan, or
credit agreement or any lease or other agreement or instrument or subject to
any charter or corporate restriction or provision of applicable law or
governmental regulation which could reasonably be expected to cause a Material
Adverse Change. The Borrower and the Guarantors are not in default under or
with respect to any contract, agreement, lease, or other instrument to which
the Borrower or any Guarantor is a party and which could reasonably be expected
to cause a Material Adverse Change. No Default has occurred and is continuing.
Section 4.15. Environmental Condition.
(a) Permits, Etc. Except as set forth on Schedule 4.15(a), the
Borrower and its Subsidiaries (i) have obtained all Environmental Permits
necessary for the ownership and operation of their respective Properties and
the conduct of their respective businesses, except where such failure to obtain
could not reasonably be expected to cause a Material Adverse Change; (ii) are
in compliance with all terms and conditions of such Environmental Permits and
with all other requirements of applicable Environmental Laws, except where such
failure to comply could not reasonably be expected to cause a Material Adverse
Change; (iii) have not received notice of any material violation or alleged
violation of any Environmental Law or Environmental Permit; and (iv) are not
subject to any actual or contingent Environmental Claim which could reasonably
be expected to cause a Material Adverse Change.
(b) Certain Liabilities. Except as set forth on Schedule 4.15(b),
to the Borrower's actual knowledge, none of the present or previously owned or
operated Properties of the Borrower or of any of its present or former
Subsidiaries, wherever located, (i) has been placed on or proposed to be placed
on the National Priorities List, the Comprehensive Environmental Response
Compensation Liability Information System list, or their state or local
analogs; (ii) is subject to a Lien, arising under or in connection with any
Environmental Laws, that attaches to any revenues or to any Property owned or
operated by the Borrower or any of its Subsidiaries, wherever located, which
could reasonably be expected to cause a Material Adverse Change; or (iii) has
been the site of any Release of Hazardous Substances or Hazardous Wastes from
present or past operations which has caused at the site or at any third-party
site any condition that has resulted in or could reasonably be expected to
result in the need for Response that would cause a Material Adverse Change.
(c) Certain Actions. Without limiting the foregoing (i) all
necessary notices have been properly filed, and no further action is required
under current Environmental
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Law as to each Response or other restoration or remedial project undertaken by
the Borrower, or its present or former Subsidiaries on any of their presently
or formerly owned or operated Properties and (ii) the present and, to the
Borrower's best knowledge, future liability, if any, of the Borrower and its
Subsidiaries which could reasonably be expected to arise in connection with
requirements under Environmental Laws will not result in a Material Adverse
Change.
Section 4.16. Permits, Licenses, Etc. The Borrower and its
Subsidiaries possess all permits, licenses, patents, patent rights or licenses,
trademarks, trademark rights, trade names rights and copyrights which are
required to the conduct of its business, except where such failure to possess
would not reasonably be expected to cause a Material Adverse Change. The
Borrower and its Subsidiaries manage and operate their business in accordance
with all applicable Legal Requirements and good industry practices, except
where such failure to manage or operate would not reasonably be expected to
cause a Material Adverse Change.
Section 4.17. Gas Contracts. Neither the Borrower nor any of its
Subsidiaries, as of the date hereof, (a) is obligated in any material respect
by virtue of any prepayment made under any contract containing a "take-or-pay"
or "prepayment" provision or under any similar agreement to deliver
hydrocarbons produced from or allocated to any of the Borrower's consolidated
Oil and Gas Properties at some future date without receiving full payment
therefor at the time of delivery, or (b) has produced gas, in any material
amount, subject to, and none of the Borrower's consolidated Oil and Gas
Properties is subject to, balancing rights of third parties or subject to
balancing duties under governmental requirements, except as to such matters for
which the Borrower or its relevant Subsidiary has established monetary reserves
adequate in amount in accordance with GAAP to satisfy such obligations and has
segregated such reserves from its other accounts.
ARTICLE V
AFFIRMATIVE COVENANTS
So long as any Note or any amount under any Credit Document shall
remain unpaid, any Letter of Credit shall remain outstanding, or any Bank shall
have any Commitment hereunder, the Borrower agrees, unless the Majority Banks
shall otherwise consent in writing, to comply with the following covenants.
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Section 5.01. Compliance with Laws, Etc. The Borrower shall
comply, and cause each of its Subsidiaries to comply, with all Legal
Requirements, except where such failure to comply could not reasonably be
expected to cause a Material Adverse Change. Without limiting the generality
and coverage of the foregoing, the Borrower shall comply, and shall cause each
of its Subsidiaries to comply with all Environmental Laws and all laws,
regulations, or directives with respect to equal employment opportunity and
employee safety in all jurisdictions in which the Borrower, or any of its
Subsidiaries do business, except where such failure to comply could not
reasonably be expected to cause a Material Adverse Change; provided, however,
that this Section 5.01 shall not prevent the Borrower, or any of its
Subsidiaries from, in good faith and with reasonable diligence, contesting the
validity or application of any such laws or regulations by appropriate legal
proceedings.
Section 5.02. Maintenance of Insurance. The Borrower shall
maintain, and cause each of its Subsidiaries to maintain, insurance with
responsible and reputable insurance companies or associations in such amounts
and covering such risks as are usually carried by companies engaged in similar
businesses and owning similar properties in the same general areas in which the
Borrower or such Subsidiary operates, provided that the Borrower or such
Subsidiary may self-insure to the extent and in the manner normal for similarly
situated companies of like size, type and financial condition that are part of
a group of companies under common control.
Section 5.03. Preservation of Corporate Existence, Etc. The
Borrower shall preserve and maintain, and cause each of its Subsidiaries to
preserve and maintain, its corporate existence, rights, franchises, and
privileges in the jurisdiction of its incorporation, and qualify and remain
qualified, and cause each such Subsidiary to qualify and remain qualified, as a
foreign corporation in each jurisdiction in which qualification is necessary or
desirable in view of its business and operations or the ownership of its
properties, and, in each case, where failure to qualify or preserve and
maintain its rights and franchises could reasonably be expected to cause a
Material Adverse Change; provided, however, that nothing herein contained shall
prevent any transaction permitted by Section 6.04.
Section 5.04. Payment of Taxes, Etc. The Borrower shall pay and
discharge, and cause each of its Subsidiaries to pay and discharge, before the
same shall become delinquent, (a) all taxes, assessments, and governmental
charges or levies imposed upon it or upon its income or profits or Property
that are material in amount, prior to the date on which penalties attach
thereto and (b) all lawful claims that are material in amount which, if unpaid,
might by law become a Lien upon its Property; provided, however,
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that neither the Borrower nor any such Subsidiary shall be required to pay or
discharge any such tax, assessment, charge, levy, or claim which is being
contested in good faith and by appropriate proceedings, and with respect to
which reserves in conformity with GAAP have been provided.
Section 5.05. Visitation Rights. At any reasonable time and from
time to time, upon reasonable notice, the Borrower shall, and shall cause its
Subsidiaries to, permit the Agent and any Bank or any of its agents or
representatives thereof, to (a) examine and make copies of and abstracts from
the records and books of account of, and visit and inspect at its reasonable
discretion the properties of, the Borrower and any such Subsidiary, and (b)
discuss the affairs, finances and accounts of the Borrower and any such
Subsidiary with any of their respective officers or directors; provided
however, the Agent or the Bank for whose benefit such inspection and visitation
is made assumes sole responsibility for the condition of any property of the
Borrower or its Subsidiaries so visited and inspected, the access and egress
thereto, and any vice or defect therein or thereon, and assumes all
responsibility for and hereby releases and indemnifies the Borrower, its
Affiliates, and their officers, directors, employees, and agents against any
claim for damage or injury to or by the Agent or such Bank (or the
representatives thereof) or to the Borrower's or its Subsidiaries' property
which may be occasioned by such inspection and visitation of the Borrower's or
its Subsidiaries' property.
Section 5.06. Reporting Requirements. The Borrower shall furnish
to the Agent and each Bank:
(a) Annual Financials. As soon as available and in any event not
later than 105 days after the end of each fiscal year of the Borrower, a copy
of the annual audit report for such year for the Borrower and its Subsidiaries,
including therein consolidated balance sheet of the Borrower and its
Subsidiaries as of the end of such fiscal year and consolidated statements of
income, cash flows, and retained earnings of the Borrower and its Subsidiaries
for such fiscal year, in each case certified by Arthur Andersen LLP or other
independent certified public accountants of national standing and including any
management letters delivered by such accountants to the Borrower in connection
with such audit together with a certificate of such accounting firm to the
Agent and the Banks stating that, in the course of the regular audit of the
business of the Borrower and its Subsidiaries, which audit was conducted by
such accounting firm in accordance with generally accepted auditing standards,
such accounting firm has obtained no knowledge that a Default has occurred and
is continuing, or if, in the opinion of such accounting firm, a Default has
occurred and is continuing, a statement as to the nature thereof, together with
a Compliance Certificate executed by the Chief Financial Officer or Chief
Accounting Officer of the Borrower;
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(b) Quarterly Financials. As soon as available and in any event
not later than 60 days after the end of each of the first three quarters of
each fiscal year of the Borrower, the unaudited consolidated balance sheet of
Borrower and its Subsidiaries as of the end of such quarter and the
consolidated statements of income and cash flows of the Borrower and its
Subsidiaries for the period commencing at the end of the previous year and
ending with the end of such quarter, all in reasonable detail and duly
certified with respect to such consolidated statements (subject to year-end
audit adjustments) by the Chief Financial Officer or Chief Accounting Officer
of the Borrower as having been prepared in accordance with GAAP (or in
compliance with the regulations promulgated by the United States Securities and
Exchange Commission), together with a Compliance Certificate executed by the
Chief Financial Officer or Chief Accounting Officer of the Borrower;
(c) Oil and Gas Reserve Reports.
(i) As soon as available but in any event on or before
March 31 of each year, an engineering report in form and substance
meeting the requirements of the Securities and Exchange Commission for
financial reporting purposes, certified by Ryder Scott Company or
other firm of independent consulting petroleum engineers approved by
the Agent, as fairly setting forth (A) the proved, producing, and
probable shut in, behind pipe, depleted and undeveloped oil and gas
reserves (separately classified as such) attributable to the
Borrower's consolidated Oil and Gas Properties as of the last day of
the previous year, (B) the aggregate present value, determined on the
basis of stated pricing assumptions, of the future Adjusted Net Income
with respect to such Oil and Gas Properties, discounted at a stated
per annum discount rate, and (C) projections of the annual rate of
production, gross income, and Adjusted Net Income with respect to such
Oil and Gas Properties;
(ii)(A) So long as the Majority Banks have allocated any
value to the Revolving B Borrowing Base, as soon as available but in
any event on or before June 30, September 30, and December 31 of each
year beginning with December 31, 1997, an internal engineering report
in form and substance satisfactory to the Agent setting forth (1) the
proved, producing, and probable shut in, behind pipe, depleted and
undeveloped oil and gas reserves (separately classified as such)
attributable to the Borrower's consolidated Oil and Gas Properties as
of the last day of the calendar quarter immediately preceding such
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date, (2) the aggregate present value, determined on the basis of
stated pricing assumptions, of the future net income with respect to
such Oil and Gas Properties, discounted at a stated per annum discount
rate, and (3) projections of the annual rate of production, gross
income, and net income with respect to such Oil and Gas Properties and
(B) If the Majority Banks have not allocated any
value to the Revolving B Borrowing Base, then as soon as available but
in any event on or before September 30 of each year an internal
engineering report in form and substance satisfactory to the Agent
setting forth (1) the proved, producing, and probable shut in, behind
pipe, depleted and undeveloped oil and gas reserves (separately
classified as such) attributable to the Borrower's consolidated Oil
and Gas Properties as of June 30 of such year, (2) the aggregate
present value, determined on the basis of stated pricing assumptions,
of the future net income with respect to such Oil and Gas Properties,
discounted at a stated per annum discount rate, and (3) projections of
the annual rate of production, gross income, and net income with
respect to such Oil and Gas Properties; and
(iii) The Agent and the Banks acknowledge that the Oil and
Gas Reserve Reports contain certain proprietary information including
geological and geophysical data, maps, models, and interpretations
necessary for determining the Borrowing Bases and the creditworthiness
of the Borrower and the Guarantors. The Agent and the Banks agree to
maintain the confidentiality of such information except as required by
law. The Agent and the Banks may share such information with Eligible
Assignees of their interests under this Agreement if such Eligible
Assignees agree to maintain the confidentiality of such information;
(d) Defaults. As soon as possible and in any event within 10 days
after the occurrence of each Default known to a Responsible Officer of the
Borrower or any of its Subsidiaries which is continuing on the date of such
statement, a statement of the Chief Financial Officer of the Borrower setting
forth the details of such Default and the actions which the Borrower has taken
and proposes to take with respect thereto;
(e) Securities Law Filings. Except as provided in paragraphs (a)
and (b) above, promptly and in any event within 15 days after the sending or
filing thereof, copies of all (i) Registration Statements (other than the
exhibits thereto) and reports on Forms 10-K, 10-Q and 8-K (or their
equivalents), and which the Borrower or any of its Subsidiaries sends to or
files with the United States Securities and Exchange
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Commission or (ii) financial statements, proxy statements, reports and other
documents it sends to the shareholders of the Borrower;
(f) Termination Events. As soon as possible and in any event (i)
within 30 days after the Borrower or any member of the Controlled Group knows
or has reason to know that any Termination Event described in clause (a) of the
definition of Termination Event with respect to any Plan has occurred, and (ii)
within 10 Business Days after the Borrower or any of its Affiliates knows or
has reason to know that any other Termination Event with respect to any Plan
has occurred, a statement of the Chief Financial Officer of the Borrower
describing such Termination Event and the action, if any, which the Borrower or
such Affiliate proposes to take with respect thereto;
(g) Termination of Plans. Promptly and in any event within five
Business Days after receipt thereof by the Borrower or any member of the
Controlled Group from the PBGC, copies of each notice received by the Borrower
or any such member of the Controlled Group of the PBGC's intention to terminate
any Plan or to have a trustee appointed to administer any Plan;
(h) Other ERISA Notices. Promptly and in any event within five
Business Days after receipt thereof by the Borrower or any member of the
Controlled Group from a Multiemployer Plan sponsor, a copy of each notice
received by the Borrower or any member of the Controlled Group concerning the
imposition of withdrawal liability exceeding $100,000.00 annually pursuant to
Section 4202 of ERISA;
(i) Environmental Notices. Promptly and in any event within five
Business Days after the receipt thereof by the Borrower or any of its
Subsidiaries, a copy of any form of notice, summons or citation received from
the EPA, or any other Governmental Authority, concerning (i) violations or
alleged violations of Environmental Laws, which seeks to impose liability
therefor, (ii) any action or omission on the part of the Borrower or any of its
present or former Subsidiaries in connection with Hazardous Waste or Hazardous
Substances which could reasonably result in the imposition of liability
therefor, including without limitation any notice of potential responsibility
under CERCLA, or (iii) concerning the filing of a Lien upon, against or in
connection with the Borrower, its present or former Subsidiaries, or any of
their leased or owned Property, wherever located;
(j) Other Governmental Notices. Promptly and in any event within
five Business Days after receipt thereof by the Borrower or any Subsidiary, a
copy of any notice, summons, citation, or proceeding seeking to modify in any
material respect, revoke, or suspend any material contract, license, or
agreement with any Governmental Authority;
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(k) Material Changes. Prompt written notice of any condition or
event of which the Borrower has knowledge, which condition or event has
resulted or may reasonably be expected to result in (i) a Material Adverse
Change or (ii) a breach of or noncompliance with any material term, condition,
or covenant of any material contract to which the Borrower or any of its
Subsidiaries is a party or by which they or their properties may be bound;
(l) Disputes, Etc. Prompt written notice of the commencement of
any litigation, legal, administrative or arbitral proceeding, investigation or
other action against the Borrower, or any of its Subsidiaries which, if
adversely determined, could reasonably be expected to cause a Material Adverse
Change, or any material labor controversy of which the Borrower or any of its
Subsidiaries has knowledge resulting in or reasonably considered to be likely
to result in a strike against the Borrower or any of its Subsidiaries; and
(m) Other Information. Such other information respecting the
business or Properties, or the condition or operations, financial or otherwise,
of the Borrower, or any of its Subsidiaries, as any Bank through the Agent may
from time to time reasonably request. The Agent agrees to provide the Banks
with copies of any material notices and information delivered solely to the
Agent pursuant to the terms of this Agreement.
Section 5.07. Maintenance of Property. Borrower shall, and shall
cause each of its Subsidiaries to, maintain their owned, leased, or operated
material property, equipment, buildings, and fixtures in good condition and
repair, ordinary wear and tear excepted; and shall abstain from, cause each of
its Subsidiaries to abstain from, and not knowingly or willfully permit the
commission of waste or other injury, destruction, or loss of natural resources,
or the occurrence of pollution, contamination, or any other condition in, on,
or about the owned or operated property involving the Environment that could
reasonably be expected to result in Response activities the costs of which
would exceed the accrual established by Borrower or by any of its Subsidiaries
for those purposes.
Section 5.08. New Subsidiaries. Upon the creation of any
Subsidiary after the date of this Agreement, the Borrower shall cause such
Subsidiary to execute and deliver to the Agent (a) a Guaranty with such changes
as the Agent may reasonably request; (b) such Security Documents as the Agent
may request to grant an Acceptable Security
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Interest in such Subsidiary's Oil and Gas Properties; and (c) evidence of
corporate authority to enter into such Guaranty and Security Documents as the
Agent may reasonably request, including, without limitation, a legal opinion
regarding the enforceability of such Guaranty.
ARTICLE VI
NEGATIVE COVENANTS
So long as any Note or any amount under any Credit Document shall
remain unpaid, any Letter of Credit shall remain outstanding, or any Bank shall
have any Commitment, the Borrower agrees, unless the Majority Banks otherwise
consent in writing, to comply with the following covenants.
Section 6.01. Liens, Etc. The Borrower shall not create, assume,
incur, or suffer to exist, or permit any of its Subsidiaries to create, assume,
incur, or suffer to exist, any Lien on or in respect of any of its Property
whether now owned or hereafter acquired, or assign any right to receive income,
except that the Borrower and its Subsidiaries may create, incur, assume, or
suffer to exist:
(a) Liens securing the Obligations;
(b) Liens specified in the attached Schedule 6.01 on the Property
owned by the Borrower and its Subsidiaries which is specified therein securing
only the Debt disclosed to be secured by such Liens therein, and any Liens
extending such existing Liens, if the amount of Debt secured thereby is not
increased;
(c) Liens securing purchase money indebtedness permitted under
Section 6.02(d), provided that each such Lien encumbers only the property
acquired in connection with the creation of any such purchase money
indebtedness, and any receivables, contract rights and similar intangibles
related thereto and proceeds thereof;
(d) Liens for taxes, assessments, or other governmental charges or
levies not yet due or that (provided foreclosure, distraint, sale, or other
similar proceedings shall not have been initiated) are being contested in good
faith by appropriate proceedings, and such reserve as may be required by GAAP
shall have been made therefor;
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(e) Liens in favor of vendors, carriers, warehousemen, repairmen,
mechanics, workmen, materialmen, construction, or similar Liens arising by
operation of law in the ordinary course of business in respect of obligations
that are not yet due or that are being contested in good faith by appropriate
proceedings, provided such reserve as may be required by GAAP shall have been
made therefor;
(f) Liens to operators and non-operators under joint operating
agreements arising in the ordinary course of the business of the Borrower or
the relevant Subsidiary 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;
(g) easements, rights-of-way, restrictions, and other similar
encumbrances, and minor defects in the chain of title that are customarily
accepted in the oil and gas financing industry, none of which interfere with
the ordinary conduct of the business of Borrower or the relevant Subsidiary 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 Borrower or the relevant Subsidiary acquired the
Property, which have been disclosed to the Agent before the date of this
Agreement or before the date of acquisition;
(i) Liens (other than any Lien imposed by ERISA) incurred or
deposits made in the ordinary course of business (i) in connection with
workers' compensation, unemployment insurance and other types of social
security or retirement benefits, or (ii) to secure the performance of tenders,
statutory obligations, bids, leases, performance and return-of-money bonds and
other similar obligations, in each case not incurred or made in connection with
the borrowing of money, the obtaining of advances or credit or the payment of
the deferred purchase price of property;
(j) any attachment Lien, judgment Lien or other similar Lien
arising in connection with court proceedings; provided that (i) the execution
or other enforcement of such Lien is effectively stayed and the claims secured
thereby are being actively contested in good faith and by appropriate
proceedings diligently conducted and effective to prevent the forfeiture or
sale of any property of the Borrower or any Subsidiary or any interference with
the ordinary use thereof by the Borrower or Subsidiary and (ii) such reserve or
other appropriate provision, if any, in the amounts and of the types as shall
be required by GAAP (or in the absence of any such
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requirement, as shall be reasonably adequate for the purpose) shall have been
made therefor on the books and records of the Borrower and its Subsidiaries;
(k) any Lien existing on any property acquired by the Borrower or
any Subsidiary at the time such property is so acquired (whether or not the
Debt secured thereby shall have been assumed), provided that (i) no such Lien
shall have been created or assumed in contemplation of such acquisition of
property, and (ii) each such Lien shall extend solely to the item or items of
property so acquired and, if required by the terms of the instrument originally
creating such Lien, other property that is an improvement to or is acquired for
specific use in connection with such acquired property;
(l) deposits of cash to secure insurance in the ordinary course of
business;
(m) banker's liens arising by operation of law, but not liens
securing borrowed money; and
(n) UCC protective filings with respect to personal property
leased by the Borrower or a Subsidiary in the ordinary course of business.
Section 6.02. Debts, Guaranties, and Other Obligations. The
Borrower shall not, and shall not permit any of its Subsidiaries to, create,
assume, suffer to exist, or in any manner become or be liable in respect of,
any Debt except:
(a) Debt of the Borrower and its Subsidiaries under the Credit
Documents;
(b) Debt of the Borrower existing on the date of this Agreement
and disclosed in the attached Schedule 6.02 and any extensions, rearrangements,
and modifications thereof which do not increase the principal amount thereof or
the interest rate charged thereon above a market rate of interest;
(c) Debt for borrowed money owed by any wholly-owned Subsidiary of
the Borrower to the Borrower;
(d) Debt existing in connection with Property acquired by the
Borrower after the date of this Agreement not to exceed $100,000.00 in
outstanding principal amount (excluding gas balancing liabilities assumed in
the acquisition of Oil and Gas Properties); and
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(e) Debt in the form of obligations for the deferred purchase
price of property or services incurred in the ordinary course of business which
are either (i) not yet due and payable, (ii) are being contested in good faith
by appropriate proceedings and for which adequate reserves in accordance with
GAAP have been established, (iii) which has been outstanding for less than 90
days since the invoice date, or (iv) which has been outstanding for more than
90 days since the original invoice date, in an aggregate amount not to exceed
$200,000.00;
(f) Debt in connection with the Borrower's production swap hedging
program permitted by Section 6.07;
(g) Debt subordinated to the Obligations, on terms and in form and
substance satisfactory to the Banks; and
(h) contingent obligations incurred to satisfy bonding
requirements imposed by any governmental regulatory agency or body not to
exceed, in the aggregate, $100,000.
Section 6.03. Agreements Restricting Liens and Distributions. The
Borrower shall not, nor shall it permit any of its Subsidiaries to, enter into
any agreement (other than a Credit Document) which (a) except with respect to
specific Property encumbered to secure payment of Debt related to such
Property, imposes restrictions upon the creation or assumption of any Lien upon
its Properties, revenues or assets, whether now owned or hereafter acquired or
(b) limits Restricted Payments to or any advance by any of the Borrower's
Subsidiaries to the Borrower.
Section 6.04. Merger or Consolidation; Asset Sales. The Borrower
shall not, and shall not permit any of its Subsidiaries to:
(a) merge or consolidate with or into any other Person, except
that the Borrower may merge with any of its wholly-owned Subsidiaries and any
of the Borrower's wholly-owned Subsidiaries may merge with another of the
Borrower's wholly-owned Subsidiaries, provided that immediately after giving
effect to any such proposed transaction no Default would exist and, in the case
of any such merger to which the Borrower is a party, the Borrower is the
surviving corporation or
(b) sell, lease, transfer, or otherwise dispose of any of its Oil
and Gas Property (other than to the Borrower or a Subsidiary), except:
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(i) transactions as to which the net proceeds of sale of
Oil and Gas Properties (with such net proceeds being the aggregate
proceeds thereof received or to be received by the Borrower or any
Subsidiary of the Borrower, without deduction for any portion thereof
to be received by the Borrower or such Subsidiary at a later date, but
less the reasonable expenses thereof to the Borrower or such
Subsidiary, and less current and deferred taxes attributable to such
sale, including income taxes, if any, after allocation of appropriate
tax basis pursuant to the Code, and less the amount necessary to
satisfy any indebtedness of the Borrower or any Subsidiary of the
Borrower, payment of which is secured by a lien on the assets or
properties which are the subject of such transaction) resulting from
such transactions do not exceed $500,000 singly or in the aggregate
during any fiscal year;
(ii) sales or transfers of hydrocarbons in the ordinary
course of business;
(iii) farmouts or other similar transactions, including any
assignments made pursuant thereto, entered into in the ordinary course
of business, which lead to or encourage the exploration or development
of the Oil and Gas Properties, provided, that such transactions do
not, individually or in the aggregate, reduce the Borrower's working
interests in its proved reserves as indicated in the most recent
reserve report in any significant respect;
(iv) sales or transfers of Oil and Gas Properties made in
arm's length transactions at not less than fair market price, the
entire net proceeds of which are used to make prepayments on the
Advances in accordance with the provisions of this Agreement;
(v) sales of or dispositions of unproductive, surplus,
obsolete or worn equipment or inventory; and
(vi) abandonment of Oil and Gas Properties not capable of
producing hydrocarbons in paying quantities.
Section 6.05. Restricted Payments. The Borrower shall not, and
shall not permit any of its Subsidiaries to, make or pay any Restricted Payment
other than Restricted Payments from a Subsidiary of the Borrower to the
Borrower.
Section 6.06. Investments. The Borrower shall not, and shall not
permit any of its Subsidiaries to, make or permit to exist any loans, advances,
or capital contributions to, or make any investment in, or purchase or commit
to purchase any stock or other securities or evidences of indebtedness of or
interests in any Person, except:
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(a) Liquid Investments;
(b) trade and customer accounts receivable which are for goods
furnished or services rendered in the ordinary course of business and are
payable in accordance with customary trade terms;
(c) ordinary course of business contributions, loans, or advances
to, or investments in, (i) a directly or indirectly wholly-owned Subsidiary of
the Borrower or (ii) the Borrower;
(d) oil and gas farm-ins, oil and gas development joint ventures
and limited partnerships, and similar transactions, in each case in the
ordinary course of business; and
(e) investments not permitted by clauses (a) through (d) above in
an aggregate outstanding amount not to exceed $500,000.00.
Section 6.07. Limitation on Speculative Hedging. The Borrower
shall not, and shall not permit any of its Subsidiaries to, purchase, assume,
or hold a speculative position in any commodities market or futures market.
Borrower (a) may establish and continue a production swap hedging program
policy to reduce price risk on quantities less than its total expected
production and may in connection therewith enter into Hedge Agreements
regarding oil and gas prices and (b) may enter into Hedge Agreements for
interest rates in the ordinary course of business.
Section 6.08. Affiliate Transactions. Except as expressly
permitted elsewhere in this Agreement or otherwise approved in writing by the
Agent, and except as required or contemplated under the partnership agreements
existing on the date of this Agreement between the Borrower and its
Subsidiaries and their Affiliates as described in Schedule 6.08, the Borrower
shall not, and shall not permit any of its Subsidiaries to, make, directly or
indirectly: (a) any investment in any Affiliate (other than a wholly-owned
Subsidiary of the Borrower); (b) any transfer, sale, lease, assignment, or
other disposal of any assets to any such Affiliate or any purchase or
acquisition of assets from any such Affiliate; or (c) any arrangement or other
transaction directly or indirectly with or for the benefit of any such
Affiliate (including without limitation, guaranties and assumptions of
obligations of an Affiliate); provided that the Borrower and its Subsidiaries
may enter into any arrangement or other transaction with any such
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Affiliate providing for the leasing of property, the rendering or receipt of
services or the purchase or sale of inventory and other assets in the ordinary
course of business if the monetary or business consideration arising therefrom
would be substantially as advantageous to the Borrower and its Subsidiaries as
the monetary or business consideration which it would obtain in a comparable
arm's length transaction with a Person not such an Affiliate.
Section 6.09. Compliance with ERISA. The Borrower shall not, and
shall not permit any of its Subsidiaries to, (a) terminate, or permit any
Affiliate to terminate, any Plan so as to result in any material (in the
opinion of the Majority Banks) liability of the Borrower or any of its
Affiliates to the PBGC or (b) permit to exist any occurrence of any Reportable
Event, or any other event or condition, which presents a material (in the
opinion of the Majority Banks) risk of such a termination by the PBGC of any
Plan.
Section 6.10. Maintenance of Ownership of Subsidiaries. Except as
permitted by Section 6.04, the Borrower shall not, and shall not permit any of
its Subsidiaries to, sell or otherwise dispose of any shares of capital stock
of any of the Borrower's Subsidiaries or permit any Subsidiary to issue, sell,
or otherwise dispose of any shares of its capital stock or the capital stock of
any of the Borrower's Subsidiaries.
Section 6.11 Sale-and-Leaseback. The Borrower shall not, nor
shall it permit any of its Subsidiaries to, sell or transfer to a Person (other
than the Borrower or a Subsidiary of the Borrower) any property, whether now
owned or hereafter acquired, if at the time or thereafter the Borrower or a
Subsidiary of the Borrower shall lease as lessee such property or any part
thereof or other property which the Borrower or a Subsidiary of the Borrower
intends to use for substantially the same purpose as the property sold or
transferred except such transactions (a) incident to transactions permitted by
Section 6.04(b) and (b) from which arise lease obligations and other rental
obligations not exceeding $100,000.00 during any fiscal year of the Borrower.
Section 6.12. Change of Business. The Borrower shall not, nor
shall it permit any of its Subsidiaries to, materially change the character of
their business as presently and normally conducted or materially engage in any
type of business not related to their business as presently and normally
conducted.
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Section 6.13. Current Ratio.
(a) So long as the Majority Banks have allocated any value to the
Revolving B Borrowing Base, the Borrower shall not permit the ratio of the
Borrower's consolidated current assets to the Borrower's consolidated current
liabilities to be less than 1.35 to 1.00 as of the last day of any fiscal
quarter.
(b) If the Majority Banks have not allocated any value to the
Revolving B Borrowing Base, the Borrower shall not permit the ratio of the
Borrower's consolidated current assets to the Borrower's consolidated current
liabilities to be less than 1.00 to 1.00 as of the last day of any fiscal
quarter.
(c) On any date for the calculation of the Borrower's current
ratio before the Termination Date, the Borrowing Bases on such date minus the
aggregate outstanding Advances on such date shall be added to the Borrower's
consolidated current assets.
Section 6.14. Net Worth. The Borrower shall not permit the
consolidated Net Worth of the Borrower, as of the last day of each fiscal
quarter, to be less than the sum of (a) $24,000,000.00 plus (b) an amount equal
to 50% of the cumulative consolidated quarterly Adjusted Net Income of the
Borrower from June 30, 1997, through the end of such fiscal quarter, but
excluding consolidated Adjusted Net Income for any fiscal quarter in which
consolidated Adjusted Net Income is not positive plus (c) an amount equal to
75% of the net cash proceeds (after offering expenses) from any sale of stock
or other equity interests in the Borrower since September 30, 1997.
ARTICLE VII
REMEDIES
Section 7.01. Events of Default. The occurrence of any of the
following events shall constitute an "Event of Default" under any Credit
Document:
(a) Payment. The Borrower shall fail to pay when due (i) any
interest or fees payable hereunder or under the Notes within five days after
the same becomes due and payable or (ii) any principal, reimbursements,
indemnifications, or other amounts (other than interest and fees described in
clause (i)) payable hereunder or under any other Credit Document within one
Business Day after the same becomes due and payable;
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(b) Representation and Warranties. Any representation or warranty
made or deemed to be made (i) by the Borrower in this Agreement or in any other
Credit Document or (ii) by any Subsidiary of the Borrower in any Credit
Document shall prove to have been incorrect in any material respect when made
or deemed to be made;
(c) Covenant Breaches. (i) The Borrower shall (A) fail to perform
or observe any covenant contained in Section 5.01, 5.02, 5.05, 5.07, or 5.08 or
in Article VI of this Agreement, (B) fail to perform or observe any covenant
contained in Section 5.06 if such failure shall remain unremedied for 15 days,
or (C) fail to perform or observe any other term or covenant set forth in this
Agreement or in any other Credit Document which is not covered by clause (i)(A)
or (B) above or any other provision of this Section 7.01 if such failure shall
remain unremedied for 30 days after the earlier of written notice of such
default shall have been given to such Person by the Agent or any Bank or such
Person's actual knowledge of such default or (ii) any Guarantor shall fail to
perform or observe any covenant contained in its Guaranty;
(d) Cross-Defaults. (i) The Borrower or any of its Subsidiaries
shall fail to pay any principal of or premium or interest on its Debt which is
outstanding in a principal amount of at least $100,000.00 individually or when
aggregated with all such Debt of the Borrower or its Subsidiaries so in default
(but excluding Debt evidenced by the Notes) when the same becomes due and
payable (whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise), and such failure shall continue after the applicable
grace period, if any, specified in the agreement or instrument relating to such
Debt; (ii) any other event shall occur or condition shall exist under any
agreement or instrument relating to Debt which is outstanding in a principal
amount of at least $100,000.00 individually or when aggregated with all such
Debt of the Borrower and its Subsidiaries so in default, and shall continue
after the applicable grace period, if any, specified in such agreement or
instrument, if the effect of such event or condition is to accelerate, or to
permit the acceleration of, the maturity of such Debt; or (iii) any such Debt
shall be declared to be due and payable, or required to be prepaid (other than
by a regularly scheduled required prepayment), prior to the stated maturity
thereof;
(e) Insolvency. The Borrower or any of its Subsidiaries shall
generally not pay its debts as such debts become due, or shall admit in writing
its inability to pay its debts generally, or shall make a general assignment
for the benefit of creditors; or any proceeding shall be instituted by or
against the Borrower or any of its Subsidiaries seeking to adjudicate it as
bankrupt or insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its
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debts under any law relating to bankruptcy, insolvency or reorganization or
relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee or other similar official for it or for any
substantial part of its property and, in the case of any such proceeding
instituted against the Borrower or any such Subsidiary, either such proceeding
shall remain undismissed for a period of 60 days or any of the actions sought
in such proceeding shall occur; or the Borrower or any of its Subsidiaries
shall take any corporate action to authorize any of the actions set forth above
in this paragraph (e);
(f) Judgments. Any judgment or order for the payment of money in
excess of $50,000.00 (net of insurance proceeds which have been paid on which
the insurance carrier has assented to pay) shall be rendered against the
Borrower or any of its Subsidiaries and either (i) enforcement proceedings
shall have been commenced by any creditor upon such judgment or order or (ii)
there shall be any period of 30 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;
(g) Termination Events. Any Termination Event with respect to a
Plan shall have occurred, and, 30 days after notice thereof shall have been
given to the Borrower by the Agent, (i) such Termination Event shall not have
been corrected; (ii) the then present value of such Plan's vested benefits
exceeds the then current value of assets accumulated in such Plan by more than
the amount of $100,000.00 (or in the case of a Termination Event involving the
withdrawal of a "substantial employer" (as defined in Section 4001(a)(2) of
ERISA), the withdrawing employer's proportionate share of such excess shall
exceed such amount); and (iii) the Termination Event could reasonably be
expected to result in liability of the Borrower in an aggregate amount
exceeding $100,000.00;
(h) Plan Withdrawals. The Borrower or any member of the
Controlled Group as employer under a Multiemployer Plan shall have made a
complete or partial withdrawal from such Multiemployer Plan and the plan
sponsor of such Multiemployer Plan shall have notified such withdrawing
employer that such employer has incurred a withdrawal liability in an annual
amount exceeding $100,000.00;
(i) Borrowing Base. Any failure to cure any Borrowing Base
deficiency in accordance with Section 2.04, including any failure of the
dedicated cash flow from the production of the Borrower's and its Subsidiaries'
Oil and Gas Properties to cure the Borrowing Base deficiency within the time
period specified by and in accordance with Section 2.04(b);
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(j) Guaranties. Any provision of any Guaranty shall for any
reason cease to be valid and binding on the applicable Guarantor or the
applicable Guarantor shall so state in writing;
(k) Security Documents. Any Security Document shall at any time
and for any reason cease to create the Lien on the property purported to be
subject to such agreement in accordance with the terms of such agreement, or
cease to be in full force and effect, or shall be contested by the Borrower or
any Guarantor; or
(l) Change of Control. (i) As a result of one or more
transactions after the date of this Agreement, any "person" or "group" of
persons shall have "beneficial ownership" of more than 25% of the outstanding
common stock of the Borrower (within the meaning of Section 13(d) or 14(d) of
the Securities Exchange Act of 1934, as amended, and the applicable rules and
regulations thereunder), provided that the relationships among the officers and
directors of the Borrower and among the respective shareholders of the Borrower
on the date of this Agreement shall not be deemed to constitute all or any
combination of them as a "group" or (ii) during any period of 12 consecutive
months, beginning with and after the date of this Agreement, individuals who at
the beginning of such 12-month period were directors of the Borrower shall
cease for any reason to constitute a majority of the board of directors of the
Borrower at any time during such period.
Section 7.02. Optional Acceleration of Maturity. If any Event of
Default (other than an Event of Default pursuant to paragraph (e) of Section
7.01) shall have occurred and be continuing, then, and in any such event,
(a) the Agent (i) shall at the request, or may with the consent,
of the Majority Banks, by notice to the Borrower, declare the obligation of
each Bank and the Issuing Bank to make extensions of credit hereunder,
including making Advances and issuing Letters of Credit, to be terminated,
whereupon the same shall forthwith terminate, and (ii) shall at the request, or
may with the consent, of the Majority Banks, by notice to the Borrower, declare
all principal, interest, fees, reimbursements, indemnifications, and all other
amounts payable under this Agreement, the Notes, and the other Credit Documents
to be forthwith due and payable, whereupon all such amounts shall become and be
forthwith due and payable in full, without notice of intent to demand, demand,
presentment for payment, notice of nonpayment, protest, notice of protest,
grace, notice of dishonor, notice of intent to accelerate, notice of
acceleration, and all other notices, all of which are hereby expressly waived
by the Borrower;
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(b) the Borrower shall, on demand of the Agent at the request or
with the consent of the Majority Banks, deposit with the Agent into the Cash
Collateral Account an amount of cash equal to the Letter of Credit Exposure as
security for the Obligations; and
(c) the Agent shall at the request of, or may with the consent of,
the Majority Banks proceed to enforce its rights and remedies under the
Security Documents, the Guaranties, and any other Credit Document for the
ratable benefit of the Banks by appropriate proceedings.
Section 7.03. Automatic Acceleration of Maturity. If any Event of
Default pursuant to paragraph (e) of Section 7.01 shall occur,
(a) (i) the obligation of each Bank and the Issuing Bank to make
extensions of credit hereunder, including making Advances and issuing Letters
of Credit, shall terminate, and (ii) all principal, interest, fees,
reimbursements, indemnifications, and all other amounts payable under this
Agreement, the Notes, and the other Credit Documents shall become and be
forthwith due and payable in full, without notice of intent to demand, demand,
presentment for payment, notice of nonpayment, protest, notice of protest,
grace, notice of dishonor, notice of intent to accelerate, notice of
acceleration, and all other notices, all of which are hereby expressly waived
by the Borrower;
(b) the Borrower shall deposit with the Agent into the Cash
Collateral Account an amount of cash equal to the outstanding Letter of Credit
Exposure as security for the Obligations; and
(c) the Agent shall at the request of, or may with the consent of,
the Majority Banks proceed to enforce its rights and remedies under the
Security Documents, the Guaranties, and any other Credit Document for the
ratable benefit of the Banks by appropriate proceedings.
Section 7.04. Right of Set-off. Upon the occurrence and during the
continuance of any Event of Default, the Agent and each Bank is hereby
authorized at any time and from time to time, to the fullest extent permitted
by law, to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other indebtedness at any
time owing by the Agent or such Bank to or for the credit or the account of the
Borrower against any and all of the obligations of
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the Borrower now or hereafter existing under this Agreement, the Notes held by
the Agent or such Bank, and the other Credit Documents, irrespective of whether
or not the Agent or such Bank shall have made any demand under this Agreement,
such Notes, or such other Credit Documents, and although such obligations may
be unmatured. The Agent and each Bank agree to promptly notify the Borrower
after any such set-off and application made by the Agent or such Bank, provided
that the failure to give such notice shall not affect the validity of such
set-off and application. The rights of the Agent and each Bank under this
Section 7.04 are in addition to any other rights and remedies (including,
without limitation, other rights of set-off) which the Agent or such Bank may
have.
Section 7.05. Actions Under Credit Documents. Following an Event
of Default, the Agent shall at the request, or may with the consent, of the
Majority Banks, take any and all actions permitted under the other Credit
Documents, including enforcing it rights under the Security Documents and the
Guaranties for the ratable benefit of the Banks.
Section 7.06. Non-exclusivity of Remedies. No remedy conferred
upon the Agent is intended to be exclusive of any other remedy, and each remedy
shall be cumulative of all other remedies existing by contract, at law, in
equity, by statute or otherwise.
ARTICLE VIII
THE AGENT AND THE ISSUING BANK
Section 8.01. Authorization and Action. Each Bank hereby appoints
and authorizes the Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement as are delegated to the Agent by the
terms hereof and of the other Credit Documents, together with such powers as
are reasonably incidental thereto. As to any matters not expressly provided
for by this Agreement or any other Credit Document (including, without
limitation, enforcement or collection of the Notes), the Agent shall not be
required to exercise any discretion or take any action, but shall be required
to act or to refrain from acting (and shall be fully protected in so acting or
refraining from acting) upon the instructions of the Majority Banks, and such
instructions shall be binding upon all Banks and all holders of Notes;
provided, however, that the Agent shall not be required to take any action
which exposes the Agent to personal liability or which is contrary to this
Agreement, any other Credit Document, or applicable law.
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Section 8.02. Agent's Reliance, Etc. Neither the Agent nor any of
its directors, officers, agents, or employees shall be liable to any Bank for
any action taken or omitted to be taken (INCLUDING THE AGENT'S OWN NEGLIGENCE)
by it or them under or in connection with this Agreement or the other Credit
Documents, except for its or their own gross negligence or willful misconduct.
Without limitation of the generality of the foregoing, the Agent: (a) may
treat the payee of any Note as the holder thereof until the Agent receives
written notice of the assignment or transfer thereof signed by such payee and
in form satisfactory to the Agent; (b) may consult with legal counsel
(including counsel for the Borrower), independent public accountants, and other
experts selected by it and shall not be liable for any action taken or omitted
to be taken in good faith by it in accordance with the advice of such counsel,
accountants, or experts; (c) makes no warranty or representation to any Bank
and shall not be responsible to any Bank for any statements, warranties, or
representations made in or in connection with this Agreement or the other
Credit Documents; (d) shall not have any duty to ascertain or to inquire as to
the performance or observance of any of the terms, covenants or conditions of
this Agreement or any other Credit Document on the part of the Borrower or its
Subsidiaries or to inspect the property (including the books and records) of
the Borrower or its Subsidiaries; (e) shall not be responsible to any Bank for
the due execution, legality, validity, enforceability, genuineness,
sufficiency, or value of this Agreement or any other Credit Document; and (f)
shall incur no liability under or in respect of this Agreement or any other
Credit Document by acting upon any notice, consent, certificate, or other
instrument or writing (which may be by telecopier or telex) believed by it to
be genuine and signed or sent by the proper party or parties.
Section 8.03. The Agent and Its Affiliates. With respect to its
Commitments, the Advances made by it and the Notes issued to it, the Agent
shall have the same rights and powers under this Agreement as any other Bank
and may exercise the same as though it were not the Agent. The term "Bank" or
"Banks" shall, unless otherwise expressly indicated, include the Agent in its
individual capacity. The Agent and its Affiliates may accept deposits from,
lend money to, act as trustee under indentures of, and generally engage in any
kind of business with, the Borrower or any of its Subsidiaries, and any Person
who may do business with or own securities of the Borrower or any such
Subsidiary, all as if the Agent were not an agent hereunder and without any
duty to account therefor to the Banks.
Section 8.04. Bank Credit Decision. Each Bank acknowledges that it
has, independently and without reliance upon the Agent or any other Bank and
based on the
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Financial Statements and the Interim Financial Statements and such other
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it shall, independently and without reliance upon the Agent
or any other Bank and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement.
Section 8.05. Indemnification. THE BANKS SEVERALLY AGREE TO
INDEMNIFY THE AGENT AND THE ISSUING BANK AND EACH AFFILIATE THEREOF AND THEIR
RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS (TO THE EXTENT NOT
REIMBURSED BY THE BORROWER), ACCORDING TO THEIR RESPECTIVE PRO RATA SHARES FROM
AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES,
ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS OF ANY KIND OR
NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE
AGENT AND THE ISSUING BANK IN ANY WAY RELATING TO OR ARISING OUT OF THIS
AGREEMENT OR ANY ACTION TAKEN OR OMITTED BY THE AGENT OR THE ISSUING BANK UNDER
THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT (INCLUDING THE AGENT'S AND THE
ISSUING BANK'S OWN NEGLIGENCE), PROVIDED THAT NO BANK SHALL BE LIABLE FOR ANY
PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS,
JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS RESULTING FROM THE AGENT'S
AND THE ISSUING BANK'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. WITHOUT
LIMITATION OF THE FOREGOING, EACH BANK AGREES TO REIMBURSE THE AGENT PROMPTLY
UPON DEMAND FOR ITS RATABLE SHARE OF ANY OUT-OF-POCKET EXPENSES (INCLUDING
COUNSEL FEES) INCURRED BY THE AGENT IN CONNECTION WITH THE PREPARATION,
EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT, OR ENFORCEMENT
(WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS, OR OTHERWISE) OF, OR LEGAL
ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THIS AGREEMENT OR ANY
OTHER CREDIT DOCUMENT, TO THE EXTENT THAT THE AGENT IS NOT REIMBURSED FOR SUCH
BY THE BORROWER.
Section 8.06. Successor Agent and Issuing Bank. The Agent or the
Issuing Bank may resign at any time by giving written notice thereof to the
Banks and the
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Borrower and may be removed at any time with or without cause by the Majority
Banks upon receipt of written notice from the Majority Banks to such effect.
Upon receipt of notice of any such resignation or removal, the Majority Banks
shall have the right to appoint a successor Agent or Issuing Bank only with the
consent of the Borrower, which consent shall not be unreasonably withheld. If
no successor Agent or Issuing Bank shall have been so appointed by the Majority
Banks with the consent of the Borrower, and shall have accepted such
appointment, within 30 days after the retiring Agent's or Issuing Bank's giving
of notice of resignation or the Majority Banks' removal of the retiring Agent
or Issuing Bank, then the retiring Agent or Issuing Bank may, on behalf of the
Banks and the Borrower, appoint a successor Agent or Issuing Bank, which shall
be, in the case of a successor agent, a commercial bank organized under the
laws of the United States of America or of any State thereof and having a
combined capital and surplus of at least $500,000,000.00 and, in the case of
the Issuing Bank, a Bank. Upon the acceptance of any appointment as Agent or
Issuing Bank by a successor Agent or Issuing Bank, such successor Agent or
Issuing Bank shall thereupon succeed to and become vested with all the rights,
powers, privileges, and duties of the retiring Agent or Issuing Bank, and the
retiring Agent or Issuing Bank shall be discharged from its duties and
obligations under this Agreement and the other Credit Documents, except that
the retiring Issuing Bank shall remain the Issuing Bank with respect to any
Letters of Credit outstanding on the effective date of its resignation or
removal and the provisions affecting the Issuing Bank with respect to such
Letters of Credit shall inure to the benefit of the retiring Issuing Bank until
the termination of all such Letters of Credit. After any retiring Agent's or
Issuing Bank's resignation or removal hereunder as Agent or Issuing Bank, the
provisions of this Article VIII shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent or Issuing Bank under
this Agreement and the other Credit Documents.
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ARTICLE IX
MISCELLANEOUS
Section 9.01. Amendments, Etc. No amendment or waiver of any
provision of this Agreement, the Notes, or any other Credit Document, nor
consent to any departure by the Borrower or any Guarantor therefrom, shall in
any event be effective unless the same shall be in writing and signed by the
Majority Banks and the Borrower, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given; provided, however, that no amendment, waiver, or consent shall, unless
in writing and signed by all the Banks, do any of the following: (a) waive any
of the conditions specified in Section 3.01 or 3.02, (b) increase the Revolving
A Commitment or the Revolving B Commitment of the Banks, (c) reduce the
principal of, or interest on, the Notes or any fees or other amounts payable
hereunder or under any other Credit Document, (d) postpone any date fixed for
any payment of principal of, or interest on, the Notes or any fees or other
amounts payable hereunder or extend the Termination Date or the Maturity Date,
(e) change the percentage of Banks which shall be required for the Banks or any
of them to take any action hereunder or under any other Credit Document, (f)
amend Section 2.10 or this Section 9.01, (g) amend the definition of "Majority
Banks," (h) release any Guarantor from its obligations under any Guaranty, or
(i) release any collateral securing the Obligations; and provided, further,
that no amendment, waiver or consent shall, unless in writing and signed by the
Agent or the Issuing Bank in addition to the Banks required above to take such
action, affect the rights or duties of the Agent or the Issuing Bank, as the
case may be, under this Agreement or any other Credit Document.
Section 9.02. Notices, Etc. All notices and other communications
shall be in writing (including, without limitation, telecopy or telex) and
mailed by certified mail, return receipt requested, telecopied, telexed, hand
delivered, or delivered by a nationally recognized overnight courier, at the
address for the appropriate party specified in Schedule 1 or at such other
address as shall be designated by such party in a written notice to the other
parties. All such notices and communications shall, when so mailed,
telecopied, telexed, or hand delivered or delivered by a nationally recognized
overnight courier, be effective when received if mailed, when telecopy
transmission is completed, when confirmed by telex answer-back, or when
delivered by such messenger or courier, respectively, except that notices and
communications to the Agent pursuant to Article II or VIII shall not be
effective until received by the Agent.
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Section 9.03. No Waiver; Remedies. No failure on the part of any
Bank, the Agent, or the Issuing Bank to exercise, and no delay in exercising,
any right hereunder or under any Note shall operate as a waiver thereof; nor
shall any single or partial exercise of any such right preclude any other or
further exercise thereof or the exercise of any other right. The remedies
herein provided are cumulative and not exclusive of any remedies provided by
law.
Section 9.04. Costs and Expenses. The Borrower agrees to pay
within 30 days after written demand (a) all reasonable out-of-pocket costs and
expenses of the Agent in connection with the preparation, execution, delivery,
administration, modification, and amendment of this Agreement, the Notes, the
Guaranties, and the other Credit Documents including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for the Agent with
respect to advising the Agent as to its rights and responsibilities under this
Agreement, and (b) all out-of-pocket costs and expenses, if any, of the Agent,
the Issuing Bank, and each Bank (including, without limitation, reasonable
counsel fees and expenses of the Agent, the Issuing Bank, and each Bank) in
connection with the enforcement (whether through negotiations, legal
proceedings, or otherwise) of this Agreement, the Notes, the Guaranties, and
the other Credit Documents.
Section 9.05. Binding Effect. This Agreement shall become
effective when it shall have been executed by the Borrower and the Agent, and
when the Agent shall have, as to each Bank, either received a counterpart
hereof executed by such Bank or been notified by such Bank that such Bank has
executed it and thereafter shall be binding upon and inure to the benefit of
the Borrower, the Agent, the Issuing Bank, and each Bank and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights or delegate its duties under this Agreement or any interest
in this Agreement without the prior written consent of each Bank.
Section 9.06. Bank Assignments and Participations.
(a) Assignments. Any Bank may assign to one or more Eligible
Assignees all or any portion of its rights and obligations under this Agreement
(including, without limitation, all or a portion of its Commitments, the
Advances owing to it, the Notes held by it, and the participation interest in
the Letter of Credit Obligations held by it); provided, however, that (i) each
such assignment shall be of a constant, and not a varying, percentage of all of
such Bank's rights and obligations under this Agreement, (ii) the amount of the
Commitments and Advances of such Bank being assigned pursuant to each such
assignment (determined as of the date of the Assignment and Acceptance with
respect to such assignment) shall be, if to an entity other than a Bank,
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not less than $5,000,000.00 and shall be an integral multiple of $1,000,000.00,
(iii) the parties to each such assignment shall execute and deliver to the
Agent, for its acceptance and recording in the Register, an Assignment and
Acceptance, together with the Notes subject to such assignment, and (iv) each
Eligible Assignee (other than the Eligible Assignee of the Agent) shall pay to
the Agent a $2,500 administrative fee. Upon such execution, delivery,
acceptance and recording, from and after the effective date specified in each
Assignment and Acceptance, which effective date shall be at least three
Business Days after the execution thereof, (A) the assignee thereunder shall be
a party hereto for all purposes and, to the extent that rights and obligations
hereunder have been assigned to it pursuant to such Assignment and Acceptance,
have the rights and obligations of a Bank hereunder and (B) such Bank
thereunder shall, to the extent that rights and obligations hereunder have been
assigned by it pursuant to such Assignment and Acceptance, relinquish its
rights and be released from its obligations under this Agreement (and, in the
case of an Assignment and Acceptance covering all or the remaining portion of
such Bank's rights and obligations under this Agreement, such Bank shall cease
to be a party hereto).
(b) Term of Assignments. By executing and delivering an
Assignment and Acceptance, the Bank thereunder and the assignee thereunder
confirm to and agree with each other and the other parties hereto as follows:
(i) other than as provided in such Assignment and Acceptance, such Bank makes
no representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency of value of this Agreement or any other instrument or document
furnished pursuant hereto; (ii) such Bank makes no representation or warranty
and assumes no responsibility with respect to the financial condition of the
Borrower or the Guarantors or the performance or observance by the Borrower or
the Guarantors of any of their obligations under this Agreement or any other
instrument or document furnished pursuant hereto; (iii) such assignee confirms
that it has received a copy of this Agreement, together with copies of the
financial statements referred to in Section 4.05 and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into such Assignment and Acceptance; (iv) such assignee will,
independently and without reliance upon the Agent, such Bank, or any other
Bank, and based on such documents and information as it shall deem appropriate
at the time, continue to make its own credit decisions in taking or not taking
action under this Agreement; (v) such assignee appoints and authorizes the
Agent to take such action as agent on its behalf and to exercise such powers
under this Agreement as are delegated to the Agent by the terms hereof,
together with such powers as are reasonably incidental thereto; and (vi) such
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assignee agrees that it will perform in accordance with their terms all of the
obligations which by the terms of this Agreement are required to be performed
by it as a Bank.
(c) The Register. The Agent shall maintain at its address
referred to in Section 9.02 a copy of each Assignment and Acceptance delivered
to and accepted by it and a register for the recordation of the names and
addresses of the Banks and the Commitments of, and principal amount of the
Advances owing to, each Bank from time to time (the "Register"). The entries
in the Register shall be conclusive and binding for all purposes, absent
manifest error, and the Borrower, the Agent, the Issuing Bank, and the Banks
may treat each Person whose name is recorded in the Register as a Bank
hereunder for all purposes of this Agreement. The Register shall be available
for inspection by the Borrower or any Bank at any reasonable time and from time
to time upon reasonable prior notice.
(d) Procedures. Upon its receipt of an Assignment and Acceptance
executed by a Bank and an Eligible Assignee, together with the Notes subject to
such assignment, the Agent shall, if such Assignment and Acceptance has been
completed and is in substantially the form of the attached Exhibit A, (i)
accept such Assignment and Acceptance, (ii) record the information contained
therein in the Register, and (iii) give prompt notice thereof to the Borrower.
Within five Business Days after its receipt of such notice, the Borrower shall
execute and deliver to the Agent in exchange for the surrendered Notes (A) a
new Revolving A Note to the order of such Eligible Assignee in an amount equal
to the Revolving A Commitment assumed by it pursuant to such Assignment and
Acceptance and a new Revolving B Note to the order of such Eligible Assignee in
an amount equal to the outstanding principal amount of the Revolving B
Commitment assigned to such Eligible Assignee and (B) if such Bank has retained
any Revolving A Commitment hereunder, a new Revolving A Note to the order of
such Bank in an amount equal to the Revolving A Commitment retained by it
hereunder and a new Revolving B Note to the order of such Bank in an amount
equal to the outstanding principal amount of the Revolving B Commitment
retained by such Bank. Such new Notes shall be dated the effective date of
such Assignment and Acceptance and shall otherwise be in substantially the form
of the attached Exhibit D-1 and D-2, respectively.
(e) Participations. Each Bank may sell participations to one or
more banks or other entities in or to all or a portion of its rights and
obligations under this Agreement (including, without limitation, all or a
portion of its Commitments, the Advances owing to it, its participation
interest in the Letter of Credit Obligations, and the Notes held by it);
provided, however, that (i) such Bank's obligations under this
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Agreement (including, without limitation, its Commitments to the Borrower
hereunder) shall remain unchanged, (ii) such Bank shall remain solely
responsible to the other parties hereto for the performance of such
obligations, (iii) such Bank shall remain the holder of any such Notes for all
purposes of this Agreement, (iv) the Borrower, the Agent, and the Issuing Bank
and the other Banks shall continue to deal solely and directly with such Bank
in connection with such Bank's rights and obligations under this Agreement, and
(v) such Bank shall not require the participant's consent to any matter under
this Agreement or any other Credit Document, except for change in the principal
amount of the Notes, reductions in fees or interest, releasing any collateral,
or extending the Termination Date or the Maturity Date. The Bank selling any
such participation shall give notice thereof to the Borrower, identifying the
participant and the amount of such participation. The Borrower hereby agrees
that participants shall have the same rights under Sections 2.11, 2.12,
2.13(c), and 9.07 as a Bank to the extent of their respective participations
provided that no participant shall be entitled to recover under the
aforedescribed provisions an amount in excess of the proportionate share which
such participant holds of the original aggregate principal amount hereunder to
which the assigning Bank would otherwise be entitled.
(f) Disclosure. Any Bank may, in connection with any
assignment or participation or proposed assignment or participation pursuant to
this Section 9.06, disclose to the assignee or participant or proposed assignee
or participant, any information relating to the Borrower furnished to such Bank
by or on behalf of the Borrower; provided that, prior to any such disclosure,
the assignee or participant or proposed assignee or participant shall agree to
preserve the confidentiality of any confidential information relating to the
Borrower received by it from such Bank and such assignee or participant shall
agree to be subject to the provisions of Section 9.13 hereof.
Section 9.07. Indemnification. THE BORROWER SHALL INDEMNIFY THE
AGENT, THE BANKS, THE ISSUING BANK, AND EACH AFFILIATE THEREOF AND THEIR
RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS FROM, AND DISCHARGE,
RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES,
LIABILITIES, CLAIMS, OR DAMAGES WHICH MAY BE IMPOSED ON, INCURRED BY, OR
ASSERTED AGAINST THEM IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT
OR ANY ACTION TAKEN OR OMITTED BY THEM UNDER THIS AGREEMENT OR ANY OTHER CREDIT
DOCUMENT (INCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSE
INCURRED BY REASON OF THE PERSON BEING
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INDEMNIFIED'S OWN NEGLIGENCE), BUT EXCLUDING ANY SUCH LOSSES, LIABILITIES,
CLAIMS, DAMAGES, OR EXPENSES INCURRED BY REASON OF THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF THE PERSON TO BE INDEMNIFIED.
Section 9.08. Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.
Section 9.09. Survival of Representations, Etc. All
representations and warranties contained in this Agreement or made in writing
by or on behalf of the Borrower in connection herewith shall survive the
execution and delivery of this Agreement and the Credit Documents, the making
of the Advances and any investigation made by or on behalf of the Banks, none
of which investigations shall diminish any Bank's right to rely on such
representations and warranties. All obligations of the Borrower provided for
in Sections 2.11, 2.12, 2.13(c), 9.04, and 9.07 and all of the obligations of
the Banks in Section 8.05 shall survive any termination of this Agreement and
repayment in full of the Obligations.
Section 9.10. Severability. In case one or more provisions of this
Agreement or the other Credit Documents shall be invalid, illegal or
unenforceable in any respect under any applicable law, the validity, legality,
and enforceability of the remaining provisions contained herein or therein
shall not be affected or impaired thereby.
Section 9.11. Business Loans. The Borrower warrants and represents
that the Loans evidenced by the Notes are and shall be for business,
commercial, investment, or other similar purposes and not primarily for
personal, family, household, or agricultural use, as such terms are used in
Chapter One ("Chapter One") of the Texas Credit Code. At all such times, if
any, as Chapter One shall establish a Maximum Rate, the Maximum Rate shall be
the "indicated rate ceiling" (as such term is defined in Chapter One) from time
to time in effect.
Section 9.12. Governing Law. This Agreement, the Notes and the
other Credit Documents shall be governed by, and construed and enforced in
accordance with, the laws of the State of Texas. Without limiting the intent of
the parties set forth above, (a) Chapter 15, Subtitle 3, Title 79, of the
Revised Civil Statutes of Texas, 1925, as amended (relating to revolving loans
and revolving tri-party accounts), shall not apply to this Agreement, the
Notes, or the transactions contemplated hereby and (b) to the
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extent that any Bank may be subject to Texas law limiting the amount of
interest payable for its account, such Bank shall utilize the indicated
(weekly) rate ceiling from time to time in effect as provided in Article
5069-1.04 of the Revised Civil Statutes of Texas, as amended. Each Letter of
Credit shall be governed by the Uniform Customs and Practice for Documentary
Credits, International Chamber of Commerce Publication No. 500 (1993 version).
Section 9.13. Confidentiality. The Agent and the Banks shall use
their best efforts to keep confidential any proprietary information of the
Borrower or any Subsidiary identified in writing by the Borrower as being
proprietary and confidential; provided that the Agent or any Bank may disclose
any such information (a) to enable it to comply with any governmental
requirement applicable to it, (b) in connection with the defense of any
litigation or other proceeding brought against it arising out of the
transactions contemplated by this Agreement and the other Credit Documents, (c)
in connection with the enforcement of the rights and remedies of the Agent and
the Banks under any Credit Document, (d) to its legal counsel and independent
certified public accountants, and (e) as set forth in Section 9.06(f).
THE BORROWER, THE BANKS, THE ISSUING BANK AND THE AGENT HEREBY
IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN RESPECT OF ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER CREDIT
DOCUMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY, AND IRREVOCABLY
SUBMIT TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF HARRIS COUNTY, TEXAS,
AND THE SOUTHERN DISTRICT OF TEXAS FOR THE RESOLUTION OF ANY DISPUTES UNDER
THIS AGREEMENT AND THE CREDIT DOCUMENTS, AND HEREBY IRREVOCABLY WAIVE ANY CLAIM
THAT SUCH JURISDICTION IS IMPRACTICAL OR INCONVENIENT.
THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS, AS DEFINED IN THIS
AGREEMENT, REPRESENT THE FINAL AGREEMENT AMONG 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 AMONG THE PARTIES.
[Remainder of page intentionally left blank]
-79-
<PAGE> 85
EXECUTED as of the date first above written.
<TABLE>
<S> <C>
BORROWER:
3DX TECHNOLOGIES INC.
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
AGENT:
NATIONSBANK OF TEXAS, N.A.
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
BANK:
NATIONSBANK OF TEXAS, N.A.
REVOLVING A COMMITMENT By:
------------------------------------------
$25,000,000.00 Name:
----------------------------------------
REVOLVING B COMMITMENT Title:
$25,000,000.00
TOTAL REVOLVING A COMMITMENTS
$25,000,000.00
TOTAL REVOLVING B COMMITMENTS
$25,000,000.00
</TABLE>
-80-
<PAGE> 1
EXHIBIT 11.1
CALCULATION OF NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Loss .............................. $(11,036,144) $ (2,735,364) $ (2,488,375) $ (385,013) $ (615,079)
Preferred B dividend .................. -- -- (783,700) (421,696) (52,790)
Preferred B accretion ................. -- (43,464) (43,464) (30,367) (14,353)
Preferred B redemption premium ........ -- (365,810) -- -- --
Preferred C dividend .................. -- (520,393) (275,256) -- --
Preferred C accretion ................. -- (11,380) (4,944) -- --
------------ ------------ ------------ ------------ ------------
Net loss attributable to common
stock .............................. $(11,036,144) $ (3,676,411) $ (3,595,739) $ (837,076) $ (682,222)
============ ============ ============ ============ ============
Avg. weighted shares .................. 7,193,837 3,042,466 2,987,908 2,373,258 993,411
============ ============ ============ ============ ============
Basic and diluted net loss per common
share as reported .................. $ (1.53) $ (1.16) $ (1.14) $ (0.33) $ (0.59)
Retroactive effect of change in
accounting principle ............... -- (0.05) (0.06) (0.02) (0.10)
------------ ------------ ------------ ------------ ------------
Basic and diluted net loss per common
share .............................. $ (1.53) $ (1.21) $ (1.20) $ (0.35) $ (0.69)
============ ============ ============ ============ ============
</TABLE>
CALCULATION OF ACTUAL WEIGHTED AVERAGE SHARES OUTSTANDING
<TABLE>
<CAPTION>
ANNUAL
ACTUAL WEIGHTED
ISSUE DATE SHARES AVERAGE
---------- ------ --------
<S> <C> <C> <C>
Inception............................... 1/6/93 768,117 768,117
Common Stock Sales...................... 11/9/93 1,464,413 225,294
---------- -----------
1993 Ending Balance................. 12/31/93 2,232,530 993,411
========= ===========
1994 Beginning Balance.................. 2,232,530 2,232,530
Common Stock Sales...................... 10/24/94 755,378 140,728
--------- -----------
1994 Ending Balance................. 12/31/94 2,987,908 2,373,258
========= ==========
1995 Beginning Balance.................. 2,987,908 2,987,908
Common Stock Sales...................... - -
--------- ---------
1995 Ending Balance................. 12/31/95 2,987,908 2,987,908
========= =========
1996 Beginning Balance.................. 2,987,908 2,987,908
Option Exercise......................... 5/15/96 3,124 1,960
Conversion of Series C.................. 12/26/96 1,376,379 18,803
Conversion of Series C Warrants......... 12/26/96 73,766 1,008
Shares issued in IPO.................... 12/26/96 2,400,000 32,787
--------- ---------
1996 Ending Balance................. 12/31/96 6,841,177 3,042,466
========= =========
1996 Beginning Balance.................. 6,841,177 6,841,177
Shares issued for over-allotment........ 1/25/97 375,000 350,342
Option Exercise......................... 6/27/97 2,000 1,030
Option Exercise......................... 10/13/97 2,585 567
Option Exercise......................... 11/6/97 4,700 721
---------- ----------
1997 Ending Balance................. 12/31/97 7,225,462 7,193,837
========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
(LETTERHEAD OF ARTHUR ANDERSEN LLP)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our report included in this Form 10-K, into the
Company's previously filed Registration Statement on Form S-8 (File No.
333-30187).
ARTHUR ANDERSEN LLP
Houston, Texas
March 27, 1998
<PAGE> 1
EXHIBIT 23.2
(LETTERHEAD OF RYDER SCOTT COMPANY)
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, we hereby consent to (a) the use of
our name and references to our firm in the Annual Report on Form 10-K of 3DX
Technologies Inc. for the year ended December 31, 1997 and (b) to the inclusion
of the estimate of proved reserves and present value of the future net revenues
included in our report dated February 9, 1998 in such Annual Report. We further
consent to the incorporation by reference of the information set forth above
which is included in such Annual Report into the Registration Statement on Form
S-8, filed June 27, 1997, (No. 333-30187) pertaining to the stock option plan
of 3DX Technologies Inc.
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,568,091
<SECURITIES> 0
<RECEIVABLES> 1,181,083
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,859,855
<PP&E> 35,499,590
<DEPRECIATION> 17,127,846
<TOTAL-ASSETS> 21,309,640
<CURRENT-LIABILITIES> 3,491,752
<BONDS> 0
0
0
<COMMON> 72,255
<OTHER-SE> 17,745,633
<TOTAL-LIABILITY-AND-EQUITY> 21,309,640
<SALES> 3,045,447
<TOTAL-REVENUES> 3,630,601
<CGS> 436,243
<TOTAL-COSTS> 14,666,745
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,036,144)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,036,144)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,036,144)
<EPS-PRIMARY> (1.53)
<EPS-DILUTED> (1.53)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,521,745
<SECURITIES> 0
<RECEIVABLES> 554,210
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,241,050
<PP&E> 13,278,627
<DEPRECIATION> 4,702,296
<TOTAL-ASSETS> 26,827,189
<CURRENT-LIABILITIES> 2,253,565
<BONDS> 0
0
0
<COMMON> 68,412
<OTHER-SE> 24,505,212
<TOTAL-LIABILITY-AND-EQUITY> 26,827,189
<SALES> 851,827
<TOTAL-REVENUES> 1,099,787
<CGS> 107,676
<TOTAL-COSTS> 3,835,151
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,735,364)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,735,364)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,735,364)
<EPS-PRIMARY> (1.21)
<EPS-DILUTED> (1.21)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,704,014
<SECURITIES> 1,595,167
<RECEIVABLES> 113,704
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,498,671
<PP&E> 5,278,671
<DEPRECIATION> 2,343,578
<TOTAL-ASSETS> 10,450,504
<CURRENT-LIABILITIES> 233,908
<BONDS> 0
14,181,659
0
<COMMON> 29,879
<OTHER-SE> (4,270,198)
<TOTAL-LIABILITY-AND-EQUITY> 10,450,504
<SALES> 274,511
<TOTAL-REVENUES> 510,697
<CGS> 78,533
<TOTAL-COSTS> 2,999,072
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,488,375)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,488,375)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,488,375)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> (1.20)
</TABLE>
