-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UFclsqIMwkdauckGsD96oPRe/L+FN2F07lodHYnc4ebRR7NAbhSWhbKrYDTCW39n 5zo+HFTbAVYucmYMpTkjEA== 0000932384-96-000181.txt : 19960816 0000932384-96-000181.hdr.sgml : 19960816 ACCESSION NUMBER: 0000932384-96-000181 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BASIN EXPLORATION INC CENTRAL INDEX KEY: 0000827795 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 841143307 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20125 FILM NUMBER: 96614749 BUSINESS ADDRESS: STREET 1: 370 SEVENTEENTH ST STE 1800 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3036858000 MAIL ADDRESS: STREET 2: 370 SEVENTEENTH STREET SUITE 1800 CITY: DENVER STATE: CO ZIP: 80202 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 -------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________ Commission File Number 0-20125 ------------------------------------------------------ BASIN EXPLORATION, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 84-1143307 ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 370 17th Street, Suite 1800, Denver, CO 80202 ------------------------------------------------------ (Address of principal executive offices) (Zip Code) (303) 685-8000 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of Common stock, as of the latest practicable date. Outstanding at Class June 30, 1996 ---------------------------- ----------------- Common stock, $.01 par value 10,701,345 shares BASIN EXPLORATION, INC. INDEX PART I. FINANCIAL INFORMATION Page ---- Item 1. Consolidated Financial Statements Consolidated Balance Sheets- June 30, 1996 and December 31, 1995 . . . . . . 3 Consolidated Income Statements- Three Months Ended June 30, 1996 and 1995 and Six Months Ended June 30, 1996 and 1995 . . . . 5 Consolidated Statements of Changes in Stockholders' Equity. . . . . . . . . . . . . . 6 Consolidated Statements of Cash Flows- Six Months Ended June 30, 1996 and 1995 . . . . 7 Notes to Consolidated Financial Statements . . . 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . 9 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . 14 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 14 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . 15 EXHIBITS - Index to Exhibits. . . . . . . . . . . . . . . . . . . . . 16 2 BASIN EXPLORATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND DECEMBER 31, 1995 ASSETS ------
(Unaudited, in thousands) June 30, December 31, 1996 1995 -------- ------------ CURRENT ASSETS: Cash and cash equivalents $ 37,623 $ 1,613 Accounts receivable 3,771 7,029 Stockholder note receivable 559 559 Inventory and other 898 1,116 ------- ------- Total current assets 42,851 10,317 ------- ------- PROPERTY AND EQUIPMENT, at cost: Oil and gas properties, under the full cost method of accounting Proved 68,567 206,880 Unproved 12,121 5,001 Less accumulated depreciation, depletion and amortization (34,885) (80,961) -------- -------- 45,803 130,920 Furniture and equipment, net 2,898 3,678 ------- ------- 48,701 134,598 ------- ------- OTHER ASSETS: Restricted cash 614 578 Other, net 338 1,158 ------- ------- 952 1,736 ------- ------- $ 92,504 $ 146,651 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 3 BASIN EXPLORATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND DECEMBER 31, 1995 LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------
(Unaudited, dollars in thousands) June 30, December 31, 1996 1995 -------- ------------ CURRENT LIABILITIES: Current portion of long-term debt $ 328 $ 175 Accounts payable and accrued expenses 14,616 7,985 Accrued ad valorem taxes 1,030 4,368 Income taxes payable 2,000 - ------- ------- Total current liabilities 17,974 12,528 ------- ------- LONG-TERM DEBT, net of current portion 373 77,172 AD VALOREM TAXES AND OTHER 1,603 3,664 DEFERRED INCOME TAXES 3,694 - COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, par value $.01 per share; 10,000,000 shares authorized, no shares issued and outstanding - - Common stock, par value $.01 per share, 50,000,000 shares authorized, 10,757,000 and 10,724,000 shares issued, respectively 107 107 Additional paid-in capital 59,436 59,288 Retained earnings (deficit) 9,445 (6,014) Common stock held in treasury, at cost, 56,000 and 32,000 shares, respectively (128) (94) -------- -------- Total stockholders' equity 68,860 53,287 ------- ------- $ 92,504 $146,651 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 4 BASIN EXPLORATION, INC. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS
For the Three Months Ended For the Six Months Ended June 30, June 30, (Unaudited, in thousands, except per 1996 1995 1996 1995 share data) --------- --------- --------- --------- REVENUE: Oil sales $ 3,164 $ 5,225 $ 7,039 $ 10,987 Gas sales 1,932 4,837 5,443 10,369 Gain on sale of assets 22,472 - 22,472 - Other - 114 23 373 ------- ------- ------- ------- 27,568 10,176 35,077 21,729 ------- ------- ------- ------- OPERATING COSTS AND EXPENSES: Lease operating expenses 1,328 2,046 3,004 4,116 Production taxes 473 880 1,199 1,884 Depreciation, depletion and amortization 2,116 4,369 5,470 9,003 General and administrative, net 1,023 1,572 2,212 3,115 Other - 117 18 261 ------- ------- ------- ------- 4,940 8,984 11,903 18,379 ------- ------- ------- ------- OPERATING INCOME 22,628 1,192 23,174 3,350 ------- ------- ------- ------- OTHER INCOME (EXPENSE): Interest income 146 28 174 36 Interest expense (671) (1,637) (2,200) (3,259) Other (34) (12) 5 (38) -------- -------- ------- -------- (559) (1,621) (2,021) (3,261) -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES 22,069 (429) 21,153 89 Income tax benefit (provision) (5,694) 158 (5,694) (35) -------- ------- -------- -------- NET INCOME (LOSS) $ 16,375 $ (271) $ 15,459 $ 54 ======== ========= ======== ======== EARNINGS (LOSS) PER SHARE $ 1.53 $ (0.02) $ 1.44 $ 0.01 ======== ========= ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,711 10,683 10,699 10,680 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 BASIN EXPLORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH JUNE 30, 1996
ADDITIONAL RETAINED TOTAL COMMON STOCK PAID-IN TREASURY STOCK EARNINGS STOCKHOLDERS' (UNAUDITED, IN THOUSANDS) SHARES AMOUNT CAPITAL SHARES AMOUNT (DEFICIT) EQUITY - ------------------------------------------------------------------------------------------------------------------------ BALANCES, January 1, 1995 10,692 $107 $58,986 (13) $(47) $13,529 $72,575 Issuance and vesting of restricted stock and stock options 32 - 302 - - - 302 Purchase of treasury stock - - - (19) (47) - (47) Net loss - - - - - (19,543) (19,543) -------------------------------------------------------------------------------- BALANCES, December 31, 1995 10,724 $107 $59,288 (32) $(94) $ (6,014) $53,287 Issuance and vesting of restricted stock and stock options 33 - 148 - - - 148 Purchase of treasury stock - - - (24) (34) - (34) Net income - - - - - 15,459 15,459 -------------------------------------------------------------------------------- BALANCES, June 30, 1996 10,757 $ 107 $59,436 (56) $(128) $ 9,445 $ 68,860 ================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 6 BASIN EXPLORATION, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands) For the Six Months Ended June 30, 1996 1995 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 15,459 $ 54 Adjustments to reconcile net income to net cash provided by operating activities Gain on sale of assets (22,472) - Depreciation, depletion and amortization 5,470 9,003 Deferred income tax expense 3,694 35 Stock compensation expense 65 183 Amortization of prepaid expenses 115 200 Changes in operating assets and liabilities: Decrease (increase) in: Restricted cash (36) (38) Receivables 2,893 2,294 Inventory and other, net (593) 51 Increase (decrease) in: Accounts payable and accrued expenses (2,708) (7,044) Ad valorem taxes and other (2,150) (2,356) Unearned income - (1,054) Income taxes payable 2,000 - ---------- ---------- Net cash provided by operating activities 1,737 1,328 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital additions (19,145) (9,850) Increase (decrease) in drilling payables 9,038 (753) Proceeds from sale of property and equipment 120,977 2,528 ---------- ---------- Net cash provided by (used in) investing activities 110,870 (8,075) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable and long-term debt 8,089 4,237 Principal payments on notes payable and long-term debt (84,736) (327) Purchase of treasury stock (34) (35) Issuance of common stock 84 - ---------- ---------- Net cash provided by (used in) financing activities (76,597) 3,875 ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 36,010 (2,872) CASH AND CASH EQUIVALENTS, beginning of period 1,613 5,394 ---------- ---------- CASH AND CASH EQUIVALENTS, end of period $ 37,623 $ 2,522 ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 2,273 $ 3,124 ========== ========== Cash paid for income taxes $ - $ - ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 7 BASIN EXPLORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------- In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the financial position of Basin Exploration, Inc. and its wholly-owned subsidiaries (collectively, "Basin" or the "Company") as of June 30, 1996 and the results of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. Management believes the disclosures made are adequate to ensure that the information is not misleading, and suggests that these financial statements be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (2) DIVESTITURE OF OIL AND GAS PROPERTIES ------------------------------------- In February 1996, the Company entered into two sales agreements with HS Resources, Inc. ("HS"). The first agreement provided for the Company to sell certain assets in the D-J Basin to HS for approximately $38.0 million. This transaction was closed on March 15, 1996. The second agreement provided for the Company to sell the remainder of its D-J Basin assets for approximately $87.5 million. This transaction was closed on June 7, 1996, following approval by the Company's stockholders. The final aggregate purchase price for both transactions was $123.5 million, reflecting the parties' negotiated settlement of $2 million for title defects and other adjustments claimed by HS. Because the second transaction constituted the sale of a significant portion of the Company's total oil and gas reserves which would significantly alter the relationship between the Company's capitalized costs and its proved reserves, net capitalized costs of oil and gas properties were allocated between the reserves sold and retained based on their estimated relative reserve quantities as of June 7, 1996 and a resulting gain was recognized in the amount of $22.5 million. Both transactions had a January 1, 1996 effective date and the related agreements provided for the Company to receive interest on the purchase prices from the effective date to the respective closing dates at 7.5% per annum. A portion of the proceeds from the sales was used to pay off all outstanding bank debt with the remaining proceeds of approximately $35 million invested in short-term money market instruments. Combined, these sales resulted in Basin selling its interests in approximately two-thirds of its producing wells and 70% of its proved oil and gas reserves at December 31, 1995. (3) INCOME TAXES ------------ The differences between the income tax provisions for the three and six months ended June 30, 1996, and the amounts which would be calculated by applying statutory income tax rates to income before income taxes are due primarily to reversal of a previously established $2.2 million deferred tax asset valuation allowance. 8 BASIN EXPLORATION, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Basin Exploration, Inc. ("Basin" or the "Company") is an independent energy company engaged in the acquisition, exploration and development of oil and gas properties and marketing of the related oil and gas production. Basin's revenue and results of operations are significantly affected by changes in oil and gas prices. Assuming level production, the Company's total revenue would generally be higher in the first and fourth quarters due to higher natural gas prices resulting from greater demand during colder months. The following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto. RESULTS OF OPERATIONS - --------------------- REVENUE. Excluding a $22,472,000 gain on sale of assets recognized during 1996, revenue for the three and six months ended June 30, 1996, were $5,096,000 and $12,605,000, representing decreases of $5,080,000, or 50%, and $9,124,000, or 42%, respectively, as compared to the same periods in 1995. The following table reflects the Company's average oil and gas prices and its average daily oil and gas production for the periods presented:
Three Months Ended Six Months Ended June 30, June 30, ------------------------------- ------------------------------- 1996 1995 % Change 1996 1995 % Change ---- ---- -------- ---- ---- -------- Average price: Oil (per Bbl) $ 20.84 $ 16.72 25 $ 19.14 $ 16.78 14 Gas (per Mcf) $ 1.32 $ 1.47 (10) $ 1.41 $ 1.53 (8) Average daily production: Oil (Bbl) 1,668 3,434 (51) 2,021 3,619 (44) Gas (Mcf) 16,103 36,300 (56) 21,558 37,400 (42)
The decreases in average daily production were attributable to the combined effects of sales of producing properties during 1995 and 1996, the Company's low level of capital expenditures during the past eighteen months (when it drilled only eight wells compared to 152 wells drilled in 1994) and natural production declines. During the three and six months ended June 30, 1995, the Company recognized gas revenue for payments received with respect to transferred Section 29 tax credits in the amount of $511,000 and $1,039,000, respectively. 9 BASIN EXPLORATION, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As more fully described below under Liquidity and Capital Resources, the Company consummated two transactions with HS Resources, Inc. during 1996 in which approximately two-thirds of its producing wells and 70% of its proved oil and gas reserves were sold. In conjunction with the second transaction, which closed in June 1996, a $22,472,000 gain was recognized. Excluding the production and sales from properties sold, average oil and gas prices and average daily oil and gas production for the periods presented were:
Three Months Ended Six Months Ended June 30, June 30, ------------------------------- ------------------------------- 1996 1995 % Change 1996 1995 % Change ---- ---- -------- ---- ---- -------- Average price: Oil (per Bbl) $ 21.07 $ 18.28 15 $ 20.01 $ 17.88 12 Gas (per Mcf) $ 1.06 $ 1.03 3 $ 1.17 $ 1.13 4 Average daily production: Oil (Bbl) 1,181 1,411 (16) 1,182 1,492 (21) Gas (Mcf) 5,029 5,684 (12) 5,003 5,883 (15)
LEASE OPERATING EXPENSES. Lease operating expenses for the three and six months ended June 30, 1996, were $1,328,000 and $3,004,000, decreases of $718,000, or 35%, and $1,112,000, or 27%, respectively, compared to the same periods in 1995. Production costs per barrel of oil equivalent (BOE) produced during the three and six months ended June 30, 1996, were $3.35 and $2.94, compared to $2.37 and $2.31, respectively, in 1995. The higher costs per BOE were caused primarily by a decline in the number of new wells brought on line, since such wells typically have relatively high initial production rates, generating average unit production costs that are lower than for more mature properties. PRODUCTION TAXES. Production taxes for the three and six months ended June 30, 1996, were $473,000 and $1,199,000, decreases of $407,000, or 46%, and $685,000, or 36%, respectively, compared to the same periods in 1995. Production taxes as a percent of oil and gas sales for the three and six months ended June 30, 1996 were 9.3% and 9.5%, compared to 8.7% and 8.8%, respectively, in 1995. The increased average tax rates were due to a greater portion of sales occurring in higher-tax jurisdictions in 1996. DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and amortization expense for the three and six months ended June 30, 1996, were $2,116,000 and $5,470,000, decreases of $2,253,000, or 52%, and $3,533,000, or 39%, respectively, compared to the same periods in 1995. The decreases are attributable to the lower production volumes in 1996 as compared to the same periods in 1995. The depletion rate of $4.88 per BOE produced in the six months ended June 30, 1996 was approximately the same as in the 1995 period. 10 BASIN EXPLORATION, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General and administrative, net. General and administrative expenses for the three and six months ended June 30, 1996 were $1,023,000 and $2,212,000, reflecting decreases of $549,000, or 35%, and $903,000, or 29%, respectively, compared to the same periods in 1995. The decreases resulted primarily from staff reductions made during the second half of 1995 and the first half of 1996. OTHER INCOME (EXPENSE), NET. Other net expenses for the three and six months ended June 30, 1996 were $559,000 and $2,021,000, decreases of $1,062,000, or 66%, and $1,240,000, or 38%, respectively, compared to the same periods in 1995. The decreases were principally attributable to lower average borrowings as a result of asset sales consummated during 1996, as summarized below:
Three Months Ended Six Months Ended June 30, June 30, ---------------------- -------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Average borrowings (in millions) $ 33 $ 80 $ 52 $ 79 Average interest rate on borrowings 8.1% 8.2% 8.5% 8.3%
INCOME TAX BENEFIT (PROVISION). The differences between the income tax provisions for the three and six months ended June 30, 1996, and the amounts which would be calculated by applying statutory income tax rates to income before income taxes are due primarily to reversal of a previously established $2.2 million deferred tax asset valuation allowance. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- In February 1996, the Company entered into agreements with HS Resources, Inc. ("HS") pursuant to which the Company sold all of its assets in the D-J Basin, in two transactions closed in March and June 1996, respectively, for an aggregate sales price of $123.5 million, effective January 1, 1996. Combined, these transactions resulted in Basin selling its interests in approximately two-thirds of its producing wells and 70% of its proved oil and gas reserves at December 31, 1995. A portion of the proceeds from the sales was used to pay off all outstanding bank debt leaving residual proceeds of approximately $35 million. It is the Company's plan to utilize the liquidity created by these asset sales to make new investments in oil and gas properties, through both acquisitions and exploration. Until the sales proceeds are redeployed, however, cash balances will be invested in short term, interest-bearing cash equivalents. As a consequence of the significant reduction of operating assets resulting from the HS asset sale, operational cash flows have been substantially reduced from pre-sale levels and the Company has reduced the staff size at its Denver office headquarters and implemented certain related general and administrative expense reductions. On August 6, 1996, the Company entered into an Amended and Restated Credit Agreement with its existing bank group. The initial borrowing base was set at $25 million. The credit agreement provides for the interest rate on borrowings to be determined based on the prime rate or LIBOR, at the Company's election. A varying spread above the prime rate ranging from 0% to 0.5% and over 11 BASIN EXPLORATION, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIBOR ranging from 0.625% to 1.25% will be applied based on the Company's applicable debt-to- capitalization ratio. The Credit Agreement provides for borrowings to be revolving loans until July 31, 1999, at which time the outstanding balance is scheduled to convert to a four year amortizing term loan. The Credit Agreement contains various covenants, including ones which could limit the Company's ability to incur other debt, dispose of assets, pay dividends or repurchase stock. No borrowings are currently outstanding under the facility. The Company had no major capital expenditure commitments pending at June 30, 1996, other than approximately $7.2 million for the balances owing on leases on which the Company was high bidder at a federal offshore lease sale held in April 1996 (further discussed below). The Company's capital expenditures are generally discretionary and activity levels are determined by a number of factors, including oil and gas prices, interest rates, availability of funds, quantity and character of identified investment projects and competition. The Company is currently conducting its exploration activities primarily in the Gulf of Mexico. This is the Company's first year of Gulf Coast operations and, as such, it began the period with no prospect inventory and, therefore, reduced control over the volume and timing of its business activity than would typically be the case. Based on activities year-to-date and anticipated developments during the second half of the year, the Company is currently projecting 1996 capital expenditures for Gulf Coast exploration between $13 million and $20 million, excluding development costs for successful prospects. This estimate anticipates participation in four to six prospect test wells during the year and reflects an estimated range for net investment in leaseholds due to uncertainty about resale proceeds and success levels in building prospect inventory. Through the first six months of 1996, the Company acquired 75% to 100% working interests in ten offshore lease blocks, including six blocks offshore Louisiana at the Central Gulf of Mexico federal lease sale held in April. The Company's total initial leasehold investment for these blocks is approximately $10 million. The Company plans to generally reduce its interests in these prospects through sale of promoted interests or through swapping for other prospect interests. Although exchanging prospect interests would result in less cost recoupment for the Company, it would be consistent with the Company's overall objectives of prospect diversification and risk management, and would accelerate development of prospect inventory. The Company is not anticipating a current year contribution of production or cash flow resulting from Gulf Coast exploration, even if it makes one or more discoveries, since at least nine months is typically required for platform fabrication and installation for a new discovery (unless such infrastructure is already in place). The Company drilled and abandoned one prospect test well during the first half of 1996. The Company anticipates investing up to $4 million during the second half of 1996 on development of its proved properties in Wyoming. The amount of any additional capital expenditures during the year will be dependent upon the level of success achieved in pursuing proved property acquisitions and the amount of development activity generated by exploration discoveries. Such investments could be significant. Although the Company is not in negotiations and cannot predict if or when it will make a material acquisition, or a substantial discovery, the Company believes that it could finance investment opportunities aggregating $75 million or more. The Company expects to be able to fund such capital investments primarily with cash flow from operations and funds made available through the sale of its D-J Basin assets, including availability established under its bank credit line. 12 BASIN EXPLORATION, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Further, if conditions warrant, the Company may consider raising additional capital through issuance of debt or equity securities. CHANGES IN PRICES. The Company's revenue, cash flow, and the value of its oil and gas properties have been, and will continue to be, affected by changes in oil and natural gas prices. The Company's ability to maintain current borrowing capacity and to obtain additional capital on attractive terms is also substantially dependent on oil and natural gas prices. As such, changes in oil and gas prices can significantly affect the amount of the Company's capital expenditures. Oil and natural gas prices are subject to significant seasonal and other fluctuations that are beyond the Company's ability to control or predict. "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - ------------------------------------------------ Statements that are not historical facts contained in this report are forward looking statements that involve risks and uncertainties that could cause actual results to differ from projected results. Factors that could cause actual results to differ materially include, among others: general economic conditions, the market price of oil and natural gas, the risks associated with exploration in the Gulf Coast and Rocky Mountain regions, the Company's ability to find, acquire, market, develop and produce new properties, operating hazards attendant to the oil and natural gas business, uncertainties in the estimation of proved reserves and in the projection of future rates of production and timing of development expenditures, the strength and financial resources of the Company's competitors, the Company's ability to find and retain skilled personnel, climatic conditions, labor relations, availability and cost of material and equipment, delays in anticipated start-up dates, environmental risks, the results of financing efforts and other risk factors detailed elsewhere herein. 13 BASIN EXPLORATION, INC. AND SUBSIDIARIES PART II OTHER INFORMATION -------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- Proxies for the Company's annual meeting of shareholders held on June 6, 1996, were solicited pursuant to Regulation 14A during the quarter ended June 30, 1996. There was no solicitation in opposition to the nominees listed in the proxy statement and all such nominees were elected. The following is a summary of the matters voted upon at such meeting and the number of votes cast for, against and abstentions:
Number of Votes Cast --------------------- For Against Abstain --- ------- ------- Election of Directors John F. Greene 9,051,675 300 1,134,895 Neil L. Stenbuck 9,051,675 300 1,134,895 Proposal to sell D-J Basin Assets to HS Resources, Inc. 7,838,874 53,506 14,500 Amend Equity Incentive Plan 7,147,265 2,761,035 13,480 Amend Non-Employee Directors' Plan 9,758,729 312,199 16,445 Ratify selection of Arthur Andersen LLP as auditors 10,165,325 7,645 13,900
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ------- -------------------------------- a. Exhibits. 10 Amended and Restated Credit Agreement dated August 6, 1996 between the Company and Colorado National Bank, Union Bank of California, N.A. and NationsBank of Texas, N.A. 27 Financial data schedule. b. Reports filed on Form 8-K. March 15, 1996 - Item 2. Acquisition or Disposition of Assets - Information relating to sale of assets to HS Resources, Inc. - Item 7. Financial Statements and Exhibits - Pro forma financial information and exhibits. June 7, 1996 - Item 2. Acquisition or Disposition of Assets - Information relating to sale of assets to HS Resources, Inc. - Item 7. Financial Statements and Exhibits - Pro forma financial information and exhibits. 14 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BASIN EXPLORATION, INC. ----------------------- (Registrant) Date: August 14, 1996 By: Neil L. Stenbuck ----------------- Neil L. Stenbuck Chief Financial Officer Date: August 14, 1996 By: James A. Tuell ---------------- James A. Tuell Controller (Principal Accounting Officer) 15 Index to Exhibits Exhibit Numbers Exhibits Page - --------------- -------- ---- 10 Amended and Restated Credit Agreement dated August 6, 1996 between the Company and Colorado National Bank, Union Bank of California, N.A. and NationsBank of Texas, N.A. 17 27 Financial data schedule 76 16 EX-10 2 EX. 10 CREDIT AGREEMENT _________________________________________________________________ AMENDED AND RESTATED CREDIT AGREEMENT ________________________________ BASIN EXPLORATION, INC. and COLORADO NATIONAL BANK, UNION BANK OF CALIFORNIA, N.A. and NATIONSBANK OF TEXAS, N.A ________________________________ August 6, 1996 _________________________________________________________________ TABLE OF CONTENTS ---------------- ARTICLE I -- Definitions and References ................. 1 Section 1.1. Defined Terms ...................... 1 Section 1.2. Incorporation of Exhibits and Schedules ..................................... 13 Section 1.3. Amendment of Defined Instruments ... 13 Section 1.4. References and Titles .............. 13 Section 1.5. Calculations and Determinations..... 13 ARTICLE II -- The Loan .................................. 14 Section 2.1. The Loan ........................... 14 Section 2.2. The Notes .......................... 15 Section 2.3. Regular Payments ................... 15 Section 2.4. Voluntary Prepayments .............. 15 Section 2.5. Termination of Commitment........... 16 Section 2.6 Payments to Lenders ................ 16 Section 2.7 Use of Proceeds .................... 16 Section 2.8 Rate Elections ..................... 17 Section 2.9 Increased Cost of Fixed Rate Portions ...................................... 18 Section 2.10 Availability ....................... 18 Section 2.11 Reimbursable Taxes ................. 19 Section 2.12 Funding Losses ..................... 20 Section 2.13 Capital Reimbursement .............. 20 ARTICLE III -- Security; Fees ........................... 21 Section 3.1. The Security ....................... 21 Section 3.2. Periodic Reviews and Borrowing Base Reductions .................................... 21 Section 3.3. Perfection and Protection of Security Interests and Liens .................. 22 Section 3.4. Bank Accounts and Offset ........... 22 Section 3.5. Proceeds of Runs ................... 22 Section 3.6. Fees ............................... 22 ARTICLE IV -- Conditions Precedent to Loan .............. 23 Section 4.1. Conditions Precedent to Loan ....... 23 Section 4.2. Additional Conditions Precedent .... 24 ARTICLE V -- Representations and Warranties ............. 25 Section 5.1. Borrower's Representations and Warranties .................................... 25 Section 5.2. Representations by Lenders ......... 30 ARTICLE VI -- Covenants of Borrower ..................... 30 Section 6.1. Affirmative Covenants .............. 30 Section 6.2. Negative Covenants ................. 38 -i- ARTICLE VII -- Events of Default and Remedies .......... 42 Section 7.1. Events of Default ................ 42 Section 7.2. Remedies ......................... 45 Section 7.3. Indemnity ........................ 46 ARTICLE VIII -- Agent; Collateral Agent ................ 47 Section 8.1. Actions .......................... 47 Section 8.2. Exculpation ...................... 48 Section 8.3. Successor ........................ 49 Section 8.4. Other Loans by Lenders ........... 50 Section 8.5. Credit Decisions ................. 50 Section 8.6. Payment of Collected Amounts ..... 50 Section 8.7. Application of Collateral Proceeds 50 Section 8.8 Right of First Refusal............ 51 Section 8.9 Majority Lenders ................. 51 ARTICLE IX -- Miscellaneous ............................ 52 Section 9.1. Waiver and Amendment .............. 52 Section 9.2. Survival of Agreements; Cumulative Nature ....................................... 52 Section 9.3. Notices ........................... 53 Section 9.4. Joint and Several Liability; Parties in Interest .......................... 54 Section 9.5. Governing Law ..................... 54 Section 9.6. Limitation on Interest ............ 54 Section 9.7. Severability ...................... 55 Section 9.8. Counterparts ...................... 55 Section 9.9. Conflicts ......................... 55 Section 9.10 Supersession ...................... 55 SCHEDULE 1 SECURITY SCHEDULE ........................... 1-1 SCHEDULE 2 DISCLOSURE SCHEDULE ......................... 2-1 Exhibit A-l -- Allonge (NBT) ........................... A-1-1 Exhibit A-2 -- Allonge (CNB) ........................... A-2-1 Exhibit A-3 -- Allonge (Union).......................... A-3-1 Exhibit B -- Advance Request ........................... B-1 Exhibit C -- Request for Issuance of Letter of Credit .. C-1 Exhibit D -- Rate Election ............................. D-1 -ii- AMENDED AND RESTATED CREDIT AGREEMENT ------------------------------------- THIS AMENDED AND RESTATED CREDIT AGREEMENT made as of August 6, 1996, is by and among BASIN EXPLORATION, INC., a Delaware corporation ("Borrower"), COLORADO NATIONAL BANK ("CNB"), UNION BANK OF CALIFORNIA, N.A. ("Union"), and NATIONSBANK OF TEXAS, N.A. ("NBT"). Each of CNB, Union and NBT shall act hereunder as a lender with respect to the Loan, as more fully described below; NBT shall act hereunder as agent, on behalf of CNB, Union and NBT, with respect to the Loan, as more fully described below; and NBT shall act as collateral agent, on behalf of CNB, Union and NBT, with respect to the Security Documents and any other collateral for the Loan, as more fully described below. RECITALS A. Borrower, CNB, Union and NBT entered into an Amended and Restated Credit Agreement dated as of May 13, 1994, as the same has heretofore been amended (the "Prior Credit Agreement"), in order to set forth the terms upon which CNB, Union and NBT would make loans to Borrower and issue letters of credit at the request of Borrower and by which the loans and letters of credit would be governed. B. Borrower, CNB, Union and NBT wish to enter into this Amended and Restated Credit Agreement in order to amend and restate in their entirety the terms and provisions of the Prior Credit Agreement and to provide for the terms upon which CNB, Union and NBT will make loans to Borrower and issue letters of credit at the request of Borrower and by which such loans and letters of credit will be governed. AGREEMENT NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I Definitions and References -------------------------- Section 1.1. Defined Terms. As used in this ------------- Agreement, each of the following terms has the meaning given it in this Section 1.1 or in the recitals, sections and subsections referred to below: "Advance" means any advance to be made to Borrower ------- pursuant to Article II hereof. "Affiliate" means, as to any Person, each other Person --------- that directly or indirectly (through one or more intermediaries or otherwise) controls, is controlled by, or is under common control with, such Person. "Agent" means NBT, in its capacity as agent for Lenders ----- hereunder and any successor Agent appointed and accepting such appointment as described in Article VIII below. "Agreement" means this Amended and Restated Credit -------- Agreement. "Allonges" means the amendments to the existing -------- Promissory Notes from Borrower to Lenders, substantially in the form of Exhibits A-1, A-2 and A-3 attached hereto and made a part hereof. "Amortization Period" means the time period commencing ------------------- upon the termination of the Revolving Period and ending four years thereafter. "Authorized Officer" means, with respect to any act to ------------------ be performed or duty to be discharged by or on behalf of any Person who is not an individual, any partner, officer, agent or representative thereof who is at the time in question authorized to perform such act or discharge such duty on behalf of such Person. "Base Rate" means the rate of interest established by --------- Agent from time to time as its "prime rate". Such rate is set by Agent as a general reference rate of interest, taking into account such factors as it may deem appropriate, it being understood that many of Agent's commercial or other loans are priced in relation to such rate, that it is not necessarily the lowest or the best rate actually charged to any customer, that it may not correspond with further increases and decreases in interest rates charged by other lenders or market rates in general and that Agent may make various commercial or other loans at rates of interest having no relationship to such rate. "Base Rate Portion" means any portion of the unpaid ----------------- principal balance of the Loan which is not a Fixed Rate Portion. "Base Rate Spread" means: (a) for any and all calendar ---------------- months that the Capitalization Ratio is greater than or equal to 50 percent, 0.25 percentage points per annum; and (b) for any and all calendar months that the Capitalization Ratio is less than 50 percent, 0.00 percentage points per annum. -2- "Borrower" means Basin Exploration, Inc., a Delaware -------- corporation. "Borrowing Base" means, at any time, the aggregate loan -------------- value of the Borrowing Base Properties, as determined by Lenders in accordance with the provisions of Section 3.2 below; provided that the Borrowing Base for the time period from the date of this Agreement through April 30, 1997 shall be $25,000,000, unless Borrower and Lenders hereafter mutually agree upon a different amount or unless the Borrowing Base is redetermined pursuant to Section 3.2 below prior to April 30, 1997. "Borrowing Base Properties" means, at any time, the ------------------------- properties of Borrower which have been reflected as containing proved developed reserves or proved undeveloped reserves in the most recent engineering report submitted by Borrower to Lenders pursuant to Section 6.1(b)(v) below and which have been evaluated by Lenders in making the then-most-recent determination of the Borrowing Base. "Business Day" means a day on which commercial banks ------------ are open for business with the public in Denver, Colorado, in Los Angeles, California and in Dallas, Texas. Any Business Day in any way relating to Fixed Rate Portions (such as the day on which an Interest Period begins or ends) must also be a day on which, in the judgment of Lenders, significant transactions in dollars are carried out in the interbank eurocurrency market. "Capitalization Ratio" means, for any calendar month, -------------------- the ratio, determined as of the end of the second preceding calendar month, of: (a) Borrower's long-term debt (including without limitation current maturities of long-term debt), determined on a Consolidated basis in accordance with GAAP, to (b) the sum of: (i) Borrower's long-term debt (including without limitation current maturities of long-term debt), determined on a Consolidated basis in accordance with GAAP, and (ii) Borrower's shareholders' equity, determined in accordance with GAAP. For example, the Capitalization Ratio in effect for August, 1996 will be calculated from Borrower's financial data as of the end of June, 1996. The Capitalization Ratio shall be increased or decreased in accordance with this definition only if Borrower notifies Lender of such increase or decrease pursuant to Section 6.1(p); provided, however, that Lenders may make such change without receiving notice from Borrower based on information then available to Lenders, but Lenders will have no obligation to do so. "Closing Date" means August 6, 1996. ------------ -3- "Collateral" means all tangible or intangible real or ---------- personal property which, under the terms of any Security Document, is or is purported to be covered thereby or subject thereto. "Collateral Agent" means NBT, in its capacity as the ---------------- holder of Lenders' Liens on the Collateral on behalf of Lenders and any successor Collateral Agent appointed and accepting such appointment as described in Article VIII below. "Commitment" means the agreement of each Lender to make ---------- Advances to Borrower of amounts up to its Proportionate Share of the Commitment Amount on the terms and subject to the conditions hereof. "Commitment Amount" means, at any time, the lesser of: ----------------- (a) the Borrowing Base, or (b) the Maximum Loan Amount. "Commitment Expiration Date" means the date after which -------------------------- no further Advances are to be made hereunder, which shall be the close of business on the earlier of: (a) the last day of the Revolving Period, or (b) the date of any termination of the Commitment. "Commitment Fee Rate" means: (a) for each day during ------------------- any and all calendar months that the Capitalization Ratio is greater than or equal to 50 percent, 0.50 percentage points per annum; (b) for each day during any and all calendar months that the Capitalization Ratio is less than 50 percent but greater than or equal to 40 percent, 0.375 percentage points per annum; (c) for each day during any and all calendar months that the Capitalization Ratio is less than 40 percent but greater than or equal to 30 percent, 0.30 percentage points per annum; and (d) for each day during any and all calendar months that the Capitalization Ratio is less than 30 percent, 0.25 percentage points per annum. "Consolidated" refers to the consolidation of any ------------ Person, in accordance with GAAP, with its properly consolidated Affiliates. References herein to a Person's Consolidated financial statements, financial position, financial condition, liabilities, etc. refer to the consolidated financial statements, financial position, financial condition, liabilities, etc. of such Person and its properly consolidated Affiliates. "Cumulative Net Income" means, with respect to any --------------------- Person, the sum of such Person's net income, determined in accordance with GAAP, on a Consolidated basis, for each completed fiscal quarter after January 1, 1996. -4- "Debt" means, as to any Person, all indebtedness, ---- liabilities and obligations of such Person, whether primary or secondary, direct or indirect, absolute or contingent. "Default" means any Event of Default and any default, ------- event or condition which would, with the giving of any requisite Default Notice and/or the passage of any requisite Grace Period, constitute an Event of Default. "Default Notice" has the meaning given it in Section -------------- 7.1. "Disclosure Schedule" means (a) Schedule 2 attached ------------------- hereto and (b) any documents listed on such schedule and expressly incorporated therein by reference, so long as Borrower has heretofore delivered true and correct copies of such documents to Lenders. Insofar as any representations and warranties made herein are incorporated by reference or otherwise remade in Loan Documents delivered as of a date after the date hereof, the term "Disclosure Schedule" shall in such representations and warranties be deemed to refer to all documents, instruments or other writings which have at the time in question been delivered to Lenders in connection with the transactions contemplated herein. "Distribution" means any dividend payable in cash or ------------ property with respect to any shares of capital stock of any Person (other than dividends payable in shares of the same class of common, preferred or other capital stock as the shares upon which the dividend is being paid), any other distribution made with respect to any shares of capital stock of any Person, or any purchase, redemption or retirement of, or other payment with respect to, any shares of capital stock of any Person. "ERISA" means the Employee Retirement Income Security ----- Act of 1974, as amended from time to time, together with all rules and regulations promulgated with respect thereto. "ERISA Plan" means any pension benefit plan subject to ---------- Title IV of ERISA maintained by any Obligated Person or any Affiliate thereof to which any Obligated Person is required to contribute. "Eurodollar Rate" means, with respect to each --------------- particular Fixed Rate Portion and the related Interest Period, the rate of interest per annum (expressed as a percentage) determined by Lenders, in accordance with their customary practices, to be representative of the rates at which deposits of U.S. dollars are offered to Agent at approximately 9:00 -5- a.m., Dallas, Texas time, two Business Days prior to the first day of such Interest Period (by prime banks in the interbank eurocurrency market which have been selected by Agent in accordance with their customary practices) for delivery on the first day of such Interest Period in an amount equal or comparable to the amount of such Fixed Rate Portion and for a period of time equal or comparable to the length of such Interest Period. The Eurodollar Rate determined by Agent with respect to a particular Fixed Rate Portion shall be fixed at such rate for the duration of the associated Interest Period. If Agent is unable so to determine the Eurodollar Rate for any Fixed Rate Portion, or if the associated Fixed Rate would cause the interest limitations set forth in Section 9.6 below to be applicable, Borrower shall be deemed not to have elected such Fixed Rate Portion. "Event of Default" has the meaning given it in Section ---------------- 7.1. "Fiscal Quarter" means a three-month period ending on -------------- the last day of March, June, September or December of any year. "Fiscal Year" means a twelve-month period ending on ----------- December 31 of any year. "Fixed Rate" means, with respect to each particular ---------- Fixed Rate Portion and the associated Eurodollar Rate and Reserve Requirement, the rate of interest per annum calculated by Agent (rounded upward, if necessary, to the next higher 0.01 percent) determined pursuant to the following formula: Fixed = Eurodollar Rate + Fixed Rate Rate -------------------------- Spread 1.00 - Reserve Requirement If the Reserve Requirement changes during the Interest Period for a Fixed Rate Portion, Agent may, at its option, either change the Fixed Rate for such Fixed Rate Portion or leave it unchanged for the duration of such Interest Period. The Fixed Rate for any Fixed Rate Portion (other than Fixed Rate Portions in outstanding and unexpired Interest Periods) shall change only if Lenders receive notice from Borrower that the Capitalization Ratio has increased or decreased pursuant to Section 6.1(p); provided, however, that Lenders may make such change without receiving notice from Borrower based on information then available to Lenders, but Lenders will have no obligation to do so. -6- "Fixed Rate Portion" means any portion of the unpaid ------------------ principal balance of the Loan which Borrower designates as such in a Rate Election. "Fixed Rate Spread" means: (a) for any and all calendar ----------------- months that the Capitalization Ratio is greater than or equal to 50 percent, 1.25 percentage points per annum; (b) for any and all calendar months that the Capitalization Ratio is less than 50 percent but greater than or equal to 40 percent, 1.00 percentage point per annum; (c) for any and all calendar months that the Capitalization Ratio is less than 40 percent but greater than or equal to 30 percent, 0.75 percentage point per annum; and (d) for any and all calendar months that the Capitalization Ratio is less than 30 percent, 0.625 percentage point per annum. "GAAP" means those generally accepted accounting ---- principles and practices which are recognized as such by the Financial Accounting Standards Board (or any generally recognized successor) and which, in the case of Borrower and its Consolidated Affiliates, (a) are applied for all periods after the date hereof in a manner consistent with the manner in which such principles and practices were applied to the Initial Financial Statements, and (b) are consistently applied for all periods after the date hereof so as to properly reflect the financial condition, and the results of operations and changes in financial position, of Borrower and, on a Consolidated basis, of Borrower and its Consolidated Affiliates. "Grace Period" shall have the meaning given it in ----------- Section 7.1. "Hedging Obligations" means, with respect to any ------------------- Person, all liabilities of such Person under: (a) interest rate swap agreements, interest rate cap agreements, interest rate collar agreements and all other agreements and arrangements designed to protect such Person against fluctuations in interest rates, or (b) commodity hedge, commodity swap, exchange, collar or cap agreements, fixed price agreements and all other agreements and arrangements designed to protect such Person against fluctuations in the price of oil, gas or other hydrocarbons. "Initial Engineering Report" means a report prepared as -------------------------- of January 1, 1996, by Borrower and audited by Netherland, Sewell & Associates, Inc., true and correct copies of which have been furnished to Lenders. -7- "Initial Financial Statements" means (a) the audited ---------------------------- annual Consolidated financial statements of Borrower, dated as of December 31, 1995, and (b) the quarterly Consolidated financial statements of Borrower dated as of March 31, 1996, copies of all of which Initial Financial Statements have heretofore been delivered by Borrower to Lenders. "Interest Period" means, with respect to each --------------- particular Fixed Rate Portion, a period of one, two, three or six months, as specified in the Rate Election applicable thereto, beginning on and including the date specified in such Rate Election (which must be a Business Day) and ending on but not including the date which corresponds numerically to such beginning date one, two, three or six months thereafter (or if such month has no numerically corresponding date, on the last Business Day of such month); provided that each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day unless such next succeeding Business Day is the first Business Day of a calendar month, in which case such Interest Period shall end on the Business Day next preceding such numerically corresponding day. No Interest Period may be elected which would end after the date on which the Loan is due and payable in full. "Late Payment Rate" means, at the option of Lenders in ----------------- each particular instance: (a) the Base Rate then in effect plus five percentage points per annum, or (b) any other rate of interest which may, with respect to the Obligation in question, be provided for in any other applicable Loan Document. "Lenders" means CNB, Union and NBT and their respective ------- successors and assigns, in their respective capacities as lenders of the Loan. "Letter of Credit" means a standby letter of credit ---------------- requested by Borrower and agreed to be issued by Lenders pursuant to Article II below. Any and all Letters of Credit shall actually be issued in the name of Agent, but any such issuance shall be on behalf of all Lenders, and each Lender shall participate in the risks and benefits relating to each such Letter of Credit to the extent of such Lender's Proportionate Share. "Lien" means, with respect to any property or assets, ---- any right or interest therein of a creditor to secure Debt owed to him or any other arrangement with such creditor which provides for the payment of such Debt out of such property or assets or which allows him to have such Debt satisfied out of -8- such property or assets prior to the general creditors of any owner thereof, including without limitation any lien, mortgage, security interest, pledge, deposit, production payment, rights of a vendor under any title retention or conditional sale agreement or lease substantially equivalent thereto, or any other charge or encumbrance for security purposes, whether arising by law or agreement or otherwise, but excluding any right of offset which arises without agreement in the ordinary course of business. "Loan" has the meaning given it in Section 2.1. ---- "Loan Documents" means this Agreement, the Security -------------- Documents, the Notes, Letters of Credit, applications for Letters of Credit, the Transfer Orders and all other agreements, certificates, legal opinions and other documents, instruments and writings heretofore or hereafter delivered in connection herewith or therewith. "Majority Lenders" means any two or more Lenders (one ---------------- of which shall be Agent) whose aggregate Proportionate Shares are not less than two-thirds. "Maximum Loan Amount" means, at any time, $102,000,000; ------------------- provided that, at any time prior to the end of the Revolving Period, Borrower may irrevocably elect, by giving written notice to Lenders, to decrease the Maximum Loan Amount to an amount less than $102,000,000. "Notes" means: (i) the Promissory Note dated ----- November 22, 1994, as amended, made by Borrower, payable to the order of CNB, (ii) the Promissory Note dated November 22, 1994, as amended, made by Borrower, payable to the order of Union, and (iii) the Promissory Note dated November 22, 1994, as amended, made by Borrower, payable to the order of NBT, all as now in effect or as hereafter amended, modified, extended, restated or replaced. "Obligated Persons" means Borrower and/or any other ----------------- Person hereafter becoming liable for payment of the Obligations. "Obligations" means all Debt from time to time owing by ----------- Borrower to any Lender under or pursuant to any of the Loan Documents. "Obligation" means any part of the Obligations. ---------- "Payment Amount" means: (a) with respect to any Payment -------------- Date during the Revolving Period, the amount of interest accrued through such Payment Date; and (b) with respect to any Payment Date during the Amortization Period, -9- 6.25 percent of the outstanding principal balance of the Loan as of the end of the Revolving Period plus interest accrued through such Payment Date. "Payment Date" means: (i) the last day of each ------------ January, April, July and October, commencing October 31, 1996, and (ii) if all Obligations due and payable on any such date are not then paid, each succeeding day until all due and payable Obligations are paid in full. "Permitted Investment" means: -------------------- (a) Any evidence of indebtedness issued or guaranteed by the United States Government, maturing not more than one year after the date of acquisition by any Obligated Person; or (b) Commercial paper, maturing not more than nine months from the date of issuance thereof, which is issued by: (i) a corporation (other than an Affiliate of Borrower) organized under the laws of any state of the United States or of the District of Columbia and rated A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc., or (ii) any Lender (or its holding company); or (c) Any certificate of deposit, maturing not more than one year from the date of issuance thereof, which is issued by a commercial banking institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than U.S. $500,000,000; or (d) Any repurchase agreement entered into with a commercial banking institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than U.S. $500,000,000, which: (i) is secured by a fully perfected security interest in any obligation of the type described in any of clauses (a) through (c) above, and (ii) has a market value at the time such repurchase agreement is entered into of not less than 100 percent of the repurchase obligation of such commercial banking institution thereunder; or (e) Any deposit account at a commercial banking institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than U.S. $500,000,000; or (f) Hedging Obligations of any Obligated Person; -10- (g) Any other investment owned by Borrower as of the date of this Agreement, so long as Borrower does not increase such investment after the date hereof; or (h) Other short-term investments of durations and involving credit risks comparable to the investments described above. "Person" means an individual, corporation, partnership, ------ association, joint-stock company, trust or trustee thereof, estate or executor thereof, unincorporated organization or joint venture, court or governmental unit or any agency or subdivision thereof, or any other legally recognizable entity. "Prior Credit Agreement" has the meaning given such ---------------------- term in Recital A above. "Prohibited Lien" means any Lien not expressly allowed --------------- under Section 6.2(b). "Proportionate Share" means, for any Lender, the ------------------- fractional share equal to that Lender's share of all of the rights and obligations of Lenders hereunder, including without limitation the obligations of Lenders to make Advances hereunder and the rights of Lenders to receive payments hereunder. Unless hereafter amended, the Proportionate Share of each of CNB, Union and NBT shall be one-third. "Rate Election" has the meaning given such term in ------------- Section 2.8 below. "Regulation D" means Regulation D of the Board of ------------ Governors of the Federal Reserve System, as from time to time in effect. "Reserve Requirement" means, on any day with respect to ------------------- each particular Fixed Rate Portion, the maximum reserve requirement, as determined by Lenders (including without limitation any basic, emergency, supplemental, marginal or similar reserves), expressed as a decimal and rounded to the next higher 0.0001, which would then apply to Lenders under Regulation D with respect to "Eurocurrency liabilities" (as such term is defined in Regulation D) equal in amount to such Fixed Rate Portion, were Lenders to have any such "Eurocurrency liabilities". If such reserve requirement shall change after the date hereof, the Reserve Requirement shall be automatically increased or decreased, as the case may be, from time to time as of the effective time of each such change in such reserve requirement. -11- "Revolving Period" means the time period from the date ---------------- of this Agreement through July 31, 1999; provided that, upon the request of Borrower, Lenders may, in their sole discretion, extend such time period at any time and from time to time to a date not later than July 31, 2002. "Section 29 Tax Credit Revenues" means any and all ------------------------------ revenues distributed to Borrower from partnerships or other entities formed for the purpose, among others, of utilizing tax credits available pursuant to Section 29 of the Internal Revenue Code of 1986, as amended. "Security Documents" means the instruments listed in ------------------ the Security Schedule and all other security agreements, deeds of trust, mortgages, chattel mortgages, pledges, guaranties, financing statements, continuation statements, extension agreements and other agreements or instruments now, heretofore, or hereafter delivered by Borrower to Lenders, or any of them, in connection with this Agreement or any transaction contemplated hereby to secure or guarantee the payment of any part of the Obligations or the performance of any other duties and obligations of Borrower under the Loan Documents, whenever made or delivered. "Security Schedule" means Schedule l hereto. ----------------- "Termination Event" means (a) the occurrence with ----------------- respect to any ERISA Plan of (i) a reportable event described in Section 4043(b)(5) of ERISA or (ii) any other reportable event described in Section 4043 of ERISA other than a reportable event not subject to the provision for 30-day notice to the Pension Benefit Guaranty Corporation under such regulations, or (b) the withdrawal of any Obligated Person or of any Affiliate of any Obligated Person from an ERISA Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (c) the filing of a notice of intent to terminate any ERISA Plan or the treatment of any ERISA Plan amendment as a termination under Section 4041 of ERISA, or (d) the institution of proceedings to terminate any ERISA Plan by the Pension Benefit Guaranty Corporation under Section 4042 of ERISA, or (e) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any ERISA Plan. "Transfer Orders" means transfer orders in proper form --------------- acceptable to Lenders and to the purchasers of production, covering the properties included in the Collateral, directing the purchasers of production to pay proceeds of such properties to Collateral Agent for the account of Borrower. -12- Section 1.2. Incorporation of Exhibits and Schedules. --------------------------------------- All Exhibits and Schedules attached to this Agreement are a part hereof for all purposes. Reference is hereby made to such Schedules for the meaning of certain terms defined therein and used but not defined herein, which definitions are incorporated herein by reference. Section 1.3. Amendment of Defined Instruments. Unless -------------------------------- the context otherwise requires or unless otherwise provided herein the terms defined in this Agreement which refer to a particular agreement, instrument or document also refer to and include all renewals, extensions and modifications of such agreement, instrument or document, provided that nothing contained in this section shall be construed to authorize any such renewal, extension or modification. Section 1.4. References and Titles. All references in --------------------- this Agreement to Exhibits, Schedules, articles, sections, subsections and other subdivisions refer to the Exhibits, Schedules, articles, sections, subsections and other subdivisions of this Agreement unless expressly provided otherwise. Titles appearing at the beginning of any subdivisions are for convenience only and do not constitute any part of such subdivisions and shall be disregarded in construing the language contained in such subdivisions. The words "this Agreement", "this instrument", "herein", "hereof", "hereby", "thereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The phrases "this section" and "this subsection" and similar phrases refer only to the sections or subsections hereof in which such phrases occur. Pronouns in masculine, feminine and neuter genders shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. Section 1.5. Calculations and Determinations. All ------------------------------- interest accruing under the Loan Documents shall be calculated on the basis of actual days elapsed (including the first day but excluding the last) and a year of 360 days. Unless otherwise expressly provided herein or unless Lenders otherwise consent, all financial statements and reports furnished to Lenders hereunder shall be prepared and all financial computations and determinations pursuant hereto shall be made in accordance with GAAP. Each determination by Lenders of amounts to be paid under Sections 2.9 through 2.12 or any other matters which are to be determined hereunder by Lenders (such as any Eurodollar Rate, Fixed Rate, Business Day, interest Period or Reserve Requirement) shall, in the absence of manifest error, be conclusive and binding. -13- ARTICLE II The Loan -------- Section 2.1. The Loan. (a) Subject to the terms and -------- conditions hereof, each Lender agrees to: (i) make its Proportionate Share of advances ("Advances") to Borrower from time to time requested by notice from Borrower to Agent, on behalf of Lenders (as to each of which notices Agent shall give prompt notice to Lenders), not later than 10:00 a.m., Denver, Colorado time on the Business Day on which such any such Advance is requested, and (ii) participate, to the extent of its Proportionate Share, in the issuance of Letters of Credit from time to time requested upon written notice to Agent, on behalf of Lenders (as to each of which notices Agent shall give prompt notice to Lenders), from Borrower no later than five days prior to the requested date of issuance of each such Letter of Credit (any request by Borrower for an Advance or for the issuance of a Letter of Credit being deemed to be a certification that the conditions precedent contained in Sections 4.1 and 4.2 below have been satisfied); provided that Lenders shall have no obligation to: (1) make any Advance or issue any Letter of Credit after the Commitment Expiration Date, (2) issue or renew a Letter of Credit which does not expire prior to the Commitment Expiration Date, or (3) make an Advance or issue a Letter of Credit which would cause the aggregate amount of all Advances outstanding hereunder plus the face amount of all Letters of Credit outstanding hereunder to exceed the Commitment Amount; provided further that within the limitation of the Commitment Amount and subject to the other terms and provisions hereof, Borrower may borrow, repay and reborrow hereunder. (b) Subject to the satisfaction (or waiver by Lenders) of all of the conditions precedent to the initial Advance, as more fully set forth in Article IV below, Borrower shall be deemed to have requested, and each Lender shall be deemed to have made its Proportionate Share of, the initial Advance on the Closing Date, in an aggregate amount equal to the entire balance of principal, interest, fees and other amounts outstanding in connection with the Prior Credit Agreement. The intent of Lenders is that each Lender will participate equally and with equal priority in the extension and refinancing of the indebtedness outstanding under the Prior Credit Agreement, and Lenders hereby assign and cross-assign to one another all rights and interests with respect to the indebtedness under the Prior Credit Agreement in order to accomplish such result. -14- (c) Each request by Borrower for an Advance shall be in the form of Exhibit B attached hereto and made a part hereof and shall be sent by Borrower to Agent, on behalf of Lenders (as to each of which notices Agent shall give prompt notice to Lenders). Each request by Borrower for the issuance of a Letter of Credit shall be in the form of Exhibit C attached hereto and made a part hereof, shall be sent by Borrower to Agent, on behalf of Lenders (as to each of which notices Agent shall give prompt notice to Lenders), and shall be accompanied by an application for issuance of a letter of credit on Agent's then-standard form, duly executed by Borrower. (d) Each payment by any Lender under or in connection with a Letter of Credit shall be deemed to be an Advance bearing interest from the date of such payment, shall be entitled to all benefits of the Security Documents and shall be subject to all terms of this Agreement and any and all other applicable Loan Documents. (e) The above-described Advances and Letters of Credit, in the aggregate, shall be herein referred to as the "Loan". Borrower hereby expressly requests and irrevocably authorizes each Lender to make its Proportionate Share of the Loan. Section 2.2. The Notes. Borrower's obligation to --------- repay the Advances, with interest thereon, shall be evidenced by the Notes. In the event any provision contained in the Notes conflicts with a provision contained in this Agreement, the provisions of this Agreement will control. The Notes shall bear interest at the rates per annum provided in the Notes. Borrower shall pay all accrued and unpaid interest due on the Notes on each Payment Date. Section 2.3. Regular Payments. Borrower shall make ---------------- payments on each Payment Date, commencing October 31, 1996, each such payment to be equal in the aggregate to the Payment Amount in effect for such Payment Date; provided that any such payments shall be in addition to any amount payable by Borrower pursuant to Section 3.2. On the last day of the Amortization Period, the entire unpaid principal balance of the Loan and all accrued and unpaid interest thereon shall be due and payable unless Lenders have extended the term of the Loan. Section 2.4. Voluntary Prepayments. Borrower shall --------------------- have the right to prepay the Notes at any time, in whole or in part, without penalty or premium. -15- Section 2.5. Termination of Commitment. Borrower ------------------------- shall have the right at any time and from time to time, upon not less than three business days' prior written or telegraphic notice to Lenders, to terminate the Commitment. Upon any termination of the Commitment, Borrower shall, at the time of such termination, prepay the Notes in full. Any such prepayment shall be without penalty or premium. Section 2.6. Payments to Lenders. ------------------- (a) Required Payments. Borrower will pay to Agent, on ----------------- behalf of Lenders (and Agent shall pay each Lender its respective Proportionate Share thereof on the Business Day that any such payment is deemed to be received from Borrower), each payment which Borrower owes under the Loan Documents, not later than 11:00 a.m., Denver, Colorado time, in lawful money of the United States of America and in immediately available funds. Any payment received after such time will be deemed to have been made on the next following Business Day. Except as otherwise provided in this Agreement with respect to Fixed Rate Portions, should any such payment become due and payable on a day other than a Business Day, the maturity of such payment shall be extended to the next succeeding Business Day, and, in the case of a payment of principal or past due interest, interest shall accrue and be payable thereon for the period of such extension. Each payment under a Loan Document shall be due and payable at the place provided therein and, if no specific place of payment is provided, shall be due and payable at the respective places of payment of the Notes. When any Lender collects or receives money on account of the Obligations owing to such Lender, such Lender may apply such money as it elects to the various Obligations then due and payable. (b) Optional Prepayments. All prepayments made by -------------------- Borrower pursuant to Section 2.4 or Section 2.5 shall be paid by Borrower to Agent, on behalf of Lenders (and Agent shall pay each Lender its respective Proportionate Share thereof on the Business Day that any such payment is deemed to be received from Borrower). Any such payment received after 11:00 a.m. Denver, Colorado time will be deemed to have been made on the next following Business Day. Section 2.7. Use of Proceeds. In no event shall the --------------- funds from the Loan be used directly or indirectly for the purpose, whether immediate, incidental or ultimate, of purchasing, acquiring or carrying any "margin stock" or any "margin securities" (as such terms are defined respectively in Regulation U and Regulation G promulgated by the Board of Governors of the Federal Reserve System) or to extend credit -16- to others directly or indirectly for the purpose of purchasing or carrying any such margin stock or margin securities. Borrower represents and warrants to Lenders that Borrower is not engaged principally, or as one of Borrower's important activities, in the business of extending credit to others for the purpose of purchasing or carrying such margin stock or margin securities. Section 2.8. Rate Elections. Borrower may from time -------------- totime designate all or any portion of the Loan (including any yet-to-be-made Advances which are to be made prior to or at the beginning of the designated Interest Period but excluding any portion of the Loan which is required to be repaid prior to the end of the designated Interest Period) as a Fixed Rate Portion; provided that, without the consent of Lenders, Borrower may make no such election during the continuance of a Default and Borrower may make such an election with respect to an already existing Fixed Rate Portion only if such election will take effect at or after the termination of the Interest Period applicable to such already existing Fixed Rate Portion. Each election by Borrower of a Fixed Rate Portion shall: (a) Be made in writing in the form and substance of the "Rate Election" attached hereto as Exhibit D, duly completed; (b) Specify the amount of the Loan which Borrower desires to designate as a Fixed Rate Portion, the first day of the Interest Period which is to apply thereto, and the length of such Interest Period; and (c) Be received by Lenders not later than 10:00 a.m., Denver, Colorado time, on the third Business Day preceding the first day of the specified Interest Period. Each election which meets the requirements of this Section 2.8 (herein called a "Rate Election") shall be irrevocable. Borrower may make no Rate Election which does not specify an Interest Period complying with the definition of "Interest Period" in Section 1.1, and the amount of the Fixed Rate Portion elected in any Rate Election must be an amount greater than or equal to $3,000,000 and an integral multiple of $1,000,000. Upon the termination of each Interest Period, the portion of the Loan theretofore constituting the related Fixed Rate Portion shall, unless the subject of a new Rate Election then taking effect, automatically become a part of the Base Rate Portion and become subject to all provisions of the Loan Documents governing the Base Rate Portion. Borrower shall have no more than four Fixed Rate Portions in effect at any time. -17- Section 2.9. Increased Cost of Fixed Rate Portions. ------------------------------------- If any applicable domestic or foreign law, treaty, rule or regulation (whether now in effect or hereafter enacted or promulgated, including Regulation D) or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law): (a) Shall change the basis of taxation of payments to Lenders of any principal, interest, or other amounts attributable to any Fixed Rate Portion or otherwise due under this Agreement in respect of any Fixed Rate Portion (other than taxes imposed on the overall net income of any Lender or any lending office of any Lender by any jurisdiction in which any Lender or any such lending office is located); or (b) Shall change, impose, modify, apply or deem applicable any reserve, special deposit or similar requirements in respect of any Fixed Rate Portion (excluding those for which Lenders are fully compensated pursuant to adjustments made in the definition of Fixed Rate) or against assets of, deposits with or for the account of, or credit extended by, any Lender to the extent the same relate to a Fixed Rate Portion; or (c) Shall impose on any Lender or the interbank eurocurrency deposit market any other condition affecting any Fixed Rate Portion, the result of which is to increase the cost to any Lender of funding or maintaining any Fixed Rate Portion or to reduce the amount of any sum receivable by any Lender in respect of any Fixed Rate Portion by an amount deemed by such Lender to be material; then: (x) Lenders shall promptly notify Borrower in writing of the happening of such event, (y) Borrower shall upon demand pay to Lenders such additional amount or amounts as will compensate Lenders for any such event (on an after-tax basis), and (z) Borrower may elect, by giving to Lenders not less than three Business Days' notice, to convert all (but not less than all) of any such Fixed Rate Portion into a part of the Base Rate Portion. Section 2.10. Availability. If Lenders shall ------------ determine (which determination shall, upon notice thereof to Borrower, be conclusive and binding on Borrower and Lenders) that: (a) the introduction of or any change in or in the interpretation of any law, treaty, rule or regulation makes it unlawful or impracticable, or any central bank or other governmental authority asserts that it is unlawful, for Lenders to make, continue or maintain any Fixed Rate Portion or shall materially restrict the authority of Lenders to purchase or take offshore deposits of dollars (i.e., -18- "Eurodollars"), or (b) matching deposits appropriate to fund or maintain any Fixed Rate Portion are not available to them, or (c) the formula for calculating the Eurodollar Rate does not fairly reflect the cost to Lenders of making or maintaining loans based on such rate, then Borrower's right to elect Fixed Rate Portions shall be suspended to the extent and for the duration of such illegality, impracticability or restriction and all Fixed Rate Portions (or portions thereof) which are then outstanding or are then the subject of any Rate Election and which cannot lawfully or practicably be maintained or funded shall immediately become or remain part of the Base Rate Portion. Borrower agrees to indemnify Lenders and hold them harmless against all costs, expenses, claims, penalties, liabilities and damages which may result from any such change in law, treaty, rule, regulation, interpretation or administration. Section 2.11. Reimbursable Taxes. Borrower covenants ------------------ and agrees that: (a) Borrower will indemnify Lenders against, and reimburse Lenders for, all present and future income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed, assessed, levied or collected on or in respect of this Agreement insofar as it pertains to a Fixed Rate Portion or any Fixed Rate Portions (whether or not legally imposed, assessed, levied or collected), but excluding taxes imposed on or measured by any Lender's net income or receipts (such non-excluded items being called "Reimbursable Taxes"). Such indemnification shall be on an after-tax basis, taking into account any income taxes imposed on the amounts paid as indemnity. (b) All payments by Borrower on account of principal of, and interest on, the Loan and all other amounts payable by Borrower to Lenders hereunder shall be made in full without set-off or counterclaim and shall be made free and clear of and without deduction or withholding for any Reimbursable Taxes, all of which shall be for the account of Borrower. In the event that any withholding or deduction from any payment to be made by Borrower hereunder is required in respect of any Reimbursable Taxes pursuant to any applicable law, rule or regulation, Borrower shall pay on the due date of such payment, by way of additional interest, such additional amounts as are needed to ensure that the amount actually received by Lenders will equal the full amount Lenders would have received had no such withholding or deduction been required. If Borrower shall make any deduction or withholding as aforesaid, Borrower shall within 60 days thereafter forward to Lenders an official receipt or other official document evidencing payment of such deduction or withholding. -19- (c) If Borrower is ever required to pay any Reimbursable Tax with respect to any Fixed Rate Portion, Borrower may elect, by giving to Lenders not less than three Business Days' notice, to convert all (but not less than all) of any such Fixed Rate Portion into a part of the Base Rate Portion, but such election shall not diminish Borrower's obligation to pay all Reimbursable Taxes. Section 2.12. Funding Losses. In addition to its -------------- other obligations hereunder, Borrower will indemnify Lenders against, and reimburse Lenders on demand for, any loss or expense (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by Lenders to make, continue or maintain any Fixed Rate Portion or any Advance) as a result of: (a) any payment or prepayment (whether authorized or required hereunder or otherwise) of all or any portion of a Fixed Rate Portion on a date other than the scheduled last day of the Interest Period applicable thereto; (b) any payment or prepayment, whether required hereunder or otherwise, of the Loan made after the delivery, but before the effective date, of a Rate Election, if such payment or prepayment prevents such Rate Election from becoming fully effective; (c) the failure of any Advance to be made or of any Rate Election to become effective due to any condition precedent not being satisfied or due to any other action or inaction of any Obligated Person; or (d) any conversion (whether authorized or required hereunder or otherwise) of all or any portion of any Fixed Rate Portion into the Base Rate Portion or into a different Fixed Rate Portion on a day other than the day on which the applicable Interest Period ends. Section 2.13. Capital Reimbursement. If either (a) --------------------- the introduction or implementation of or the compliance with or any change in or in the interpretation of any law, rule or regulation, or (b) the introduction or implementation of or the compliance with any request, directive or guideline from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by any Lender or any corporation controlling any Lender, then, upon demand by such Lender, Borrower will pay to such Lender, from time to time as specified by such Lender, such additional amount or amounts which such Lender shall determine to be appropriate to compensate such Lender or any corporation controlling such Lender in light of such circumstances, to the extent that such Lender reasonably determines that the amount of any such capital would be increased or the rate of return on any such capital would be reduced by or in whole or in part -20- based on the existence of the face amount of such Lender's Proportionate Share of the Loan or such Lender's commitments under this Agreement or the existence of the Letters of Credit issued hereunder. ARTICLE III Security; Fees -------------- Section 3.1. The Security. The Obligations will be ------------ secured by the Security Documents listed on the Security Schedule and any additional Security Documents hereafter delivered by Borrower and accepted by Lenders. Section 3.2. Periodic Reviews and Borrowing Base ----------------------------------- Reductions. As of approximately April 15 and October 15 of each - ---------- year, commencing in April, 1997, and up to one additional time per calendar year at the option of Lenders, and up to one additional time per calendar year at the option of Borrower, Lenders will perform a review of the Borrowing Base Properties and will determine the Borrowing Base, based upon their then- current customary practices and standards applied generally to their substantial energy credits (which will be substantially similar to their present practices, except for market-induced changes relating to pricing, costs and risk factors relating to types of oil and gas reserves) and taking into account such other factors as Lenders in their reasonable discretion deem appropriate. Promptly after each such determination of the Borrowing Base, Lenders shall advise Borrower of the new Borrowing Base. If, at the time of any such determination or at any other time, the then-outstanding principal balance of the Loan plus the face amount of all Letters of Credit outstanding hereunder exceeds the Commitment Amount, Borrower shall, within 30 days of any such determination: (i) mortgage, by instruments satisfactory in form and substance to Lenders, sufficient additional available collateral owned by Borrower and satisfactory to Lenders to increase the Commitment Amount by an amount sufficient to eliminate such excess; or (ii) prepay the principal of the Loan in an amount at least equal to the amount of such excess; or (iii) commence (and thereafter continue) an amortization schedule under which Borrower repays the Loan in an amount at least equal to the excess in six equal monthly principal installments on the last Business Day of each calendar month, which amounts shall be in addition to the monthly interest payments and any other principal payments otherwise due, such that the entire excess is paid within six months. Failure by Borrower to comply with the foregoing shall be deemed an Event of Default hereunder. -21- Section 3.3. Perfection and Protection of Security ------------------------------------- Interests and Liens. Borrower will from time to time deliver to - ------------------- Lenders any financing statements, continuation statements, extension agreements and other documents, properly completed and executed (and acknowledged when required) by Borrower in form and substance reasonably satisfactory to Lenders, which Lenders may request for the purpose of perfecting, confirming or protecting Lenders' Liens and other rights in the Collateral. Section 3.4. Bank Accounts and Offset. To secure the ------------------------ repayment of the Obligations, Borrower hereby grants to Lenders a security interest, a lien, and a right of offset, each of which shall be upon and against (a) any and all moneys, securities or other property (and the proceeds therefrom) of Borrower now or hereafter held or received by or in transit to any Lender from or for the account of Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise, (b) any and all deposits (general or special, time or demand, provisional or final) of Borrower with any Lender, and (c) any other credits and claims of Borrower at any time existing against any Lender, including without limitation claims under certificates of deposit; provided that the foregoing security interest, lien and right of offset shall not apply to amounts held by Borrower in trust for the benefit of Persons other than Borrower. Upon the occurrence of any Event of Default, Lenders are hereby authorized to foreclose upon, offset, appropriate, and apply, at any time and from time to time, without notice to Borrower, any and all items hereinabove referred to against the Obligations (whether or not such Obligations are then due and payable). Section 3.5. Proceeds of Runs. By the terms of the ---------------- deeds of trust and mortgages described in the Security Schedule, Borrower is and will be assigning to Collateral Agent, for the benefit of Lenders, all of the proceeds of production accruing to the property covered thereby. Until and unless an Event of Default has occurred and is continuing, Collateral Agent, on behalf of Lenders, shall permit Borrower to continue to receive such proceeds of production. Section 3.6. Fees. (a) Borrower shall pay to Agent, ---- on behalf of Lenders (and Agent shall pay each Lender its respective Proportionate Share thereof on the Business Day that any such payment is deemed to be received from Borrower), within 30 days after the end of each three-month period ending on the last day of January, April, July or October during the Revolving Period, commencing with the three-month period ending October 31, 1996, a commitment fee, computed on a daily -22- basis for such three-month period, in an amount equal to: (i) the Commitment Fee Rate, times (ii) the excess of the Commitment Amount over the sum of the outstanding principal balance of the Loan plus the face amount of all Letters of Credit outstanding hereunder. (b) If at any time the Borrowing Base is increased to an amount in excess of $83,500,000 (or in excess of such higher amount as to which Borrower has already paid a fee pursuant to this Section 3.6(b)), Borrower shall pay to Agent, on behalf of Lenders (and Agent shall pay each Lender its respective Proportionate Share thereof on the Business Day that any such payment is deemed to be received from Borrower), a fee in an amount equal to: (i) 0.00125, times (ii) the amount by which the Borrowing Base exceeds $83,500,000 (or by which the Borrowing Base exceeds such higher amount as to which Borrower has already paid a fee pursuant to this Section 3.6(b)). (c) Borrower shall pay to Agent, on behalf of Lenders (and, as to the fee described in (1) below, Agent shall pay each Lender its respective Proportionate Share thereof on the Business Day that any such payment is deemed to be received from Borrower), with respect to each Letter of Credit the following fees: (l) for the account of all Lenders, an amount equal to the greater of: (A) $250.00, or (B) the Fixed Rate Spread per annum in effect at the time of issuance of such Letter of Credit times the face amount of such Letter of Credit, plus (2) for the account of the Lender issuing such Letter of Credit, one-eighth of one percentage point per annum times the face amount of such Letter of Credit, which fee shall be payable at the time of issuance (and again at the time of any renewal) of such Letter of Credit. ARTICLE IV Conditions Precedent to Loan ---------------------------- Section 4.1. Conditions Precedent to Loan. Lenders ---------------------------- shall have no obligation to extend and refinance (as more fully described in Section 2.l(b) above) the loan made pursuant to the Prior Credit Agreement unless Lenders shall have received all of the following in Denver, Colorado, duly executed and delivered and in form, substance and date satisfactory to Lenders: (a) An "Omnibus Certificate" of the Secretary of Borrower, which shall contain the names and signatures of the officers of Borrower authorized to execute Loan Documents and which -23- shall certify to the truth, correctness and completeness of the following exhibits attached thereto: (i) a copy of resolutions duly adopted by the Board of Directors of Borrower and in full force and effect at the time this Agreement is entered into, authorizing the execution of this Agreement and any and all other Loan Documents delivered or to be delivered by Borrower in connection herewith and with the consummation of the transactions contemplated herein and therein, (ii) a copy of the articles of incorporation of Borrower and all amendments thereto, and (iii) a copy of the bylaws of Borrower. (b) A "Compliance Certificate" of an officer of Borrower in which such officer certifies to the satisfaction of the conditions set out in subsections (a), (b), and (c) of Section 4.2. (c) Each Security Document listed in the Security Schedule. (d) An opinion of Borrower's counsel in form and substance satisfactory to Lenders, relating to authority, enforceability and other related matters. (e) Such title opinions, supplemental title opinions, UCC searches and other title information concerning the Borrowing Base Properties or any portions thereof as may be requested by Lenders. (f) All fees owing to any Lender and, if available, legal fees incurred by any Lender through the date hereof in connection with the negotiation and preparation of this Agreement. (g) Any and all other Loan Documents. Section 4.2. Additional Conditions Precedent. No ------------------------------- Lender shall have any obligation to make its Proportionate Share of any subsequent Advance under the Loan unless the following conditions precedent have been satisfied: (a) All representations and warranties made by any Obligated Person in any Loan Document shall be true on and as of the date of such Advance as if such representations and warranties had been made as of the date hereof. -24- (b) No Default shall exist as of the date of such Advance. (c) Each Obligated Person shall have performed and complied with all agreements and conditions herein required to be performed or complied with by it on or prior to the date of such Advance. (d) The Loan shall not be prohibited by any law or any regulation or order of any court or governmental agency or authority and shall not subject any Lender to any penalty or other onerous condition under or pursuant to any such law, regulation or order. (e) Lenders shall have received all documents and instruments which any Lender has then reasonably requested, in addition to those described in Section 4.1 (including without limitation opinions of legal counsel for Borrower; corporate documents and records; documents evidencing governmental authorizations, consents, approvals, licenses and exemptions; and certificates of public officials and of officers and representatives of Borrower and other persons), as to (i) the accuracy and validity of or compliance with all representations, warranties and covenants made by any of the Obligated Persons in this Agreement and the other Loan Documents, (ii) the satisfaction of all conditions contained herein or therein, and (iii) all other matters pertaining hereto and thereto. All such additional documents and instruments shall be reasonably satisfactory to Lenders in form, substance and date. (f) All legal matters relating to the Loan Documents and the consummation of the transactions contemplated thereby shall be reasonably satisfactory to Lenders and their counsel. ARTICLE V Representations and Warranties ------------------------------ Section 5.1. Borrower's Representations and ----------------------------------------- Warranties. To induce Lenders to enter into this Agreement and to make the Loan, Borrower represents and warrants to Lenders that: -25- (a) No Default. Borrower is not in default in any ---------- material respect in the performance of any of the covenants and agreements contained herein. No event has occurred and is continuing which constitutes a Default. (b) Organization and Good Standing. Each Obligated ------------------------------ Person is duly organized, validly existing and in good standing under the laws of its state of organization, having all corporate powers required to carry on its business and enter into and carry out the transactions contemplated hereby. Each such Obligated Person is duly qualified, in good standing, and authorized to do business in all other jurisdictions wherein the character of the properties owned or held by it or the nature of the business transacted by it makes such qualification necessary. (c) Authorization. Each Obligated Person has duly ------------- taken all corporate action necessary to authorize the execution and delivery by it of the Loan Documents to which it is a party and to authorize the consummation of the transactions contemplated thereby and the performance of its obligations thereunder. (d) No Conflicts or Consents. The execution and ------------------------ delivery by the various Obligated Persons of the Loan Documents to which each is a party, the performance by each of its obligations under such Loan Documents, and the consummation of the transactions contemplated by the various Loan Documents, do not and will not (i) conflict with any provision of (A) any domestic or foreign law, statute, rule or regulation, (B) the articles or certificate of incorporation, bylaws, or charter of any Obligated Person, or (C) any agreement, judgment, license, order or permit applicable to or binding upon any Obligated Person, (ii) result in the acceleration of any Debt owed by any Obligated Person, or (iii) result in or require the creation of any Lien upon any assets or properties of any Obligated Person except as expressly contemplated in the Loan Documents. Except as expressly contemplated in the Loan Documents, no consent, approval, authorization or order of, and no notice to or filing with, any court or governmental authority or third -26- party is required in connection with the execution, delivery or performance by any Obligated Person of any Loan Document or to consummate any transactions contemplated by the Loan Documents. (e) Enforceable Obligations. This Agreement is, and ----------------------- the other Loan Documents when duly executed and delivered will be, legal and binding obligations of each Obligated Person which is a party hereto or thereto, enforceable in accordance with their respective terms except as limited by bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights and as limited by general equitable principles. (f) Initial Financial Statements. The Initial ---------------------------- Financial Statements fairly present Borrower's Consolidated financial position at the respective dates thereof and the results of Borrower's Consolidated operations and the changes in Borrower's Consolidated cash flows for the respective periods thereof. Since the date of the annual Initial Financial Statements no material adverse change has occurred in Borrower's Consolidated financial condition or businesses, except as reflected in the quarterly Initial Financial Statements or in the Disclosure Schedule. All Initial Financial Statements were prepared in accordance with GAAP. (g) Other Obligations. Except as consented to by ----------------- Lenders pursuant to the terms of this Agreement, no Obligated Person has any outstanding Debt of any kind (including contingent obligations, tax assessments, and unusual forward or long-term commitments) which is, in the aggregate, material to Borrower or material with respect to Borrower's financial condition and not shown in the Initial Financial Statements or disclosed in the Disclosure Schedule. (h) Full Disclosure. To the best of Borrower's --------------- knowledge after due inquiry, no certificate, statement or other information delivered herewith or heretofore by any Obligated Person to any Lender in connection with the negotiation of this Agreement or in connection with any -27- transaction contemplated hereby contains any untrue statement of a material fact or omits to state any material fact known to any Obligated Person (other than industry-wide risks normally associated with the types of businesses conducted by the Obligated Persons) necessary to make the statements contained herein or therein not misleading in any material respect as of the date made or deemed made. At the date of this Agreement, none of the Obligated Persons is aware of any material fact (other than industry-wide risks normally associated with the types of businesses conducted by the Obligated Persons) of which Lenders should not reasonably be otherwise aware that has not been disclosed to Lenders in writing which could materially and adversely affect Borrower's properties, business, prospects or condition (financial or otherwise) or Borrower's Consolidated properties, businesses, prospects or condition (financial or otherwise). In connection with the preparation of the Initial Engineering Report, to the best of Borrower's knowledge, Borrower furnished to the preparer thereof factual information that was complete and accurate in all material respects, it being understood that the Initial Engineering Report is necessarily based upon professional opinions, estimates and projections and that Borrower does not warrant that such opinions, estimates and projections will ultimately prove to have been accurate. Borrower has heretofore delivered to Lenders true, correct and complete copies of any letters and documents listed in the Disclosure Schedule. (i) Litigation. Except as disclosed in the Initial ---------- Financial Statements or in the Disclosure Schedule: (i) there are no actions, suits or legal, equitable, arbitrative or administrative proceedings pending, or to the knowledge of any Obligated Person threatened, against any Obligated Person before any federal, state, municipal or other court, department, commission, body, board, bureau, agency, or instrumentality, domestic or foreign, which do or may materially and adversely affect Borrower, Affiliates controlled by Borrower, their ownership or use of any of their assets or properties, their businesses or financial -28- condition or prospects, or the right or ability of any Obligated Person to enter into the Loan Documents to which it is a party or perform its obligations thereunder and (ii) there are no outstanding judgments, injunctions, writs, rulings or orders by any such governmental entity against any Obligated Person which have or may have any such effect. (j) ERISA Liabilities. Except as disclosed in the ----------------- Initial Financial Statements or in the Disclosure Schedule, no Termination Event has occurred with respect to any ERISA Plan, and the Obligated Persons are in compliance with ERISA in all material respects. No Obligated Person is required to contribute to, or has any other absolute or contingent liability in respect of, any "multiemployer plan" as defined in Section 4001 of ERISA. (k) Title to Properties. Subject to, and not in ------------------- limitation of, any representations or covenants on title contained in the Security Documents, to the best of Borrower's knowledge and subject to typical oil-industry operating agreements and product-purchase contracts and other matters listed on the Disclosure Schedule, Borrower has good and defensible title to the Borrowing Base Properties, free and clear of all Prohibited Liens, except that no representation or warranty is made with respect to any gas or mineral property or interest which does not have proved oil or gas reserves attributed to it in any information or report prepared for Borrower or submitted to Lenders. (l) Borrower's Affiliates. Borrower is not a member --------------------- of any general or limited partnership, joint venture or association of any type whatsoever except those listed in the Disclosure Schedule and except for associations, joint ventures or other relationships (a) which are established pursuant to a standard form oil and gas operating agreement, (b) which are not corporations or partnerships (or subject to the Uniform Partnership Act) under applicable state law, and (c) whose businesses are limited to the exploration, development and operation of oil, gas or mineral properties and interests owned directly by the parties in such associations, -29- joint ventures or relationships. Borrower has no subsidiaries other than Basin Offshore Oil & Gas, Inc., a wholly-owned subsidiary, and Sterling Energy Resources, Inc., a wholly-owned subsidiary. As of the date hereof Borrower owns, directly or indirectly, the interest identified in the Disclosure Schedule in each entity listed in the Disclosure Schedule. (m) Names and Places of Business. Borrower has not, ---------------------------- during the preceding five years, been known by or used any other partnership or fictitious name, except as disclosed in the Disclosure Schedule. Except as otherwise indicated in the Disclosure Schedule, the chief executive office and principal place of business of Borrower are (and for the preceding five years have been) located at the address of Borrower set out in Section 8.3. Except as indicated in the Disclosure Schedule, no Obligated Person has any other office or place of business. Section 5.2. Representations by Lenders. Each Lender -------------------------- hereby represents that it will acquire its Note for its own account in the ordinary course of its commercial banking business; however, the disposition of each Lender's property shall at all times be and remain within its control and this section does not prohibit any Lender's sale of its Note or of any participation in its Note to any bank, financial institution or similar purchaser. ARTICLE VI Covenants of Borrower --------------------- Section 6.1. Affirmative Covenants. Borrower --------------------- warrants, covenants and agrees that until the full and final payment of the Obligations and the termination of this Agreement, unless Lenders have previously agreed otherwise in writing: (a) Payment and Performance. Borrower will pay all ----------------------- amounts due under the Loan Documents in accordance with the terms thereof and will in all material respects observe, perform and comply with every covenant, term and condition express or implied in the Loan Documents. -30- (b) Books Financial Statements and Records. Borrower -------------------------------------- will at all times maintain full and accurate books of account and records. Borrower will maintain a standard system of accounting and will furnish the following statements and reports to Lenders at Borrower's expense: (i) As soon as available, and in any event within 90 days after the end of each Fiscal Year, complete Consolidated financial statements of Borrower, together with all notes thereto, prepared in reasonable detail in accordance with GAAP, together with an opinion, based on an audit using generally accepted auditing standards, by Arthur Andersen LLP or other independent certified public accountants reasonably acceptable to Lenders, stating that such Consolidated financial statements have been so prepared. Borrower shall also submit a report signed by the chief financial officer or the chief accounting officer of Borrower stating that he has read this Agreement and the Security Documents and further stating that in making the examination and reporting on the Consolidated financial statements described above he has concluded that there did not exist any condition or event at the end of such Fiscal Year or at the time of his report which constituted an Event of Default or a Default, or, if he did conclude that such condition or event existed, specifying the nature and period of existence of any such condition or event. These Consolidated financial statements shall contain a Consolidated balance sheet as of the end of such Fiscal Year and Consolidated statements of earnings, cash flows and changes in stockholders' equity, setting forth in comparative form the corresponding figures for the preceding Fiscal Year. (ii) As soon as available and in any event within 45 days after the end of each Fiscal Quarter, complete Consolidated financial statements of Borrower, -31- including at least a balance sheet and a statement of the earnings and cash flow of Borrower from the beginning of the then-current Fiscal Year to the end of such Fiscal Quarter, prepared in reasonable detail and in accordance with GAAP, together with a report showing the calculation of all applicable financial covenants and signed by the chief financial officer or the chief accounting officer of Borrower stating that he has read this Agreement and the Security Documents and further stating that in making the examination and reporting on the financial statements described above, he concluded that there did not exist any condition or event at the end of such Fiscal Quarter or at the time of his report which constituted an Event of Default or Default, or, if he did conclude that such condition or event existed, specifying the nature and period of existence of any such condition or event. (iii) As soon as available and in any event within 90 days after the end of each Fiscal Year, an estimate of the Consolidated cash flow of Borrower for the then-current Fiscal Year in a form substantially similar to the form of such estimates heretofore provided by Borrower to Lenders. (iv) Promptly upon their becoming available, copies of all financial statements, reports, notices and proxy statements sent by any Obligated Person to its stockholders and all registration statements, periodic reports and other statements and schedules filed by any Obligated Person with any securities exchange, the Securities and Exchange Commission or any similar governmental authority. (v) By: (A) March 1 of each year, an engineering report and economic evaluation prepared by Williamson Petroleum Consultants, Inc., Netherland, -32- Sewell & Associates, Inc. or one or more other independent petroleum engineers chosen by Borrower and reasonably acceptable to Lenders, concerning all oil and gas properties and interests included in the Borrowing Base Properties, and (B) September 1 of each year, an engineering report and economic evaluation prepared by Borrower, concerning all oil and gas properties and interests included in the Borrowing Base Properties. These engineering reports shall be in form and substance satisfactory to Lenders and shall contain information and analysis comparable in scope to that contained in the Initial Engineering Report. (vi) At least 45 days prior to the date of any redetermination of the Borrowing Base pursuant to Section 3.2 above and at any other time requested by Lenders, a report describing by lease or unit the gross volume of production and sales attributable to production (and the prices at which such sales were made and the revenues derived from such sales) during each of the preceding six calendar months from the Borrowing Base Properties and from all other properties owned by Borrower, and describing the related severance taxes, other taxes, and leasehold operating expenses attributable thereto and incurred during each such calendar month. (c) Other Information and Inspections. Each Obligated --------------------------------- Person will furnish to Lenders any information which any Lender may from time to time reasonably request concerning any covenant, provision or condition of the Loan Documents or any matter in connection with the Obligated Persons' businesses and operations that could reasonably be deemed to materially and adversely affect the Loan. Each Obligated Person will permit representatives appointed by any Lender, including independent accountants, agents, attorneys, appraisers and any other persons, to visit and inspect, at their sole risk, any of such Obligated Person's property, including its books of account, other books and records, and any facilities or other business assets, and to make extra copies therefrom and photocopies and photographs thereof, and to write down and record any information such representatives obtain, and each Obligated Person shall permit any Lender or its representatives to investigate and verify the accuracy of the information furnished to any Lender in connection with the -33- Loan Documents and to discuss all such matters with its officers, employees and representatives. Each Lender agrees that, until the occurrence of a Default, it will take all reasonable steps to keep confidential any such proprietary information, provided, however, that this restriction shall not apply to information which (i) has at the time in question entered the public domain, (ii) is required to be disclosed by law or by any order, rule or regulation (whether valid or invalid) of any court or governmental agency, or (iii) is furnished to purchasers or prospective purchasers of participations or interests in the Loan or the Notes so long as such purchasers and prospective purchasers have agreed to be subject to restrictions identical to those imposed upon Lenders under this sentence. (d) Notice of Material Events. Borrower will promptly ------------------------- notify Lenders (i) of any material adverse change in Borrower's financial condition or Borrower's Consolidated financial condition, (ii) of the occurrence of any Default, (iii) of the acceleration of the maturity of any Debt owed by any Obligated Person or of any default by any Obligated Person under any indenture, mortgage, agreement, contract or other instrument to which any of them is a party or by which any of them or any of their properties is bound, if such acceleration or default might reasonably be expected to have a material adverse effect upon Borrower's Consolidated financial condition, (iv) of any uninsured claim of $100,000 or more asserted against Borrower or its properties, (v) of the occurrence of any Termination Event, (vi) of the filing of any suit or proceeding against any Obligated Person in which an adverse decision could have a material adverse effect upon any Obligated Person's financial condition, business or operations (or could result in a judgment not covered by insurance of $100,000 or more against Borrower), (vii) of the merger or consolidation of Borrower or any of its Affiliates with any other business entity not previously affiliated with any of the Obligated Persons, and (viii) of the sale, transfer, lease, exchange or disposal by Borrower of any material assets or properties or any assets or properties with a value in excess of $500,000, except sales of already-severed hydrocarbons and other products in the ordinary course of Borrower's business and except any transaction of a type described in Section 6.2(d)(i), (ii), (iii) or (iv) below (regardless of whether any such transaction involves Borrowing Base Properties or other properties owned by Borrower). Upon the occurrence of any of the foregoing the Obligated Persons will take all necessary or appropriate steps to remedy promptly any such material adverse change, Default, or default, to protect against any such adverse claim, to defend any such suit or proceeding, and to resolve all controversies on account of any of the foregoing. Borrower will also notify Lenders in writing at least twenty Business Days prior to the -34- date that any Obligated Person changes its name or the location of its chief executive office or principal place of business or the place where it keeps its books and records concerning the Collateral, furnishing with such notice any necessary financing statement amendments or requesting Lenders and their counsel to prepare the same. (e) Maintenance of Existence and Qualifications. Each ------------------------------------------- Obligated Person which is a corporation will maintain and preserve its corporate existence and its rights and franchises in full force and effect and will qualify to do business as a foreign corporation in all states or jurisdictions where required by applicable law, except where the failure so to qualify will not have any material adverse effect on Borrower. (f) Maintenance of Properties. Each Obligated Person ------------------------- will in ail material respects maintain, preserve, protect, and keep all property used or useful in the conduct of its business in accordance with the standards of a reasonable and prudent operator. (g) Payment of Trade Debt, Taxes, etc. Each Obligated -------------------------------- Person will (i) timely file all required tax returns; (ii) timely pay all taxes, assessments, and other governmental charges or levies imposed upon it or upon its income, profits or property; (iii) pay all Debt owed by it on ordinary trade terms to vendors, suppliers and other Persons providing goods and services used by it in the ordinary course of its business; and (iv) maintain appropriate accruals and reserves for all of the foregoing Debt in accordance with GAAP. Each Obligated Person will pay and discharge in all material respects, when due, all other Debt, taxes or assessments now or hereafter owed by it. Each Obligated Person may, however, delay paying or discharging any such Debt so long as it is in good faith contesting the validity thereof by appropriate proceedings and has set aside on its books adequate reserves therefor. (h) Insurance. Each Obligated Person will maintain --------- with financially sound and reputable insurance companies, insurance with respect to its business, operations and properties in at least such amounts and against at least such risks as are usually insured against in the same general area by companies of established repute engaged in the same or a similar business, including property insurance, public liability insurance for bodily injury and property damage, well-control coverage insurance, workmen's compensation insurance and insurance against loss or damage by employee -35- dishonesty, theft, fire, lightning, hail, windstorm, explosion, hazards, casualties and other contingencies; will apply the proceeds of any such insurance to pay for, or to reimburse itself for, the cost of repairing or replacing property covered by such insurance; and will furnish to Lenders, upon any Lender's written request, full information as to the insurance carried. (i) Payment of Expenses. Whether or not the ------------------- transactions contemplated by this Agreement are consummated, Borrower will promptly (and in any event within 30 days after any invoice or other statement or notice) pay all reasonable costs and expenses incurred by or on behalf of any Lender (including attorneys' fees) in connection with (i) the preparation, execution and delivery of the Loan Documents, and any and all consents, waivers or other documents or instruments relating thereto, (ii) the filing, recording, refiling and re-recording of any Security Documents and any other documents or instruments or further assurances required to be filed or recorded or refiled or re-recorded by the terms of any Loan Document, and/or (iii) the enforcement, after the occurrence of a Default or an Event of Default, of the Loan Documents. (j) Performance on Borrower's Behalf. If any -------------------------------- Obligated Person fails to pay any taxes, insurance premiums or other amounts it is required to pay under any Loan Document, Lenders may pay the same. Borrower shall immediately reimburse Lenders for any such payments and each amount paid shall constitute a part of the Obligations, shall be secured by the Security Documents and shall bear interest at the Late Payment Rate from the date such amount is paid by Lenders until the date such amount is repaid to Lenders. (k) Compliance with Agreements and Law. Each ---------------------------------- Obligated Person will perform all material obligations it is required to perform under the terms of each indenture, mortgage, deed of trust, security agreement, lease, franchise, agreement, contract or other instrument or obligation to which it is a party or by which it or any of its properties is bound in such a way that they result in no material adverse effect upon the Borrowing Base Properties or Borrower's ability to perform its obligations under this Agreement. Each Obligated Person will in all material respects conduct its business and affairs in compliance with all laws, regulations, and orders applicable thereto (including those relating to pollution and other environmental matters). (l) Certifications of Compliance. Each Obligated ---------------------------- Person will furnish to Lenders at such Obligated Person's or Borrower's expense all certifications which any Lender from -36- time to time reasonably requests, including but not limited to the forms of evidence and assurance described in Section 4.2(e), as to the accuracy and validity of or compliance with all representations, warranties and covenants made by any Obligated Person in the Loan Documents, the satisfaction of all conditions contained therein, and all other matters pertaining thereto. (m) Additional Security Documents. Promptly after a ----------------------------- request therefor by Lenders at any time and from time to time, but only if the outstanding principal balance of the Loan plus the face amount of all Letters of Credit outstanding hereunder exceeds 75 percent of the Commitment Amount at the time of any such request, Borrower will execute and deliver to Collateral Agent, for the benefit of Lenders, such additional Security Documents and/or amendments to existing Security Documents as Lenders may reasonably deem necessary or appropriate in order to grant to Collateral Agent, for the benefit of Lenders, a perfected lien on and security interest (subject to any other then-existing Liens, except Prohibited Liens) in any or all Borrowing Base Properties not previously mortgaged to Collateral Agent, for the benefit of Lenders. (n) Use of Proceeds. Borrower will use the proceeds --------------- of the Loan for the exploration, acquisition and/or the improvement of oil and gas properties and for general working capital purposes. (o) Environmental Matters. Borrower will not in any --------------------- material respect cause or permit the Borrowing Base Properties, the Associated Collateral or Borrower to be in violation of, or do anything or permit anything to be done which will subject the Borrowing Base Properties or the Associated Collateral to, any remedial obligations under any applicable Environmental Laws, assuming disclosure to the applicable governmental authorities of all relevant facts, conditions and circumstances, if any, pertaining to the Borrowing Base Properties or the Associated Collateral, and Borrower will promptly notify Lenders in writing of any existing, pending or, to the best knowledge of Borrower, threatened investigation or inquiry by any governmental authority in connection with any Applicable Environmental Laws. Borrower will take all reasonable steps necessary to determine that no hazardous substances or solid wastes have been disposed of or otherwise released on or to the Borrowing Base Properties or the Associated Collateral. Borrower will not cause or permit the disposal or other release of any hazardous substance or solid waste (as defined in the Applicable Environmental Laws) on or to the Borrowing Base Properties or the Associated Collateral and covenants and agrees to keep or cause the Borrowing Base Properties or the Associated Collateral to be kept free of any hazardous substance or solid waste and to remove the same (or if removal -37- is prohibited by law, to take whatever actions is required by law) promptly upon discovery at its sole expense. Upon any Lender's reasonable request, at any time and from time to time during the existence of this Agreement, Borrower will provide at Borrower's sole expenses, an inspection or audit of the Borrowing Base Properties and the Associated Collateral from an engineering or consulting firm approved by Lenders, indicating the presence or absence of hazardous substances and solid waste on the Borrowing Base Properties and/or the Associated Collateral. Insofar and only insofar as Borrower's obligations under this Section 6.1(o) relate to Associated Collateral which is not owned or controlled by Borrower, Borrower shall not be deemed to be in default hereunder if Borrower has taken any and all reasonable and practical actions available to it in attempting to comply with the provisions of this Section 6.1(o). The term "Associated Collateral" as used in this Section and in Section 7.3 below shall mean any and all interest in and to (and or carved out of) the lands which are described or referred to in the Security Documents in connection with the Borrowing Base Properties, or which are otherwise described in any of the oil, gas and/or mineral leases or other instruments described in or referred to in the Security Documents whether or not such collateral interests are owned by Borrower. "Applicable Environmental Laws" as used in this Section and in Section 7.3 below means any laws, orders, rules, or regulations pertaining to health of the environment (as the same now exist or are hereafter enacted and/or amended), including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (as amended, hereinafter called "CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the solid Waste Disposal Act Amendments of 1980, and the Hazardous and Solid Waste Amendments on 1984 (as amended, hereinafter called "RCRA") and applicable state law. (p) Capitalization Ratio. Borrower will notify -------------------- Lenders of any change in the Capitalization Ratio that would cause a change in the applicable Base Rate Spread or Fixed Rate Spread, such notice to be received by Lenders not later than the beginning of the calendar month as to which such change would be effective. Section 6.2. Negative Covenants. Borrower warrants, ------------------ covenants and agrees that until the full and final payment of the Obligations and the termination of this Agreement, unless Lenders have previously agreed otherwise in writing: -38- (a) Current Ratio. The Consolidated current ratio of ------------- Borrower, determined in accordance with GAAP (but excluding current maturities of long-term debt from the calculation of current liabilities, and including up to a maximum of $10,000,000 in unused borrowing capacity hereunder in the calculation of current assets), shall not at any time be less than 1.0:1.0. (b) Limitation on Liens. No Obligated Person will ------------------- create, assume or permit to exist any mortgage, deed of trust, pledge, encumbrance, lien or charge of any kind (including any security interest in or vendor's lien on property purchased under conditional sales or other title retention agreements and including any lease intended as security or in the nature of a title retention agreement) upon any of its properties or assets, whether now owned or hereafter acquired except: (i) Liens at any time existing in favor of Collateral Agent, for the benefit of Lenders; (ii) statutory Liens for taxes, statutory or contractual mechanics' and materialmen's Liens incurred in the ordinary course of business, and other similar Liens incurred in the ordinary course of business, provided such Liens secure only Debt which is not delinquent or which is being contested as provided in Section 6.1(g); (iii) any Liens expressly permitted under the terms of any Security Documents hereafter accepted by Lenders; and (iv) Liens securing Debt owing by Borrower to any third party, if such Debt has not been incurred in violation of this Agreement; provided that no such Lien (except any Lien for the benefit of Lenders) shall cover or affect any of the Borrowing Base Properties. (c) Additional Debt. No Obligated Person will create, --------------- incur, assume or permit to exist Debt not existing on the date of this Agreement, except (i) trade debt owed to suppliers, pumpers, mechanics, materialmen and others furnishing goods or services to Borrower in the ordinary course of Borrower's business, (ii) non-recourse Debt as to which Lenders have given their prior written consent, which consent shall not be withheld if the incurrence of such Debt would not have a material adverse effect upon the Borrowing Base Properties or upon Borrower's ability to perform its -39- obligations under this Agreement, (iii) Hedging Obligations of any Obligated Person in an amount not to exceed 85 percent of the proved developed producing reserves as shown in the most recent engineering report delivered to Lenders pursuant to Section 6.1(b)(v), and (iv) other Debt in the aggregate outstanding amount of not more than $1,000,000 at any time. (d) Limitation on Sales of Property. No Obligated ------------------------------- Person will sell, transfer, lease, exchange, alienate or dispose of any Borrowing Base Properties except as follows (and the following exceptions shall be subject to any limitations contained in the Security Documents): (i) equipment which is worthless or obsolete, which is replaced by equipment of equal suitability and value or which is salvaged from wells which have been plugged and abandoned by or on behalf of Borrower; (ii) inventory (including oil and gas sold as produced and seismic data) which is sold in the ordinary course of business; (iii) personal property located on oil and gas properties operated by third parties, the sale of which personal property cannot be prevented by Borrower; (iv) farmouts, promotions, acreage swaps, acreage sales, non-recourse Debt (to the extent permitted under Section 6.2(c) above) and similar oil-industry arrangements for the exploration or development of undeveloped reserves included in the Borrowing Base Properties; provided that no such arrangement shall affect in any way any developed reserves included in the Borrowing Base Properties; (v) portions of the Borrowing Base Properties as to which Borrower prepays the Loan in an amount agreed upon between Borrower and Lenders as the result of good-faith negotiations between Borrower and Lenders; and -40- (vi) properties having an aggregate value of not more than $2,500,000 during any period subsequent to the then most recent determination of the Borrowing Base pursuant to Section 3.2 above. (e) ERISA Plans. No Obligated Person will incur any ----------- obligation to contribute to any "multiemployer plan" as defined in Section 4001 of ERISA. (f) Limitation on Credit Extensions. No Obligated ------------------------------- Person will extend credit, make advances or make loans other than (i) normal and prudent extensions of credit to customers buying goods and services in the ordinary course of business, which extensions shall not be for longer periods than those extended by similar businesses operated in a normal and prudent manner, and (ii) advances to employees of Borrower in an aggregate amount of not more than $15,000 outstanding at any time. (g) Fiscal Year. No Obligated Person will change its ----------- fiscal year without Lenders' consent, which will not be unreasonably withheld. (h) Amendment of Contracts. No Obligated Person will ---------------------- amend or permit any amendment to any contract which could reasonably be foreseen to release, qualify, limit, make contingent or otherwise detrimentally affect, in any material way, the rights and benefits of Collateral Agent or any Lender under or acquired pursuant to any of the Security Documents. (i) Limitation on Guarantees. No Obligated Person ------------------------ will guarantee or be or become secondarily liable for any Debt which is the primary obligation of any other Person. (j) Distributions. No Obligated Person will make any ------------- Distributions; provided that the foregoing shall not be deemed to prevent Borrower from granting stock options or making restricted stock awards to the extent that the foregoing actions are taken in connection with Borrower's presently existing Equity Incentive Plan, Borrower's presently-existing Non-Employee Directors Stock Option Plan or any similar employee or director incentive program granting reasonable incentives to Borrower's employees and/or directors; provided further that Borrower may hereafter pay dividends and/or purchase outstanding stock of Borrower so long as, immediately after any such purchase or payment, the aggregate amount expended for such purchases and payments after the date hereof does not exceed the lesser of: (1) $5,000,000, or (2) 50 percent of Borrower's Cumulative Net Income after December 31, 1995, except that no such dividend payment or stock purchase shall be made at any time that a Default has occurred and is continuing or would result from any such payment or purchase. -41- (k) Reorganizations; Combinations. No Obligated ----------------------------- Person will change its name or the nature of its business, reorganize, liquidate, dissolve or enter into any merger, joint venture, partnership or other combination. (l) Investments. No Obligated Person will purchase, ----------- acquire, hold or otherwise invest in, or deposit any money into, any stock, bond, evidence of indebtedness, deposit account or other security or investment other than any Permitted Investment. ARTICLE VII Events of Default and Remedies ------------------------------ Section 7.1. Events of Default. Each of the following ----------------- events constitutes an Event of Default under this Agreement: (a) Borrower fails to pay any Obligation when due and payable, whether at a date for the payment of a fixed installment or contingent or other payment to any Lender or as a result of acceleration or otherwise, and such failure is not remedied within the applicable Grace Period; or (b) Any "default" or "event of default" occurs under any Loan Document which defines either term, and the same is not remedied within the applicable period of grace (if any) provided in such Loan Document; or (c) Any Obligated Person fails (other than as referred to in subsections (a) and (b) above) to duly observe, perform or comply with any covenant, agreement, condition or provision (other than those referred to in subsections (a) and (b) above) of any Loan Document, and such failure is not remedied within the applicable Grace Period; or (d) Any representation or warranty previously, presently or hereafter made in writing by or on behalf of any Obligated Person in connection with any Loan Document shall prove to have been false or incorrect in any material respect on any date on or as of which made, and the represented or warranted state of affairs does not become true within the applicable Grace Period; or (e) Either (i) any "accumulated funding deficiency" (as defined in Section 412(a) of the Internal Revenue Code of 1954, as amended) in excess of $10,000 exists with respect to any ERISA Plan, whether or not waived by the Secretary of the Treasury or his delegate, or (ii) any Termination Event occurs -42- with respect to any ERISA Plan and the then current value of such ERISA Plan's benefits guaranteed under Title IV of ERISA exceeds the then current value of such ERISA Plan's assets available for the payment of such benefits by more than $10,000 (or in the case of a Termination Event involving the withdrawal of a substantial employer, the withdrawing employer'S proportionate share of such excess exceeds such amount); or (f) Any Obligated Person: (i) suffers the entry against it of a judgment, decree or order for relief by a court of competent jurisdiction in an involuntary proceeding commenced under any applicable bankruptcy, insolvency or other similar law of any jurisdiction now or hereafter in effect, including the federal Bankruptcy Code, as from time to time amended, or has any such proceeding commenced against it which remains undismissed for a period of 120 days (or, if applicable, such longer or shorter period as may be necessary to ensure that the Obligated Person has a reasonable opportunity to respond to such proceeding and request that it be dismissed); or (ii) suffers the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for a substantial part of its assets or for any part of the Borrowing Base Properties in a proceeding brought against or initiated by it, and such appointment is neither made ineffective nor discharged within 30 days after the making thereof, or such appointment is consented to, requested by, or acquiesced to by it (or, if applicable, such longer or shorter period as may be necessary to ensure that the Obligated Person has a reasonable opportunity to respond to such proceeding and request that it be dismissed); or (iii) commences a voluntary case under any applicable bankruptcy, insolvency or similar law now or hereafter in effect, including the federal Bankruptcy Code, as from time to time amended; or applies -43- for or consents to the entry of an order for relief in an involuntary case under any such law or to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or other similar official of any substantial part of its assets or any part of the Borrowing Base Properties; or makes a general assignment for the benefit of creditors; or fails generally to pay (or admits in writing its inability to pay) its debts as such debts become due; or takes corporate or other action in furtherance of any of the foregoing); or (iv) suffers the entry against it of a final judgment for the payment of money in excess of $250,000 (not covered by insurance), unless the same is discharged within 30 days after the date of entry thereof or an appeal or appropriate proceeding for review thereof is taken within such period and a stay of execution pending such appeal is obtained; or (v) suffers the entry of an order issued by any court or tribunal taking, seizing or apprehending all or any substantial part of its property or any part of the Borrowing Base Properties and bringing the same into the custody of such Court or tribunal, and such order is not stayed or released within thirty days after the entry thereof; or (g) Any Person or Persons acting in concert (other than Michael S. Smith and his immediate family and entities controlled by Michael S. Smith or his immediate family) acquire 35 percent or more of Borrower's common stock; or (h) Changes occur in the membership of the Board of Directors of Borrower (except for any change arising by reason of the death of any director) such that a majority of the members of the Board of Directors of Borrower is changed within any 12-month period; or (i) Borrower fails to comply with the provisions of Section 3.2 above within the time periods for compliance specified in said Section 3.2. -44- Upon the occurrence of an Event of Default described in subsection (f)(i), (f)(ii) or (f)(iii) of this section, all of the Obligations shall thereupon be immediately due and payable, without presentment, demand, protest, notice of protest, declaration or notice of acceleration or intention to accelerate, or any other notice or declaration of any kind, all of which are hereby expressly waived by Borrower. During the continuance of any other Event of Default, Lenders owning Proportionate Shares of at least 66-2/3 percent at any time and from time to time (unless all Events of Default have theretofore been remedied) may declare any or all of the Obligations immediately due and payable, and all such Obligations shall thereupon be immediately due and payable. The term "Grace Period," as used herein with respect to an Event of Default for which a Grace Period is expressly provided, means the period beginning on the date of the related Default and ending the number of days provided below after written notice of such Default (a "Default Notice") is given by any Lender to Borrower: (x) in the case of a Default described in Section 7.1(a) above, one Business Day; (y) in the case of any Default (other than a Default described in Section 7.1(a)) as to which Borrower does not give notice of such Default to Lenders as required in Section 6.1(d) prior to a Lender's giving notice thereof to Borrower, 15 days (which period may be extended for one additional period of 30 days if the Default relates to a breach of a covenant contained in Article VI above, if the Default cannot reasonably be cured within the original period, and if, within such original period, Borrower commences, and thereafter diligently prosecutes, measures to cure such Default); and (z) in the case of any other Default for which a Grace Period is expressly provided, 30 days (which period may be extended for one additional period of 30 days if the Default relates to a breach of a covenant contained in Article VI above, if the Default cannot reasonably be cured within the original period, and if, within such original period, Borrower commences, and thereafter diligently prosecutes, measures to cure such Default). Section 7.2. Remedies. If any Default shall occur and -------- be continuing, the obligation of Lenders to make Advances under this Agreement shall terminate immediately. If any Event of Default shall occur, Lenders may protect and enforce their rights under the Loan Documents by any appropriate proceedings, including proceedings for specific performance of any covenant or agreement contained in any Loan Document, and Lenders may enforce the payment of any Obligations due or enforce any other legal or equitable right. All rights, remedies and powers conferred upon Lenders under the Loan Documents shall be deemed cumulative and not exclusive of any other rights, remedies or powers available under the Loan Documents or at law or in equity. -45- Section 7.3. Indemnity. Borrower hereby agrees to --------- indemnify, defend and hold harmless Lenders and their agents, affiliates, officers, directors, and employees from and against any claims, losses, demands, actions, causes of action, and liabilities whatsoever (including without limitation reasonable attorney's fees and expenses, and costs and expenses reasonably incurred in investigating, preparing or defending against any litigation or claim, action, suit, proceeding or demand of any kind or character) arising out of or resulting from: (a) the Loan Documents (including without limitation the enforcement thereof), except to the extent such claims, losses, and liabilities are proximately caused by a Lender's gross negligence or willful misconduct, (b) any violation on or prior to the Release Date (as hereinafter defined) of any Applicable Environmental Law, (c) any act, omission, event or circumstance existing or occurring on or prior to the Release Date (including without limitation the presence on the Borrowing Base Properties or the Associated Collateral or release from the Borrowing Base Properties or the Associated Collateral of hazardous substances or solid wastes disposed of or otherwise released, resulting from or in connection with the ownership, construction, occupancy, operation, use and/or maintenance of the Borrowing Base Properties or the Associated Collateral, regardless of whether the act, omission, event or circumstance constituted a violation of any Applicable Environmental Law at the time of its existence of occurrence, and (d) any and all claims or proceedings (whether brought by a private party or governmental agencies) for bodily injury, property damage, abatement or remediation, environmental damage or impairment or any other injury or damage resulting from or relating to any hazardous or toxic substance, solid waste or contaminated material located upon or migrating into, from or through the Borrowing Base Properties or Associated Collateral (whether or not the release of such materials was caused by Borrower, a tenant or subtenant or a prior owner or tenant, or subtenant on the Borrowing Base Properties or the Associated Collateral and whether or not the alleged liability is attributable to the handling, storage, generation, transportation, removal or disposal of such substance, waste or material or the mere presence of such substance, waste or material on the Borrowing Base Properties or the Associated Collateral), which the any Lender may have liability with respect to due to the making of the Loan, the granting of the Security Documents, the exercise of its rights under the Loan Documents, or otherwise. The "Release Date" as used herein shall mean the earlier of the following two dates: (i) the date on which the Obligations have been paid and performed in full and the Security Documents have been released of record, or (ii) the date on which the liens of the Security Documents are foreclosed or a deed in lieu of such foreclosure is fully effective and -46- recorded. WITHOUT LIMITATION, IT IS THE INTENTION OF BORROWER, AND BORROWER AGREES, THAT THE FOREGOING INDEMNITIES SHALL APPLY TO EACH INDEMNIFIED PARTY WITH RESPECT TO CLAIMS, DEMANDS, LIABILITIES, LOSSES, DAMAGES, CAUSES OF ACTION, JUDGMENTS, PENALTIES, COSTS AND EXPENSES (INCLUDING WITHOUT LIMITATION REASONABLE ATTORNEYS' FEES) WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF THE NEGLIGENCE OF SUCH (AND/OR ANY OTHER) INDEMNIFIED PARTY. However, such indemnities shall not apply to any particular indemnified party (but shall apply to the other indemnified parties) to the extent the subject of the indemnification is caused by or arises out of the gross negligence or willful misconduct of such particular indemnified party. The foregoing indemnities shall not terminate upon the Release Date or upon the release, foreclosure or other termination of the Security Documents, but will survive the Release Date, foreclosure of the Security Documents or conveyances in lieu of foreclosure, and the repayment of the Loan and the discharge and release of the Security Documents and the other documents evidencing and/or securing the Loan. ARTICLE VIII Agent; Collateral Agent ----------------------- Section 8.1. Actions. Each Lender hereby irrevocably ------- appoints Agent to act as agent for Lenders under and for purposes of this Agreement and each other Loan Document (other than the Security Documents), to the extent provided herein. Each Lender hereby irrevocably appoints Collateral Agent to act as collateral agent under the Security Documents. Each Lender authorizes Agent to act on behalf of such Lender hereunder and under the other Loan Documents (other than the Security Documents) and to exercise such powers hereunder and thereunder as are specifically delegated to or required of Agent by the terms hereof and thereof, together with such other powers as may be reasonably incidental thereto. Each Lender authorizes Collateral Agent to act on behalf of such Lender under the Security Documents and to exercise such powers thereunder as are specifically delegated to or required of Collateral Agent by the terms hereof and thereof, together with such other powers as may be reasonably incidental thereto. Without limiting the generality of the foregoing, each Lender authorizes Collateral Agent to act on behalf of such Lender to execute and accept on its behalf any and all of the Security Documents. Each Lender hereby indemnifies (which indemnity shall survive any termination of this Agreement) Agent and Collateral Agent (and agrees to make payment thereof to Agent within 10 days after demand is made by Agent), pro rata according to such Lender's Proportionate Share, from and against any and all liabilities, -47- obligations, losses, damages, claims, costs or expenses of any kind or nature whatsoever which may at any time be imposed upon, incurred by, or asserted against, Agent or Collateral Agent in any way relating to or arising out of this Agreement or any other Loan Document, including reasonable attorneys' fees, and as to which Agent or Collateral Agent is not reimbursed by Borrower or either of them; provided, however, that no Lender shall be liable to Agent or Collateral Agent for the payment of any portion of such liabilities, obligations, losses, damages, claims, costs or expenses which are determined by a court of competent jurisdiction in a final proceeding to have resulted solely from Agent's or Collateral Agent's gross negligence or wilful misconduct. Agent or Collateral Agent shall not be required to take any action hereunder or under any other Loan Document, or to prosecute or defend any suit in respect of this Agreement or any other Loan Documents, unless it is indemnified hereunder to its satisfaction. If any indemnity in favor of Agent or Collateral Agent shall be or become, in Agent's or Collateral Agent's determination, inadequate, Agent or Collateral Agent may call for additional indemnification from Lenders and cease to do the acts indemnified against hereunder until such additional indemnity is given. The relationship of Agent to Lenders is only that of one commercial bank acting as administrative agent for others, and nothing in the Loan Documents shall be construed to constitute Agent a trustee or other fiduciary for any holder of any of the Notes or of any participation therein nor to impose on Agent duties and obligations other than those expressly provided for in the Loan Documents. With respect to any matters not expressly provided for in the Loan Documents and any matters which the Loan Documents place within the discretion of Agent, Agent shall not be required to exercise any discretion or take any action, and it may request instructions from Lenders with respect to any such matter, in which case it shall be required to act or to refrain from acting (and shall be fully protected and free from liability to all Lenders in so acting or refraining from acting) upon the instructions of Majority Lenders (including itself); provided, however, that Agent shall not be required to take any action which exposes it to a risk of personal liability that it considers unreasonable or which is contrary to the Loan Documents or to applicable law. Section 8.2. Exculpation. None of Agent, Collateral ----------- Agent or any Lender, nor any of their respective directors, officers, employees or agents, shall be liable to any Lender for any action taken or omitted to be taken by it under this Agreement or any other Loan Document, or in connection herewith or therewith, except for its own wilful misconduct or gross negligence, nor responsible for any recitals or warranties herein or therein, nor for the effectiveness, -48- enforceability, validity or due execution of this Agreement or any other Loan Document, nor for the creation, perfection or priority of any Liens purported to be created by any of the Loan Documents, or the validity, genuineness, enforceability, existence, value or sufficiency of any collateral security, nor to make any inquiry respecting the performance by Borrower of its obligations hereunder or under any other Loan Document. Any such inquiry which may be made by any Lender, Agent or Collateral Agent shall not obligate it to make any further inquiry or to take any action. Each Lender, Agent and Collateral Agent shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which such Lender, Agent or Collateral Agent believes to be genuine and to have been presented by a proper Person. Section 8.3. Successor. Agent or Collateral Agent may --------- resign as such at any time upon at least 30 days' prior notice to Borrower and all Lenders. If Agent or Collateral Agent at any time shall resign, Lenders may appoint another Lender as a successor Agent or Collateral Agent which shall thereupon become Agent or Collateral Agent hereunder. If no successor Agent or Collateral Agent shall have been so appointed by Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent or Collateral Agent's giving notice of resignation, then the retiring Agent or Collateral Agent may, on behalf of Lenders, appoint a successor Agent or Collateral Agent, which shall be one of Lenders or a commercial banking institution organized under the laws of the U.S. or Canada (or any State or Province thereof) or a U.S. or Canadian branch or agency of a commercial banking institution, and having a combined capital and surplus of at least $200,000,000. Upon the acceptance of any appointment as Agent or Collateral Agent hereunder by a successor Agent or Collateral Agent, such successor Agent or Collateral Agent shall be entitled to receive from the retiring Agent or Collateral Agent such documents of transfer and assignment as such successor Agent or Collateral Agent may reasonably request, and shall thereupon succeed to and become vested with all rights, powers, privileges and duties of the retiring Agent or Collateral Agent, and the retiring Agent or Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's or Collateral Agent's resignation hereunder as Agent or Collateral Agent, the provisions of (a) this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent or Collateral Agent under this Agreement; and (b) Section 8.2 shall continue to inure to its benefit. -49- Section 8.4. Other Loans by Lenders. Each Lender and ---------------------- its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with Borrower or any Affiliate of Borrower. Section 8.5. Credit Decisions. Each Lender ---------------- acknowledges that it has, independently of Agent, Collateral Agent and each other Lender, and based on such Lender's review of the financial information of Borrower, this Agreement, the Security Documents, the other Loan Documents (the terms and provisions of which being satisfactory to such Lender) and such other documents, information and investigations as such Lender has deemed appropriate, made its own credit decision to extend its Proportionate Share of the Commitment. Each Lender also acknowledges that it will, independently of Agent, Collateral Agent and each other Lender, and based on such other documents, information and investigations as it shall deem appropriate at any time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement, the Security Documents or any other Loan Document. Section 8.6. Payment of Collected Amounts. (a) If any ---------------------------- Lender receives any payment or other amount on account of the Loan (whether by exercise of such Lender's rights of setoff or banker's lien or by any other method) other than such Lender's Proportionate Share of any payment made by or on behalf of Borrower, such Lender shall, no later than the next Business Day after such Lender's receipt of any such payment or other amount, pay over to the other Lenders, their respective Proportionate Shares of the payment or other amount received by such Lender. (b) Subject to the rights of any other persons in the Borrowing Base Properties, in the event of the acquisition of title to any portion of the Borrowing Base Properties, either through foreclosure or otherwise, this Agreement shall continue in full force and effect and (i) each Lender shall pay its Proportionate Share (determined as of the date such expenses are incurred) of expenses for maintenance and taxes and any and all other expenses necessary in connection with the acquisition, holding, sale or other disposition of the Borrowing Base Properties and (ii) each Lender shall be deemed to have an undivided interest in the Borrowing Base Properties (as tenants-in-common) equal to such Lender's Proportionate Share. Section 8.7. Application of Collateral Proceeds. The ---------------------------------- Security Documents secure: (a) obligations of Borrower, or either of them, to Lenders, or any of them, or Collateral Agent under or in connection with this Agreement, and (b) -50- other obligations of Borrower, or either of them, to Lenders, or any of them. The parties agree that, from and after the occurrence of an Event of Default and upon the election of Lenders to foreclose against or otherwise realize upon the Collateral, any amounts collected as proceeds of the Collateral shall be applied as follows: first, to the repayment of the obligations described in (a) above until such obligations have been repaid in full (with any amount collected by any Lender or Collateral Agent being divided pro rata among Lenders according to their respective proportionate shares of the obligations described in (a) above and applied by each Lender at its discretion to the principal, interest, fees and other amounts due under or in connection with any or all of such obligations); and second, to the repayment of the obligations described in (b) above (with any amount collected by any Lender or Collateral Agent being applied pro rata among all obligations owed to any Lender pursuant to (b) above) until such obligations have been repaid in full. Section 8.8. Right of First Refusal. If any Lender ---------------------- desires to terminate its participation as a Lender hereunder, each of the other Lenders, in proportion to their respective Proportionate Shares, shall have a right of first refusal, to be exercised within 30 days of its receipt of notice from the terminating Lender of its desire to terminate its participation, to acquire the participation of the terminating Lender by paying to the terminating Lender an amount equal to all outstanding principal, interest, fees and other amounts owing to the terminating Lender hereunder or in connection herewith, insofar as such amounts are allocable to the proportionate interest being acquired by such acquiring Lender. If any Lender having a right of first refusal declines to exercise such right, the other Lender(s) shall have the right to exercise such right of first refusal for their own benefit for a period of 10 days after notification of the original Lender's decision not to exercise such right of first refusal. Section 8.9. Majority Lenders. Any and all decisions ---------------- to be made and actions to be taken by Lenders hereunder or under any of the Loan Documents (including without limitation any determination or re-determination of the Borrowing Base, any consent or waiver of, or amendment to, any covenant, or any acceleration of the maturity of the Loan) may be made or taken by Majority Lenders on behalf of all Lenders; provided that the agreement of all Lenders shall be required in order to: (a) waive or consent to any default in the timely payment of principal or interest, (b) approve any release of any of the Collateral, (c) change any interest rate or fee payable with respect to the Loan, (d) change the Maximum Loan Amount, or (e) extend the Amortization Period or the Revolving Period. -51- ARTICLE IX Miscellaneous ------------- Section 9.1. Waiver and Amendment. No failure or -------------------- delay by any Lender in exercising any right, power or remedy which it may have under any of the Loan Documents shall operate as a waiver thereof or of any other right, power or remedy, nor shall any single or partial exercise by any Lender of any such right, power or remedy preclude any other or further exercise thereof or of any other right, power or remedy. No waiver of any provision of any Loan Document and no consent to any departure therefrom shall ever be effective unless it is in writing and signed by all Lenders, and then such waiver or consent shall be effective only in the specific instances and for the purposes for which given and to the extent specified in such writing. No notice to or demand on any Obligated Person shall in any case of itself entitle any Obligated Person to any other or further notice or demand in similar or other circumstances. This Agreement and the other Loan Documents set forth the entire understanding between the parties hereto, and no modification or amendment of or supplement to this Agreement or the other Loan Documents shall be valid or effective unless the same is in writing and signed by the party against whom it is sought to be enforced. Section 9.2. Survival of Agreements; Cumulative ---------------------------------- Nature. All of the Obligated Persons' various representations, - ------ warranties, covenants and agreements in the Loan Documents shall survive the execution and delivery of this Agreement and the other Loan Documents and the performance hereof and thereof, including without limitation the making or granting of the Loan and the delivery of the Notes and the other Loan Documents, and shall further survive until all of the Obligations are paid in full to Lenders and all of Lenders' obligations to Borrower are terminated. All statements and agreements contained in any certificate or other instrument delivered by any Obligated Person to any Lender under any Loan Document shall be deemed representations and warranties by Borrower to Lenders and/or agreements and covenants of Borrower under this Agreement. The representations, warranties, and covenants made by the Obligated Persons in the Loan Documents, and the rights, powers, and privileges granted to Lenders in the Loan Documents, are cumulative, and no Loan Document shall be construed in the context of another to diminish, nullify, or otherwise reduce the benefit to any Lender of any such representation, warranty, covenant, right, power or privilege. In particular and without limitation, no exception set out in this Agreement to any representation, warranty or covenant -52- herein contained shall apply to any similar representation, warranty or covenant contained in any other Loan Document, and each such similar representation, warranty or covenant shall be subject only to those exceptions which are expressly made applicable to it by the terms of the various Loan Documents. Section 9.3. Notices. All notices, requests, ------- consents, demands and other communications required or permitted under any Loan Document shall be in writing and, unless otherwise specifically provided in such Loan Document, shall be deemed sufficiently given or furnished if delivered by personal delivery, by telegram or telex, by expedited delivery service with proof of delivery, or by registered or certified United States mail, return receipt requested, postage prepaid, at the addresses specified below (unless changed by similar notice in writing given by the particular Person whose address is to be changed). Any such notice or communication shall be deemed to have been given either at the time of personal delivery or, in the case of delivery service or mail, as of the date of first attempted delivery at the address and in the manner provided herein (provided that the notifying party promptly takes reasonable steps to effect actual delivery if the first attempted delivery is unsuccessful), or, in the case of telegram or telex, upon receipt. All such notices to any Obligated Person may, at the option of Lenders in each particular instance, be either addressed and delivered to such Obligated Person or addressed and delivered to Borrower: Borrower's address: 370 Seventeenth Street Suite 1800 Denver, Colorado 80202 Attention: Neil Stenbuck CNB's address: 950 Seventeenth Street Denver, Colorado 80202 Attention: Kathryn A. Gaiter Union's address: 500 North Akard Street Suite 4200 Dallas, Texas 75201 Attention: Randall L. Osterberg NBT's address: 901 Main Street, 64th Floor Dallas, Texas 75283 Attention: Energy Banking Group with an additional copy to NBT at: 370 Seventeenth Street Suite 3250 Denver, Colorado 80202 Attention: David C. Rubenking -53- Section 9.4. Joint and Several Liability; Parties in --------------------------------------- Interest. All Obligations which are owed by two or more - -------- Obligated Persons shall be joint and several, and not merely joint, obligations. All grants, covenants and agreements contained in the Loan Documents shall bind and inure to the benefit of the parties thereto and their respective successors and assigns; provided, however, that no Obligated Person may assign or transfer any of its rights or delegate any of its duties or obligations under any Loan Document without the prior consent of Lenders. Section 9.5. Governing Law. The Loan Documents shall ------------- be deemed contracts and instruments made under the laws of the State of Colorado and shall be construed and enforced in accordance with and governed by the laws of the State of Colorado and the laws of the United States of America, except (i) to the extent that the law of another jurisdiction is expressly elected in a Loan Document, and (ii) with respect to specific Liens, or the perfection thereof, evidenced by Security Documents covering real or personal property which by the laws applicable thereto are required to be construed under the laws of another jurisdiction. Borrower hereby irrevocably submits itself and each other Obligated Person to the non-exclusive jurisdiction of the state and federal courts of the State of Colorado. Section 9.6. Limitation on Interest. Lenders and the ---------------------- the Obligated Persons intend to contract in strict compliance with applicable usury law from time to time in effect. In furtherance thereof such persons stipulate and agree that none of the terms and provisions contained in the Loan Documents shall ever be construed to create a contract to pay, for the use, forbearance or detention of money, interest in excess of the maximum amount of interest permitted to be charged by applicable law from time to time in effect. Neither any Obligated Person nor any present or future guarantors, endorsers, or other Persons hereafter becoming liable for payment of any Obligation shall ever be liable for unearned interest thereon or shall ever be required to pay interest thereon in excess of the maximum amount that may be lawfully charged under applicable law from time to time in effect, and the provisions of this section shall control over all other provisions of the Loan Documents which may be in conflict or apparent conflict herewith. Lenders expressly disavow any intention to charge or collect excessive unearned interest or finance charges in the event the maturity of any Obligation is accelerated. If (a) the maturity of any Obligation is accelerated for any reason, (b) any Obligation is prepaid and as a result any amounts held to constitute interest are determined to be in excess of the legal maximum, or (c) any Lender or any other holder of any or all of the Obligations -54- shall otherwise collect moneys which are determined to constitute interest which would otherwise increase the interest on any or all of the Obligations to an amount in excess of that permitted to be charged by applicable law then in effect, then all such sums determined to constitute interest in excess of such legal limit shall, without penalty, be promptly applied to reduce the then outstanding principal of the related Obligations or, at Lenders' option, promptly returned to Borrower or the other payor thereof upon such determination. Section 9.7. Severability. If any term or provision ------------ of any Loan Document shall be determined to be illegal or unenforceable all other terms and provisions of the Loan Documents shall nevertheless remain effective and shall be enforced to the fullest extent permitted by applicable law. Section 9.8. Counterparts. This Agreement may be ------------ separately executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Agreement. Section 9.9. Conflicts. To the extent of any --------- irreconcilable conflicts between the provisions of this Agreement and the provisions of any of the Loan Documents, the provisions of this Agreement shall prevail. Section 9.10. Supersession. Upon the repayment of all ------------ amounts due under or in connection with the Prior Credit Agreement, the terms of this Agreement shall supersede the terms of the Prior Credit Agreement in their entirety. IN WITNESS WHEREOF, this Agreement is executed as of the date first above written. BASIN EXPLORATION, INC. By: /s/ Neil Stenbuck -------------------------------- Neil Stenbuck, Vice President-Chief Financial Officer COLORADO NATIONAL BANK By:________________________________ Kathryn A. Gaiter, Vice President -55- NATIONSBANK OF TEXAS, N.A., as a LENDER, AGENT and COLLATERAL AGENT By:________________________________ ______________________, _______ Vice President UNION BANK OF CALIFORNIA, N.A. By: /s/ Randall L. Osterberg -------------------------------- Randall L. Osterberg, Vice President By: /s/ Michael E. Tregoning -------------------------------- Michael E. Tregoning Senior Vice President -56- EX-27 3 FINANCIAL DATA SCHEDULE 6/96
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JUN-30-1996 37,623 0 4,330 0 92 42,851 86,288 (37,587) 92,504 17,974 0 0 0 107 68,753 92,504 12,582 35,077 4,203 11,903 0 0 2,200 21,153 5,694 15,459 0 0 0 15,459 1.44 1.44 Per share.
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