-----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, Qp8sHzGUybuXgq5/Z0mrPDTVMbJme5KjuDSUNXr1DENxV6lxUCCeI+3/6ysaNLzO 1+hxZYDGJhReKUXravRYWA== 0000023194-99-000003.txt : 19990315 0000023194-99-000003.hdr.sgml : 19990315 ACCESSION NUMBER: 0000023194-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMSTOCK RESOURCES INC CENTRAL INDEX KEY: 0000023194 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 941667468 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03262 FILM NUMBER: 99564071 BUSINESS ADDRESS: STREET 1: 5005 LBJ FRWY STE 1000 CITY: DALLAS STATE: TX ZIP: 75244 BUSINESS PHONE: 2147012000 MAIL ADDRESS: STREET 1: 5005 LBJ FREEWAY STREET 2: STE 1000 CITY: DALLAS STATE: TX ZIP: 75244 FORMER COMPANY: FORMER CONFORMED NAME: COMSTOCK TUNNEL & DRAINAGE CO DATE OF NAME CHANGE: 19880121 10-K 1 ANNUAL REPORT - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF X THE SECURITIES EXCHANGE ACT OF 1934 --- For the fiscal year ended December 31, 1998 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 No. 0-16741 COMSTOCK RESOURCES, INC. (Exact name of registrant as specified in its charter) NEVADA 94-1667468 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5005 LBJ Freeway, Suite 1000, Dallas, Texas 75244 (Address of principal executive offices including zip code) (972) 701-2000 (Registrant's telephone number and area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.50 Par Value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange (Title of class) (Name of exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [ X ] As of March 12, 1999, there were 24,350,452 shares of common stock outstanding. As of March 12, 1999, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $78,000,000. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this report is incorporated by reference from registrant's definitive proxy statement for its 1999 annual meeting of stockholders (to be filed with the Securities and Exchange Commission not later than April 30, 1999). - -------------------------------------------------------------------------------- COMSTOCK RESOURCES, INC. FORM 10-K For the Fiscal Year Ended December 31, 1998 CONTENTS Page Part I Items 1 and 2. Business and Properties..................................... 5 Item 3. Legal Proceedings...........................................20 Item 4. Submission of Matters to a Vote of Security Holders.........20 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.........................................21 Item 6. Selected Financial Data.....................................22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............23 Item 8. Financial Statements........................................29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............29 Part III Item 10. Directors and Executive Officers of the Registrant..........30 Item 11. Executive Compensation......................................30 Item 12. Security Ownership of Certain Beneficial Owners and Management....................................30 Item 13. Certain Relationships and Related Transactions..............30 Part IV Item 14. Exhibits and Reports on Form 8-K............................31 1 FORWARD-LOOKING STATEMENTS All statements other than statements of historical facts included in this report, including without limitation, statements under "Business and Properties" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding budgeted capital expenditures, estimates of oil and natural gas production, the Company's financial position, oil and natural gas reserve estimates, business strategy and other plans and objectives for future operations, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the Company. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates made by different engineers often vary from one another. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revisions of such estimate and such revisions, if significant, would change the schedule of any further production and development drilling. Accordingly, reserve estimates are generally different from the quantities of oil and gas that are ultimately recovered. All forward-looking statements in this report are expressly qualified in their entirety by the cautionary statements in this paragraph. DEFINITIONS The following are abbreviations and definitions of terms commonly used in the oil and gas industry and this report. Natural gas equivalents and crude oil equivalents are determined using the ratio of six Mcf to one Bbl. "Bbl" means a barrel of 42 U.S. gallons of oil. "Bcf" means one billion cubic feet of natural gas. "Bcfe" means one billion cubic feet of natural gas equivalent. "Cash Margin per Mcfe" means the equivalent price per Mcfe less oil and gas operating expenses per Mcfe and general and administrative expenses per Mcfe. "Completion" means the installation of permanent equipment for the production of oil or gas. "Condensate" means a hydrocarbon mixture that becomes liquid and separates from natural gas when the gas is produced and is similar to crude oil. "Development well" means a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive. "Dry hole" means a well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes. "Exploratory well" means a well drilled to find and produce oil or natural gas reserves not classified as proved, to find a new productive reservoir in a field previously found to be productive of oil or natural gas in another reservoir or to extend a known reservoir. 2 "Gross" when used with respect to acres or wells, production or reserves refers to the total acres or wells in which the Company or other specified person has a working interest. "MBbls" means one thousand barrels of oil. "MMBbls" means one million barrels of oil. "Mcf" means one thousand cubic feet of natural gas. "Mcfe" means thousand cubic feet of natural gas equivalent. "MMcf" means one million cubic feet of natural gas. "MMcfe" means one million cubic feet of natural gas equivalent. "Net" when used with respect to acres or wells, refers to gross acres of wells multiplied, in each case, by the percentage working interest owned by the Company. "Net production" means production that is owned by the Company less royalties and production due others. "Oil" means crude oil or condensate. "Operator" means the individual or company responsible for the exploration, development, and production of an oil or gas well or lease. "Present Value of Proved Reserves" means the present value of estimated future revenues to be generated from the production of proved reserves calculated in accordance with the Securities and Exchange Commission guidelines, net of estimated production and future development costs, using prices and costs as of the date of estimation without future escalation, without giving effect to non-property related expenses such as general and administrative expenses, debt service, future income tax expense and depreciation, depletion and amortization, and discounted using an annual discount rate of 10%. "Proved developed reserves" means reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery will be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. "Proved reserves" means the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. (i) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation tests. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. 3 (ii) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. (iii) Estimates of proved reserves do not include the following: (A) oil that may become available from known reservoirs but is classified separately as "indicated additional reserves"; (B) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (C) crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such resources. "Proved undeveloped reserves" means reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. "Recompletion" means the completion for production of an existing well bore in another formation from that in which the well has been previously completed. "Reserve life" means the calculation derived by dividing year-end reserves by total production in that year. "Reserve replacement" means the calculation derived by dividing additions to reserves from acquisitions, extensions, discoveries and revisions of previous estimates in a year by total production in that year. "Royalty" means an interest in an oil and gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the cost of drilling or operating the wells on the leased acreage. Royalties may be either landowner's royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner. "3-D seismic" means an advanced technology method of detecting accumulations of hydrocarbons identified by the collection and measurement of the intensity and timing of sound waves transmitted into the earth as they reflect back to the surface. "Working interest" means an interest in an oil and gas lease that gives the owner of the interest the right to drill for and produce oil and gas on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations. The share of production to which a working interest owner is entitled will always be smaller than the share of costs that the working interest owner is required to bear, with the balance of the production accruing to the owners of royalties. For example, the owner of a 100% working interest in a lease burdened only by a landowner's royalty of 12.5% would be required to pay 100% of the costs of a well but would be entitled to retain 87.5% of the production. "Workover" means operations on a producing well to restore or increase production. 4 PART I ITEMS 1. AND 2. BUSINESS AND PROPERTIES Comstock Resources, Inc. (together with its subsidiaries, the "Company" or "Comstock") is an independent energy company engaged in the acquisition, development, production and exploration of oil and natural gas properties. The Company has an oil and natural gas reserve base which is entirely focused in the Gulf of Mexico, Southeast Texas and East Texas/ North Louisiana regions. Approximately 43% of the Company's oil and natural gas reserves are located in the Gulf of Mexico, 26% in Southeast Texas and 31% in East Texas/ North Louisiana. Due to this focus, Comstock has accumulated significant geologic knowledge, technical expertise and industry relationships in these regions. Additionally, the Company has significant operating control over its properties and operates 83% of its Present Value of Proved Reserves as of December 31, 1998. Comstock has compiled a high quality reserve base that is 67% natural gas and 76% proved developed on a Bcfe basis. The Company has estimated proved oil and natural gas reserves of 371.9 Bcfe with an estimated Present Value of Proved Reserves of $305.3 million as of December 31, 1998. Comstock has achieved substantial growth in oil and gas reserves, production and revenues over the last five years. The Company's estimated proved oil and natural gas reserves have increased at a compounded annual growth rate of 32% from 123.6 Bcfe at the end of 1994 to 371.9 Bcfe at the end of 1998. Average net daily production has increased at a compounded annual growth rate of 51% from 22.2 MMcfe per day in 1994 to 115.5 MMcfe per day in 1998. The Company's oil and gas revenues have increased from $16.9 million in 1994 to $93.0 million in 1998. While its historical growth has been primarily attributable to acquisitions, during 1998 Comstock focused on the exploitation and development of its properties through development drilling, workovers, recompletions and exploration. The Company believes it has a significant inventory of development and exploration prospects and increased its spending on exploration and development activities from $2.1 million in 1994 to $64.6 million in 1998. In 1998, Comstock drilled 30 development wells (18.2 net) of which 25 were successful (14.7 net) and 14 exploratory wells (7.2 net) of which eight were successful (4.3 net). Over the past five years, the Company has been able to lower lifting costs and general and administrative expenses per unit of production, concurrent with increases in production, through strict control over operations and costs. Comstock's lifting costs per Mcfe have decreased from $0.75 in 1994 to $0.59 in 1998. Comstock's general and administrative expenses per Mcfe have decreased from $0.19 in 1994 to $0.04 in 1998. Operated wells represent 83% of the Company's Present Value of Proved Reserves as of December 31, 1998, which enables Comstock to effectively control costs and expenses and the timing and method of exploration and development of its properties. Additionally, Comstock's geographic focus allows it to manage its asset base with a relatively small number of employees. Business Strategy The Company's strategy is to increase cash flow and net asset value by exploiting its reserves, pursuing selective exploration opportunities, maintaining a low cost structure and acquiring oil and gas properties at attractive costs. Exploit Existing Reserves The Company seeks to maximize the value of its properties by increasing production and recoverable reserves through active workover, recompletion and exploitation activities. The Company utilizes advanced industry technology, including 3-D seismic data, improved logging tools and formation stimulation 5 techniques. During 1998, the Company spent $20.4 million to drill 30 development wells (18.2 net), of which 25 wells (14.7 net) were successful, representing a success rate of 83%. In addition, the Company spent approximately $10.2 million for recompletion and workover activity during 1998. The Company has budgeted up to $26.0 million in 1999 for development drilling and installation of production facilities. Comstock's level of spending on development drilling in 1999 will be principally dependent on improvement to existing oil and gas prices. Pursue Selective Exploration Opportunities The Company pursues selective exploration activities to find additional reserves on its undeveloped acreage. In 1998, the Company spent approximately $30.4 million to drill 14 exploratory wells (7.2 net), of which eight wells (4.3 net) were successful, representing a success rate of 53%. The Company has budgeted up to $10.0 million in 1999 for exploration activities which will be focused on the Gulf of Mexico region and based on drilling 3-D seismic generated prospects. These prospects include those acquired from Bois d' Arc Resources and certain of its affiliates and working interest partners, and those prospects generated under the joint exploration program with Bois d' Arc Resources and its principals ("Bois d' Arc") entered into in December 1997 under which the Company and Bois d' Arc jointly explore for prospects in the Gulf of Mexico Region (the "Bois d' Arc Exploration Venture"). Under the Bois d' Arc Exploration Venture, Bois d' Arc is responsible for identifying potential prospects and the parties jointly acquire 3-D seismic data and leasehold acreage, the costs for which are shared 80% by the Company and 20% by Bois d' Arc. With respect to any prospect in which the Company elects to participate in drilling, the Company acquires up to 33% working interest and recovers any disproportionate seismic and leasehold costs previously incurred. The Company issued to Bois d' Arc warrants to acquire up to 1,000,000 shares of the Company's common stock at an exercise price of $14.00 per share as part of the venture. The warrants vest in 50,000 share increments based on the success of an initial test well on a prospect. Maintain Low Cost Structure The Company seeks to increase cash flow by carefully controlling operating costs and general and administrative expenses. The Company targets acquisitions that possess, among other characteristics, low per unit operating costs. In addition, the Company has been able to reduce per unit operating costs by eliminating unnecessary field and corporate overhead costs and by divesting properties that have high lifting costs with little future development potential. Through these efforts, the Company's general and administrative expenses and average oil and gas operating costs per Mcfe have decreased from $0.19 and $0.75, respectively, in 1994 to $0.04 and $0.59, respectively, in 1998. In addition, the Company prefers to operate the properties it acquires, allowing it to further control operating costs, exercise greater control over the timing and plans for future development, the level of drilling and lifting costs, and the marketing of production. The Company operates 366 of the 580 wells in which it owns an interest which comprise approximately 83% of its Present Value of Proved Reserves as of December 31, 1998. Acquire High Quality Properties at Attractive Costs The Company has a successful track record of increasing its oil and natural gas reserves through opportunistic acquisitions. Since 1991, Comstock has added 482.4 Bcfe of proved oil and natural gas reserves from 18 acquisitions at a total cost of $411.9 million, or $0.85 per Mcfe. The acquisitions were acquired at 63% of their Present Value of Proved Reserves in the year the acquisitions were completed. The Company's three largest acquisitions to date have been its acquisition of offshore Gulf of Mexico properties from Bois d' Arc and certain of its affiliates and working interest partners in December 1997 for $200.9 6 million (the "Bois d'Arc Acquisition"), its acquisition of Black Stone Oil Company and interests in the Double A Wells field in Southeast Texas in May 1996 for $100.4 million (the "Black Stone Acquisition") and its purchase of properties from Sonat Inc. in July 1995 for $48.1 million (the "Sonat Acquisition"). The Company applies strict economic and reserve risk criteria in evaluating acquisitions and targets properties in its core operating areas with established production and low operating costs that also have potential opportunities to increase production and reserves through exploration and exploitation activities. Primary Operating Areas The Company's activities are concentrated in three primary operating areas: Gulf of Mexico, Southeast Texas, and East Texas/ North Louisiana. The following table summarizes the Company's estimated proved oil and natural gas reserves by field as of December 31, 1998. Present Value Net Oil Net Gas of Proved Field Area (MBbls) (MMcf) MMcfe Reserves Percentage ---------- ------- ------ ----- -------- ---------- (In thousands) Gulf of Mexico: Ship Shoal .................... 11,344 35,935 104,000 $ 99,803 South Timbalier/ South Pelto .. 1,191 4,583 11,728 10,580 Bay Marchand .................. 1,062 1,689 8,064 7,725 West Cameron .................. 1 5,638 5,643 5,380 Main Pass ..................... 1,831 2,309 13,295 4,869 East White Point .............. 814 3,512 8,393 3,704 El Campo ...................... 241 3,394 4,842 3,214 Other ......................... 75 3,086 3,538 2,447 ------ ------ ------- ------- 16,559 60,146 159,503 137,722 45.1% ------ ------ ------- ------- Southeast Texas: Double A Wells ................ 2,836 76,954 93,968 86,925 Redmond Creek ................. 124 1,522 2,267 1,861 ------ ------ ------- ------- 2,960 78,476 96,235 88,786 29.1% ------ ------ ------- ------- East Texas/ North Louisiana: Beckville ..................... 117 27,387 28,089 17,611 Logansport .................... 52 22,133 22,442 17,103 Waskom ........................ 239 13,457 14,893 7,133 Box Church .................... 3 11,855 11,870 6,975 Lisbon ........................ 80 6,095 6,574 6,330 Blocker ....................... 43 9,977 10,234 5,553 Ada ........................... 9 3,934 3,988 4,657 Longwood ...................... 40 5,542 5,779 3,543 Sugar Creek ................... 65 2,980 3,371 3,237 Sligo ......................... 13 2,223 2,299 1,673 Simsboro ...................... 3 2,266 2,282 1,387 Other ......................... 45 3,419 3,699 3,080 ------ ------ ------- ------- 709 111,268 115,520 78,282 25.6% ------ ------ ------- ------- Other Areas ................... 17 512 614 519 .2% ------ ------- ------- -------- ------ Total ......................... 20,245 250,402 371,872 $305,309 100.0% ====== ======= ======= ======== ====== Gulf of Mexico The Company's largest operating region includes properties located offshore of Louisiana in state and federal waters of the Gulf of Mexico, and in fields along the Texas and Louisiana Gulf Coast. The Company owns interests in 121 producing wells (71.1 net) in 11 field areas, the largest of which are the Ship Shoal area (Ship Shoal Blocks 66, 67, 68, 69 and South Pelto Block 1), the Main Pass area (Main Pass Blocks 21 and 25), Bay Marchand Blocks 4 and 5 and the South Timbalier/ South Pelto area (South Timbalier Blocks 11,16, 34, 50 and South Pelto Blocks 5 and 15.) The Company has 159.5 Bcfe of oil and natural gas reserves in the Gulf of Mexico region with a Present Value of Proved Reserves of $137.7 million as of December 31, 1998. The Company operates 47 of the wells (46.1 net) that it owns in this region. The Company acquired a large percentage of its reserves in the region in the Bois d' Arc Acquisition. Production from the region averaged 17.5 MMcf of natural gas per day and 5,229 barrels of oil 7 per day during 1998. The Company spent $35.7 million in this region in 1998 to drill two development wells (1.4 net) and to drill 13 exploratory wells (6.7 net). In 1999, the Company plans to spend $2.0 million for production facilities at Bay Marchand and South Timbalier/ South Pelto and up to $12.0 million for development drilling and up to $10.0 million for exploration activities in this region. Ship Shoal The Ship Shoal area is located in Louisiana state waters and in federal waters, offshore of Terrebonne Parish and near the state/federal waters boundary. The Company became the operator of its properties in this area as a result of the Bois d' Arc Acquisition and owns a 99% to 100% working interest and operates these properties except for its properties in Ship Shoal Block 69 in which the Company has a 25% working interest. In the Ship Shoal area, oil and natural gas are produced from numerous Miocene sands occurring at depths from 5,800 feet to 13,500 feet, and in water depths from 10 to 40 feet. The Company's Ship Shoal area has estimated proved reserves of 104.0 Bcfe (28% of total proved reserves) with a Present Value of Proved Reserves of $99.8 million as of December 31, 1998. The Company owns interests in 33 wells (23.9 net) in the Ship Shoal area, which averaged 12.8 MMcf of natural gas per day and 4,342 barrels of oil per day during 1998. In 1998 the Company drilled five wells (5.0 net), four exploratory wells and one development well in the Ship Shoal area. Three of the exploration wells were successful and one was a dry hole. The three successful wells were placed on production in November and December 1998. The Company has temporarily abandoned the development well as it was unable to successfully complete it. South Timbalier/ South Pelto The Company owns working interests ranging from 25% to 33% in Louisiana state waters and in federal waters in the South Timbalier/ South Pelto area located offshore of Terrebonne and Lafourche Parishes in water depths ranging from 20 to 60 feet. Oil and natural gas are produced from numerous sands of Pliocene to Upper Miocene age, at depths ranging from 2,000 to 12,000 feet. The Company has drilled three successful wells in the area since beginning its exploration program with Bois d' Arc in 1998. These wells should be placed on production from common facilities which are expected to be completed by mid-year 1999. The Company also acquired a 33% working interest in seven producing wells as well as production facilities in this area in 1998. The Company has identified six exploration prospects and one proved undeveloped location in this area using 3-D seismic, targeting the Upper Miocene sands occurring at depths from 10,000 to 12,000 feet. The Company has estimated proved net reserves totaling 11.7 Bcfe (3% of total proved reserves) in this area as of December 31, 1998. Bay Marchand The Company owns a 22.5% working interest in Louisiana state leases in the Bay Marchand area, located offshore of Lafourche Parish in 12 feet of water. The Company has drilled three successful wells in its exploration program with Bois d' Arc since its inception in early 1998. The Company has estimated proved net reserves totaling 8.1 Bcfe (2% of total proved reserves) at Bay Marchand as of December 31, 1998. Production from these wells should begin in the second quarter of 1999 pending the acquisition of production facilities for the new wells. The properties are located on the west flank of the Bay Marchand salt dome in a highly prolific oil and natural gas producing region. Producing zones in this area are Upper to Middle Miocene in age, highly porous and permeable, and occur at depths ranging from 9,000 to 14,500 feet. The Company has identified three additional exploration prospects in this area, using 3-D seismic data. 8 Southeast Texas Approximately 26% (96.2 Bcfe) of the Company's proved reserves are located in Southeast Texas where the Company owns interests in 32 producing wells (12.2 net) and operates 24 of these wells. Reserves in Southeast Texas represent 29% of the Company's Present Value of Proved Reserves as of December 31, 1998. Production rates from the area averaged 28.3 MMcf of natural gas per day and 1,532 barrels of oil per day during 1998. Substantially all of the reserves in this region are in the Double A Wells field area in Polk County, Texas. The Double A Wells field is the Company's second largest field area with total estimated proved reserves of 94.0 Bcfe (25% of total proved reserves) which have a Present Value of Proved Reserves of $86.9 million as of December 31, 1998. The Company acquired its interests in the Double A Wells field in May 1996 in the Black Stone Acquisition. Net daily production averaged 1,463 barrels of oil per day and 27.4 MMcf of natural gas during 1998. These wells typically produce from the Woodbine formation at an average depth of 14,300 feet. The Company has an average working interest in this area of 37% and its leasehold position at December 31, 1998 consisted of 21,225 acres (7,863 net). During 1998, the Company successfully recompleted two wells in this field and is in the process of acquiring 3-D seismic data on 25,000 acres in this area. The Company has budgeted $2.5 million to drill two development wells (0.6 net) in the Double A Wells field in 1999. East Texas/ North Louisiana Approximately 31% (115.5 Bcfe) of the Company's proved reserves are located in East Texas and North Louisiana where the Company owns interests in 401 producing wells (225.2 net) in 18 field areas and operates 276 of these wells (199.5 net). The largest of the Company's field areas in this region are the Beckville, Logansport, Waskom and Box Church fields. Reserves in the region represented 26% of the Company's Present Value of Proved Reserves as of December 31, 1998. Production from this region averaged 27.1 MMcf of natural gas per day and 246 barrels of oil per day during 1998. The Company's largest acquisition in this region was the Sonat Acquisition in July 1995. Since this acquisition, the Company has focused on increasing production through infill drilling and recompletions. Most of the reserves in this area produce from the Cretaceous aged Travis Peak/Hosston formation and the Jurassic aged Cotton Valley formation. The total thickness of these formations range from 2,000 feet to 4,000 feet of sand and shale sequences in the East Texas Basin and the North Louisiana Salt Basin, at depths ranging from 6,000 feet to 10,500 feet. The Company believes that success in these formations can be enhanced by applying new hydraulic fracturing and completion techniques, magnetic resonance imaging (MRI) logging tools and infill drilling. In 1998 the Company spent $14.5 million to drill 29 wells (17.3 net) and plans to spend up to $9.5 million in 1999 to drill 16 development wells (10.5 net). Beckville The Company's properties in the Beckville field, located in Panola County, Texas, represented approximately 8% (28.1 Bcfe) of the Company's proved reserves as of December 31, 1998. The Company operates 54 wells in this field and owns interests in seven additional wells. The Company has an average working interest of 72% in this field. During 1998, the production attributable to the Company's interest from this field averaged 4.3 MMcf of natural gas and 23 barrels of oil per day. The Beckville field produces from the Cotton Valley formation at depths ranging from 9,000 to 10,000 feet. The Company drilled nine wells (6.2 net) in 1998 at a cost of $6.2 million and has budgeted up to $4.5 million to drill six development wells (4.6 net) in 1999. 9 Logansport The Logansport field produces from multiple pay zones in the Hosston formation at an average depth of 8,000 feet and is located in DeSoto Parish, Louisiana. The Company's proved reserves of 22.4 Bcfe in the Logansport field represented approximately 6% of the Company's proved reserves as of December 31, 1998. The Company operates 72 wells in this field and owns interests in 32 additional wells. The Company's average working interest in this field is 50%. During 1998, production attributable to the Company's interest averaged 7.1 MMcf of natural gas and 28 barrels of oil per day. The Company spent $3.4 million to drill nine wells (4.4 net) during 1998 and has budgeted up to $2.0 million to drill six development wells in 1999 (3.2 net). Waskom The Waskom field, located in Harrison and Panola Counties in Texas, represented approximately 4% (14.9 Bcfe) of the Company's proved reserves as of December 31, 1998. The Company operates 58 wells in this field and owns interests in 38 additional wells. The Company's average working interest in this field is 49%. During 1998, production attributable to the Company's interest averaged 2.3 MMcf of natural gas and 32 barrels of oil per day. The Waskom field produces from the Cotton Valley formation at depths ranging from 9,000 to 10,000 feet. Box Church The Company's properties in the Box Church field, located in Limestone County, Texas, represented approximately 3% (11.9 Bcfe) of the Company's proved reserves as of December 31, 1998. The Company operates nine wells in this field with an average working interest of 86%. During 1998, production attributable to the Company's interest from this field averaged 1.3 MMcf of natural gas and 2 barrels of oil per day. The Box Church field produces from the Cotton Valley formation at depths ranging from 10,200 to 10,500 feet. The Company drilled three wells (3.7 net) in 1998 at a cost of $2.4 million and has budgeted up to $1.6 million to drill two development wells (1.9 net) in 1999. Acquisition Activities Acquisition Strategy The Company has concentrated its acquisition activity in the Gulf of Mexico, Southeast Texas and East Texas/ North Louisiana regions. Using a strategy that capitalizes on management's strong knowledge of and experience in these regions, the Company seeks to selectively pursue acquisition opportunities where the Company can evaluate the assets to be acquired in detail prior to completion of the transaction. The Company evaluates a large number of prospective properties according to certain internal criteria, including established production and the properties' future development and exploration potential, low operating costs and the ability for the Company to obtain operating control. The Company believes that due to the current environment of depressed commodity prices, the industry will continue to consolidate as companies look to divest oil and gas properties. As a result, the Company may have opportunities to make acquisitions at favorable prices, including attractive acquisitions outside its core operating areas. 10 Major Property Acquisitions As a result of its acquisitions, the Company has added 482.4 Bcfe of proved oil and natural gas reserves since 1991 as summarized in the following table:
Present Acquisition Value of Cost as a Proved Percentage Reserves of Present Acquisition Acquisition When Value of Cost Proved Reserves When Acquired(1) Cost Per Acquired Proved Year (000's) (MBbls) (MMcf) (MMcfe) Mcfe(1) (000's)(1) Reserves(1) - ---- ------- ------- ------ ------- ------- ---------- ----------- 1997(2) $ 189,904 14,473 39,970 126,808 $1.50 $205,583 92% 1996 100,446 5,930 100,446 136,027 0.74 282,150 36% 1995 56,081 1,859 108,432 119,585 0.47 85,706 65% 1994 12,970 388 12,744 15,074 0.86 14,050 92% 1993 26,928 2,250 28,349 41,848 0.64 33,502 80% 1992 4,730 44 8,821 9,086 0.52 8,474 56% 1991 20,862 689 29,868 34,002 0.61 27,298 76% --------- ------ ------- ------- ---- -------- Total $ 411,921 25,633 328,630 482,430 0.85 $656,763 63% ========= ====== ======= ======= ==== ======== (1) Based on reserve estimates and prices at the end of the year in which the acquisition occurred, as adjusted to reflect actual production from the closing date of the respective acquisition to such year end. (2) The 1997 Acquisitions exclude acquisition costs allocated to unevaluated properties of $30.2 million and other assets of $1.0 million.
In 1998 the Company's only acquisition was a purchase of acreage and production facilities at South Timbalier Blocks 34 and 50 and South Pelto Block 15 located offshore of Louisiana in the Gulf of Mexico. Of the 18 property acquisitions completed by the Company since 1991, four acquisitions described below account for 83% of the total acquisition cost and total reserves acquired. Bois d' Arc Acquisition. In December 1997, the Company acquired working interests in certain producing offshore Louisiana oil and gas properties as well as interests in undeveloped offshore oil and natural gas leases for approximately $200.9 million from Bois d' Arc and certain of its affiliates and working interest partners. The Company acquired interests in 43 wells (29.6 net) and eight separate production complexes located in the Gulf of Mexico offshore of Plaquemines and Terrebonne Parishes, Louisiana. The acquisition included interests in the Louisiana state and federal offshore areas of Main Pass Blocks 21 and 25, Ship Shoal Blocks 66, 67, 68 and 69 and South Pelto Block 1. The Company also acquired interests in seven undrilled prospects which were delineated by 3-D seismic data. The net proved reserves acquired were estimated at 14.3 MMBbls of oil and 29.4 Bcf of natural gas. Approximately $30.2 million of the purchase price was attributed to the undrilled prospects and $1.0 million was attributed to other assets. Black Stone Acquisition. In May 1996, the Company acquired 100% of the capital stock of Black Stone Oil Company and interests in producing and undeveloped oil and gas properties located in Southeast Texas for $100.4 million. The Company acquired interests in 19 wells (7.7 net) that are located in the Double A Wells field in Polk County, Texas and is the operator of most of the wells in the field. The net proved reserves acquired were estimated at 5.9 MMBbls of oil and 100.4 Bcf of natural gas. Sonat Acquisition. In July 1995, the Company purchased interests in certain producing oil and gas properties located in East Texas and North Louisiana from Sonat Inc. for $48.1 million. The Company acquired interests in 319 producing wells (188.0 net). The acquisition included interests in the Beckville, Logansport, Waskom, Blocker, Longwood and Simsboro fields. The net proved reserves acquired were estimated at 0.8 MMBbls of oil and 104.7 Bcf of natural gas. 11 Stanford Acquisition. In November 1993, the Company acquired Stanford Offshore Energy, Inc. ("Stanford") through a merger with a wholly owned subsidiary. The Stanford stockholders were issued an aggregate of 1,760,000 shares of common stock of the Company in the merger with a total value of $6.2 million and the Company assumed approximately $16.5 million of indebtedness of Stanford. Stanford had interests in 107 producing wells (58.8 net) located primarily in the Gulf of Mexico region. Major properties acquired include West Cameron Blocks 238, 248 and 249, the East White Point field and the Redmond Creek field. The net proved reserves acquired were estimated at 1.0 MMBbls of oil and 17.8 Bcf of natural gas. Oil and Natural Gas Reserves The following table sets forth the estimated proved oil and natural gas reserves of the Company and the Present Value of Proved Reserves as of December 31, 1998: Present Value of Proved Oil Gas Total Reserves Category (MBbls) (Mmcf) (Mmcfe) (000's) -------- ------- ------ ------- ------- Proved Developed Producing 9,800 132,613 191,414 $176,780 Proved Developed Non-producing 6,785 50,342 91,053 72,436 Proved Undeveloped 3,660 67,447 89,405 56,093 ------ ------- ------- -------- Total Proved 20,245 250,402 371,872 $305,309 ====== ======= ======= ======== There are numerous uncertainties inherent in estimating oil and natural gas reserves and their values, including many factors beyond the control of the producer. The reserve data set forth above represents estimates only. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers may vary. In addition, estimates of reserves are subject to revision based on the results of drilling, testing and production subsequent to the date of such estimate. Accordingly, reserve estimates are often different from the quantities of oil and gas reserves that are ultimately recovered. In general, the volume of production from oil and natural gas properties declines as reserves are depleted. Except to the extent the Company acquires properties containing proved reserves or conducts successful exploration and development activities, the proved reserves of the Company will decline as reserves are produced. The Company's future oil and natural gas production is, therefore, highly dependent upon its level of success in acquiring or finding additional reserves. The Company's average price received for crude oil production on December 31, 1997 was $17.24 per Bbl. This price declined to $10.55 per Bbl on December 31, 1998. The Company's average price received for natural gas production on December 31, 1997 was $2.64 per Mcf. This price declined to $2.21 per Mcf on December 31, 1998. Further declines in the price of crude oil or natural gas could have an adverse effect on the Company's Present Value of Proved Reserves, which in turn could adversely affect borrowing capacity and the Company's ability to obtain additional capital and the Company's financial condition, revenues, profitability and cash flows from operations. 12 Drilling Activity Summary During the three-year period ended December 31, 1998, the Company drilled development and exploratory wells as set forth in the table below. Year Ended December 31, ----------------------- 1996 1997 1998 ---- ---- ---- Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Development Wells: Oil 2 1.0 2 0.6 -- -- Gas 16 8.4 31 16.1 25 14.7 Dry 1 1.0 7 2.3 5 3.5 -- ---- -- ---- -- ---- 19 10.4 40 19.0 30 18.2 -- ---- -- ---- -- ---- Exploratory Wells: Oil -- -- 1 0.3 6 2.3 Gas -- -- 4 1.3 2 2.0 Dry 1 0.2 4 1.6 6 2.9 -- ---- -- ---- -- ---- 1 0.2 9 3.2 14 7.2 -- ---- -- ---- -- ---- Total Wells 20 10.6 49 22.2 44 25.4 == ==== == ==== == ==== As of December 31, 1998, the Company was drilling one exploratory well (0.2 net) which subsequently resulted in a successful discovery. Producing Well Summary The following table sets forth the gross and net producing oil and natural gas wells in which the Company owned an interest at December 31, 1998. Oil Gas --- --- Gross Net Gross Net ----- --- ----- --- Texas 17 10.7 277 149.5 Louisiana 9 5.7 204 99.2 State and Federal Offshore 32 23.9 38 22.3 Mississippi 1 0.1 2 0.3 -- ---- --- ----- Total wells 59 40.4 521 271.3 == ==== === ===== The Company operates 366 of the 580 producing wells presented in the above table. Acreage The following table summarizes the Company's developed and undeveloped leasehold acreage at December 31, 1998. Excluded is acreage in which the Company's interest is limited to royalty or similar interests. Developed Undeveloped --------- ----------- Gross Net Gross Net ----- --- ----- --- Texas 164,529 118,471 37,102 15,876 Louisiana 78,812 58,381 1,896 1,123 State and Federal Offshore 34,056 14,619 870 870 Mississippi 1,360 210 - - ------- ------- ------ ------ Total 278,757 191,681 39,868 17,869 ======= ======= ====== ====== 13 Title to the Company's oil and natural gas properties is subject to royalty, overriding royalty, carried and other similar interests and contractual arrangements customary in the oil and gas industry, liens incident to operating agreements, current taxes not yet due, and other minor encumbrances. All of the Company's oil and natural gas properties are pledged as collateral under the Company's bank credit facility. As is customary in the oil and gas industry, the Company is generally able to retain its ownership interest in undeveloped acreage by production of existing wells, by drilling activity which establishes commercial reserves sufficient to maintain the lease or by payment of delay rentals. Markets and Customers The market for oil and natural gas produced by the Company depends on factors beyond its control, including the extent of domestic production and imports of oil and natural gas, the proximity and capacity of natural gas pipelines and other transportation facilities, demand for oil and natural gas, the marketing of competitive fuels and the effects of state and federal regulation. The oil and gas industry also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers. Substantially all of the Company's natural gas production is sold either on the spot natural gas market on a month-to-month basis at prevailing spot market prices or under long-term contracts based on current spot market gas prices. A portion of the natural gas production from the Company's Double A Wells field is sold under a long-term contract to Houston Pipeline Company, a subsidiary of Enron Corporation ("HPL"). The agreement with HPL expires on October 31, 2000 with pricing based on a percentage of spot gas prices for natural gas delivered to the Houston Ship Channel. Total gas sales in 1998 to HPL accounted for approximately 17% of the Company's 1998 oil and gas sales. Gas production from the Company's offshore properties at the Ship Shoal and Main Pass areas, which represented 12% of the Company's 1998 oil and gas sales, is sold under a short-term contract based on spot market gas prices to H & N Gas, Ltd. All of the Company's oil production is sold at the well site at posted field prices tied to the spot oil markets. Sales of oil production from the Company's Ship Shoal and Main Pass offshore properties to Gulfmark Energy, Inc, accounted for 25% of the Company's 1998 oil and gas sales. Competition The oil and gas industry is highly competitive. Competitors include major oil companies, other independent energy companies, and individual producers and operators, many of which have financial resources, personnel and facilities substantially greater than those of the Company. The Company faces intense competition for the acquisition of oil and natural gas properties. Regulation The Company's operations are regulated by certain federal and state agencies. In particular, oil and natural gas production and related operations are or have been subject to price controls, taxes and other laws relating to the oil and natural gas industry. The Company cannot predict how existing laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on its business or financial condition. Sales of natural gas by the Company are not regulated and are made at market prices. However, the Federal Energy Regulatory Commission ("FERC") regulates interstate and certain intrastate natural gas transportation rates and service conditions, which affect the marketing of natural gas produced by the Company, as well as the revenues received by the Company for sales of such 14 production. Since the mid-1980s, FERC has issued a series of orders, culminating in Order Nos. 636, 636-A and 636-B ("Order 636"), that have significantly altered the marketing and transportation of gas. Order 636 mandated a fundamental restructuring of interstate pipeline sales and transportation service, including the unbundling by interstate pipelines of the sales, transportation, storage and other components of the city-gate sales services such pipelines previously performed. One of FERC's purposes in issuing the orders was to increase competition within all phases of the natural gas industry. Generally, Order 636 has eliminated or substantially reduced the interstate pipelines' traditional role as wholesalers of natural gas, and has substantially increased competition and volatility in natural gas markets. Sales of oil and natural gas liquids by the Company are not regulated and are made at market prices. The price the Company receives from the sale of these products is affected by the cost of transporting the products to market. The Company's oil and natural gas exploration, production and related operations are subject to extensive rules and regulations promulgated by federal, state and local agencies. Failure to comply with such rules and regulations can result in substantial penalties. The regulatory burden on the oil and gas industry increases the Company's cost of doing business and affects its profitability. Because such rules and regulations are frequently amended or reinterpreted, the Company is unable to predict the future cost or impact of complying with such laws. The states of Texas and Louisiana require permits for drilling operations, drilling bonds and the filing of reports concerning operations and impose other requirements relating to the exploration and production of oil and gas. These states also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum rates of production from oil and gas wells and the regulation of spacing, plugging and abandonment of such wells. The statutes and regulations of certain states limit the rate at which oil and gas can be produced from the Company's properties. The Company is required to comply with various federal and state regulations regarding plugging and abandonment of oil and natural gas wells. The Company provides reserves for the estimated costs of plugging and abandoning its wells, to the extent such costs exceed the estimated salvage value of the wells, on a unit of production basis. Environmental Various federal, state and local laws and regulations governing the discharge of materials into the environment, or otherwise relating to the protection of the environment, health and safety, affect the Company's operations and costs. These laws and regulations sometimes require governmental authorization before conducting certain activities, limit or prohibit other activities because of protected areas or species, create the possibility of substantial liabilities for pollution related to Company operations or properties, and provide penalties for noncompliance. In particular, the Company's drilling and production operations, its activities in connection with storage and transportation of crude oil and other liquid hydrocarbons, and its use of facilities for treating, processing or otherwise handling hydrocarbons and related exploration and production wastes are subject to stringent environmental regulation. As with the industry in general, compliance with existing and anticipated regulations increases the Company's overall cost of business. While these regulations affect the Company's capital expenditures and earnings, the Company believes that such regulations do not affect its competitive position in the industry because its competitors are similarly affected by environmental regulatory programs. Environmental regulations have historically been subject to frequent change and, therefore, the Company cannot predict with certainty the future costs or other future impacts of environmental regulations on its future operations. A discharge of hydrocarbons or hazardous 15 substances into the environment could subject the Company to substantial expense, including the cost to comply with applicable regulations that require a response to the discharge, such as containment or cleanup, claims by neighboring landowners or other third parties for personal injury, property damage or their response costs and penalties assessed, or other claims sought, by regulatory agencies for response cost or for natural resource damages. The following are examples of some environmental laws that potentially impact the Company and its operations. Water. The Oil Pollution Act ("OPA") was enacted in 1990 and amends provisions of the Federal Water Pollution Control Act of 1972 ("FWPCA") and other statutes as they pertain to the prevention of and response to major oil spills. The OPA subjects owners of facilities to strict, joint and potentially unlimited liability for removal costs and certain other consequences of an oil spill along shorelines or that enters navigable waters. In the event of an oil spill into such waters, substantial liabilities could be imposed upon the Company. Recent regulations developed under OPA require companies that own offshore facilities, including the Company, to demonstrate oil spill financial responsibility for removal costs and damage caused by oil discharge. States in which the Company operates have also enacted similar laws. Regulations are currently being developed under the OPA and similar state laws that may also impose additional regulatory burdens on the Company. The FWPCA imposes restrictions and strict controls regarding the discharge of produced waters, other oil and gas wastes, any form of pollutant, and, in some instances, storm water runoff, into waters of the United States. The FWPCA provides for civil, criminal and administrative penalties for any unauthorized discharges and, along with the OPA, imposes substantial potential liability for the costs of removal, remediation or damages resulting from an unauthorized discharge. State laws for the control of water pollution also provide civil, criminal and administrative penalties and liabilities in the case of an unauthorized discharge into state waters. The cost of compliance with the OPA and the FWPCA have not historically been material to the Company's operations, but there can be no assurance that changes in federal, state or local water pollution control programs will not materially adversely affect the Company in the future. Although no assurances can be given, the Company believes that compliance with existing permits and compliance with foreseeable new permit requirements will not have a material adverse effect on the Company's financial condition or results of operations. Air Emissions. Amendments to the Federal Clean Air Act enacted in 1990 (the "1990 CAA Amendments") require or will require most industrial operations in the United States to incur capital expenditures in order to meet air emissions control standards developed by the United States Environmental Protection Agency ("EPA") and state environmental agencies. The 1990 CAA Amendments impose a new operating permit on major sources, and several of the Company's facilities may require permits under this new program. Although no assurances can be given, the Company believes implementation of the 1990 CAA Amendments will not have a material adverse effect on the Company's financial condition or results of operations. Solid Waste. The Company generates non-hazardous solid wastes that are subject to the requirements of the Federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. The EPA and the states in which the Company operates are considering the adoption of stricter disposal standards for the type of non-hazardous wastes generated by the Company. RCRA also governs the generation, management, and disposal of hazardous wastes. At present, the Company is not required to comply with a substantial portion of the RCRA requirements because the Company's operations generate minimal quantities of hazardous wastes. However, it is possible that additional wastes, which could include wastes currently generated during the Company's operations, could in the future be designated as "hazardous wastes." Hazardous wastes are subject to more 16 rigorous and costly disposal and management requirements than are non-hazardous wastes. Such changes in the regulations may result in additional capital expenditures or operating expenses by the Company. Superfund. The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as "Superfund", imposes liability, without regard to fault or the legality of the original act, on certain classes of persons in connection with the release of a "hazardous substance" into the environment. These persons include the current owner or operator of any site where a release historically occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. CERCLA also authorizes the EPA and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In the course of its ordinary operations, the Company may have managed substances that may fall within CERCLA's definition of a "hazardous substance." Therefore, the Company may be jointly and severally liable under CERCLA for all or part of the costs required to clean up sites where the Company disposed of or arranged for the disposal of these substances. This potential liability extends to properties that the Company previously owned or operated, as well as to properties owned and operated by others at which disposal of the Company's hazardous substances occurred. The Company may also fall into the category of the "current owner or operator." The Company currently owns or leases numerous properties that for many years have been used for the exploration and production of oil and gas. Although the Company believes it has utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released by the Company on or under the properties owned or leased by the Company. In addition, many of these properties have been previously owned or operated by third parties who may have disposed of or released hydrocarbons or other wastes at these properties. Under CERCLA and analogous state laws, the Company could be subject to certain liabilities and obligations, such as being required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators), to clean up contaminated property (including contaminated groundwater) or to perform remedial plugging operations to prevent future contamination. Office and Operations Facilities The Company's executive offices are located at 5005 LBJ Freeway, Suite 1000, Dallas, Texas 75244, and its telephone number is (972) 701-2000. The Company leases office space in Dallas, Texas. The Dallas lease covers 13,525 square feet at a monthly rate of $19,682 during 1998. The lease expires on July 31, 1999. In August 1997, the Company entered into a seven year lease covering 20,046 square feet in a building under construction. The Company plans to relocate its corporate headquarters to the building in June 1999. The new lease begins when the space is occupied and is at an initial monthly rate of $35,081. The Company also owns production offices and pipe yard facilities near Marshall and Livingston, Texas and near Logansport, Louisiana. Employees As of December 31, 1998, the Company had 47 employees and utilized contract employees for certain of its field operations. The Company considers its employee relations to be satisfactory. 17 Directors, Executive Officers and Other Management The following table sets forth certain information concerning the executive officers and directors of the Company. Name Age Position with Company ---- --- --------------------- M. Jay Allison 43 President, Chief Executive Officer and Charirman of the Board of Directors Roland O. Burns 38 Senior Vice President, Chief Financial Officer, Secretary and Treasurer Mack D. Good 48 Vice President of Operations Stephen E. Neukom 49 Vice President of Marketing Richard G. Powers 44 Vice President of Land Daniel K. Presley 38 Vice President of Accounting and Controller Michael W. Taylor 45 Vice President of Corporate Development Richard S. Hickok 73 Director Franklin B. Leonard 71 Director Cecil E. Martin, Jr 57 Director David W. Sledge 42 Director Executive Officers M. Jay Allison has been a director of the Company since 1987, and President and Chief Executive Officer of the Company since 1988. Mr. Allison was elected Chairman of the Board of Directors in 1997. From 1987 to 1988, Mr. Allison served as Vice President and Secretary of the Company. From 1981 to 1987, he was a practicing oil and gas attorney with the firm of Lynch, Chappell & Alsup in Midland, Texas. In 1983, Mr. Allison co-founded a private independent oil and gas company, Midwood Petroleum, Inc., which was active in the acquisition and development of oil and gas properties from 1983 to 1987. He received B.B.A., M.S. and J.D. degrees from Baylor University in 1978, 1980 and 1981, respectively. Roland O. Burns has been Senior Vice President of the Company since 1994, Chief Financial Officer and Treasurer since 1990 and Secretary since 1991. From 1982 to 1990, Mr. Burns was employed by the public accounting firm, Arthur Andersen LLP. During his tenure with Arthur Andersen LLP, Mr. Burns worked primarily in the firm's oil and gas audit practice. Mr. Burns received B.A. and M.A. degrees from the University of Mississippi in 1982 and is a Certified Public Accountant. Mack D. Good was appointed Vice President of Operations of the Company in March 1999. From August 1997 until his promotion, Mr. Good served as the Company's District Engineer for the East Texas/ North Louisiana region. From 1983 until 1997, Mr. Good was with Enserch Exploration, Inc. serving in various operations management and engineering positions. Mr. Good received a B.S. of Biology/Chemistry from Oklahoma State University in 1975 and a B.S. of Petroleum Engineering from the University of Tulsa in 1983. He is a Registered Professional Engineer in the State of Texas. Stephen E. Neukom has been Vice President of Marketing of the Company since December 1997 and has served as Manager of Crude Oil and Natural Gas Marketing since December 1996. From October 1994 to 1996, Mr. Neukom served as Vice President of Comstock Natural Gas, Inc., the Company's wholly owned gas marketing subsidiary. Prior to joining the Company, Mr. Neukom was Senior Vice President of Victoria Gas Corporation from 1987 to 1994. Mr. Neukom received a B.B.A. degree from the University of Texas in 1972. 18 Richard G. Powers joined the Company as Land Manager in October 1994 and has been Vice President of Land since December 1997. Mr. Powers has over 20 years experience as a petroleum landman. Prior to joining the Company, Mr. Powers was employed for 10 years as Land Manager for Bridge Oil (U.S.A.), Inc. and its predecessor Pinoak Petroleum, Inc. Mr. Powers received a B.B.A. degree in 1976 from Texas Christian University. Daniel K. Presley has been Vice President of Accounting since December 1997 and has been with the Company since December 1989 serving as Controller since 1991. Prior to joining the Company, Mr. Presley had six years of experience with several independent oil and gas companies including AmBrit Energy, Inc. Prior thereto, Mr. Presley spent two and one-half years with B.D.O. Seidman, a public accounting firm. Mr. Presley has a B.B.A. from Texas A & M University. Michael W. Taylor has been Vice President of Corporate Development since December 1997 and has served the Company in various capacities since September 1994. Prior to joining the Company, Mr. Taylor had been an independent oil and gas producer and petroleum consultant for the previous 15 years. Mr. Taylor is a registered professional engineer in the state of Texas and he received a B.S. degree in Petroleum Engineering from Texas A & M University in 1974. Outside Directors Richard S. Hickok has been a director of the Company since 1987. From 1948 to 1983, he was employed by the international accounting firm of Main Hurdman where he retired as Chairman. From 1978 to 1980, Mr. Hickok served as a Trustee of the Financial Accounting Foundation and has extensive involvement serving on various committees of the American Institute of Certified Public Accountants. Mr. Hickok holds a B.S. degree from the Wharton School of the University of Pennsylvania. Franklin B. Leonard has been a director of the Company since 1960. From 1961 to 1994, Mr. Leonard served as President of Crossley Surveys, Inc., a New York based company which conducted statistical surveys. Mr. Leonard's family's involvement in the Company spans four generations dating back to the 1880's when Mr. Leonard's great grandfather was a significant shareholder of the Company. Mr. Leonard holds a B.S. degree from Yale University. Cecil E. Martin, Jr. has been a director of the Company since 1988. From 1973 to 1991 he served as Chairman of a public accounting firm in Richmond, Virginia. Mr. Martin also serves as a director for CareerShop.com. Mr. Martin holds a B.B.A. degree from Old Dominion University and is a Certified Public Accountant. David W. Sledge was elected to the Board of Directors of the Company in 1996. Mr. Sledge served as President of Gene Sledge Drilling Corporation, a privately held contract drilling company based in Midland, Texas until its sale in October 1996. Mr. Sledge served Gene Sledge Drilling Corporation in various capacities from 1979 to 1996. Mr. Sledge is a past director of the International Association of Drilling Contractors and is a past chairman of the Permian Basin chapter of this association. He received a B.B.A. degree from Baylor University in 1979. 19 ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings which management believes will have a material adverse effect on the Company's consolidated results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of 1998. 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed for trading on the New York Stock Exchange under the symbol "CRK". The following table sets forth, on a per share basis for the periods indicated, the high and low sales prices by calendar quarter for the periods indicated as reported by the New York Stock Exchange. High Low ---- --- 1997 - First Quarter $ 14.38 $ 8.13 Second Quarter 10.88 6.63 Third Quarter 12.94 9.88 Fourth Quarter 17.50 10.63 1998 - First Quarter $12.00 $ 8.75 Second Quarter 13.50 7.31 Third Quarter 8.13 5.25 Fourth Quarter 6.13 2.81 As of March 12, 1999, the Company had 24,350,452 shares of common stock outstanding, which were held by 734 holders of record and approximately 8,500 beneficial owners who maintain their shares in "street name" accounts. The Company has never paid cash dividends on its common stock. The Company presently intends to retain any earnings for the operation and expansion of its business and does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of dividends will depend upon results of operations, capital requirements, the financial condition of the Company and such other factors as the Board of Directors of the Company may deem relevant. In addition, the Company is prohibited under the Company's bank credit facility from paying or declaring cash dividends. 21 ITEM 6. SELECTED FINANCIAL DATA The historical financial data presented in the table below as of and for each of the years in the five-year period ended December 31, 1998 are derived from the Consolidated Financial Statements of the Company. Significant acquisitions of producing oil and gas properties affect the comparability of the financial and operating data for the periods presented. The financial results are not necessarily indicative of the Company's future operations or financial results. The data presented below should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto included elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year Ended December 31, ------------------------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ($ in thousands, except per share data) Statement of Opertatons Data: Revenues: Oil and gas sales ............................ $ 16,855 $ 22,091 $ 68,915 $ 88,555 $ 92,961 Gain on sales of property .................... 328 19 1,447 85 -- Other income ................................. 416 264 593 704 274 ------ ------ ------ ------ ------ Total revenues ............................ 17,599 22,374 70,955 89,344 93,235 ------ ------ ------ ------ ------ Expenses: Oil and gas operating(1) ..................... 6,099 7,427 13,838 17,919 24,747 Exploration .................................. -- -- 436 2,810 8,301 Depreciation, depletion and amortization ..... 7,350 8,379 18,269 26,235 51,005 General and administrative, net .............. 1,569 1,301 2,239 2,668 1,617 Interest ..................................... 2,869 5,542 10,086 5,934 16,977 Impairment of oil and gas properties ......... -- 29,150 -- -- 17,000 --------- --------- --------- --------- --------- Total expenses ............................ 17,887 51,799 44,868 55,566 119,647 --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes and extraordinary item .... (288) (29,425) 26,087 33,778 (26,412) Income tax benefit (expense) ................. -- -- -- (11,622) 9,244 --------- --------- --------- --------- --------- Net income (loss) from continuing operations before extraordinary item ..................... (288) (29,425) 26,087 22,156 (17,168) Preferred stock dividends .................... (818) (1,908) (2,021) (410) -- --------- --------- --------- --------- --------- Net income (loss) from continuing operations attributable to common stock before extraordinary item ............................ (1,106) (31,333) 24,066 21,746 (17,168) Income from discontinued operations .......... 229 3,264 1,866 -- -- Extraordinary loss ........................... (615) -- -- -- -- --------- --------- --------- --------- --------- Net income (loss) attributable to common stock.... $ (1,492) $ (28,069) $ 25,932 $ 21,746 $ (17,168) ========= ========= ========= ========= ========= Weighted average shares outstanding: Basic ......................................... 12,065 12,546 15,449 24,186 24,275 ========= ========= ========= ========= ========= Diluted........................................ 21,199 26,008 ========= ========= Basic earnings per share: Net income (loss) from continuing operations before extraordinary item.................... $ (0.09) $ (2.50) $ 1.56 $ 0.90 $ (0.71) Net income (loss) after extraordinary item.... (0.12) (2.24) 1.68 0.90 (0.71) Diluted earnings per share: Net income (loss) from continuing operations before extraordinary item.................... $ 1.23 $ 0.85 Net income (loss) after extraordinary item..... 1.32 0.85 Other Financial Data: EBITDA(2)......................................... $ 9,931 $ 13,646 $ 54,878 $ 68,757 $ 66,871 Ratio of EBITDA to interest expense............... 3.5 2.5 5.4 11.3 3.5 As of December 31, -------------------------------------------------------------- Balance Sheet Data: 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Cash and cash equivalents ..................... $ 3,425 $ 1,917 $ 16,162 $ 14,504 $ 5,176 Property and equipment, net ................... 77,989 102,116 185,928 410,781 404,017 Total assets .................................. 91,571 120,099 222,002 456,800 429,672 Total debt .................................... 37,932 71,811 80,108 260,000 278,104 Stockholders' equity .......................... 41,205 30,128 118,216 124,594 109,663 (1) Includes lease operating costs and production and ad valorem taxes. (2) EBITDA means income (loss) from continuing operations before income taxes, plus interest, depreciation, depletion and amortization, exploration expense and impairment of oil and gas properties. EBITDA is a financial measure commonly used in the Company's industry and should not be considered in isolation or as a substitute for net income, cash flow provided by operating activities or other income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity.
22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations General The Company's results of operations have been significantly affected by its success in acquiring producing oil and natural gas properties. Fluctuations in oil and natural gas prices have also influenced the Company's financial results. Relatively minor movements in oil and natural gas prices can lead to a change in the Company's results of operations and cash flow and could have an impact on the Company's borrowing base under its bank credit facility. Based on the 1998 operating results, a change in the average natural gas price realized by the Company of $0.10 per Mcf would result in a change in net income attributable to common stock of approximately $1.6 million, or $0.07 per share. A change in the average oil price realized by the Company of $1.00 per barrel would result in a change in net income attributable to common stock of approximately $1.5 million or $0.06 per share. The following table reflects certain summary operating data for the periods presented: Year Ended December 31, ----------------------- 1996 1997 1998 ---- ---- ---- Net Production Data: Oil (MBbls) 952 1,343 2,571 Natural gas (MMcf) 19,427 22,860 26,713 Average Sales Price: Oil (per Bbl) $21.96 $19.47 $12.73 Natural gas (per Mcf) 2.47 2.73 2.25 Average equivalent price (per Mcfe) 2.74 2.87 2.21 Expenses ($ per Mcfe): Oil and gas operating(1) $ 0.55 $ 0.58 $ 0.59 General and administrative 0.09 0.09 0.04 Depreciation, depletion and amortization(2) 0.72 0.84 1.20 Cash Margin ($ per Mcfe)(3) $ 2.10 $ 2.20 $ 1.58 (1)Includes lease operating costs and production and ad valorem taxes. (2)Represents depreciation, depletion and amortization of oil and gas properties only. (3)Represents average equivalent price per Mcfe less oil and gas operating expenses per Mcfe and general and administrative expenses per Mcfe. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Oil and gas sales increased $4.4 million (5%) to $93.0 million in 1998 from $88.6 million in 1997. The increase is attributable to a 17% increase in natural gas production and a 92% increase in oil production, offset by 18% lower realized natural gas prices and 35% lower realized oil prices. The increase in production is attributable to the Bois d' Arc Acquisition completed in December 1997. Other income in 1998 decreased $430,000 (61%) to $274,000 from $704,000 for 1997. This decrease is attributable to a lower level of short-term cash deposits outstanding as well as the termination of management fee income previously received by the Company. Oil and gas operating costs in 1998 increased $6.8 million (38%) to $24.7 million from $17.9 million in 1997 due to the 36% increase in oil and gas production (on an equivalent Mcf basis). Oil and gas operating expenses per equivalent Mcf produced increased $0.01 to $0.59 in 1998 from $0.58 in 1997. 23 Exploration expense for 1998 was $8.3 million which relates to the write-off of the six unsuccessful exploratory wells, as compared to $2.8 million in 1997. Depreciation, depletion and amortization ("DD&A") increased $24.8 million (94%) to $51.0 million from $26.2 million in 1997. The increase is due to a 36% increase in oil and natural gas production and to higher costs per unit of amortization. DD&A per equivalent Mcf increased by $0.36 to $1.20 in 1998 from $0.84 in 1997. The increases in the DD&A rate relate to the higher costs of the offshore properties acquired in the Bois d' Arc Acquisition. General and administrative expenses, which are reported net of overhead reimbursements, decreased $1.1 million (39%) to $1.6 million in 1997. The decrease is attributable to an increase in overhead reimbursements received by the Company in 1998 which was greater than the increase in the Company's overhead costs before reimbursements. Interest expense in 1998 increased $11.0 million (186%) to $17.0 million in 1998 from $5.9 million in 1997. The increase is related to a higher level of outstanding advances under the Company's bank credit facility due to the Bois d' Arc Acquisition completed in December 1997 as well as a higher average interest rate on the Company's bank credit facility. The weighted average annual interest rate under the Company's bank credit facility increased to 7.2% in 1998 as compared to 6.6% in 1997. The increase in the rate was attributable to a higher utilization of the borrowing base under the bank credit facility after the December 1997 acquisition. Due to the substantial drop in oil and gas prices during 1998, the Company provided an impairment of $17.0 million in 1998 of its oil and gas properties. The Company had a deferred tax benefit of $9.2 million for 1998, using an estimated tax rate of 35%. The net loss for the year ended December 31, 1998 was $17.2 million, as compared to net income of $21.7 million, in 1997. Net loss per share for 1998 was $0.71 on weighted average shares outstanding of 24.3 million as compared to net income per share of $0.85 for 1997 on diluted weighted average shares outstanding of 26.0 million. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Oil and gas sales increased $19.6 million (28%) to $88.6 million in 1997 from $68.9 million in 1996 due primarily to a 18% increase in natural gas production and a 41% increase in oil production as well as higher natural gas prices. The production increases related primarily to production from the Black Stone Acquisition, which closed in May 1996 and the Bois d' Arc Acquisition which closed in December 1997. The Company's average gas price increased 11% and its average oil price decreased 11% during 1997 as compared to 1996. Other income increased $111,000 (19%) to $704,000 in 1997 from $593,000 in 1996 due primarily to additional interest income earned on an increased level of short-term cash deposits in 1997. Oil and gas operating expenses, including production taxes, increased $4.1 million (29%) to $17.9 million in 1997 from $13.8 million in 1996 due primarily to the 23% increase in oil and natural gas production (on an equivalent Mcf basis) resulting primarily from the acquisitions in 1996 and 1997. Oil and gas operating expenses per Mcfe produced increased 5% to $0.58 in 1997 from $0.55 in 1996 due primarily to increases in production taxes and ad valorem taxes which were related to the higher gas prices received in 1997. 24 General and administrative expenses increased $429,000 (19%) to $2.7 million in 1997 from $2.2 million in 1996. This increase related to increased general corporate expenses associated with the increased size of the Company's operations. DD&A increased $8.0 million (44%) to $26.2 million in 1997 from $18.3 million in 1996 due to the 23% increase in oil and natural gas production (on an Mcfe basis). Oil and gas property DD&A per Mcfe produced of $0.84 in 1997 increased from $0.72 in 1996 due to the higher costs of the acquisitions closed in 1996 and 1997. Interest expense decreased $4.2 million (41%) to $5.9 million in 1997 from $10.1 million in 1996 due primarily to a decrease in the average outstanding advances under the Company's bank credit facility. The average annual interest rate paid under the Company's bank credit facility also decreased to 6.6% in 1997 as compared to 8.1% in 1996. The Company provided for income taxes of $11.6 million for 1997 using an estimated effective tax rate of 34%. No provision for income taxes was made in 1996 due to the availability of previously unrecognized tax assets relating to net operating loss carryforwards. The Company reported net income of $21.7 million, after preferred stock dividends of $410,000, for the year ended December 31, 1997, as compared to a net income of $24.1 million from continuing operations, after preferred stock dividends of $2.0 million, for the year ended December 31, 1996. Net income per share for 1997 was $0.85 on diluted average shares outstanding of 26.0 million as compared to $1.23 for 1996 on diluted average shares outstanding of 21.2 million. Liquidity and Capital Resources Funding for the Company's activities has historically been provided by operating cash flow, debt and equity financings and asset dispositions. In 1998 the Company's net cash flow provided by operating activities totaled $40.7 million ($50.2 million before changes to other working capital accounts). In addition to operating cash flow, the primary source of funds for the Company in 1998 was aggregate borrowings of $23.2 million. The Company's primary needs for capital, in addition to funding of ongoing operations, relate to the acquisition, development and exploration of oil and gas properties and the repayment of principal and interest on debt. In 1998, the Company repaid $5.1 million of indebtedness and incurred capital expenditures of $67.4 million primarily for development and exploration activities. The Company's annual capital expenditure activity is summarized as follows: Year Ended December 31, --------------------------------------- 1996 1997 1998 -------- -------- -------- (In thousands) Acquisition of oil and gas properties $100,446 $220,054 $ 2,453 Other leasehold costs 93 2,304 3,622 Workovers and recompletions 2,972 2,517 10,198 Development drilling 7,964 22,765 20,361 Exploratory drilling 436 6,043 30,423 Other 51 1,160 330 -------- -------- -------- Total $111,962 $254,843 $ 67,387 ======== ======== ======== 25 The timing of most of the Company's capital expenditures is discretionary with no material long-term capital expenditure commitments. Consequently, the Company has a significant degree of flexibility to adjust the level of such expenditures as circumstances warrant. The Company spent $11.5 million, $33.6 million and $64.6 million on development and exploration activities in 1996, 1997 and 1998, respectively. The Company currently anticipates spending approximately $10.0 to $36.0 million on development and exploration projects in 1999. The Company intends to primarily use internally generated cash flow to fund capital expenditures other than significant acquisitions and plans to limit drilling expenditures in 1999 to available cash flow after debt service payments. Such debt service payments are expected to require a substantial amount of the Company's available cash flow unless oil and gas prices improve from current levels. Without an improvement in oil and gas prices or the completion of a debt or equity financing, the Company's 1999 total capital expenditures will probably be limited to $10.0 million to $15.0 million. The Company does not have a specific acquisition budget as a result of the unpredictability of the timing and size of forthcoming acquisition activities. The Company intends to use borrowings under its bank credit facility or other debt or equity financings to the extent available to finance significant acquisitions. The availability and attractiveness of these sources of financing will depend upon a number of factors, some of which will relate to the financial condition and performance of the Company, and some of which will be beyond the Company's control, such as prevailing interest rates, oil and gas prices and other market conditions. The Company's bank credit facility consists of a $280.0 million revolving credit commitment provided by a syndicate of ten banks for which The First National Bank of Chicago serves as administrative agent. Indebtedness under the bank credit facility is secured by substantially all of the Company's assets. The Company's bank credit facility is subject to borrowing base availability which is generally redetermined semiannually based on the banks' estimates of the future net cash flows of the Company's oil and gas properties. As of December 31, 1998, the borrowing base was $280.0 million and is scheduled to reduce to $240.0 million by December 31, 1999 and by an additional $20.0 million by January 1, 2000. Such borrowing base may be affected from time to time by the performance of the Company's oil and gas properties and changes in oil and gas prices. The determination of the Company's borrowing base is at the sole discretion of the administrative agent and the bank group. The next scheduled borrowing base redetermination will occur in April 1999; however, the bank group can request a redetermination at any time. The revolving credit line bears interest at the option of the Company at either (i) LIBOR plus 2.25% or (ii) the "corporate base rate" plus 1.25%. The Company incurs a commitment fee of up to 0.5% per annum on the unused portion of the borrowing base. The average annual interest rate as of December 31, 1998 of all outstanding indebtedness under the Company's bank credit facility was approximately 7.6%. The revolving credit line matures on December 9, 2002 or such earlier date as the Company may elect. The credit facility contains covenants which, among other things, restrict the payment of cash dividends, limit the amount of consolidated debt, and limit the Company's ability to make certain loans, capital expenditures and investments. Significant financial covenants include the maintenance of a current ratio, as defined, (0.75 to 1.0), maintenance of tangible net worth ($98.0 million), maintenance of an interest coverage ratio (2.5 to 1), and a limitation on capital expenditures ($30.0 million). Based on the scheduled borrowing base reductions in 1999, the Company has classified $38.0 million of the amount outstanding under its bank credit facility as a current liability at December 31, 1998. The Company plans to reduce its drilling expenditures in 1999 as compared to 1998 and utilize cash flow generated from operations to reduce outstanding borrowings under the bank credit facility. The Company believes that it will generate sufficient operating cash flow during 1999 to reduce the amounts outstanding under the bank credit facility in accordance with the scheduled reductions to the borrowing base. The Company intends to refinance the additional $20.0 million reduction to the 26 borrowing base scheduled to occur in January 2000 with a future debt or equity financing or to pay down such debt from proceeds from sale of existing properties. Management cannot be assured that such debt or equity financing will be available for the Company on the terms acceptable to its existing shareholders or that the banks will not require additional reductions to the borrowing base in the future. Based on estimated 1999 oil and natural gas production, the Company estimates a change in the average natural gas price realized by the Company of $0.10 per Mcf on unhedged production would result in a change in cash flow of approximately $1.5 million. Also, the Company estimates a change in the average oil price realized by the Company of $1.00 per barrel on unhedged production would result in a change in cash flow of approximately $2.9 million. If oil and gas prices were to fall significantly below current levels for the remainder of 1999 or if the banks were to further reduce the Company's borrowing base, the Company would likely have to complete a debt or equity financing or sell selected properties in order to meet the required 1999 scheduled reductions to its borrowing base. The Company may consider additional debt or equity financings in order to provide liquidity and working capital for attractive acquisition opportunities during the current depressed price environment of the industry. Based on the current low oil and gas price environment, there can be no assurance that such capital would be available with terms and conditions acceptable to the Company or its existing stockholders. Federal Taxation At December 31, 1998, the Company had federal income tax net operating loss ("NOL") carryforwards of approximately $57.4 million. The NOL carryforwards expire from 2005 through 2018. The value of these carryforwards depends on the ability of the Company to generate federal taxable income and to utilize the carryforwards to reduce such income. Inflation In recent years inflation has not had a significant impact on the Company's operations or financial condition. Risk Management The Company's market risk exposures relate primarily to commodity prices and interest rates. Therefore, the Company periodically uses commodity price swaps to hedge the impact of natural gas price fluctuations and uses interest rate swaps to hedge interest rates on floating rate debt. The Company does not engage in activities using complex or highly leveraged instruments. These instruments are generally put in place to limit risk of adverse natural gas price or interest rate movements, however, these instruments usually limit future gains from favorable natural gas price or lower interest rates. Recognition of realized gains or losses are deferred until the underlying physical product is purchased or sold. Unrealized gains or losses on derivative financial instruments are not recorded. The cash flow impact of derivative and other financial instruments is reflected as cash flows from operating activities. As a result of certain hedging transactions for natural gas the Company's average realized natural gas price has been impacted as follows: Year Ended December 31, ----------------------------- 1996 1997 1998 ---- ---- ---- Percent of natural gas production hedged 15% - 7% Price realized without hedging (per Mcf) $ 2.53 $ 2.73 $ 2.24 Increase (decrease) in price realized (per Mcf) $ (0.06) - $ 0.01 27 As of December 31, 1998, the Company had no open derivative financial instruments held for price risk management. Subsequent to December 31, 1998, the Company entered into natural gas price swaps covering 10,480,000 MMBtus of its natural gas production for March 1999 to October 1999 at 1,310,000 MMBtus per month at a fixed index price of $1.81 (after basis adjustment), which represents approximately 60% of the Company's estimated gas production for that period. The table below provides information about the Company's derivative financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For interest rate swaps, the table presents notional amounts and weighted average interest rates by contractual maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve as of December 31, 1998.
Expected Maturity Date -------------------------------------------------------- Fair Value as of 1999 2000 2001 2002 Total December 31, 1998 ---- ---- ---- ---- ----- ----------------- ($ in thousands) Liabilities: Bank credit facility $ 38,000 $ 20,000 $ - $ 220,000 $ 278,000 $ 278,000 Variable rate 7.2% 7.2% - 7.4% 7.4% Interest Rate Swaps: Variable to fixed $ - $ - $ - $ 125,000 $ 125,000 (95) Average pay rate 5.0% 5.0% Average receive rate 5.1% 5.1%
Year 2000 "Year 2000," or the ability of computer systems to process dates with years beyond 1999, affects almost all companies and organizations. Computer systems that are not Year 2000 compliant by January 1, 2000 may cause an adverse effect to companies and organizations that rely upon those systems. The Company is assessing and correcting the potential impact of problems with computer software, operating systems, and equipment containing computer processing chips that are unable to properly process dates beyond 1999. The Company has outsourced its significant financial information systems. Based on information received from the Company's providers, the Company is relying on assurances from the providers that they are Year 2000 compliant. The Company's costs related to Year 2000 have not been significant and it expects future costs will not be material. Because the Company outsources its information technology systems and software, it believes that there is little risk associated with Year 2000 for its information systems. The Company believes that there is minimal risk with embedded technology associated with its operations because it does not own any significant gas processing plants or pipelines, nor does it have any significant electronic field data capture systems on its wells. However, the Company cannot provide assurance that all significant third parties will achieve compliance in a timely manner. Such failure to achieve Year 2000 compliance could have an adverse effect on the Company's operations and cash flow due to potential shut-in production or delay in drilling schedules. Although the Company does not have a formal contingency plan, it stands ready to switch from vendors that are not Year 2000 compliant. 28 ITEM 8. FINANCIAL STATEMENTS The Consolidated Financial Statements for Comstock Resources, Inc. and Subsidiaries are included on pages F-1 to F-19 of this report. The financial statements have been prepared by the management of the Company in conformity with generally accepted accounting principles. Management is responsible for the fairness and reliability of the financial statements and other financial data included in this report. In the preparation of the financial statements, it is necessary to make informed estimates and judgments based on currently available information on the effects of certain events and transactions. The Company maintains accounting and other controls which management believes provide reasonable assurance that financial records are reliable, assets are safeguarded, and that transactions are properly recorded in accordance with management's authorizations. However, limitations exist in any system of internal control based upon the recognition that the cost of the system should not exceed benefits derived. The Company's independent public accountants, Arthur Andersen LLP, are engaged to audit the financial statements of the Company and to express an opinion thereon. Their audit is conducted in accordance with generally accepted auditing standards to enable them to report whether the financial statements present fairly, in all material respects, the financial position and results of operations of the Company in accordance with generally accepted accounting principles. The Audit Committee of the Board of Directors of the Company, composed of three directors who are not employees, meets periodically with the independent public accountants and management. The independent public accountants have full and free access to the Audit Committee to meet, with and without management being present, to discuss the results of their audits and the quality of financial reporting. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 29 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference to the Company's definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the Company's definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the Company's definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the Company's definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998. 30 PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K Exhibits: The following exhibits are included on pages E-1 to E-61 of this report. Exhibit No. Description - ------- ---------------------------------------------------------------------- 3.1(a) Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 3.1(b) Certificate of Amendment to the Restated Articles of Incorporation dated July 1, 1997 (incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-3, dated October 25, 1996). 4.2(a) Rights Agreement dated as of December 10, 1990, by and between the Company and Society National Bank, as Rights Agent (incorporated herein by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A, dated December 14, 1990). 4.2(b) First Amendment to the Rights Agreement, by and between the Company and Society National Bank (successor to Ameritrust Texas, N.A.), as Rights Agent, dated January 7, 1994 (incorporated herein by reference to Exhibit 3.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4.2(c) Second Amendment to the Rights Agreement, by and between the Company and Bank One, Texas N.A. (successor to Society National Bank), as Rights Agent, dated April 1, 1995 (incorporated by reference to Exhibit 4.7 to the Company's Annual Report on Form 10-K for the ended December 31, 1995). 4.2(d) Third Amendment to the Rights Agreement, by and between the Company and Bank One, Texas N.A. (successor to Society National Bank), as Rights Agent, dated April 1, 1995 (incorporated by reference to Exhibit 4.8 to the Company's Annual Report on Form 10-K for the ended December 31, 1995). 4.2(e) Fourth Amendment to the Rights Agreement, by and between the Company and Bank One, Texas N.A. (successor to Society National Bank), as Rights Agent, dated April 1, 1995 (incorporated by reference to Exhibit 4.9 to the Company's Annual Report on Form 10-K for the ended December 31, 1995). 4.3 Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock dated December 6, 1990 (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-3, dated October 25, 1996). 10.1(a)* Credit Agreement dated as of December 23, 1998, between the Company, the Banks Party thereto and The First National Bank of Chicago, as Administrative Agent and Toronto Dominion (Texas), Inc., as Syndication Agent. 10.2# Employment Agreement dated May 11, 1998, by and between the Company and M. Jay Allison (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 10.3# Employment Agreement dated May 11, 1998, by and between the Company and Roland O. Burns (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 31 10.4# Change in Control Employment Agreement dated May 15, 1997, by and between the Company and M. Jay Allison (incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.5# Change in Control Employment Agreement dated May 15, 1997, by and between the Company and Roland O. Burns (incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.6(a)# Comstock Resources, Inc. 1991 Long-term Incentive Plan, dated as of April 1, 1991 (incorporated herein by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991). 10.6(b)# Amendment No. 1 to the Comstock Resources, Inc. 1991 Long-term Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.7# Form of Nonqualified Stock Option Agreement, dated April 2, 1991, between the Company and certain officers and directors of the Company (incorporated herein by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991). 10.8# Form of Restricted Stock Agreement, dated April 2, 1991, between the Company and certain officers of the Company (incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991). 10.9 Form of Stock Option Agreement, dated October 12, 1994 by and between the Company and Christopher T. H. Pell, et al. (incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.10 Warrant Agreement dated December 9, 1997 by and between the Company and Bois d' Arc Resources (incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.11 Joint Exploration Agreement dated December 8, 1997 by and between the Company and Bois d' Arc Resources (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.12 Office Lease Agreement dated August 12, 1997 between the Company and Briar Center LLC (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 21* Subsidiaries of the Company. 23* Consent of Arthur Andersen LLP. 27* Financial Data Schedule for the twelve months ended December 31, 1998. *Filed herewith. # Management contract or compensatory plan document. Reports on Form 8-K: There were no reports filed on Form 8-K filed subsequent to September 30, 1998 to the date of this report. 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMSTOCK RESOURCES, INC. By:/s/M. JAY ALLISON -------------------- M. Jay Allison President and Chief Executive Officer (Principal Executive Officer) Date: March 12, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/M. JAY ALLISON President, Chief Executive Officer and March 12, 1999 - ---------------------- M. Jay Allison Chairman of the Board of Directors (Principal Executive Officer) /s/ROLAND O. BURNS Senior Vice President, Chief Financial March 12, 1999 - ---------------------- Roland O. Burns Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) /s/RICHARD S. HICKOK Director March 12, 1999 - ---------------------- Richard S. Hickok /s/FRANKLIN B. LEONARD Director March 12, 1999 - ---------------------- Franklin B. Leonard /s/CECIL E. MARTIN, JR. Director March 12, 1999 - ---------------------- Cecil E. Martin, Jr. /s/DAVID W. SLEDGE Director March 12, 1999 - ---------------------- David W. Sledge 33 CONSOLIDATED FINANCIAL STATEMENTS OF COMSTOCK RESOURCES, INC. AND SUBSIDIARIES INDEX Report of Independent Public Accountants.....................................F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998.................F-3 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998.....................................F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1997 and 1998.....................................F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998.....................................F-6 Notes to Consolidated Financial Statements...................................F-7 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Comstock Resources, Inc.: We have audited the accompanying consolidated balance sheets of Comstock Resources, Inc. (a Nevada corporation) and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Comstock Resources, Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, February 15, 1999 F-2 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 1997 and 1998 ASSETS December 31, 1997 1998 --------- --------- (In thousands) Cash and Cash Equivalents............................ $ 14,504 $ 5,176 Accounts Receivable: Oil and gas sales ................................. 24,509 13,355 Joint interest operations ......................... 6,732 4,506 Other Current Assets ................................ 172 1,457 --------- --------- Total current assets ...................... 45,917 24,494 Property and Equipment: Unevaluated oil and gas properties ................ 30,291 436 Oil and gas properties, successful efforts method .................................. 456,606 547,372 Other ............................................. 1,561 1,648 Accumulated depreciation, depletion and amortization ................................ (77,677) (145,439) --------- --------- Net property and equipment ................ 410,781 404,017 Other Assets ........................................ 102 1,161 --------- --------- $ 456,800 $ 429,672 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Portion of Long-Term Debt.................... $ -- $ 38,104 Accounts Payable and Accrued Expenses ............... 56,184 34,652 --------- --------- Total current liabilities ................. 56,184 72,756 Long-Term Debt, less current portion ................ 260,000 240,000 Deferred Taxes Payable .............................. 11,207 1,778 Reserve for Future Abandonment Costs ................ 4,815 5,475 Stockholders' Equity: Preferred stock--$10.00 par, 5,000,000 shares aurthorized, no shares outstanding............... -- -- Common stock--$0.50 par, 50,000,000 shares authorized, 24,208,785 and 24,350,452 shares shares outstanding at December 31, 1997 and 1998, respectively .......................... 12,104 12,175 Additional paid-in capital ........................ 110,273 112,432 Retained earnings (deficit) ....................... 2,234 (14,934) Less: Deferred compensation-restricted stock grants .................................... (17) (10) --------- --------- Total stockholders' equity ................ 124,594 109,663 --------- --------- $ 456,800 $ 429,672 ========= ========= The accompanying notes are an integral part of these statements. F-3 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1996, 1997 and 1998
1996 1997 1998 ---- ---- ---- (In thousands, except per share amounts) Revenues: Oil and gas sales................................................. $ 68,915 $ 88,555 $ 92,961 Gain on sales of property ........................................ 1,447 85 -- Other income ..................................................... 593 704 274 --------- --------- --------- Total revenues .......................................... 70,955 89,344 93,235 --------- --------- --------- Expenses: Oil and gas operating ........................................... 13,838 17,919 24,747 Exploration ..................................................... 436 2,810 8,301 Depreciation, depletion and amortization ........................ 18,269 26,235 51,005 General and administrative, net ................................. 2,239 2,668 1,617 Interest ........................................................ 10,086 5,934 16,977 Impairment of oil and gas properties ............................ -- -- 17,000 --------- --------- --------- Total expenses .......................................... 44,868 55,566 119,647 --------- --------- --------- Income (loss) from continuing operations before income taxes .......................................... 26,087 33,778 (26,412) Income tax benefit (expense) ...................................... -- (11,622) 9,244 --------- --------- --------- Net income (loss) from continuing operations ...................... 26,087 22,156 (17,168) Preferred stock dividends ......................................... (2,021) (410) -- --------- --------- --------- Net income (loss) from continuing operations attributable to common stock ................................. 24,066 21,746 (17,168) Income from discontinued gas gathering, processing and marketing operations including gain on disposal .......... 1,866 -- -- --------- --------- --------- Net income (loss) attributable to common stock..................... $ 25,932 $ 21,746 $ (17,168) ========= ========= ========= Net income (loss) per share: Basic - Net income (loss) per share from continuing operations....... $ 1.56 $ 0.90 $ (0.71) ========= ========== ========= Net income (loss) per share.................................. $ 1.68 $ 0.90 $ (0.71) ========= ========== ========= Diluted - Net income (loss) per share from continuing operations....... $ 1.23 $ 0.85 ========= ========= Net income (loss) per share.................................. $ 1.32 $ 0.85 ========= ========= Weighted average shares outstanding: Basic................................................... 15,449 24,186 24,275 ========= ========= ========= Diluted................................................. 21,199 26,008 ========= ========= The accompanying notes are an integral part of these statements.
F-4 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1996, 1997 and 1998
Deferred Additional Retained Compensation- Preferred Common Paid-In Earnings Restricted Stock Stock Capital (Deficit) Stock Grants Total ----- ----- ------- --------- ------------ ----- (In thousands) Balance at December 31, 1995............... $ 31,000 $ 6,463 $ 38,183 $ (45,444) $ (74) $ 30,128 Conversion of preferred stock .......... (23,937) 2,506 21,431 -- -- -- Issuance of common stock ............... -- 3,082 59,033 -- -- 62,115 Restricted stock grants ................ -- -- -- -- 41 41 Net income attributable to common stock ......................... -- -- -- 25,932 -- 25,932 --------- --------- --------- --------- --------- --------- Balance at December 31, 1996 .............. 7,063 12,051 118,647 (19,512) (33) 118,216 --------- --------- --------- --------- --------- --------- Conversion of preferred stock .......... (7,063) 673 6,390 -- -- -- Issuance of common stock ............... -- 53 708 -- -- 761 Repurchase of common stock ............. -- (673) (15,472) -- -- (16,145) Restricted stock grants ................ -- -- -- -- 16 16 Net income attributable to common stock ......................... -- -- -- 21,746 -- 21,746 --------- --------- --------- --------- --------- --------- Balance at December 31, 1997 .............. -- 12,104 110,273 2,234 (17) 124,594 --------- --------- --------- --------- --------- --------- Issuance of common stock ............... -- 71 664 -- -- 735 Value of stock options issued for exploration prospects ................ -- -- 1,495 -- -- 1,495 Restricted stock grants ................ -- -- -- -- 7 7 Net loss attributable to common stock ......................... -- -- -- (17,168) -- (17,168) --------- --------- --------- --------- --------- --------- Balance at December 31, 1998............... $ -- $ 12,175 $ 112,432 $ (14,934) $ (10) $ 109,663 ========= ========= ========= ========= ========= ========= The accompanying notes are an integral part of these statements.
F-5 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1996, 1997 and 1998
1996 1997 1998 ---- ---- ---- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................................... $ 27,953 $ 22,156 $ (17,168) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Compensation paid in common stock ............................ 196 129 269 Depreciation, depletion and amortization ..................... 18,642 26,235 51,005 Impairment of oil and gas properties ......................... -- -- 17,000 Deferred income taxes ........................................ -- 11,363 (9,244) Deferred revenue ............................................. (430) -- -- Exploration .................................................. 436 2,810 8,301 Gain on sales of property .................................... (2,265) (85) -- --------- --------- --------- Working capital provided by operations ..................... 44,532 62,608 50,163 Decrease (increase) in accounts receivable ................... (4,764) (11,744) 13,380 Decrease (increase) in other current assets .................. 86 2 (1,285) Increase (decrease) in accounts payable and accrued expenses ........................................... 6,065 33,411 (21,532) --------- --------- --------- Net cash provided by operating activities .................. 45,919 84,277 40,726 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of properties ............................ 9,016 5,079 -- Proceeds from sale of discontinued operations ................ 3,036 -- -- Capital expenditures and acquisitions ........................ (111,962) (254,843) (67,387) --------- --------- --------- Net cash used for investing activities ..................... (99,910) (249,764) (67,387) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings ................................................... 172,150 295,000 23,238 Debt issuance costs .......................................... -- -- (1,059) Principal payments on debt ................................... (163,853) (115,108) (5,134) Proceeds from common stock issuances ......................... 61,503 507 288 Repurchase of common stock ................................... -- (16,145) -- Stock issuance costs ......................................... (863) (15) -- Dividends paid on preferred stock ............................ (701) (410) -- --------- --------- --------- Net cash provided by financing activities .................. 68,236 163,829 17,333 --------- --------- --------- Net increase (decrease) in cash and cash equivalents ..... 14,245 (1,658) (9,328) Cash and cash equivalents, beginning of year ............. 1,917 16,162 14,504 --------- --------- --------- Cash and cash equivalents, end of year.................... $ 16,162 $ 14,504 $ 5,176 ========= ========= ========= The accompanying notes are an integral part of these statements.
F-6 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Business and Organization Comstock Resources, Inc., a Nevada corporation (together with its subsidiaries, the "Company"), was formed in 1919 as Comstock Tunnel and Drainage Company. In 1987, the Company's name was changed to Comstock Resources, Inc. The Company is primarily engaged in the acquisition, development, production and exploration of oil and natural gas properties in the United States. (2) Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentrations of Credit Risk Although the Company's cash equivalents and accounts receivable are exposed to credit loss, the Company does not believe such risk to be significant. Cash equivalents are high-grade, short-term securities, placed with highly rated financial institutions. Most of the Company's accounts receivable are from a broad and diverse group of oil and gas companies and, accordingly, do not represent a significant credit risk. Oil and Gas Properties The Company follows the successful efforts method of accounting for its oil and gas operations. Under this method, costs of productive wells, development dry holes and productive leases are capitalized and amortized on a unit-of-production basis over the life of the remaining related oil and gas reserves. Cost centers for amortization purposes are determined on a field area basis. The estimated future costs of dismantlement, restoration and abandonment are accrued as part of depreciation, depletion and amortization expense and included in the accompanying Consolidated Balance Sheets as Reserve for Future Abandonment Costs. Oil and gas leasehold costs are capitalized. Unproved oil and gas properties with significant acquisition costs are periodically assessed and any impairment in value is charged to expense. The costs of unproved properties which are determined to be productive are transferred to proved oil and gas properties. Exploratory expenses, including geological and geophysical expenses and delay rentals for unevaluated oil and gas properties, are charged to expense as incurred. Exploratory drilling costs are initially capitalized as unproved property but charged to expense if and when the well is determined not to have found proved oil and gas reserves. F-7 In accordance with the Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of", the Company assesses the need for an impairment of capitalized costs of oil and gas properties on a property by property basis. If an impairment is indicated based on undiscounted expected future cash flows, then an impairment is recognized to the extent that net capitalized costs exceed discounted expected future cash flows. No impairment was required in 1996 or 1997. Due to the substantial drop in oil and gas prices during 1998, the Company provided an impairment of $17.0 million in 1998. Other Property and Equipment Other property and equipment of the Company consists primarily of work boats, a gas gathering system, computer equipment, and furniture and fixtures which are depreciated over estimated useful lives on a straight-line basis. Income Taxes Deferred income taxes are provided to reflect the future tax consequences of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. Earnings Per Share Basic and diluted earnings per share for 1996, 1997 and 1998 were determined as follows:
For the Year Ended December 31, ------------------------------------------------------------------------------------ 1996 1997 1998 ------------------------- ------------------------ --------------------------- Per Per Income Per Income Shares Share Income Shares Share (Loss) Shares Share (In thousands, except per share amounts) Basic Earnings Per Share: Income (Loss) from Continuing Operations $ 26,087 15,449 $ 22,156 24,186 $(17,168) 24,275 $(0.71) Less Preferred Stock Dividends (2,021) - (410) - - - - -------- ------- -------- ------- -------- ------- ------ Net Income (Loss) Available to Common Stockholders $ 24,066 15,449 $1.56 21,746 24,186 $0.90 $(17,168) 24,275 $(0.71) ===== ===== ======== ======= ====== Diluted Earnings Per Share: Effect of Dilutive Securities: Stock Options - 922 - 967 Convertible Preferred Stock 2,021 4,828 410 855 -------- ------ -------- ------- Net Income Available to Common Stockholders and Assumed Conversions $ 26,087 21,199 $1.23 $ 22,156 26,008 $0.85 ======== ====== ===== ======== ======= =====
Statements of Cash Flows For the purpose of the consolidated statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. F-8 The following is a summary of all significant noncash investing and financing activities and cash payments made for interest and income taxes: Year Ended December 31, 1996 1997 1998 ---- ---- ---- (In thousands) Noncash activities - Common stock issued for compensation ..... $ 154 $ 113 $ 269 Value of vested stock options under exploration venture .................. -- -- 1,495 Common stock issued in payment of preferred stock dividends .............. 1,320 -- -- Cash payments - Interest payments ........................ 9,934 5,112 19,898 Income tax payments ...................... -- 270 -- New Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). The Statement establishes accounting and reporting standards that are effective for the fiscal years beginning after June 15, 1999 which require that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company uses derivatives to hedge floating interest rate and natural gas price risks. Such derivatives are reported at cost, if any, and gains and losses on such derivatives are reported when the hedged transaction occurs. Accordingly, the Company's adoption of SFAS No. 133 will have an impact on the reported financial position of the Company, and although such impact has not been determined, it is currently not believed to be material. Adoption of SFAS No. 133 should have no significant impact on reported earnings, but could materially affect comprehensive income. (3) Acquisitions of Oil and Gas Properties On May 7, 1997, the Company purchased certain producing oil and gas properties located in the Lisbon field in Claiborne Parish, Louisiana for a net purchase price of $20.1 million. The acquisition included interests in 13 wells (7.1 net wells). On December 9, 1997, the Company acquired interests in certain offshore Louisiana oil and gas properties as well as interests in undeveloped oil and gas leases for $200.9 million from Bois d' Arc Resources ("Bois d' Arc") and certain affiliates and working interest partners of Bois d' Arc. The Company acquired interests in 43 wells (29.6 net wells) and eight separate production complexes located in the Gulf of Mexico offshore of Plaquemines and Terrebonne Parishes, Louisiana. The acquisition included interests in the Louisiana state and federal offshore areas of Main Pass Blocks 21 and 25, Ship Shoal Blocks 66, 67, 68 and 69 and South Pelto Block 1. Approximately $30.2 million of the purchase price was attributed to the undrilled prospects and $1.0 million of the purchase price was attributed to other assets. F-9 The acquisitions were accounted for utilizing the purchase method of accounting. The accompanying consolidated statements of operations include the results of operations from the acquired properties beginning on the dates that the acquisitions were closed. The following table summarizes the unaudited pro forma effect on the Company's consolidated statements of operations as if the acquisitions consummated in 1997 had been closed on January 1, 1997. Future results may differ substantially from pro forma results due to changes in prices received for oil and gas sold, production declines and other factors. Therefore, the pro forma amounts should not be considered indicative of future operations. Unaudited 1997 Pro Forma Results - Total Revenues (000s) $ 144,313 Net income from continuing operations attributable to common stock (000s) 27,327 Net income from continuing operations per share: Basic 1.13 Diluted 1.07 (4) Sales of Oil and Gas Properties The Company sold certain oil and gas properties for approximately $9.0 million and $5.1 million in 1996 and 1997, respectively. The properties sold were non-strategic assets to the Company. Gains from the property sales of $1.4 million and $85,000 are included in the accompanying Consolidated Statements of Operations for 1996 and 1997, respectively. (5) Oil and Gas Producing Activities Set forth below is certain information regarding the aggregate capitalized costs of oil and gas properties and costs incurred in oil and gas property acquisition, development and exploration activities: Capitalized Costs As of December 31, 1997 1998 ---- ---- (In thousands) Proved properties $ 456,606 $ 547,372 Unproved properties 30,291 436 Accumulated depreciation, depletion and amortization (77,414) (145,152) --------- --------- $ 409,483 $ 402,656 ========= ========= Costs Incurred For the Year Ended December 31, 1996 1997 1998 ---- ---- ---- (In thousands) Property acquisitions: Proved properties $ 100,539 $ 190,708 $ -- Unproved properties - 31,650 6,075 Development costs 10,936 25,282 30,559 Exploration costs 436 6,043 30,423 --------- --------- --------- $ 111,911 $ 253,683 $ 67,057 ========= ========= ========= F-10 The following presents the results of operations of oil and gas producing activities for the three years in the period ended December 31, 1998: 1996 1997 1998 ---- ---- ---- (In thousands) Oil and gas sales $ 68,915 $ 88,555 $ 92,961 Production costs (13,838) (17,919) (24,747) Exploration (436) (2,810) (8,301) Depreciation, depletion and amortization (18,162) (26,111) (50,738) Impairment of oil and gas properties -- -- (17,000) -------- -------- -------- Operating income (loss) 36,479 41,715 (7,825) Income tax -- (14,353) 2,739 -------- -------- -------- Results of operations (excluding general and administrative and interest expenses) $ 36,479 $ 27,362 $ (5,086) ======== ======== ======== (6) Long-Term Debt Total debt at December 31, 1997 and 1998 consists of the following: 1997 1998 ---- ---- (In thousands) Bank Credit Facility $ 260,000 $ 278,000 Other -- 104 --------- --------- 260,000 278,104 Less current portion -- (38,104) --------- --------- $ 260,000 $ 240,000 ========= ========= The Company has a $280.0 million revolving credit facility with a syndication of ten banks in which The First National Bank of Chicago serves as administrative agent, (the "Bank Credit Facility"). As of December 31, 1998, the Company had $278.0 million outstanding under the Bank Credit Facility. Borrowings under the Bank Credit Facility cannot exceed a borrowing base determined semiannually by the banks. The borrowing base at December 31, 1998 was $280.0 million. The borrowing base is scheduled to reduce to $240.0 million by December 31, 1999 and will reduce by an additional $20.0 million by January 1, 2000. The determination of the Company's borrowing base is at the sole discretion of the administrative agent and the bank group. The next scheduled borrowing base redetermination will occur in April 1999; however, the bank group can request a redetermination at any time. Amounts outstanding under the Bank Credit Facility bear interest at a floating rate based on The First National Bank of Chicago's base rate (as defined) plus 1.25% or, at the Company's option, at a fixed rate for up to six months based on the London Interbank Offered Rate ("LIBOR") plus 2.25%. As of December 31, 1998, the Company had placed the outstanding advances under the revolving credit facility under fixed rate loans based on LIBOR at an average rate of approximately 7.6% per annum. In addition, the Company incurs a commitment fee of 0.5% on the unused portion of the borrowing base depending upon the utilization of the available borrowing base. The Bank Credit Facility matures on December 9, 2002. Significant financial covenants under the Bank Credit Facility include the maintenance of a current ratio, as defined, (0.75 to 1.0), maintenance of tangible net worth ($98.0 million), maintenance of an interest coverage ratio (2.5 to 1), and a limitation on capital expenditures ($30.0 million). Based on the scheduled borrowing base reductions in 1999, the Company has classified $38.0 million of the amount outstanding under the Bank Credit Facility as a current liability at December 31, 1998. The Company plans to reduce its drilling expenditures in 1999 as compared to 1998 and utilize cash flow generated from operations to reduce outstanding borrowings under the Bank F-11 Credit Facility. The Company believes that it will generate sufficient operating cash flow during 1999 to reduce the amounts outstanding under the Bank Credit Facility in accordance with the scheduled reductions to the borrowing base. The Company intends to refinance the additional $20.0 million reduction to the borrowing base scheduled to occur in January 2000 with a future debt or equity financing or to pay down such debt from proceeds from sale of existing properties. Management cannot be assured that such debt or equity financing will be available for the Company on the terms acceptable to its existing shareholders or that the banks will not require additional reductions to the borrowing base in the future. If oil and gas prices were to fall significantly below current levels for the remainder of 1999 or if the banks were to further reduce the Company's borrowing base, the Company would likely have to complete a debt or equity financing or sell selected properties in order to meet the required 1999 scheduled reductions to its borrowing base. (7) Lease Commitments The Company rents office space under certain noncancellable leases. Minimum future payments under the leases are as follows: (In thousands) 1999 $ 389 2000 421 2001 421 2002 421 2003 421 (8) Stockholders' Equity Preferred Stock On January 7, 1994, the Company sold 600,000 shares of its Series 1994 Convertible Preferred Stock, $10 par value per share (the "Series 1994 Preferred"), in a private placement for $6.0 million. Dividends were payable at the quarterly rate of $0.225 on each outstanding share of the Series 1994 Preferred (9% per annum of the par value). On September 16, 1996, the holders of the Series 1994 Preferred converted all of the shares of the Series 1994 Preferred into 1,500,000 shares of common stock of the Company. On July 22, 1994, the Company issued 1,000,000 shares of its 1994 Series B Convertible Preferred Stock, $10 par value per share (the "1994 Series B Preferred"), in connection with the repurchase of certain production payments previously conveyed by the Company to a major natural gas company. Dividends were payable at the quarterly rate of $0.15625 on each outstanding share (6.25% per annum of the par value). On July 11, 1996, the Company redeemed the 1,000,000 shares of the 1994 Series B Preferred by issuing 2,000,000 shares of common stock of the Company. On June 19, 1995, the Company sold 1,500,000 shares of its Series 1995 Convertible Preferred Stock, $10 par value per share (the "Series 1995 Preferred"), in a private placement for $15.0 million. Dividends were payable at the quarterly rate of $0.225 on each outstanding share (9% per annum of the par value). On December 2, 1996, holders of 793,677 shares of the Series 1995 Preferred converted their preferred shares into 1,511,761 shares of common stock of the Company. On August 20, 1997, the holders of the Series 1995 Preferred converted all of the remaining shares of the Series 1995 Preferred, $10 par value, into 1,345,373 shares of common stock of the Company. Common Stock Under a plan adopted by the Board of Directors, non-employee directors can elect to receive shares of common stock valued at the then current market price in payment of annual director and consulting fees. Under this plan, the Company issued 37,117, 9,256 and 39,678 shares of common stock in 1996, 1997, 1998 F-12 respectively, in payment of fees aggregating $154,000, $113,000 and $263,000 for 1996, 1997 and 1998, respectively. Shares issued in 1998 also prepaid the director and consulting fees for 1999. Each of the Company's formerly outstanding preferred stock series provided that the Company could issue common stock in lieu of cash for payment of quarterly dividends. The Company issued 249,453 shares of common stock in 1996 in payment of dividends on its preferred stock of $1,320,000. On December 2, 1996, the Company completed a public offering of 5,795,000 shares of common stock of which 4,000,000 (4,869,250 including the over-allotment option which was exercised on December 12, 1996) shares were sold by the Company and 1,795,000 shares were sold by certain stockholders. Net proceeds to the Company, after the underwriting discount and other expenses, were approximately $57.0 million and were used to reduce indebtedness under the Bank Credit Facility. On August 20, 1997, the Company repurchased the 1,345,373 shares of common stock held by former Series 1995 Preferred stockholders at $12.00 per share for an aggregate purchase price of $16.1 million. Options and warrants to purchase common stock of the Company were exercised for 1,007,177 shares, 98,100 shares and 102,000 shares in 1996, 1997 and 1998, respectively. Such exercises yielded net proceeds to the Company of approximately $3.6 million, $507,000 and $288,000 in 1996, 1997 and 1998, respectively. Stock Options and Warrants On July 16, 1991, the Company's stockholders approved the 1991 Long-Term Incentive Plan (the "Incentive Plan") for the Company's management including officers, directors and managerial employees. The Incentive Plan authorizes the grant of non-qualified stock options and incentive stock options and the grant of restricted stock to key executives of the Company. On May 15, 1996, the Company's stockholders approved an amendment to the Incentive Plan increasing the shares to be awarded by 1,240,000. As of December 31, 1998, the Incentive Plan provided for future awards of stock options or restricted stock grants of up to 228,630 shares of common stock plus 10% of any future issuances of common stock. The following table summarizes stock option activity during 1996, 1997 and 1998 under the Incentive Plan: Weighted Average Number of Exercise Exercise Shares Price Price ------ ----- ----- Outstanding at December 31, 1995 791,750 $2.00 to $3.00 $2.27 Granted 1,933,000 $4.81 to $11.00 $9.31 Exercised (113,250) $2.00 to $4.81 $3.06 Forfeited (10,000) $6.56 $6.56 ----------- Outstanding at December 31, 1996 2,601,500 $2.00 to $11.00 $7.45 Granted 667,000 $9.63 to $12.38 $12.00 Exercised (50,000) $3.00 to $6.56 $5.33 ----------- Outstanding at December 31, 1997 3,218,500 $2.00 to $12.38 $8.43 Granted 767,000 $3.44 to $11.94 $4.57 Exercised (85,000) $2.00 to $2.50 $2.38 Forfeited (10,000) $3.44 $3.44 ----------- Outstanding at December 31, 1998 3,890,500 $2.00 to $12.38 $7.81 =========== Exercisable at December 31, 1998 1,839,750 $2.00 to $12.38 $6.76 =========== F-13 The following table summarizes information about Incentive Plan stock options outstanding at December 31, 1998: Number of Weighted Average Number of Shares Remaining Life Shares Exercise Price Outstanding (Years) Exercisable -------------- ----------- ------- ----------- $2.00 451,000 2.3 436,500 $2.50 20,000 3.5 14,000 $3.00 155,000 1.1 155,000 $3.44 567,000 8.8 -- $4.81 264,000 2.6 264,000 $6.56 250,000 3.1 250,000 $6.94 150,000 5.0 -- $9.63 90,000 3.6 90,000 $11.00 1,326,500 6.6 366,500 $11.94 40,000 4.9 40,000 $12.38 577,000 6.5 223,750 ----------- --- --------- 3,890,500 5.5 1,839,750 =========== === ========= The Company accounts for the stock options issued under the Incentive Plan under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for this plan been determined consistent with Statement of Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation," the Company's net income and earnings per share from continuing operations would have been reduced to the following pro forma amounts: 1996 1997 1998 ---- ---- ---- (In thousands, except per share amounts) Net income (loss) from continuing operations: As Reported $ 24,066 $ 21,746 $(17,168) Pro Forma 20,296 18,633 (20,651) Basic earnings per share: As Reported 1.56 0.90 (0.71) Pro Forma 1.31 0.77 (0.85) Diluted earnings per share: As Reported 1.23 0.85 Pro Forma 0.96 0.72 Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1996, 1997, and 1998, respectively: average risk-free interest rates of 6.34, 6.33, and 5.30 percent; average expected lives of 7.7, 7.3, and 8.2 years; average expected volatility factors of 54.5, 51.9 and 58.8; and no dividend yield. The estimated weighted average fair value of options to purchase one share of common stock issued under the Company's Incentive Plan was $6.20 in 1996, $7.45 in 1997, and $2.98 in 1998. The Company also has options outstanding to purchase 220,530 common shares at $5.00 per share at December 31, 1998 that were issued in connection with an oil and gas property acquisition in 1994. These options expire in 1999. F-14 On December 8, 1997, the Company awarded warrants to purchase up to 1,000,000 shares of the Company's common stock at $14.00 per share to Bois d' Arc in connection with a five-year joint exploration venture. The warrants become exercisable in increments of 50,000 shares upon the election by the Company to complete a successful exploration well on a prospect generated by Bois d' Arc under the joint exploration venture. Warrants which become exercisable under the exploration venture expire on December 31, 2007. The fair value of each warrant to purchase one share of common stock is estimated at the date of grant at $9.97 using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 6.35 percent; expected life of 10.1 years; expected volatility factor of 51.9 percent; and no dividend yield. During 1998, warrants to purchase 150,000 shares became vested. The estimated value of the warrants which vested in 1998 of $1.5 million was included as exploration costs for three successful wells under the exploration venture. Restricted Stock Grants Under the Incentive Plan, officers and managerial employees of the Company may be granted a right to receive shares of the Company's common stock without cost to the employee. The shares vest over a ten-year period with credit given for past service rendered to the Company. Restricted stock grants for 330,000 shares have been awarded under the Incentive Plan. As of December 31, 1998, 322,500 shares of such awards are vested. A provision for the restricted stock grants is made ratably over the vesting period. Compensation expense recognized for restricted stock grants for the years ended December 31, 1996, 1997 and 1998 was $41,000, $15,000, and $7,000, respectively. (9) Significant Customers The Company had sales to one purchaser of crude oil which accounted for 17%, 17%, and 25% of the Company's oil and gas sales in 1996, 1997, and 1998, respectively. In 1996 and 1997, the Company had one purchaser of natural gas which accounted for 31% and 35%, respectively, of the Company's oil and gas sales. In 1998 the Company had two purchasers of natural gas which accounted for 17% and 12% of the Company's oil and gas sales. (10) Income Taxes The tax effects of significant temporary differences representing the net deferred tax liability at December 31, 1997 and 1998 were as follows: 1997 1998 ---- ---- (In thousands) Net deferred tax assets (liabilities): Property and equipment $(13,965) $(22,150) Net operating loss carryforwards 2,193 20,102 Other carryforwards 565 270 Valuation allowance -- -- -------- -------- $(11,207) $ (1,778) ======== ======== The following is an analysis of the consolidated income tax benefit (expense): 1997 1998 ---- ---- (In thousands) Current $ (259) $ -- Deferred (11,363) 9,244 -------- -------- $(11,622) $ 9,244 ======== ======== F-15 No income tax provision was recognized in 1996 due to the availability of net operating loss carryforwards to offset any current or deferred income tax liabilities. The difference between income taxes computed using the statutory rate of 35% and the Company's effective tax rate in 1997 and 1998 is as follows: 1997 1998 ---- ---- (In thousands) Income tax benefit (expense) computed at federal statutory rate $(11,822) $ 9,244 Reduction in valuation allowance for net operating loss carryforward 176 -- Other 24 -- --------- -------- $ (11,622) $ 9,244 ========= ======== The Company has net operating loss carryforwards of approximately $57.4 million as of December 31, 1998 for income tax reporting purposes which expire in varying amounts from 2005 to 2018. (11) Related Party Transactions The Company served as general partner of Comstock DR-II Oil & Gas Acquisition Limited Partnership ("Comstock DR-II") until December 29, 1997. In 1996 and 1997, the Company received management fees from Comstock DR-II of $87,000 and $40,000, respectively. From August 1, 1995 to December 1, 1996, the Company was the managing general partner and owned a 20.31% limited partner interest in Crosstex Pipeline Partners, Ltd. ("Crosstex"). The Company sold its interest in connection with the sale of its third party natural gas marketing operations (see Note 13 "Discontinued Operations"). The Company received $82,000 in fees for management and construction services provided to Crosstex in 1996 and was reimbursed $228,000 for direct expenses incurred in connection with managing Crosstex in 1996. The Company paid $477,000 to Crosstex for transportation of its natural gas production in 1996. (12) Risk Management The Company's market risk exposures relate primarily to commodity prices and interest rates. Therefore, the Company periodically uses commodity price swaps to hedge the impact of natural gas price fluctuations and uses interest rate swaps to hedge interest rates on floating rate debt. The Company does not engage in activities using complex or highly leveraged instruments. These instruments are generally put in place to limit risk of adverse natural gas price or interest rate movements, however, these instruments usually limit future gains from favorable natural gas prices or lower interest rates. Recognition of realized gains or losses in the Consolidated Statements of Operations are deferred until the underlying physical product is purchased or sold. Unrealized gains or losses on derivative financial instruments are not recorded. The cash flow impact of derivative and other financial instruments is reflected as cash flows from operating activities in the Consolidated Statements of Cash Flows. F-16 As a result of certain hedging transactions for natural gas the Company realized the following gains and losses: 1996 1997 1998 ---- ---- ---- (In thousands) Realized Gains $ 509 $ -- $ 367 Realized Losses 1,643 -- -- As of December 31, 1997 and 1998, the Company had no open derivative financial instruments held for price risk management. Subsequent to December 31, 1998, the Company entered into natural gas price swaps covering 10,480,000 MMBtus of its natural gas production for March 1999 to October 1999 at 1,310,000 MMBtus per month at a fixed index price of $1.81 (after basis adjustment). The Company entered into interest rate swap agreements in September 1998 to hedge the impact of interest rate changes on a portion of its long-term debt. The notional amount of the swap agreements is $125.0 million and fixed the LIBOR rate at an average rate of 5.1% through September 2000. Gains and losses attributable to the swap agreements are accounted for as a hedge. Gains from the swap agreements reduced interest expense by $59,000 in 1998. The fair value of the interest rate swaps as of December 31, 1998 was a liability of approximately $95,000. (13) Discontinued Operations In December 1996, the Company sold its third party natural gas marketing operations and substantially all of its related gas gathering and gas processing assets for approximately $3.0 million. The Company realized a $818,000 gain from the sale. The Company's gas gathering, processing and marketing segment is accounted for as discontinued operations in the accompanying financial statements, and accordingly, the results of the gas gathering, processing and marketing operations as well as the gain on disposal are segregated in the accompanying Consolidated Statements of Operations. Income for discontinued gas gathering, processing and marketing operations included in the Consolidated Statements of Operations for the year ended December 31, 1996 is comprised of the following: (In thousands) Revenues $ 85,398 Operating costs (83,168) Depreciation, depletion and amortization (373) General and administrative, net (809) Gain on sales of property -- Gain on disposal of segment 818 Provision for income taxes -- -------- Income from discontinued operations $ 1,866 ======== F-17 (14) Supplementary Quarterly Financial Data (Unaudited)
First Second Third Fourth Total ----- ------ ----- ------ ----- (In thousands, except per share amounts) 1997 - Total revenues..................................$ 23,727 $ 18,279 $ 18,285 $ 29,053 $ 89,344 ========= ========= ========= ========= ======== Net income attributable to common stock.........$ 7,764 $ 3,973 $ 4,190 $ 5,819 $ 21,746 ========= ========= ========= ========= ======== Net income per share: Basic ........................................$ 0.32 $ 0.16 $ 0.17 $ 0.24 $ 0.90 ========= ========= ========= ========= ======== Diluted ......................................$ 0.30 $ 0.16 $ 0.17 $ 0.23 $ 0.85 ========= ========= ========= ========= ======== 1998 - Total revenues..................................$ 25,558 $ 24,894 $ 21,517 $ 21,266 $ 93,235 ========= ========= ========= ========= ======== Net income (loss) attributable to common stock..$ 570 $ (1,304) $ (3,387) $ (13,047)(1) $(17,168)(1) ========= ========= ========= ========= ======== Net income (loss) per share: Basic.........................................$ 0.02 $ (0.05) $ (0.14) $ (0.54) $ (0.71) ========= ========== ========= ========= ======== Diluted.......................................$ 0.02 ========= (1) Includes impairment of oil and gas properties of $17 million.
(15) Oil and Gas Reserves Information (Unaudited) The estimates of proved oil and gas reserves utilized in the preparation of the financial statements were estimated by independent petroleum engineers in accordance with guidelines established by the Securities and Exchange Commission and the Financial Accounting Standards Board, which require that reserve reports be prepared under existing economic and operating conditions with no provision for price and cost escalation except by contractual agreement. All of the Company's reserves are located onshore in or offshore to the continental United States. Future prices received for production and future production costs may vary, perhaps significantly, from the prices and costs assumed for purposes of these estimates. There can be no assurance that the proved reserves will be developed within the periods indicated or that prices and costs will remain constant. There can be no assurance that actual production will equal the estimated amounts used in the preparation of reserve projections. In accordance with the Securities and Exchange Commission's guidelines, the Company's independent petroleum engineers' estimates of future net cash flows from the Company's proved properties and the present value thereof are made using oil and natural gas sales prices in effect as of the dates of such estimates and are held constant throughout the life of the properties. Average prices used in estimating the future net cash flows were as follows: $17.24 and $10.55 per barrel of oil for 1997 and 1998, respectively, and $2.64 and $2.21 per Mcf of natural gas for 1997 and 1998, respectively. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures. Oil and gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and estimates of other engineers might differ materially from those shown below. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. Results of drilling, testing and production after the date of the estimate may justify revisions. Accordingly, reserve estimates are often materially different from the quantities of oil and gas that are ultimately recovered. Reserve estimates are integral in management's analysis of impairments of oil and gas properties and the calculation of depreciation, depletion and amortization on those properties. F-18 The following unaudited table sets forth proved oil and gas reserves at December 31, 1996, 1997 and 1998: 1996 1997 1998 ---- ---- ---- Oil Gas Oil Gas Oil Gas (MBbls) (MMcf) (MBbls) (MMcf) (Mbbls) (MMcf) ------- ------ ------- ------ ------- ------ Proved Reserves: Beginning of year 3,779 173,165 8,994 234,444 20,927 240,117 Revisions of previous estimates 243 (5,926) (1,202) (7,398) (3,284) 12,025 Extensions and discoveries 613 551 263 5,566 5,173 24,973 Purchases of minerals in place 5,930 100,446 14,473 39,970 -- -- Sales of minerals in place (619) (14,365) (258) (9,605) -- -- Production (952) (19,427) (1,343) (22,860) (2,571) (26,713) -------- -------- -------- -------- -------- -------- End of year 8,994 234,444 20,927 240,117 20,245 250,402 ======== ======== ======== ======== ======== ======== Proved Developed Reserves: Beginning of year 2,562 130,375 6,953 187,247 16,635 188,102 ======== ======== ======== ======== ======== ======== End of year 6,953 187,247 16,635 188,102 16,585 182,955 ======== ======== ======== ======== ======== ========
The following table sets forth the standardized measure of discounted future net cash flows relating to proved reserves at December 31, 1997 and 1998: 1997 1998 ---- ---- (In thousands) Cash Flows Relating to Proved Reserves: Future Cash Flows $ 993,812 $ 767,869 Future Costs: Production (217,637) (212,558) Development (66,418) (74,130) --------- --------- Future Net Cash Flows Before Income Taxes 709,757 481,181 Future Income Taxes (128,983) (30,221) --------- --------- Future Net Cash Flows 580,774 450,960 10% Discount Factor (162,498) (145,967) --------- --------- Standardized Measure of Discounted Future Net Cash Flows $ 418,276 $ 304,993 ========= =========
The following table sets forth the changes in the standardized measure of discounted future net cash flows relating to proved reserves for the years ended December 31, 1996, 1997 and 1998: 1996 1997 1998 ---- ---- ---- (In thousands) Standardized Measure, Beginning of Year $ 146,506 $ 390,422 $ 418,276 Net Change in Sales Price, Net of Production Costs 132,094 (188,079) (146,742) Development Costs Incurred During the Year Which Were Previously Estimated 5,934 10,740 20,361 Revisions of Quantity Estimates (7,612) (16,779) (7,391) Accretion of Discount 14,829 50,292 45,956 Changes in Future Development Costs (5,801) (3,919) (19,318) Changes in Timing and Other (13,165) (20,347) (39,805) Extensions and Discoveries 9,216 6,233 60,906 Purchases of Reserves In Place 282,150 205,583 -- Sales of Reserves In Place (10,342) (16,450) -- Sales, Net of Production Costs (55,077) (70,636) (68,214) Net Changes in Income Taxes (108,310) 71,216 40,964 --------- --------- --------- Standardized Measure, End of Year $ 390,422 $ 418,276 $ 304,993 ========= ========= =========
F-19 INDEX TO EXHIBITS Exhibit No. Description Page - ---------- ------------------------------------------------------ ----------- 3.1(a) Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 3.1(b) Certificate of Amendment to the Restated Articles of Incorporation dated July 1, 1997 (incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-3, dated October 25, 1996). 4.2(a) Rights Agreement dated as of December 10, 1990, by and between the Company and Society National Bank, as Rights Agent (incorporated herein by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A, dated December 14, 1990). 4.2(b) First Amendment to the Rights Agreement, by and between the Company and Society National Bank (successor to Ameritrust Texas, N.A.), as Rights Agent, dated January 7, 1994 (incorporated herein by reference to Exhibit 3.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4.2(c) Second Amendment to the Rights Agreement, by and between the Company and Bank One, Texas N.A. (successor to Society National Bank), as Rights Agent, dated April 1, 1995 (incorporated by reference to Exhibit 4.7 to the Company's Annual Report on Form 10-K for the ended December 31, 1995). 4.2(d) Third Amendment to the Rights Agreement, by and between the Company and Bank One, Texas N.A. (successor to Society National Bank), as Rights Agent, dated April 1, 1995 (incorporated by reference to Exhibit 4.8 to the Company's Annual Report on Form 10-K for the ended December 31, 1995). 4.2(e) Fourth Amendment to the Rights Agreement, by and between the Company and Bank One, Texas N.A. (successor to Society National Bank), as Rights Agent, dated April 1, 1995 (incorporated by reference to Exhibit 4.9 to the Company's Annual Report on Form 10-K for the ended December 31, 1995). 4.3 Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock dated December 6, 1990 (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-3, dated October 25, 1996). 10.1(a)* Credit Agreement dated as of December 23, 1998, E-4 between the Company, the Banks Party thereto and The First National Bank of Chicago, as Administrative Agent and Toronto Dominion (Texas), Inc., as Syndication Agent. E-1 INDEX TO EXHIBITS Exhibit No. Description Page - ---------- ------------------------------------------------------ ----------- 10.2# Employment Agreement dated May 11, 1998, by and between the Company and M. Jay Allison (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 10.3# Employment Agreement dated May 11, 1998, by and between the Company and Roland O. Burns (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 10.4# Change in Control Employment Agreement dated May 15, 1997, by and between the Company and M. Jay Allison (incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.5# Change in Control Employment Agreement dated May 15, 1997, by and between the Company and Roland O. Burns (incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.6(a)# Comstock Resources, Inc. 1991 Long-term Incentive Plan, dated as of April 1, 1991 (incorporated herein by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991). 10.6(b)# Amendment No. 1 to the Comstock Resources, Inc. 1991 Long-term Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.7# Form of Nonqualified Stock Option Agreement, dated April 2, 1991, between the Company and certain officers and directors of the Company (incorporated herein by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991). 10.8# Form of Restricted Stock Agreement, dated April 2, 1991, between the Company and certain officers of the Company (incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991). 10.9 Form of Stock Option Agreement, dated October 12, 1994 by and between the Company and Christopher T. H. Pell, et al (incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.10 Warrant Agreement dated December 9, 1997 by and between the Company and Bois d' Arc Resources (incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). E-2 INDEX TO EXHIBITS Exhibit No. Description Page - ---------- ------------------------------------------------------ ----------- 10.11 Joint Exploration Agreement dated December 8, 1997 by and between the Company and Bois d' Arc Resources (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.12 Office Lease Agreement dated August 12, 1997 between the Company and Briar Center LLC (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 21* Subsidiaries of the Company. E-59 23* Consent of Arthur Andersen LLP. E-60 27* Financial Data Schedule for the twelve months ended December 31, 1998. E-61 *Filed herewith. # Management contract or compensatory plan document. E-3 EX-10 2 CREDIT AGREEMENT DATED DECEMBER 23, 1998 CREDIT AGREEMENT dated as of December 23, 1998 between COMSTOCK RESOURCES, INC., COMSTOCK OIL & GAS, INC., COMSTOCK OIL & GAS - LOUISIANA, INC., COMSTOCK OFFSHORE, LLC, and THE BANKS PARTY HERETO, THE FIRST NATIONAL BANK OF CHICAGO, AS AGENT AND TORONTO DOMINION (TEXAS), INC., AS SYNDICATION AGENT E-4 CREDIT AGREEMENT THIS AGREEMENT, dated as of December 23, 1998, is among COMSTOCK RESOURCES, INC. a Nevada corporation ("CRI"), COMSTOCK OIL & GAS, INC., a Nevada corporation ("COG"), COMSTOCK OIL & GAS - LOUISIANA, INC., a Nevada corporation ("COGL"), COMSTOCK OFFSHORE, LLC, a Nevada limited liability company ("Offshore") (CRI, COG, COGL and Offshore may hereinafter collectively be referred to as the "Borrowers"), the lenders party hereto from time to time (collectively, the "Banks" and individually, a "Bank"), TORONTO DOMINION (TEXAS), INC., as syndication agent for the Banks (in such capacity, the "Syndication Agent") and THE FIRST NATIONAL BANK OF CHICAGO, as agent for the Banks (in such capacity, the "Agent"). RECITALS A. The Borrowers, the banks party thereto, Toronto Dominion (Texas), Inc., as syndication agent for such banks, and The First National Bank of Chicago, as agent for such banks, executed a Credit Agreement dated as of September 24, 1998 (the "Existing Credit Agreement"), which amended and restated a Credit Agreement December 9, 1997, which in turn amended and restated a Credit Agreement dated as of August 13, 1996, which in turn amended and restated a Credit Agreement dated as of May 1, 1996, which in turn amended and restated a Credit Agreement dated as of July 31, 1995, which in turn amended and restated a Credit Agreement dated as of September 30, 1994, as amended, and which in turn amended and restated a Credit Agreement dated as of November 15, 1993, as amended. B. The Borrowers have requested that the Banks amend and restate the Existing Credit Agreement as herein provided, replacing and refinancing the indebtedness thereunder with a secured revolving credit facility terminating December 9, 2002 providing for revolving credit loans in the aggregate principal amount of $280,000,000, including a $5,000,000 letter of credit subfacility participated in by all the Banks, and the Banks are willing to establish such a credit facility in favor of the Borrowers and amend and restate the Existing Credit Agreement on the terms and conditions herein set forth. AGREEMENT In consideration of the premises and of the mutual agreements herein contained, the parties hereto agree that the Existing Credit Agreement shall be amended and restated as follows: SECTION 1. Definitions 1.1 Certain Definitions . As used herein, the following terms shall have the following respective meanings: "Advances" shall mean any Loan or any Letter of Credit Advance. "Advance Date" shall mean each date for the making, continuation or conversion of an Advance as specified in the notice delivered by the Borrowers, or any of them, permitted by this Agreement. "Affiliate", when used with respect to any Person shall mean any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person or any other Person which is owned 5% or more by such Person or any Subsidiary or other Affiliate of such Person. For purposes of this definition "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), with respect to any Person, shall mean possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or otherwise. E-5 "Applicable Margin" shall mean, with respect to any Eurodollar Loan, Floating Rate Loan and commitment fee payable under Section 4.3(a), as the case may be, the applicable percentage set forth in the table below based upon a fraction, expressed as a percentage, determined as of the last day of each calendar month, the numerator of which is the daily average of the Advances outstanding during such calendar month and the denominator of which is the daily average of the Threshold Amount during such calendar month (the "Utilization Percentage"): Eurodollar Commitment Utilization Rate Loan and Letter Floating Rate Fee under Percentage of Credit Fee Loan Section 4.3(a) ---------- ------------- ------------- -------------- UP>=100% 2.25% 1.25% 0.50% UP>=75% and <100% 2.00% 1.00% 0.50% UP>=50% and <75% 1.75% 0.75% 0.50% UP<50% 1.50% 0.50% 0.375% The Utilization Percentage shall be determined by the Agent at the end of each calendar month and shall remain in effect for the following calendar month of CRI, and the Agent shall adjust the Applicable Margin upon such determination, provided that the Agent shall also determine the Utilization Percentage promptly after any public offering of common stock or offering under Rule 144A pursuant to the Securities Act of 1933 of subordinated debt (if allowed hereunder) of CRI and adjust the Applicable Margin upon such determination. Notwithstanding the above or anything else in this Agreement, prior to the first determination of the Applicable Margin hereunder by the Agent and upon and during the continuance of any Event of Default, the Applicable Margin shall be 2.25% with respect to any Eurodollar Loan, 1.25% with respect to any Floating Rate Loan and 0.50% with respect to any commitment fee payable under Section 4.3(a). "Bank Obligations" shall mean all indebtedness, obligations and liabilities, whether now or hereafter arising, of the Borrowers to the Agent or any Bank pursuant to any of the Loan Documents. "Borrowing Base" shall mean an amount determined in accordance with the procedures described in Section 9.14, and based upon the Agent's and the Banks' customary and standard practices in lending to oil and gas companies generally, including without limitation their standard engineering criteria and oil and gas lending criteria (and it is acknowledged and agreed that such customary and standard practices, including without limitation such engineering criteria and oil and gas lending criteria, shall be determined by the Agent and each Bank, as the case may be, in their sole discretion, and such determination shall be conclusive and binding). "Borrowing Base Deficiency" is defined in Section 4.1(c). "Business Day" shall mean (i) with respect to any borrowing, payment or rate selection of Eurodollar Loans, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago and New York for the conduct of substantially all of their commercial lending activities and on which dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open i Chicago for the conduct of substantially all of their commercial lending activities. "Capital Expenditures" shall mean, without duplication, any expenditures for any purchase or other acquisition of any asset which would be classified as a fixed or capital asset on a consolidated balance sheet of CRI and its Subsidiaries prepared in accordance with GAAP. E-6 "Capital Stock" shall mean (i) in the case of any corporation, all capital stock and any securities exchangeable for or convertible into capital stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents of corporate stock (however designated) in or to such association or entity, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distribution of assets of, the issuing Person, and including, in all of the foregoing cases described in clauses (i), (ii), (iii) or (iv), any warrants, rights or other options to purchase or otherwise acquire any of the interests described in any of the foregoing cases. "Change in Control" shall mean (a) the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of more than 50% of the outstanding shares of voting stock of CRI, (b) COG, COGL, Offshore or any other present or future Borrower (other than CRI) or Subsidiary shall cease to be a wholly-owned Subsidiary, directly or indirectly, o CRI or (c) the Board of Directors of CRI shall not consist of a majority of the Continuing Directors of CRI. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations thereunder. "Collateral" shall have the meaning ascribed thereto in Section 5.1(a) hereof. "Commitments" shall mean, with respect to each Bank, the commitment of each such Bank to make Loans and assume a risk participation in Letter of Credit Advances pursuant to Sections 2.1(a) and (b), in amounts not exceeding in aggregate principal amount outstanding at any time the respective Commitment amount for each Bank set forth next to the name of each such Bank on the signature pages hereof or established pursuant to Section 10.6, as the case may be, as such amount may be reduced from time to time. "Consent and Amendment of Security Documents" shall mean the consent and amendment of security documents entered into by the Borrowers and the Agent pursuant to this Agreement in substantially the form of Exhibit A, as amended or modified from time to time. "Consolidated" or "consolidated" shall mean, when used with reference to any financial term in this Agreement, the aggregate for two or more Persons of the amount signified by such term for all such Persons determined on a consolidated basis and in accordance with GAAP. "Consolidated Interest Expense" shall mean, for any period, total interest and related expense (including, without limitation, that portion of any capitalized lease obligation attributable to interest expense in conformity with GAAP, amortization of debt discount, all capitalized interest, the interest portion of any deferred payment obligations, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers acceptance financing, the net costs and net payments under any interest rate hedging, cap or similar agreement or arrangement, prepayment charges, agency fees, administrative fees, commitment fees and capitalized transaction costs allocated to interest expense) paid, payable or accrued during such period, without duplication for any period, with respect to all outstanding Indebtedness of CRI and its Subsidiaries, all as determined for CRI and its Subsidiaries on a consolidated basis for such period in accordance with GAAP. "Consolidated Net Income" shall mean, for any period, the net income of CRI and its Subsidiaries for such period, determined in accordance with GAAP. "Contingent Liabilities" of any Person shall mean, as of any date, all obligations of such Person or of others for which such Person is contingently liable, as obligor, guarantor, surety or in any other capacity, or in respect of which obligations such Person assures a creditor against loss or agrees to take any action to prevent any such loss (other than endorsements of negotiable instruments for collection in the ordinary course of business and E-7 indemnifications typical and customary in the ordinary course of such Person's oil and gas business in connection with operating agreements and other agreements executed in the ordinary course of such Person's oil and gas business), including without limitation all reimbursement obligations of such Person in respect of any letters of credit, surety bonds or similar obligations and all obligations of such Person to advance funds to, or to purchase assets, property or services from, any other Person in order to maintain the financial condition of such other Person. "Continuing Directors" of any Person shall mean the directors of such Person on the Effective Date and each other director of such Person if such other director's nomination for election to the Board of Directors of such Person is recommended by a majority of the then Continuing Directors of such Board of Directors. "Current Assets" and "Current Liabilities" shall mean all assets or liabilities of CRI and its Subsidiaries, on a consolidated basis respectively, which should be classified as current assets and current liabilities in accordance with GAAP; provided that the calculation of Current Assets shall not include receivables of the Borrowers owing by any Affiliate in excess of 120 days or subject to any dispute or offset or otherwise unacceptable, advances by the Borrowers to any Affiliate or any asset classified as a Current Asset solely because it is held for sale, and Current Liabilities shall not include the current maturities of any Indebtedness of any Borrower for borrowed money which by its terms has a final maturity more than one year from the date of any calculation of Current Liabilities. "Default" shall mean any Event of Default or any event or condition which might become an Event of Default with notice or lapse of time or both. "Disqualified Stock" shall mean any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part. "Dollars" and "$" shall mean the lawful money of the United States of America. "EBITDA" shall mean, for any period, the Consolidated Net Income for such period taken as a single accounting period, plus, to the extent deducted in determining such Consolidated Net Income, all depreciation, amortization and depletion expense, and other non cash charges, Consolidated Interest Expense and income taxes, provided that in determining Consolidated Net Income as used in this definition the following shall be excluded, without duplication: (a) the income of any Perso accrued prior to the date such Person is merged into or consolidated with a Borrower or such Person's assets are acquired by a Borrower, (b) the proceeds of any insurance policy, (c) gains or losses from the sale, exchange, transfer or other disposition of property or assets of any Borrower or any of their Subsidiaries and related tax effects in accordance with GAAP and (d) any extraordinary or non-recurring gains of any Borrower or any of their Subsidiaries, and related tax effects in accordance with GAAP. "Effective Date" shall mean the effective date specified in the final paragraph of this Agreement. "Environmental Laws" at any date shall mean all provisions of law, statute, ordinances, rules, regulations, judgments, writs, injunctions, decrees, orders, awards and standards promulgated by the government of the United States of America or any foreign government or by any state, province, municipality or other political subdivision thereof or therein or by any court, agency, instrumentality, regulatory authority or commission of any of the foregoing concerning the protection of, or regulating the discharge of substances into, the environment. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, together with any successor statute thereto and the regulations thereunder. E-8 "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) which (i) together with the Borrowers or any Subsidiary, would be treated as a single employer under Section 414(b) or (c) of the Code or (ii) for purposes of liability under Section 412(C)(11) of the Code, the lien created under Section 412(n) of the Code or for a tax imposed for failure to meet minimum funding standards under Section 4971 of the Code, a member of the same affiliated service group (within the meaning of Section 401(m) of the Code) as the Borrowers or any Subsidiary, or any other trade or business described in clause (i) above. "Eurodollar Base Rate" shall mean, with respect to a Eurodollar Loan for the relevant Eurodollar Interest Period, the rate determined by the Agent to be the rate at which First Chicago offers to place deposits in Dollars with first-class banks in the London interbank market at approximately 11 a.m. (London time) two Business Days prior to the first day of such Eurodollar Interest Period, in the approximate amount of First Chicago's relevant Eurodollar Loan and having a maturity approximately equal to such Eurodollar Interest Period. "Eurodollar Interest Period" or "Interest Period" shall mean, with respect to a Eurodollar Loan, a period of one, two, three or six months commencing on a Business Day selected by the Borrowers pursuant to this Agreement. Such Eurodollar Interest Period shall end on the day which corresponds numerically to such date one, two, three or six months thereafter, provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Eurodollar Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If a Eurodollar Interest Period would otherwise end on a day which is not a Business Day, such Eurodollar Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new calendar month, such Eurodollar Interest Period shall end on the immediately preceding Business Day. "Eurodollar Loan" shall mean a Loan which bears interest at a Eurodollar Rate. "Eurodollar Rate" shall mean, with respect to a Eurodollar Loan for the relevant Eurodollar Interest Period, the sum of (i) the quotient of (a) the Eurodollar Base Rate applicable to such Eurodollar Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Eurodollar Interest Period, plus (ii) the Applicable Margin. "Event of Default" shall mean any of the events or conditions described in Section 8.1. "Federal Funds Rate" shall mean, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10 a.m. (Chicago time) on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion. "First Chicago" shall mean The First National Bank of Chicago, a national banking association, as a Bank under this Agreement. "Floating Rate" shall mean the per annum rate equal to the sum of (a) with respect to Loans and any other amounts owing hereunder, the Applicable Margin, plus (b) the greater of (i) the per annum rate announced by the Agent from time to time as its "corporate base rate", and (ii) the sum of one-half percent (1/2%) per annum plus the Federal Funds Rate, such Floating Rate to change simultaneously with any change in such "corporate base rate" or Federal Funds Rate, as the case may be; all as conclusively determined in good faith by the Agent, such sum to be rounded up, if necessary, to the nearest whole multiple of 1/16 of 1%. "Floating Rate Loan" shall mean any Loan bearing interest at the Floating Rate. E-9 "GAAP" shall mean generally accepted accounting principles applied on a basis consistent with that reflected in the financial statements referred to in Section 6.7 hereof. "Hydrocarbons" shall mean oil, gas casinghead, gas, drip gasoline, natural gas and condensates and all other liquid or gaseous hydrocarbons. "Indebtedness" of any Person shall mean, as of any date, (a) all obligations of such Person for borrowed money, (b) all obligations which are secured by any lien or encumbrance existing on property owned by such Person whether or not the obligation secured thereby shall have been assumed by such Person, other than those obligations which are incurred in the ordinary course of business and are not required to be shown as a liability on a balance sheet in accordance with GAAP, (c) all obligations as lessee under any lease which, in accordance with GAAP, is or should be capitalized on the books of the lessee, (d) the deferred purchase price for goods, property or services acquired by such Person, and all obligations of such Person to purchase such goods, property or services where payment therefor is required regardless of whether or not delivery of such goods or property or the performance of such services is ever made or tendered, other than unsecured trade payables incurred in the ordinary course of business, (e) all obligations of such Person to advance funds to, or to purchase property or services from, any other Person in order to maintain the financial condition of such Person, (f) all obligations of such Person in respect of any interest rate or currency swap, rate cap or other similar transaction (valued in an amount equal to the highest termination payment, if any, that would be payable by such Person upon termination for any reason on the date of termination), and (g) all obligations of such Person or of others for which such Person is contingently liable, as guarantor, surety or in any other similar capacity, or in respect of which obligations such Person assures a creditor against loss or agrees to take any action to prevent any such loss (other than endorsements of negotiable instruments for collection in the ordinary course of business), including without limitation all reimbursement obligations of such Person in respect of any letters of credit, surety bonds or similar obligations and all obligations of such Person to advance funds to, or to purchase assets, property or services from, any other Person in order to maintain the condition, financial or otherwise, of such other Person. "Interest Payment Date" shall mean (a) with respect to each Eurodollar Loan, the last day of each Eurodollar Interest Period with respect to such Eurodollar Loan and, in the case of any Eurodollar Interest Period exceeding three months, those days that occurred during such Eurodollar Interest Period at intervals of three months after the first day of such Eurodollar Interest Period, (b) in all other cases, the last Business Day of each month, commencing with the first such day after the Effective Date, and (c) the Termination Date with respect to Loans. "Lending Installation" shall mean, with respect to a Bank or the Agent, any office, branch, subsidiary or affiliate of such Bank or the Agent. "Letter of Credit" shall mean a standby letter of credit having a stated expiry date not later than twelve months after the date of issuance and not later than the fifth Business Day before the Termination Date, issued by the Agent on behalf of the Banks for the account of any Borrower under an application and related documentation acceptable to the Agent requiring, among other things, immediate reimbursement by the Borrowers to the Agent in respect of all drafts or other demand for payment honored thereunder and all expenses paid or incurred by the Agent relative thereto. Standby letters of credit which are automatically renewed annually unless revoked shall be considered standby letters of credit which have a stated expiry date not later than twelve months after their date of issuance for purposes of this definition. "Letter of Credit Advance" shall mean any issuance of a Letter of Credit under Section 3.1 made pursuant to Section 2.1 in which each Bank acquires a risk participation equal to its Pro Rata Share. E-10 "Letter of Credit Documents" shall have the meaning ascribed thereto in Section 3.3(b)(i). "Lien" shall mean any pledge, assignment, hypothecation, mortgage, security interest, deposit arrangement, option, conditional sale or title retaining contract, sale and leaseback transaction, financing statement filing, lessor's or lessee's interest under any lease, subordination of any claim or right, or any other type of lien, charge, encumbrance, preferential arrangement or other claim or right. "Loan" means any loan under Section 3.1 evidenced by the Notes and made pursuant to Section 2.1(a). "Loan Documents" shall mean this Agreement, the Notes, the Security Documents, the environmental certificate and any other agreement, instrument or document executed at any time pursuant to, in connection with, or otherwise relating to this Agreement. "Material Adverse Effect" shall mean a material adverse effect on or change in (a) the business, property (including without limitation the Collateral), operations or condition, financial or otherwise, of the Borrowers on a consolidated basis, (b) the ability of any Borrower to perform its obligations under any Loan Document or (c) the validity or enforceability or the rights and remedies of the Agent or any Bank under any Loan Document. "Monthly Borrowing Base Reductions" is defined in Section 9.14. "Mortgages" shall have the meaning ascribed thereto in Section 5.1. "Multiemployer Plan" shall mean any "multiemployer plan" as defined in Section 4001(a)(3) of ERISA or Section 414(f) of the Code. "Note" shall mean any promissory note of the Borrowers evidencing the Loans, in substantially the form annexed hereto as Exhibit B, as amended or modified from time to time and together with any promissory note or notes issued in exchange or replacement therefor. "Oil and Gas Interests" shall mean all leasehold interests, mineral fee interest, overriding royalty and royalty interests, net revenue and net working interest and all other rights and interests relating to Hydrocarbons, including without limitation any reserves thereof. "Overdue Rate" shall mean (a) in respect of principal of Floating Rate Loans, a rate per annum that is equal to the sum of three percent (3%) per annum plus the Floating Rate, (b) in respect of principal of Eurodollar Loans, a rate per annum that is equal to the sum of three percent (3%) per annum plus the per annum rate in effect thereon until the end of the then current Eurodollar Interest Period for such Loan and, thereafter, a rate per annum that is equal to the sum of three percent (3%) per annum plus the Floating Rate, and (c) in respect of other amounts payable by the Borrowers hereunder (other than interest), a per annum rate that is equal to the sum of three percent (3%) per annum plus the Floating Rate. "PBGC" shall mean the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Permitted Liens" shall mean the Liens permitted by Section 7.2(e) hereof. "Person" shall include an individual, a corporation, an association, a partnership, a trust or estate, a joint stock company, an unincorporated organization, a joint venture, a government (foreign or domestic), and any agency or political subdivision thereof, or any other entity. E-11 "Plan" shall mean, with respect to any Person, any employee benefit or other plan (other than a Multiemployer Plan) maintained by such Person for its employees and covered by Title IV of ERISA or to which Section 412 of the Code applies. "Pro Rata Share" shall mean, as to obligations of the Banks, the loan percentage set forth opposite its name on the signature pages hereof or otherwise established pursuant to Section 10.6, and as to obligations owing to the Banks, shall mean: (a) in the case of payments of principal and interest on the Loans, an amount with respect to each Bank equal to the product of such amount received multiplied by the ratio which the outstanding principal balance of its Note bears to the outstanding principal balance of all Notes, and (b) in the case of all other amounts payable hereunder (other than as otherwise noted with respect to fees) and other amounts, an amount with respect to each Bank equal to the product of such amount received multiplied by the ratio which the Commitment of such Bank bears to the Commitments of all Banks. "Proved Developed Reserves" shall mean all Oil and Gas Interests which, to the satisfaction of the Agent, are estimated, with reasonable certainty, and as demonstrated by geological and engineering data acceptable to the Agent, to be economically recoverable from existing wells requiring no more than minor workover operations from existing completion intervals open for production and which are producing, and have proven reserves of, Hydrocarbons. "Reportable Event" shall mean a reportable event as described in Section 4043(b) of ERISA including those events as to which the thirty (30) day notice period is waived under Part 2615 of the regulations promulgated by the PBGC under ERISA. "Required Banks" shall mean Banks holding not less than 66-2/3% of the aggregate principal amount of the Advances then outstanding (or 66-2/3% of the Commitments if no Advances are then outstanding). "Reserve Requirement" means, with respect to a Eurodollar Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities. "Security Agreements" shall have the meaning ascribed thereto in Section 5.1. "Security Documents" shall have the meaning ascribed thereto in Section 5.1. "Subsidiary" of any Person shall mean any other Person (whether now existing or hereafter organized or acquired) in which (other than directors qualifying shares required by law) at least a majority of the securities or other ownership interests of each class having ordinary voting power or analogous right (other than securities or other ownership interests which have such power or right only by reason of the happening of a contingency), at the time as of which any determination is being made, are owned, beneficially and of record, by such Person or by one or more of the other Subsidiaries of such Person or by any combination thereof. Unless otherwise specified, reference to "Subsidiary" shall mean a Subsidiary of CRI. "Swap Agreement" shall mean any interest rate or oil and gas commodity swap agreement, interest cap or collar agreement or other financial agreement or arrangement designed to protect the Borrowers against fluctuations in interest rates or oil and gas prices. "Tangible Net Worth" of any Person shall mean, as of any date, (a) the amount of any capital stock or similar ownership liability plus (or minus in the case of a deficit) the capital surplus and retained earnings of such Person and the amount of any foreign currency translation adjustment account shown as a capital account of such Person, less (b) the net book value of all items of the following character which are included in the assets of such Person: (i) goodwill, including without limitation, the excess of cost over book value of E-12 any asset, (ii) organization or experimental expenses, (iii) unamortized debt discount and expense, (iv) stock discount and expense, (v) patents, trademarks, trade names and copyrights, (vi) treasury stock, (vii) deferred taxes and deferred charges, (viii) franchises, licenses and permits, and (ix) all other assets which are deemed intangible assets under GAAP; provided, that such calculation of Tangible Net Worth under this definition shall not include receivables of such Person which are owing by any Affiliate or advances by such Person to any Affiliate. "Termination Date" shall mean the earlier to occur of (a) December 9, 2002 and (b) the date on which the Commitments shall be terminated pursuant to Section 2.1(c) or 8.2. "Threshold Amount" shall mean an amount for purposes of determining the Applicable Margin (which amount may be less than the Borrowing Base as determined by the Agent and the Banks in accordance with the terms hereof) determined in accordance with the procedures described in Section 9.14, and based upon the Agent's and the Banks' customary and standard practices in lending to oil and gas companies generally, including without limitation their standard engineering criteria and oi and gas lending criteria (and it is acknowledged and agreed that such customary and standard practices, including without limitation such engineering criteria and oil and gas lending criteria, shall be determined by the Agent and each Bank, as the case may be, in their sole discretion, and such determination shall be conclusive and binding). "Total Liabilities" of any Person shall mean, as of any date, all obligations which, in accordance with GAAP, are or should be classified as liabilities on a balance sheet of such Person. "Type" shall mean, with respect to any Advance, its nature as a Floating Rate Loan, Eurodollar Loan or Letter of Credit Advance. "Year 2000 Issues" shall mean anticipated costs, problems and uncertainties associated with the inability of certain computer applications to effectively handle data including dates on and after January 1, 2000, as such inability affects the business, operations, and financial condition of the Borrowers. 1.2 Other Definitions; Rules of Construction . As used herein, the terms "Agent", "Banks", "CRI", "COG", "COGL", "Borrowers" and "this Agreement" shall have the respective meanings ascribed thereto in the introductory paragraph of this Agreement. Such terms, together with the other terms defined in Section 1.1 shall include both the singular and the plural forms thereof and shall be construed accordingly. All computations required hereunder and all financial terms used herein shall be made or construed in accordance with GAAP unless such principles are inconsistent with the express requirements of this Agreement. SECTION 2. The Commitments. 2.1 Advances. (a) Each Bank agrees, for itself only, to lend and to relend, and to participate in Letter of Credit Advances pursuant to Section 3.1, in each case subject to the terms and conditions of this Agreement, to the Borrowers at any time and from time to time from the Effective Date until the Termination Date amounts equal to such Bank's Pro Rata Share of such aggregate Advances as any Borrower may from time to time request, provided that no Advances may be made if the aggregate outstanding amount of all Advances to all Borrowers would exceed the lesser of the Commitments or the Borrowing Base; provided, however, that the aggregate principal amount of Letters of Credit outstanding at any time shall not exceed $5,000,000. Each Loan made hereunder shall be evidenced by the Notes, which shall mature and bear interest as set forth in Section 4 hereof and in such Notes. On the Effective Date, the Borrowers shall issue and deliver to each Bank a Note in the principal amount of such Banks' Commitment for the period beginning on the Effective Date. Each Loan which is a Floating Rate Loan shall be in a minimum amount of $500,000 and in integral multiples of $100,000 and each Loan which is a Eurodollar Loan shall be in a minimum amount of $1,000,000 and in integral multiples of $1,000,000. No more than ten Eurodollar Interest Periods shall be permitted to exist at any one time. Subject to the terms and conditions of this Agreement, the Borrowers may borrow, prepay pursuant to Section 4.1(b) and reborrow under this Section 2.1(a). E-13 (b) For purposes of this Agreement, a Letter of Credit Advance (i) shall be deemed outstanding in an amount equal to the sum of the maximum amount available to be drawn under the related Letter of Credit on or after the date of determination and on or before the stated expiry date thereof plus the amount of any draws under such Letter of Credit that have not been reimbursed as provided in Section 3.3 and (ii) shall be deemed outstanding at all times on and before such stated expiry date or such earlier date on which all amounts available to be drawn under such Letter of Credit have been fully drawn, and thereafter until all related reimbursement obligations have been paid pursuant to Section 3.3. As provided in Section 3.3, upon each payment made by the Agent in respect of any draft or other demand for payment under any Letter of Credit, the amount of any Letter of Credit Advance outstanding immediately prior to such payment shall be automatically reduced by the amount of each Loan deemed advanced in respect of the related reimbursement obligation of the Borrowers. (c) The Borrowers shall have the right to terminate or reduce the Commitments at any time and from time to time, provided that (i) the Borrowers shall give notice of such termination or reduction to the Agent specifying the amount and effective date thereof, (ii) each partial reduction of the Commitments shall be in a minimum amount of $1,000,000 and in integral multiples of $1,000,000 and shall reduce the Commitments of all of the Banks proportionally in accordanc with the respective Commitment amounts of each such Bank, (iii) no such termination or reduction, either in whole or part and including without limitation any termination, shall be permitted with respect to any portion of the Commitments as to which a request for Advances is then pending, and (iv) the Commitments may not be terminated if any Advances are then outstanding and may not be reduced below the principal amount of Advances then outstanding. The Commitments or any portion thereo so terminated or reduced may not be reinstated. Any Borrower may request Advances without the consent of any other Borrower, and each Borrower consents to and approves any Advances requested by any other Borrower. The Advances hereunder replace the revolving credit loans and letters of credit outstanding pursuant to Section 2.1(a) of the Existing Credit Agreement and provide additional credit as described above. (d) This Agreement amends and restates the Existing Credit Agreement, and all Advances and Letters of Credit outstanding under the Existing Credit Agreement shall constitute Advances and Letters of Credit under this Agreement and all fees and other obligations accrued under the Existing Credit Agreement will continue to accrue and be paid under this Agreement. As stated in the Notes and the Consent and Amendment to Security Documents, the Advances and other obligations pursuant hereto are issued in exchange and replacement for the Advances and other obligations under an Existing Credit Agreement, shall not be a novation or satisfaction thereof and shall be entitled to the same collateral with the same priority. SECTION 3. The Advances. 3.1 Disbursement of Advances . (a) Borrowers shall give notice to the Agent of each requested Advance in substantially the form of Exhibit C hereto, which notice given shall be received by the Agent not later than 10:00 a.m. (Chicago time), (i) three Business Days prior to the date such Advance is requested to be made if such Advance is to be made as a Eurodollar Loan, (ii) one Business Day prior to the date such Advance is requested to be made if such Advance i to be made as a Floating Rate Loan and (iii) three Business Days prior to the date such Advance is to be made if such Advance is to be made as a Letter of Credit Advance. Each such notice given shall be irrevocable and binding on the Borrowers, any such notice must specify the Advance Date, which shall be a Business Day, the aggregate amount of such Advance, the Type of Advance selected, in the case of any Eurodollar Loan, the Eurodollar Interest Period applicable thereto, and in the case of any Letter of Credit Advance such other information and documents with respect thereto as may be required by the Agent. The Agent shall provide notice of such requested Advance to each Bank on the same Business Day such notice is received from the Borrowers. Subject to the terms and conditions of this Agreement, the Agent shall, on the date any Letter of Credit Advance is requested to be made, issue the related Letter of Credit on behalf of the Banks for the account of the designated Borrower. Notwithstanding anything herein to the contrary, the Agent may decline to issue any requested Letter of Credit on the basis that the beneficiary, the purpose of issuance or the terms or the conditions of drawing are illegal or contrary to a policy of the Agent. E-14 (b) Floating Rate Loans shall continue as Floating Rate Loans unless and until such Floating Rate Loans are converted into Eurodollar Loans. Each Eurodollar Loan of any Type shall continue as a Eurodollar Loan of such Type until the end of the then applicable Interest Period therefor, at which time such Eurodollar Loan shall be automatically converted into a Floating Rate Loan unless the Borrower shall have given the Agent a Conversion/Continuation Notice requestin that, at the end of such Interest Period, such Eurodollar Loan either continue as a Eurodollar Loan for the same or another Interest Period or be converted into a Loan of another Type. Subject to the terms of Section 2.1, the Borrower may elect from time to time to convert all or any part of a Loan of any Type into any other Type or Types of a Loan; provided that any conversion of any Eurodollar Loan shall be made on, and only on, the last day of the Interest Period applicable thereto. The Borrowers shall give the Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of a Loan or continuation of a Eurodollar Loan not later than 10:00 a.m. (Chicago time) at least one Business Day, in the case of a conversion into a Floating Rate Loan, or three Business Days, in the case of a conversion into or continuation of a Eurodollar Loan, prior to the date of the requested conversion or continuation, specifying: (i) the requested date, which shall be a Business Day, of such conversion or continuation, (ii) the aggregate amount and Type of the Loan which is to be converted or continued, and (iii) the amount and Type(s) of Loan(s) into which such Loan is to be converted or continued and, in the case of a conversion into or continuation of a Eurodollar Loan, the duration of the Interest Period applicable thereto. (c) Subject to the terms and conditions of this Agreement, the proceeds of such requested Loan shall be made available to the Borrowers by depositing the proceeds thereof, in immediately available funds, on the Advance Date for such Loan in an account maintained and designated by the Borrowers at the principal office of the Agent. Each Bank, on the Advance Date of each such Loan shall make its Pro Rata Share of such Loan available in immediately available funds at the principal office of the Agent for disbursement to the Borrowers. Unless the Agent shall have received notice from any Bank prior to the date of any requested Loan under this Section 3.1 that such Bank will not make available to the Agent such Bank's Pro Rata Share, the Agent may assume that such Bank has made such share available to the Agent on the Advance Date of such Loan in accordance with this Section 3.1(b). If and to the extent such Bank shall not have so made such Pro Rata Share available to the Agent, the Agent may (but shall not be obligated to) make such amount available to the Borrowers on the relevant Advance Date, and such Bank agrees to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date such amount is made available to the Borrowers by the Agent until the date such amount is paid to the Agent, at the Federal Funds Rate. If such Bank shall pay to the Agent such amount, such amount so paid shal constitute a Loan by such Bank as a part of such borrowing for purposes of this Agreement. The failure of any Bank to make its Pro Rata Share of any such Loan available to the Agent shall not relieve any other Bank of its obligations to make available its Pro Rata Share of such Loan on the Advance Date of such Loan, but no Bank shall be responsible for failure of any other Bank to make such Pro Rata Share available to the Agent on the Advance Date of any such Loan. (d) Each Bank may book its Loans at any Lending Installation selected by such Bank and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Notes shall be deemed held by each Bank for the benefit of such Lending Installation. Each Bank may, by written or telex notice to the Agent and the Borrowers, designate a Lending Installation through which Loans will be made by it and for whose account Loan payments are to be made. (e) Nothing in this Agreement shall be construed to require or authorize any Bank to issue any Letter of Credit, it being recognized that the Agent has the sole obligation under this Agreement to issue Letters of Credit on E-15 behalf of the Banks, and the Commitment of each Lender with respect to Letter of Credit Advances is expressly conditioned upon the Agent's performance of such obligations. Upon such issuance by the Agent, each Bank shall automatically and unconditionally acquire a risk participation interest to the extent of its Pro Rata Share in such Letter of Credit Advance based on its respective Commitment. If the Agent shall honor a draft or other demand for payment presented or made under any Letter of Credit, the Agent shall provide notice thereof to each Bank on the date such draft or demand is honored unless the Borrowers shall have satisfied their reimbursement obligation under Section 3.3 by payment to the Agent on such date. Each Bank, not later than the Business Day after the Agent shall have given the notice specified in the previous sentence, shall make its Pro Rata Share of the amount paid by the Agent available in immediately available funds at the principal office of the Agent for the account of the Agent. If and to the extent such Bank shall not have made any required Pro Rata Share amount available to the Agent or made its portion of Loan available pursuant to Section 3.3(a)(i), such Bank and the Borrowers severally agree to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date such amount was paid by the Agent until such amount is so made available to the Agent at (i) the interest rate then applicable to Floating Rate Loans for such day in the case of the Borrowers and (ii) the rate per annum equal to the Federal Funds Rate for the first five days, and thereafter at the interest rate applicable to Floating Rate Loans, in the case of any Bank. If such Bank shall pay such amount to the Agent together with such interest, such amount so paid shall constitute a Loan by such Bank as part of the Loans disbursed in respect of the reimbursement obligation of the Borrowers under Section 3.3 for purposes of this Agreement. The failure of any Bank to make its Pro Rata Share of any such amount paid by the Agent available to the Agent shall not relieve any other Bank of its obligation to make available its Pro Rata Shar of such amount, but no Bank shall be responsible for failure of any other Bank to make such Pro Rata Share available to the Agent. 3.2 Conditions of Advances . The Banks and the Agent shall not be obligated to make any Advance hereunder at any time unless: (a) On the Effective Date, there shall have been delivered to each Bank the following documents, in form and substance satisfactory to the Agent and the following additional conditions shall have been satisfied: (i) The favorable opinion of such counsel for the Borrowers as shall be approved by the Required Banks, with respect to the matters as requested by the Banks, all in form and substance satisfactory to the Required Banks; (ii) certified copies of such corporate documents of each Borrower, including each Borrower's articles of incorporation, by-laws and a good standing certificate, and such documents evidencing necessary corporate action with respect to this Agreement, the Loans, the Notes and the Security Documents, and certifying to the incumbency of, and attesting to the genuineness of the signatures of, those officers authorized to act on behalf of each Borrower, as the Banks shall request; (iii) the Security Documents required as of the Effective Date under Section 5.1 duly executed on behalf of the Borrowers, together with evidence of the recordation, filing and other action in such jurisdictions as the Banks may deem necessary or appropriate with respect to the Security Documents and evidence of the first-priority of the Banks' liens and security interests under the Security Documents, subject only to Permitted Liens, including without limitation such additional mortgages, security agreements, pledge agreements, other documents and opinions of counsel required by the Banks and original stock certificates and assignments separate from certificate of each Person whose stock is required to be pledged; (iv) the Notes duly executed on behalf of the Borrowers, and it is acknowledged and agreed that the Notes: (A) are issued in exchange and replacement for the promissory notes issued pursuant to the Existing Credit Agreement, (B) shall not be deemed a novation or to have satisfied such promissory notes and (C) evidence the same indebtedness evidenced by such promissory notes plus additional indebtedness; E-16 (v) the Consent and Amendment of Security Documents duly executed by the Borrowers; (vi) Payment of such fees agreed to among the Borrowers and the Agent; (vii) the execution by the Borrowers of the Agent's standard environmental certificate; (viii) the Banks shall have determined that the Loans to be made are equal to or less than the Borrowing Base; (ix) copies of all agreements relating to any material Indebtedness for borrowed money, any outstanding preferred stock, any joint ventures or partnerships or any other material documents requested by the Banks; (x) the originals of all promissory notes payable to any Borrower, other than promissory notes in an aggregate amount less than $1,000,000; and (xi) such other agreements, documents, conditions and certificates as reasonably requested by the Banks, including without limitation, releases and terminations of all other Liens which are not permitted hereunder, amendments of existing Security Documents, all in form and substance satisfactory to the Banks. (b) The aggregate outstanding principal amount of all Advances after giving effect to the proposed Advance, does not exceed the lesser of the Commitments or the Borrowing Base. (c) On and as of the date of each such Advance, the representations and warranties contained in Section 6 hereof shall be true and correct in all material respects as if made on such date; provided, however, that for purposes of this Section 3.2(c) the representations and warranties contained in Section 6.7 hereof shall be deemed made with respect to both the financial statements referred to therein and the most recent financial statements delivered pursuant to Section 7.1(d)(ii) and (iii). (d) No Default or event or condition which could cause a Material Adverse Effect has occurred and is continuing or will exist upon the disbursement of such Advance. Acceptance of the proceeds of any Advance hereunder by the Borrowers shall be deemed to be a certification by the Borrowers at such time with respect to the matters set forth in subparagraphs (b), (c) and (d) of this Section 3.2. 3.3 Letter of Credit Reimbursement Payments. (a)(i) The Borrowers agree to pay to the Agent, on the day on which the Agent shall honor a draft or other demand for payment presented or made under any Letter of Credit, an amount equal to the amount paid by the Agent in respect of such draft or other demand under such Letter of Credit and all expenses paid or incurred by the Agent relative thereto. Unless the Borrowers shall have made such payment to the Agent on such day upon each such payment by the Agent, the Agent shall be deemed to have disbursed to the Borrowers, and the Borrowers shall be deemed to have elected to satisfy the reimbursement obligation by borrowing, a Loan bearing interest at the Floating Rate for the account of the Banks in an amount equal to the amount so paid by the Agent in respect of such draft or other demand under such Letter of Credit. Such Loan shall be disbursed, and each Bank shall advance its Pro Rata Share thereof, notwithstanding any failure to satisfy any conditions for disbursement of any Loan set forth in Article III or any other condition and, to the extent of the Loan so disbursed, the reimbursement obligation of the Borrowers under this Section 3.3 shall be deemed satisfied; provided, however, that such disbursement shall not be deemed to be a waiver of any Event of Default or Default, if any. E-17 (ii) If for any reason (including without limitation as a result of the occurrence of an Event of Default pursuant to Section 6.1(h)), Floating Rate Loans may not be made by the Banks as described in Section 3.3(a)(i), then (A) the Borrowers agree that each reimbursement amount not paid pursuant to the first sentence of Section 3.3(a)(i) shall bear interest, payable on demand by the Agent, at the interest rate then applicable to Floating Rate Loans, and (B) effective on the date each such Floating Rate Loan would otherwise have been made, each Bank severally agrees that it shall unconditionally and irrevocably, without regard to the occurrence of any Default or Event of Default, in lieu of a deemed disbursement of Loans, to the extent of such Bank's Pro Rata Share, purchase a participating interest in each reimbursement amount. Each Bank will immediately transfer to the Agent, in same day funds, the amount of its participation. Each Bank shall share in accordance with its Pro Rata Share (calculated by reference to the Commitments) in any interest which accrues thereon and in all repayments thereof. If and to the extent that any Bank shall not have so made the amount of such participating interest available to the Agent, such Bank and the Borrowers agree to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date of demand by the Agent until the date such amount is paid to the Agent, at (x) in the case of the Borrowers, the interest rate then applicable to Floating Rate Loans and (y) in the case of such Bank, the Federal Funds Rate for the first five days, and thereafter the interest rate applicable to Floating Rate Loans. (b) The reimbursement obligations of the Borrowers under this Section 3.3 shall be absolute, unconditional and irrevocable and shall remain in full force and effect until all obligations of the Borrowers to the Agent and the Banks hereunder shall have been satisfied, and such obligations of the Borrowers shall not be affected, modified or impaired upon the happening of any event, including without limitation, any of the following, whether or not with notice to, or the consent of, the Borrowers: (i) Any lack of validity or enforceability of any Letter of Credit or any documentation relating to any Letter of Credit or to any transaction related in any way to such Letter of Credit (the "Letter of Credit Documents"); (ii) Any amendment, modification, waiver or consent, or any substitution, exchange or release of or failure to perfect any interest in collateral or security, with respect to any of the Letter of Credit Documents. (iii) The existence of any claim, setoff, defense or other right which the Borrowers may have at any time against any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such transferee may be acting), the Agent or any Bank or any other person or entity, whether in connection with any of the Letter of Credit Documents, the transactions contemplated herein or therein or any unrelated transactions; (iv) Any draft or other statement or document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (v) Payment by the Agent to the beneficiary under any Letter of Credit against presentation of documents which do not comply with the terms of the Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit; (vi) Any failure, omission, delay or lack on the part of the Agent or any Bank or any party to any of the Letter of Credit Documents to enforce, assert or exercise any right, power or remedy conferred upon the Agent, any Bank or any such party under this Agreement or any of the Letter of Credit Documents, or any other acts or omissions on the part of the Agent, any Bank or any such party; or (vii) Any other event or circumstance that would, in the absence of this clause, result in the release or discharge by operation of law or otherwise the Borrowers from the performance or observance of any obligation, covenant or agreement contained in this Section 3.3. No setoff, counterclaim, E-18 reduction or diminution of any obligation or any defense of any kind or nature which the Borrowers have or may have against the beneficiary of any Letter of Credit shall be available hereunder to the Borrowers against the Agent or any Bank. Nothing in this Section 3.3 shall limit the liability, if any, of the Borrowers to the Banks pursuant to Section 10.5(b). 3.4. Withholding Tax Exemption. At least five Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America, or a state thereof, agrees that it will deliver to each of the Borrowers and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Bank which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Borrowers and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires (currently, three successive calendar years for Form 1001 and one calendar year for Form 4224) or becomes obsolete or after the occurrence of an event requiring a change in the most recent forms so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrowers or the Agent, in each case certifying that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the dat on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the Borrowers and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. SECTION 4. Payment and Prepayment; Fees; Change in Circumstances. 4.1 Principal Payments . (a) Unless earlier payment is required under this Agreement, the Borrowers shall pay the entire outstanding principal amount of the Advances on the Termination Date. (b) The Borrowers may from time to time prepay all or a portion of the Advances without premium or penalty, provided, however, that (i) the Borrowers shall have given not less than one Business Day's prior written notice thereof to the Agent, (ii) other than mandatory payments, each such prepayment, in the case of prepayment of Floating Rate Loans, shall be in the minimum amount of $500,000 and in integral multiples of $100,000 and, in the case of prepayment of Eurodollar Loans, shall be in the minimum amount of $1,000,000 and in integral multiples thereof, (iii) any prepayment of any Eurodollar Loan shall be accompanied by any amount required pursuant to Section 4.10. (c) If it should be determined by the Agent at any time and from time to time that the principal amount of the Advances exceed the lesser of the then Borrowing Base or the Commitments (such condition defined herein as a "Borrowing Base Deficiency"), the Borrowers shall within thirty (30) days of written notice to the Borrowers of such Borrowing Base Deficiency, in addition to all other payments of principal and interest required to be paid on the Advances, prepay upon demand and without premium or penalty the Advances in an amount by which, in the determination of the Agent, such aggregate principal amount outstanding exceeds the lesser of the then Borrowing Base or the Commitments, provided that such prepayment shall be made first on the Loans and if the Loans are paid in full and such excess still exists, the Borrowers shall provide cash collateral for any outstanding Letters of Credit to the extent of such remaining excess. (d) In addition to all other payments required hereunder, upon any sale or other disposition of any assets when a Default exists, or if such sale or other disposition would cause a Default, the Borrowers shall prepay the E-19 Advances by an amount equal to 100% of the net proceeds (net only of reasonable and customary costs of such sale or other disposition) of such sale or disposition, which prepayment is due upon receipt of such net proceeds. (e) In addition to all other payments required hereunder, upon any sale or other disposition of any assets when a Borrowing Base Deficiency exists, or if such sale or other disposition would cause a Borrowing Base Deficiency, the Borrower shall prepay the Advances by the amount of the Borrowing Base Deficiency from the net proceeds (net only of any reasonable and customary costs of such sale or other disposition) of such sale or disposition, which prepayment is due upon receipt of such net proceeds. (f) In addition to all other payments required hereunder, the Borrowers shall prepay the Advances by an amount equal to 100% of the proceeds of any Indebtedness (excluding Indebtedness permitted by Section 7.2(d) hereof), provided that it is acknowledged that the incurrence of any such Indebtedness shall require the consent of the Required Banks. (g) In addition to all other payments required hereunder, the Borrowers shall prepay the Advances by an amount equal to 100% of the proceeds received by the Borrowers from the issuance or other sale of any Capital Stock of any Borrower, other than net cash proceeds in an aggregate amount per fiscal year not to exceed $2,500,000 received by CRI in connection with the exercising of stock options. Unless specified as a determination to be made by all Banks, all determinations made pursuant to this Section 4.1 shall be made by the Agent or the Required Banks, as the case may be, and shall be conclusively binding on the parties absent manifest error. 4.2 Interest Payment. (a) The Borrowers shall pay interest to the Banks on the unpaid principal amount of each Loan for the period commencing on the date such Loan is made until such Loan is paid in full, on each Interest Payment Date and at maturity (whether at stated maturity, by acceleration or otherwise), and thereafter on demand, at the following rates per annum: (i) during such periods that such Loan is a Floating Rate Loan, the Floating Rate, and (ii) during such periods that such Loan is a Eurodollar Loan, the Eurodollar Rate applicable to such Loan for each related Eurodollar Interest Period. (b) Notwithstanding the foregoing paragraph (a), the Borrowers hereby agree, if requested by the Required Banks, to pay interest on demand at the Overdue Rate on the outstanding principal amount of any Loan and any other amount payable by the Borrowers hereunder (other than interest) upon and during the continuance of any Default. 4.3 Fees . (a) The Borrowers agree to pay to the Agent, for the pro rata account of the Banks in accordance with their Pro Rata Shares, a commitment fee computed at the per annum rate equal to the Applicable Margin on the amount by which the Commitments exceed the aggregate outstanding principal amount of the Advances, for the period from the Effective Date until the Termination Date. Such fee shall be paid quarterly in arrears on the last Business Day of each March, June, September and December and on the Termination Date. (b) The Borrowers agree (i) to pay to the Agent, for the benefit of the Banks, a fee computed at the Applicable Margin on the maximum amount available to be drawn under each Letter of Credit at the time such fee is to be paid for the period from and including the date of issuance of such Letter of Credit to and including the stated expiry date of such Letter of Credit, and (ii) to pay an additional fee to the Agent for its own account computed at the rate of 0.25% per annum on such maximum amount for such period. Such fees shall be payable each month in advance, payable on the date of the issuance of any Letter of Credit and each month thereafter. Such fees are nonrefundable and the Borrowers shall not be entitled to any rebate of any portion thereof if such Letter of Credit does not remain outstanding through the date for which such E-20 fees have been paid. The Borrowers further agree to pay to the Agent, on demand, such other customary administrative fees, charges and expenses of the Agent in respect of the issuance, negotiation, acceptance, amendment, transfer and payment of each Letter of Credit or otherwise payable pursuant to the application and related documentation under which such Letter of Credit is issued. (c) The Borrowers agree to pay to the Agent agency and servicing fees for its services under this Agreement in such amounts as it may from time to time be agreed upon between the Borrowers and the Agent, which fee shall be retained solely by the Agent. 4.4 Payment Method . All payments to be made by the Borrowers hereunder will be made in Dollars and in immediately available funds to the Agent at its address set forth in Section 10.2 not later than 11:00 a.m. Chicago time on the date on which such payment shall become due. Payments received after 11:00 a.m. Chicago time shall be deemed to be payments made prior to 11:00 a.m. Chicago time on the next succeeding Business Day. At the time of making each such payment, the Borrowers shall specify to the Agent that obligation of the Borrowers hereunder to which such payment is to be applied, or, in the event that the Borrowers fail to so specify or if an Event of Default shall have occurred and be continuing, the Agent may apply such payments as it may determine in its sole discretion. On the day such payments are received, the Agent shall remit to the Banks their respective Pro Rata Shares of such payments, in immediately available funds. 4.5 No Setoff or Deduction. All payments of principal of and interest on the Advances and other amounts payable by the Borrowers hereunder shall be made by the Borrowers without setoff or counterclaim, and free and clear of, and without deduction or withholding for, or on account of, any present or future taxes, levies, imposts, duties, fees, assessments, or other charges of whatever nature, imposed by any governmental authority, or by any department, agency or other political subdivision or taxing authority. 4.6 Payment on Non-Business Day; Payment Computations . Except as otherwise provided in this Agreement to the contrary, whenever any installment of principal of, or interest on, any Advances outstanding hereunder or any other amount due hereunder, becomes due and payable on a day which is not a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and, in the case of any installment of principal, interest shall be payable thereon at the rate per annum determined in accordance with this Agreement during such extension. Computations of interest and other amounts due under this Agreement shall be made on the basis of a year of 360 days for the actual number of days elapsed, including the first day but excluding the last day of the relevant period. 4.7. Yield Protection. If any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any interpretation thereof, or the compliance of any Bank therewith, (i) subjects any Bank or any applicable Lending Installation to any tax, duty, charge or withholding on or from payments due from the Borrowers (excluding federal taxation of the overall net income of any Bank or applicable Lending Installation), or changes the basis of taxation of payments to any Bank in respect of its Loans or other amounts due it hereunder, or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank or any applicable Lending Installation (other than reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Loans), or (iii) imposes any other condition the result of which is to increase the cost to any Bank or any applicable Lending Installation of making, funding or maintaining loans or reduces any amount receivable by any Bank or any applicable Lending Installation in connection with loans, or requires any Bank or any applicable Lending Installation to make any payment calculated by reference to the amount of loans held or interest received by it, by an amount E-21 deemed material by such Bank, then, within 30 days of demand by such Bank, the Borrowers shall pay such Bank that portion of such increased expense incurred or reduction in an amount received which such Bank determines is attributable to making, funding and maintaining its Loans and its Commitment. 4.8. Changes in Capital Adequacy Regulations. If a Bank determines the amount of capital required or expected to be maintained by such Bank, any Lending Installation of such Bank or any corporation controlling such Bank is increased as a result of a Change, then, within 15 days of demand by such Bank, the Borrowers shall pay such Bank the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Bank determine is attributable to this Agreement, its Advances or its Commitment (after taking into account such Bank's policies as to capital adequacy). "Change" means (i) any change after the date of this Agreement in the Risk-Based Capital Guidelines or (ii) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement which affects the amount of capital required or expected to be maintained by any Bank or any Lending Installation or any corporation controlling any Bank. "Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement. 4.9. Availability of Types of Advances. If any Bank determines that maintenance of its Eurodollar Loans at a suitable Lending Installation would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or if the Required Banks determine that (i) deposits of a type and maturity appropriate to match fund Eurodollar Loans are not available or (ii) the interest rate applicable to a Type of Advance does not accurately reflect the cost o making or maintaining such Advance, then the Agent shall suspend the availability of the affected Type of Advance and require any Eurodollar Loans of the affected Type to be repaid. 4.10. Funding Indemnification. If any payment of a Eurodollar Loan occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a Eurodollar Loan is not made on the date specified by the Borrowers for any reason other than default by the Banks, the Borrowers will indemnify each Bank for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain the Eurodollar Loan. 4.11. Bank Statements; Survival of Indemnity. To the extent reasonably possible, each Bank shall designate an alternate Lending Installation with respect to its Eurodollar Loans to reduce any liability of the Borrowers to such Bank under Sections 4.7 and 4.8 or to avoid the unavailability of a Type of Advance under Section 4.9, so long as such designation is not disadvantageous to such Bank. Each Bank shall deliver a written statement of such Bank to the Borrowers (with a copy to the Agent) as to the amount due, if any, under Sections 4.7, 4.8 or 4.10. Such written statement shall set forth in reasonable detail the calculations upon which such Bank determined such amount and shall be final, conclusive and binding on the Borrowers in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurodollar Loan shall be calculated as though each Bank funded its Eurodollar Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate applicable to such Loan, whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement of any Bank shall be payable on demand after receipt by the Borrowers of such written statement. The obligations of the Borrowers under Sections 4.7, 4.8 and 4.10 shall survive payment of the Bank Obligations and termination of this Agreement. E-22 SECTION 5. Security 5.1 Security Documents . To secure all indebtedness, obligations and liabilities under this Agreement, the Notes, the Security Documents, the Advances, any Swap Agreements among any Borrower and any Lender and to secure all other Indebtedness and obligations of the Borrowers to the Agent and the Banks pursuant thereto, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, the Borrowers shall: (a) Execute and deliver to the Agent, promptly upon the request of the Agent or the Required Banks, such indentures of mortgage, deeds of trust, security agreements, financing statements and assignment of production and other agreements, including without limitation any amendments to any such documents previously executed and delivered in favor of the Agent or any Bank (as amended or modified from time to time, the "Mortgages" and together with the Security Agreements, and all agreements and documents described in this Section 5.1(a) or in 5.1(b) or 5.2 and all other agreements and documents securing any of the Bank Obligations at any time or otherwise executed by any Borrower with or in favor of the Agent and the Banks, and including without limitation the Letter of Credit Documents, as amended or modified from time to time, the "Security Documents"), in form and substance satisfactory to the Required Banks, granting the Agent, for the benefit of the Banks, a first-priority, perfected and enforceable lien and security interest, subject only to the Permitted Liens, in the following (collectively, with all other assets described in Section 5.1(b), the "Collateral"): all oil, gas and mineral properties and all other assets of the Borrowers as requested at any time by the Required Banks, including without limitation all leasehold and royalty interests and all other rights in connection therewith, and all interests in machinery, equipment, materials, improvements, hereditaments, appurtenances and other property, real, Personal and/or mixed, now or hereafter a part of or obtained in or used in connection with such properties and all interests in and to any and all oil, gas and other minerals now in storage or now or hereafter located in, under, on or produced from, such properties and an assignment of production from such properties to the Agent; (b) Execute and deliver to the Agent, on or before the Effective Date, such security agreements, pledge agreements, financing statements and other agreements, including without limitation the Consent and Amendment of Security Documents confirming the continuing effectiveness of Security Documents previously executed and delivered to the Agent or any Bank (as amended or modified from time to time, the "Security Agreements"), in form and substance satisfactory to the Required Banks, granting to the Agent, for the benefit of the Banks, a first-priority, perfected and enforceable lien and security interest, subject only to the Permitted Liens, in all other assets, whether real, personal or mixed, and whether now owned or hereafter existing and wherever located, of the Borrowers. 5.2 Additional Security Documents. If at any time requested by the Agent or the Required Banks, the Borrowers shall execute and deliver such additional documents, and shall take such other action, as the Agent or the Required Banks may reasonably consider necessary or proper to evidence or perfect the liens and security interests described in Section 5.1 hereof. SECTION 6. Representations and Warranties. Each of the Borrowers represents and warrants that: 6.1 Corporate Existence and Power. It is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and is duly qualified to do business and in good standing in each additional jurisdiction where failure to so qualify would have a Material Adverse Effect. It has all requisite corporate power to own its properties and to carry on its business as now being conducted and as proposed to be conducted, and to execute and deliver this Agreement, the Notes and the Security Documents and to engage in the transactions contemplated by this Agreement, the Notes and the Security Documents. E-23 6.2 Corporate Authority . The execution, delivery and performance by it of this Agreement, the Notes and the Security Documents are within its corporate powers, have been duly authorized by all necessary corporate action and are not in contravention of any law, rule or regulation, or any judgment, decree, writ, injunction, order or award of any arbitrator, court or governmental authority, or of the terms of its charter or by-laws, or of any contract or undertaking to which it is a party or by which it or its property may be bound or affected. 6.3 Binding Effect . This Agreement is, and the Notes and the Security Documents to which it is a party when delivered hereunder will be, legal, valid and binding obligations of each Borrower, enforceable against each in accordance with their respective terms. 6.4 Subsidiaries. All Subsidiaries of CRI are duly organized, validly existing and in good standing under the laws of their jurisdictions of organization and are duly qualified to do business in each jurisdiction where failure to so qualify would have a Material Adverse Effect. All outstanding shares of capital stock of each class of each Subsidiary of CRI have been and will be validly issued and are and will be fully paid and nonassessable and are and will be owned, beneficially and of record, by CRI, free and clear of any Liens. Schedule 6.4 is a complete list of all Subsidiaries of CRI. COG is and will remain a wholly owned subsidiary of CRI and COGL is and will remain a wholly owned subsidiary of COG, and Offshore is and will remain a wholly owned subsidiary of COGL. Comstock Management Corporation, a Nevada corporation, does not have material assets and the Borrowers agree that it will not have any material assets at any time. 6.5 Liens. The properties of each Borrower and each Subsidiary of any Borrower (including without limitation the Collateral) are not subject to any Lien except Permitted Liens. 6.6 Litigation. There is no action, suit or proceeding pending or, to the best of its knowledge, threatened against or affecting it before or by any court, governmental authority, or arbitrator which would be reasonably likely to result in, either individually or collectively, a Material Adverse Effect and, to the best of the Borrowers' knowledge, there is no basis for any such action, suit or proceeding. 6.7 Financial Condition. The consolidated balance sheet of CRI and its Subsidiaries and the consolidated statements of income and cash flow of CRI and its Subsidiaries for the fiscal year ended December 31, 1997 and reported on by Arthur Andersen, LLP, and the interim consolidated balance sheet of CRI and its Subsidiaries and the interim consolidated statements of income and cash flow of CRI and its Subsidiaries for the fiscal quarter of CRI ended June 30, 1998, copies of which have been furnished to the Banks, fairly present, and the financial statements of CRI and its Subsidiaries to be delivered pursuant to Section 7.1(d) will fairly present, the consolidated financial position of CRI and its Subsidiaries as of the respective dates thereof, and the consolidated results of operations of CRI and its Subsidiaries for their respective periods indicated, all in accordance with generally accepted accounting principles consistently applied. There has been no event or development which has had or would be reasonably likely to have a Material Adverse Effect since December 31, 1997. There is no material Contingent Liability of CRI or any of its Subsidiaries that is not reflected in such financial statements or in the notes thereto. 6.8 Use of Advances. The Advances will be used for working capital and general corporate purposes. No Borrower extends or maintains, in the ordinary course of business, credit for the purpose, whether immediate, incidental, or ultimate, of buying or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of each Advance will be used for the purpose, whether immediate, incidental, or ultimate, of buying or carrying any such margin stock or maintaining or extending credit to others for such purpose. After applying the proceeds of the Advances, such margin stock will not constitute more than 25% of the value of the assets that are subject to any provisions of this Agreement or any Security Document that may cause the Advances to be secured, directly or indirectly by margin stock. E-24 6.9 Security Documents. The Security Documents create a valid and enforceable first-priority lien on and perfected security interest in all right, title and interest of each Borrower in and to the Collateral described therein, securing all amounts intended to be secured thereby (including without limitation all principal of and interest on the Notes) subject only to the Permitted Liens. The respective net revenue interests of each Borrower in and to the Oil and Gas Interests as set forth in the Security Documents are true and correct and accurately reflect the interests to which each Borrower is legally entitled, subject only to the Permitted Liens. 6.10 Consents, Etc. No consent, approval or authorization of or declaration, registration or filing with any governmental authority or any nongovernmental Person or entity, including without limitation any creditor or stockholder of it, is required on the part of it in connection with the execution, delivery and performance of this Agreement, the Notes, the Security Documents or the transactions contemplated hereby or as a condition to the legality, validity or enforceability of this Agreement, the Notes or any of the Security Documents. 6.11 Taxes . It has filed all tax returns (federal, state and local) required to be filed and has paid all taxes shown thereon to be due, including interest and penalties, or has established adequate financial reserves on its books and records for payment thereof, except where the failure to do so would not have a Material Adverse Effect. 6.12 Title to Properties . It has good and defensible title to, and a valid indefeasible ownership interest in, all of its properties and assets (including, without limitation, the Collateral subject to the Security Documents) free and clear of any Lien except the Permitted Liens, and it is the owner of all the Collateral described in the Security Documents to which it is a party. All wells on any of the mortgaged premises have been drilled, operated, shut-in, abandoned or suspended in accordance with good oil and gas field practices and in compliance with all applicable laws, permits, statutes, orders, licenses, rules and regulations. All leases with respect to any Oil and Gas Interests owned by any Borrower are in good standing and are in full force and effect, all royalties, rents, taxes, assessments and other payments thereunder or with respect thereto have been properly and timely paid and all conditions necessary to keep such leases in full force have been fully performed, including without limitation any condition to maintain continuous production or other activity with respect thereto. The Borrowers have delivered to the Agent title opinions with respect to at least 80% of the value of the assets included in the Borrowing Base. 6.13 ERISA. CRI and its Subsidiaries and their Plans are in compliance in all material respects with those provisions of ERISA and of the Code which are applicable with respect to any Plan. No prohibited transaction (as defined in Section 406 of ERISA and Section 9975 of the Code) and no reportable event (as defined in ERISA) has occurred with respect to any Plan. Neither CRI, any of its Subsidiaries nor any of its ERISA Affiliates is an employer with respect to any multiemployer plan (as defined in Section 4001(a)(3) of ERISA). CRI, its Subsidiaries and the ERISA Affiliates have met the minimum funding requirements under ERISA and the Code with respect to each of the respective Plans, if any, and have not incurred any liability to the PBGC or any Plan. There is no unfunded benefit liability with respect to any Plan. 6.14 Environmental and Safety Matters. It is in compliance in all material respects with all federal, state and local laws, ordinances and regulations relating to safety and industrial hygiene or to the environmental condition, including without limitation all Environmental Laws in jurisdictions in which it owns any interest in or operates, a well, a facility or site, or arranges for disposal or treatment of hazardous substances, solid waste, or other wastes, accepts for transporting any hazardous substances, solid waste, or other wastes, or holds any interest in real property or otherwise, except where any such noncompliance would not have a Material Adverse Effect. No demand, claim, notice, suit, suit in equity, action, administrative action, investigation or E-25 inquiry whether brought by any governmental authority, private Person or entity or otherwise, arising under, relating to or in connection with any Environmental Laws is pending or, to the best of any Borrower's knowledge, threatened against it, any real property in which it holds or has held an interest or any past or present operation of it. It (a) does not know of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic substances, radioactive materials, hazardous wastes or related materials into the environment, (b) has not received any notice of any toxic substances, radioactive materials, hazardous waste or related materials in, or upon any of its properties in violation of any Environmental Laws, and (c) does not know of any basis for any such investigation, notice or violation. No material release, threatened release or disposal of hazardous waste, solid waste or other wastes is occurring or has occurred on, under or to any real property in which it holds any interest or performs any of its operations, in violation of any Environmental Law which would have a Material Adverse Effect. 6.15 Direct Benefit. The initial Advances hereunder and all additional Advances are for the direct benefit of each of the Borrowers, and the initial Advances hereunder are used to refinance and replace indebtedness owing, directly or indirectly, by the Borrowers to the Banks under the Existing Credit Agreement. The Borrowers are engaged as an integrated group in the business of oil and gas exploration and related fields, and any benefits to any Borrower is a benefit to all of them, both directly or indirectly, inasmuch as the successful operation and condition of the Borrowers is dependent upon the continued successful performance of the functions of the integrated group as a whole. 6.16 Solvency. Each of the following is true for each Borrower and the Borrowers on a consolidated basis: (a) the fair saleable value of its property is (i) greater than the total amount of its liabilities (including contingent liabilities), and (ii) greater than the amount that would be required to pay its probable aggregate liability on its then existing debts as they become absolute and matured; (b) its property is not unreasonable in relation to its business or any contemplated or undertaken transaction; and (c) it does not intend to incur, or believe that it will incur, debts beyond its ability to pay such debts as they become due. 6.17 Disclosure. This Agreement and all other documents, certificates, reports or statements or other information furnished to any Bank or the Agent in writing by or on behalf of any Borrower in connection with the negotiation or administration of this Agreement or any transactions contemplated hereby when read together do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein an therein not misleading. There is no fact known to any Borrower which has caused, or which likely would in the future in the reasonable judgment of the Borrowers cause, a Material Adverse Effect (except for any economic conditions which affect generally the industry in which the Borrowers and their Subsidiaries conduct business), which has not been set forth in this Agreement or in the other documents, certificates, statements, reports and other information furnished in writing to the Banks by or on behalf of any Borrower in connection with the transactions contemplated hereby. 6.18 Year 2000. The Borrowers have made a full and complete assessment of the Year 2000 Issues. Based on such assessment, the Borrowers do not reasonably anticipate that Year 2000 Issues will have a Material Adverse Effect. SECTION 7. Covenants. 7.1 Affirmative Covenants . Each Borrower covenants and agrees that, until the payment in full of the principal of and accrued interest on the Notes, the expiration of this Agreement and all Letters of Credit and the payment and performance of all other obligations of the Borrowers under this Agreement, the Notes and the Security Documents, unless the Required Banks shall otherwise consent in writing, each of the Borrowers shall: (a) Preservation of Corporate Existence, Etc. Preserve and maintain its corporate existence, rights and privileges and its material licenses, franchises and permits, and qualify and remain qualified as a validly existing corporation in good standing in each jurisdiction in which such qualification is necessary under applicable law. (b) Compliance with Laws, Etc . Comply in all material respects with all applicable laws, rules, regulations and orders of any governmental E-26 authority, whether federal, state, local or foreign (including without limitation ERISA, the Code and Environmental Laws), in effect from time to time; and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income, revenues or property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise, which, if unpaid, might give rise to Liens upon such properties or any portion thereof, except to the extent that payment of any of the foregoing is then being contested in good faith by appropriate legal proceedings and with respect to which adequate financial reserves have been established on its books and records. (c) Maintenance of Properties; Insurance . Maintain, preserve and protect all property that is material to the conduct of its business and keep such property in good repair, working order and condition and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times in accordance with customary and prudent business practices for similar businesses; comply with all applicable permits, statutes, laws, orders, licenses, rules and regulations relating to the Oil and Gas Interests owned by it, unless any non compliance would not cause a Material Adverse Effect, and ensure that all wells and other properties operated by it, either in its own name or as a partner, are operated in accordance with prudent oil and gas field practices; comply with all of its duties and obligations under, and take all actions to maintain, consistent with prudent oil and gas practices, all leases and other rights in full force and effect; and, in addition to that insurance required under the Security Documents, maintain in full force and effect insurance with responsible and reputable insurance companies or associations in such amounts, on such terms and covering such risks, including fire and other risks insured against by extended coverage, as is usually carried by companies engaged in similar businesses and owning similar properties similarly situated and maintain in full force and effect public liability insurance, insurance against claims for personal injury or death or property damage occurring in connection with any of its activities or any of any properties owned, occupied or controlled by it, in such amount as it shall reasonably deem necessary, and maintain such other insurance as may be required by law or as may be reasonably requested by the Banks for purposes of assuring compliance with this Section 7.1(c). (d) Reporting Requirements. Furnish to each Bank, in form and substance satisfactory to the Required Banks, the following: (i) Promptly and in any event within three calendar days after becoming aware of the occurrence of (A) any Default, (B) the commencement of any material litigation against, by or affecting the Borrowers and, upon request by any Bank, any material developments therein, or (C) any development in the business or affairs of the Borrowers which has resulted in, or which is likely in the reasonable judgment of the Borrowers to result in (including without limitation the entering into of any material contract and/or undertaking by the Borrowers) a Material Adverse Effect or (D) any "reportable event" (as defined in ERISA) under, or the institution of steps by the Borrowers or any Subsidiary to withdraw from, or the institution of any steps to terminate, any Plan, a statement of the chief financial officer of the Borrowers setting forth details of such Default or such event or condition or such litigation and the action which CRI or any Subsidiary has taken and proposes to take with respect thereto; (ii) As soon as available and in any event within 45 days after the end of each fiscal quarter of CRI, the consolidated balance sheets of CRI and its Subsidiaries as of the end of such quarter, and the related consolidated statements of income and cash flow for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding dat or period of the preceding fiscal year, all in reasonable detail and duly certified (subject to year-end audit adjustments) by an appropriate officer of the Borrowers as having been prepared in accordance with generally accepted accounting principles, together with a certificate of an appropriate officer of the Borrowers with a computation in reasonable detail calculating the covenants contained in Sections 7.2(a), (b), (c), (i) and (j); E-27 (iii) As soon as available and in any event within 120 days after the end of each fiscal year, a copy of the consolidated balance sheet of CRI and its Subsidiaries for such fiscal year and related statements of income and cash flow with a customary audit report thereon by Arthur Andersen LLP or other independent certified public accountants selected by CRI and acceptable to the Banks, without qualifications unacceptable to the Banks, together with a certificate of such accountants stating that they have reviewed this Agreement and stating further that in making their review in accordance with generally accepted accounting principles nothing came to their attention that made them believe that any Default exists, or if their examination has disclosed the existence of any Default, specifying the nature, period of existence and status thereof, together with a certificate of an appropriate officer of the Borrowers with a computation in reasonable detail calculating the covenants contained in Sections 7.2(a), (b), (c), (i) and (j) hereof; (iv) Upon the request of the Required Banks or the Agent, a schedule of all oil, gas, and other mineral production attributable to all material Oil and Gas Interests of the Borrowers, and in any event all such Oil and Gas Interests included in the Borrowing Base; (v) Promptly, all title or other information received after the Effective Date by any Borrower which discloses any material defect in the title to any material asset included in the Borrowing Base; (vi) As soon as practicable and in any event within 30 days after the sending or filing thereof, copies of all such financial statements and reports as it shall send to its security holders and of all final prospectuses under the Securities Act of 1933 (other than Form S-8), reports on Forms 10-Q, 10-K and 8-K and all similar regular and periodic reports filed by it (i) with any federal department, bureau, commission or agency from time to time having jurisdiction with respect to the sale of securities or (ii) with any securities exchange; (vii) (A) As soon as available and in any event within 90 days after each January 1, commencing with January 1, 1999, an annual reserve report as of each such January 1 with respect to all Hydrocarbon reserves of the Borrowers prepared by an independent engineering firm of recognized standing acceptable to the Required Banks in accordance with accepted industry practices and otherwise acceptable and in form and substance satisfactory to the Required Banks, an including without limitation all assets included in the Borrowing Base, and (B) within 90 days after each July 1 thereafter, a reserve report as of such July 1, with respect to all Hydrocarbon reserves of the Borrowers prepared by the Borrowers in accordance with accepted industry practices and otherwise acceptable and in form and substance satisfactory to the Required Banks, and including without limitation all assets included in the Borrowing Base; (viii) On or within 30 days after the request of the Agent or the Required Banks, in connection with a redetermination of the Borrowing Base permitted under Section 9.14 an updated reserve report with respect to all Hydrocarbon reserves of the Borrowers prepared by an independent engineering firm of recognized standing acceptable to the Required Banks in accordance with accepted industry practices and otherwise acceptable and in form and substance satisfactory to the Required Banks, and including without limitation all assets included in the Borrowing Base; (ix) Promptly, any management letter from the auditors for any Borrower and all other information respecting the business, properties or the condition or operations, financial or otherwise, including, without limitation, geological and engineering data of any Borrower and any title work with respect to any Oil and Gas Interests of any Borrower as any Bank may from time to time reasonably request; (x) At all times after the date ninety (90) days after the Effective Date, if requested by the Required Banks, title opinions and other opinions of counsel, in each case in form and substance acceptable to the Required Banks, with respect to at least eighty (80%) percent of the value of the assets included in the Borrowing Base; and E-28 (xi) As soon as available and in any event within 45 days after the end of each month, the consolidated balance sheet of CRI and its Subsidiaries as of the end of such month, and the related consolidated statements of income and cash flow for the period commencing at the end of the previous fiscal year and ending with the end of such month, all in reasonable detail and duly certified (subject to year-end audit adjustments) by an appropriate officer of the Borrowers a having been prepared in accordance with generally accepted accounting principles, and (xii) The Borrowers will advise the Agent of any reasonably anticipated Material Adverse Effect as a result of Year 2000 Issues and will take all actions reasonably necessary to assure that the Year 2000 Issues will not have a Material Adverse Effect. (e) Access to Records, Books, Etc. At any reasonable time and from time to time, permit any Bank or any agents or representatives thereof, at the Borrowers' own expense, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Borrowers, and to discuss the affairs, finances and accounts of the Borrowers with their respective officers and employees. Without limiting the foregoing, the Borrowers agree that at any reasonable time and from time to time, the Borrowers will permit any Bank or any agents or representatives thereof to inspect, at the office of the Borrowers listed on its signature page hereto, all opinions with respect to title and other material work received by the Borrowers with respect to any asset included in the Borrowing Base. (f) Swap Agreements. Enter into, on or before February 28, 1999, one or more commodity hedging agreements with respect to not less than 50% of projected proved developed producing gas volumes through December 31, 1999 of the Borrowers and on such terms as may be reasonably acceptable to the Agent. 7.2 Negative Covenants. Until payment in full of the principal of and accrued interest on the Notes, the expiration of this Agreement and all Letters of Credit and the payment and performance of all other obligations of the Borrowers and each Guarantor under this Agreement, the Notes and the Security Documents, each Borrower agrees that, unless the Required Banks shall otherwise consent in writing, none of them shall: (a) Current Ratio. Permit or suffer the ratio of (i) the sum of Current Assets plus the unused availability under the revolving credit facility established by Section 2.1(a) to (ii) Current Liabilities to be less than (x) 0.75 to 1.0 at any time from and including the Effective Date to and including December 30, 1999, or (y) 1.0 to 1.0 at any time thereafter. (b) Tangible Net Worth. Permit or suffer Consolidated Tangible Net Worth of CRI and its Subsidiaries, at any time, to be less than the sum of (i) $98,000,000, plus (ii) 50% of Consolidated Net Income for each fiscal year, commencing with the fiscal year ending December 31, 1998, and to be added as of the last day of such fiscal quarter and each such fiscal year, provided that if such Consolidated Net Income is negative in such fiscal quarter or in any fiscal year, the amount added pursuant to this clause (ii) shall be zero and shall not reduce the amount added pursuant to this clause (ii) for any other fiscal year, plus (iii) 75% of the net cash proceeds of any equity offering or other sale of Capital Stock of CRI or any of its Subsidiaries, other than net cash proceeds in an aggregate amount per fiscal year not to exceed $2,500,000 received by CRI in connection with the exercising of stock options. (c) Interest Coverage Ratio. Permit or suffer, as of the last day of any fiscal quarter of CRI, the ratio of (i) EBITDA, as calculated for the four fiscal quarters then ending, to (ii) Consolidated Interest Expense, as calculated for the four fiscal quarters then ending, to be less than 2.5 to 1.0. (d) Indebtedness. Create, incur, assume, guaranty or in any manner become liable in respect of, or suffer to exist, any Indebtedness other than: E-29 (i) The Advances; (ii) Other Indebtedness in aggregate outstanding amount not to exceed $5,000,000; (iii) Unsecured insurance premium financing incurred in the ordinary course of business; (iv) Indebtedness pursuant to any Swap Agreement with any Bank, any Person with an investment grade debt rating acceptable to the Agent and any other Person acceptable to the Agent; and (v) Indebtedness permitted pursuant to Section 7.2(i). (e) Liens. Create, incur or suffer to exist, any Lien to exist on any assets, rights, revenues or property, real, personal or mixed, tangible or intangible, other than: (i) Liens for taxes not delinquent or for taxes being contested in good faith by appropriate proceedings and as to which adequate financial reserves have been established on its books and records; (ii) Liens (other than any Lien imposed by ERISA) created and maintained in the ordinary course of business which are not material in the aggregate, and which would not have a Material Adverse Effect and which constitute (A) pledges or deposits under worker's compensation laws, unemployment insurance laws or similar legislation, (B) good faith deposits in connection with bids, tenders, contracts or leases to which any Borrower is a party for a purpose other than borrowing money or obtaining credit, including rent security deposits, (C) liens imposed by law, such as those of carriers, warehousemen, operators and mechanics, if payment of the obligation secured thereby is not yet due, (D) Liens securing taxes, assessments or other governmental charges or levies not yet subject to penalties for nonpayment, and (E) pledges or deposits to secure public or statutory obligations of any Borrower, or surety, customs or appeal bonds to which such Borrower is a party; (iii) Liens created pursuant to the Security Documents and Liens expressly permitted by the Security Documents, including without limitation liens securing any reimbursement and other obligations pursuant to any Letters of Credit issued by any Bank for the account of any Borrower, and it is acknowledged and agreed that, without limiting the indebtedness secured by the Security Documents, each Security Document secures all reimbursement and other obligations incurred at any time by any Borrower pursuant to any Letter of Credit issued by any Bank for the account of any Borrower; (iv) Liens securing Indebtedness permitted pursuant to Section 7.2(d)(iii) created to secure payment of a portion of the purchase price of, or existing at the time of acquisition of, any tangible fixed asset acquired by any Borrower if the outstanding principal amount of the Indebtedness secured by such Lien does not at any time exceed the purchase price paid by such Borrower for such assets, provided that such Lien does not encumber any other asset at any time owned by such Borrower. (f) Merger; Acquisitions; Etc. Purchase or otherwise acquire, whether in one or a series of transactions, unless the Required Banks shall otherwise consent in writing, all or any substantial portion of the business assets, rights, revenues or property, real, personal or mixed, tangible or intangible, of any Person, or all or any substantial portion of the capital stock of or other ownership interest in any other Person, nor merge or consolidate or E-30 amalgamate with any other Person or take any other action having a similar effect, unless in each of the foregoing cases, each of the following conditions is satisfied: (i) no Default or Event of Default exists either before or after such acquisition, merger, consolidation, amalgamation or other action having a similar effect, (ii) if such transaction is a merger, consolidation, amalgamation or other action having a similar effect, a Borrower is the surviving entity and (iii) in the cas of any take-over bid or offer to acquire all or substantially all of the outstanding voting or equity securities of a corporation or an acquisition of all or substantially all of the assets of any Person, the board of directors of the target corporation or management of the target Person(if the target is not a corporation) has recommended acceptance of such bid or offer. (g) Disposition of Assets; Etc . Without the prior written consent of the Required Banks, sell, lease, license, transfer, assign or otherwise dispose of any Collateral or any of its other business, assets, rights, revenues or property, real, personal or mixed, tangible or intangible, whether in one or a series of transactions, other than (i) inventory sold in the ordinary course of business upon customary credit terms, and (ii) if no Default has occurred and is continuing or would be caused thereby, other sales of assets in aggregate amount not to exceed $15,000,000 in any twelve-month period, provided that in connection with any such sales in excess of $500,000 in aggregate amount since the date of the most recent redetermination of the Borrowing Base all the net proceeds (net only of reasonable and customary fees actually incurred in connection with such sales and of taxes paid or reasonably estimated to be payable as a result thereof), will simultaneously reduce the Borrowing Base by a like amount. (h) Nature of Business. Make any substantial change in the nature of its business from that engaged in on the date of this Agreement or engage in any other businesses other than those in which it is engaged on the date of this Agreement. (i) Investments and Advances . Purchase or otherwise acquire any Capital Stock of or other ownership interest in, or debt securities of or other evidences of Indebtedness of, any other Person; nor make any loan or advance of any of its funds or property or make any other extension of credit to, or make any investment or acquire any interest whatsoever in, any other Person, except (i) loans and advances to officers of the Borrowers, provided that the aggregate amount of all such loans and advances does not exceed $25,000, (ii) loans and advances among the Borrowers or any Subsidiary of any Borrower guaranteeing all indebtedness, obligations and liabilities of the Borrowers to the Banks and the Agent pursuant to a guaranty and other agreements satisfactory to the Agent, and (iii) other loans and advances, provided that the aggregate amount of all such loans and advances, together with Indebtedness allowed under Section 7.2(d)(iii), shall not exceed $5,000,000. (j) Dividends . With respect to CRI only, make, pay, declare or authorize any dividend, payment or other distribution in respect of any class of its Capital Stock or any dividend, payment or distribution in connection with the redemption, repurchase, defeasance, conversion, retirement or other acquisition, directly or indirectly, of any shares of its capital stock, (all of the foregoing defined herein as "Restricted Payments"), except Restricted Payments payable solely in shares of capital stock of CRI. Additionally, CRI will not issue any Disqualified Stock. (k) Transactions with Affiliates. Enter into or be a party to any transaction or arrangement with any Affiliate (including, without limitation, the purchase from, sale to or exchange of property with, or the rendering of any service by or for, any Affiliate), except in the ordinary course of and pursuant to the reasonable requirements of the Borrowers' business and upon fair and reasonable terms no less favorable to such Borrower than would be obtained in a comparable arms-length transaction with a Person other than an Affiliate and except the loans and advances described in Section 7.2(i). (l) Additional Covenants. If at any time any Borrower shall enter into or be a party to any instrument or agreement, including all such instruments or agreements in existence as of the date hereof and all such instruments or agreements entered into after the date hereof, relating to or amending any terms or conditions applicable to any of its Indebtedness which includes covenants, E-31 terms, conditions or defaults not substantially provided for in this Agreement or more favorable to the lender or lenders thereunder than those provided for in this Agreement, then the Borrowers shall promptly so advise the Agent and the Banks. Thereupon, if the Agent shall request, upon notice to the Borrowers, the Agent and the Banks shall enter into an amendment to this Agreement or an additional agreement (as the Agent may request), providing for substantially the same covenants, terms, conditions and defaults as those provided for in such instrument or agreement to the extent required and as may be selected by the Agent. In addition to the foregoing, any covenants, terms, conditions or defaults in any existing agreements or other documents evidencing or relating to any Indebtedness of any Borrower not substantially provided for in this Agreement or more favorable to the holders of such Indebtedness, are hereby incorporated by reference into this Agreement to the same extent as if set forth fully herein, and no subsequent amendment, waiver or modification thereof shall affect any such covenants, terms, conditions or defaults as incorporated herein. (m) Financial Contracts. Enter into any Swap Agreement (or any other agreement, device or arrangement providing for payments relating to fluctuations of interest rates, exchange rates or commodity prices) for purposes of financial speculation or otherwise not in the ordinary course of business of the Borrowers, and any Swap Agreement with respect to fluctuations in interest rates shall be entered into by the Borrowers only with respect to Indebtedness for borrowed money of the Borrowers. (n) Capital Expenditures. Permit or suffer Capital Expenditures to exceed $30,000,000 for the period from and including December 1, 1998 through and including December 31, 1999. SECTION 8. Default 8.1 Events of Default. The occurrence of any one of the following events or conditions shall be deemed an "Event of Default" hereunder unless waived by the Required Banks pursuant to Section 10.1: (a) Any Borrower shall fail to pay within 2 Business Days of when due any principal of or interest on the Notes (whether pursuant to Section 4.1 or otherwise), any fees or any other amount payable hereunder or under any Security Document; or (b) Any representation or warranty made by any Borrower in Section 6 hereof, in any Security Document or in any other document or certificate furnished by or on behalf of any Borrower in connection with this Agreement, shall prove to have been incorrect in any material respect when made; or (c) (i) Any Borrower shall fail to perform or observe any term, covenant or agreement contained in Sections 7.1(b), 7.1(c) (other than the agreement to maintain continuous insurance coverage) or 7.1(d) hereof or in any Security Document, any other Loan Document or any other agreement among the Borrowers, the Banks and the Agent, or any of them, and such failure shall remain unremedied for 30 calendar days after the earlier of the date notice thereof shall have been given to Borrowers by the Agent or any Bank or any Borrower knows of such failure, or (ii) any Borrower shall fail to perform or observe any other term, covenant, or agreement contained in this Agreement; or (d) Any Borrower shall fail to pay any part of the principal of, the premium, if any, or the interest on, or any other payment of money due under any of its Indebtedness (other than Indebtedness hereunder), beyond any period of grace provided with respect thereto, which individually or together with other such Indebtedness as to which any such failure exists has an aggregate outstanding principal amount in excess of $10,000,000; or if any Borrower fails to perform o observe any other term, covenant or agreement contained in any agreement, document or instrument evidencing or securing any such Indebtedness, or under which any such Indebtedness was issued or created, beyond any period of grace, if any, provided with respect thereto if the effect of such failure is either (i) to cause, or permit the holders of such Indebtedness (or a trustee on behalf of such holders) to cause, any payment in respect of such Indebtedness to become due prior to its due date or (ii) to permit the holders of such Indebtedness (or a trustee on behalf of such holder) to elect a majority of the board of directors of any Borrower; or E-32 (e) A judgment or order for the payment of money, which together with other such judgments or orders exceeds the aggregate amount of $10,000,000, shall be rendered against any Borrower and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order and such judgment or order shall have remained unsatisfied and such proceedings shall have remained unstayed for a period of 30 consecutive days, or (ii) for a period of 30 consecutive days, such judgment or order shall have remained unsatisfied and a stay of enforcement thereof, by reason of pending appeal or otherwise, shall not have been in effect; or (f) The occurrence or existence with respect to any Borrower or any Guarantor or any of their ERISA Affiliates of any of the following: (i) any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any Reportable Event shall occur with respect to any Plan, (iii) the filing under ERISA of a notice of intent to terminate any Plan or the termination of any Plan, (iv) any event or circumstance exists which might constitute grounds entitling the PBGC to institute proceedings under ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the institution of the PBGC of any such proceedings, or (v) complete or partial withdrawal under ERISA from any Multiemployer Plan or the reorganization, insolvency, or termination of any Multiemployer Plan, and in each of the foregoing cases, such event or condition, together with all other events or conditions, if any, could in the opinion of the Banks subject any Borrower to any tax, penalty, or other liability to a Plan, the PBGC, or otherwise (or any combination thereof); or (g) Any Borrower shall generally not pay its debts as they become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or shall institute, or there shall be instituted against any Borrower, any proceeding or case seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief or protection of debtors or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property, and, if such proceeding is instituted against any Borrower and is being contested by such Borrower in good faith by appropriate proceedings, such proceedings shall remain undismissed or unstayed for a period o 30 days; or any Borrower shall take any action (corporate or other) to authorize or further any of the actions described above in this subsection; or (h) Any event of default described in any Security Document shall have occurred and be continuing, or any material provision of any Security Document shall at any time for any reason cease to be valid and binding and enforceable against any obligor thereunder, or the validity, binding effect or enforceability thereof shall be contested or repudiated by any Person, or any obligor, shall deny that it has any or further liability or obligation thereunder, or any Security Document shall be terminated, invalidated or set aside, or be declared ineffective or inoperative or in any way cease to give or provide to the Agent and the Banks the benefits purported to be created thereby; or (i) Any Change in Control shall occur. 8.2 Remedies . (a) Upon the occurrence and during the continuance of any Event of Default, the Agent may, and upon being directed to do so by the Required Banks, shall, by notice to the Borrowers terminate the Commitments or declare the outstanding principal of, and accrued interest on, the Notes and all other amounts due under this Agreement and all other Loan Documents, to be immediately due and payable, or demand immediate delivery of cash collateral, and the Borrowers agree to deliver such cash collateral upon such demand, in an amount E-33 equal to the maximum amount that may be available to be drawn at any time prior to the stated expiry of all outstanding Letters of Credit, or all of the above, whereupon the Commitments shall terminate forthwith and all such amounts shall become immediately due and payable, or both, as the case may be, provided that in the case of any event or condition described in Section 8.1(g), the Commitments shall automatically terminate forthwith and all such amounts shall automatically become immediately due and payable without notice; in each case without demand, presentment, protest, diligence, notice of dishonor or other formality, all of which are hereby expressly waived. (b) Upon the occurrence and during the continuance of such Event of Default, the Agent may, and upon being directed to do so by the Required Banks, shall, in addition to the remedies provided in Section 8.2(a), enforce its rights either by suit in equity, or by action at law, or by other appropriate proceedings, whether for the specific performance (to the extent permitted by law) of any covenant or agreement contained in this Agreement or in any then outstanding Note or any Security Document or in aid of the exercise of any power granted in this Agreement, any then outstanding Notes or any Security Document, and may enforce the payment of any then outstanding Notes and any of the other rights of the Agent and the Banks in any other agreement or available at law or in equity. (c) Upon the occurrence and during the continuance of any Event of Default hereunder, each Bank may at any time and from time to time, without notice to the Borrowers (any requirement for such notice being expressly waived by the Borrowers) set off and apply against any and all of the obligations of any Borrower now or hereafter existing under this Agreement, any of the Notes or the Security Documents, any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of any Borrower and any property of any Borrower from time to time in possession of such Bank, irrespective of whether or not any Bank shall have made any demand hereunder and although such obligations may be contingent and unmatured. The rights of the Banks under this Section 8.2(c) are in addition to other rights and remedies (including, without limitation, other rights of setoff) which the Banks may have. 8.3 Distribution of Proceeds . All proceeds of any realization on the Collateral received by the Agent pursuant to the Security Documents or any payments on any of the liabilities secured by the Security Documents received by the Agent or any Bank upon and during the continuance of any Event of Default shall be allocated and distributed as follows: (a) First, to the payment of all costs and expenses, including without limitation all attorneys' fees, of the Agent in connection with the enforcement of the Security Documents and otherwise administering this Agreement; (b) Second, to the payment of all costs, expenses and fees, including without limitation, commitment fees and attorneys' fees, owing to the Banks pursuant to the Bank Obligations on a pro rata basis in accordance with the Bank Obligations consisting of fees, costs and expenses owing to the Banks under the Bank Obligations for application to payment of such liabilities; (c) Third, to the Banks on a pro rata basis in accordance with the Bank Obligations consisting of interest and principal owing to the Banks under the Bank Obligations, with any obligations owing to any Bank pursuant to any Swap Agreement to which it is a party (whether pursuant to a termination thereof or otherwise) and with any reimbursement obligations or other liabilities owing to any Bank pursuant to any Letter of Credit, for application to payment of such liabilities; (c) Fourth, to the payment of any and all other amounts owing to the Banks on a pro rata basis in accordance with the total amount of such Indebtedness owing to each of the Banks, for application to payment of such liabilities; and (d) Fifth, to the Borrowers or such other Person as may be legally entitled thereto. E-34 8.4 Letter of Credit Liabilities. For the purposes of payments and distributions under Section 8.3, the full amount of Bank Obligations on account of any Letter of Credit then outstanding but not drawn upon shall be deemed to be then due and owing. Amounts distributable to any of the Banks on account of such Bank Obligations under such Letter of Credit shall be deposited in a separate interest bearing collateral account in the name of and under the control of the Agent and held by the Agent first as security for such Letter of Credit Bank Obligations and then as security for all other Bank Obligations and the amount so deposited shall be applied to the Letter of Credit Bank Obligations at such times and to the extent that such Letter of Credit Bank Obligations become absolute liabilities. If and to the extent that the Letter of Credit Bank Obligations fail to become absolute Bank Obligations because of the expiration or termination of the underlying Letters of Credit without being drawn upon, then such amounts shall be applied to the remaining Bank Obligations in the order provided in Section 8.3. Each Borrower hereby grants to the Agent, for the benefit of the Banks, a lien and security interest in all such funds deposited in such separate interest bearing collateral account, as security for all the Bank Obligations as set forth above. The Borrowers acknowledge and agree that all reimbursement and other obligations and liabilities pursuant to any Letters of Credit issued by the Agent for the account of any Borrower are secured by all Collateral and the Security Documents. SECTION 9. The Agent, the Syndication Agent and the Banks. 9.1 Appointment; Nature of Relationship. The First National Bank of Chicago is hereby appointed by the Banks as the Agent hereunder and under each other Loan Document, and each of the Banks irrevocably authorizes the Agent to act as the contractual representative of such Bank with the rights and duties expressly set forth herein and in the other Loan Documents. The Agent agrees to act as such contractual representative upon the express conditions contained in this Section 9. Notwithstanding the use of the defined term "Agent," it is expressly understood and agreed that the Agent shall not have any fiduciary responsibilities to any Bank by reason of this Agreement or any other Loan Document and that the Agent is merely acting as the representative of the Banks with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In its capacity as the Banks' contractual representative, the Agent (i) does not hereby assume any fiduciary duties to any of the Banks, (ii) is a "representative" of the Banks within the meaning of Section 9-105 of the Uniform Commercial Code and (iii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Banks hereby agrees to assert no claim against the Agent on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Bank hereby waives. 9.2 Powers . The Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Agent shall have no implied duties to the Banks, or any obligation to the Banks to take any action thereunder except any action specifically provided by the Loan Documents to be taken by the Agent. 9.3 General Immunity. Neither the Agent nor any of its directors, officers, agents or employees shall be liable to the Borrowers, any Borrower, the Banks or any Bank for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except for its or their own gross negligence or willful misconduct. 9.4 No Responsibility for Loans, Recitals, etc. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (i) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Bank; (iii) the satisfaction of any condition specified in Section 3.2 or otherwise hereunder; (iv) the validity, enforceability, effectiveness, sufficiency or genuineness of any Loan Document or any other instrument or E-35 writing furnished in connection therewith; or (v) the value, sufficiency, creation, perfection or priority of any interest in any collateral security. The Agent shall have no duty to disclose to the Banks information that is not required to be furnished by the Borrowers to the Agent at such time, but is voluntarily furnished by the Borrowers to the Agent (either in its capacity as Agent or in its individual capacity). 9.5 Action on Instructions of Banks. The Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Banks, and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Banks and on all holders of Notes. The Banks hereby acknowledge that the Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Document unless it shall be requested in writing to do so by the Required Banks. The Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Banks pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuin to take any such action. 9.6 Employment of Agents and Counsel . The Agent may execute any of its duties as Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Banks, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Agent shall be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and its duties hereunder and under any other Loan Document. 9.7 Reliance on Documents; Counsel . The Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper Person or Persons, and, in respect to legal matters, upon the opinion of counsel selected by the Agent, which counsel may be employees of the Agent. 9.8 Agent's Reimbursement and Indemnification . The Banks agree to reimburse and indemnify the Agent ratably in proportion to their respective Commitments (or, if the Commitments have been terminated, in proportion to their Commitments immediately prior to such termination) (i) for any amounts not reimbursed by the Borrowers for which the Agent is entitled to reimbursement by the Borrowers under the Loan Documents, (ii) for any other expenses incurred by the Agen on behalf of the Banks, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby, or the enforcement of any of the terms thereof or of any such other documents, provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. The obligations of the Banks under this Section 9.8 shall survive payment of the Bank Obligations and termination of this Agreement. 9.9 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Agent has received written notice from a Bank or a Borrower referring to this Agreement describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give prompt notice thereof to the Banks. 9.10 Rights as a Bank. In the event the Agent is a Bank, the Agent shall have the same rights and powers hereunder and under any other Loan Document as any Bank and may exercise the same as though it were not the Agent, and the term "Bank" or "Banks" shall, at any time when the Agent is a Bank, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated E-36 by this Agreement or any other Loan Document, with any Borrower or any of their respective Subsidiaries in which any Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. The Agent, in its individual capacity, is not obligated to remain a Bank. 9.11 Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank and based on the financial statements prepared by the Borrowers and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. 9.12 Successor Agent . The Agent may resign at any time by giving written notice thereof to the Banks and the Borrowers, such resignation to be effective upon the appointment of a successor Agent or, if no successor Agent has been appointed, forty-five days after the retiring Agent gives notice of its intention to resign. Upon any such resignation, the Required Banks shall have the right to appoint, on behalf of the Borrowers and the Banks, a successor Agent. If no successor Agent shall have been so appointed by the Required Banks within thirty days after the resigning Agent's giving notice of its intention to resign, then the resigning Agent may appoint, on behalf of the Borrowers, and the Banks, a successor Agent. If the Agent has resigned and no successor Agent has been appointed, the Banks may perform all the duties of the Agent hereunder and the Borrowers shall make all payments in respect of the Bank Obligations to the applicable Bank and fo all other purposes shall deal directly with the Banks. No successor Agent shall be deemed to be appointed hereunder until such successor Agent has accepted the appointment. Any such successor Agent shall be a commercial bank having capital and retained earnings of at least $50,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of th resigning Agent. Upon the effectiveness of the resignation of the Agent, the resigning Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation of an Agent, the provisions of this Section 9 shall continue in effect for the benefit of such Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder and under the other Loan Documents. 9.13 Pro Rata Sharing by Banks . Each Bank agrees with every other Bank that, in the event that it shall receive and retain any payment on account of the Borrower's obligations under this Agreement, the Notes or the Security Documents in a greater proportion than that received by any other Bank, whether such payment be voluntary, involuntary or by operation of law, by application of set-off of any indebtedness or otherwise, then such Bank shall promptly purchase a participation interest from the other Banks, without recourse, for cash and at face value, ratably in accordance with its Pro Rata Share, in such an amount that each Bank shall have received payment in respect of such obligations in accordance with its Pro Rata Share; provided, that if any such purchase be made by any Bank and if any such excess payment relating thereto or any part thereof is thereafter recovered from such Bank, appropriate adjustment in the related purchase from the other Banks shall be made by rescission and restoration of the purchase price as to the portion of such excess payment so recovered. It is further agreed that, to the extent there is then owing by the Borrowers to any Bank indebtedness other than that evidenced by this Agreement, the Notes and the Security Documents to which such Bank may apply any involuntary payments of indebtedness by the Borrowers, including those resulting from exercise of rights of set-off or similar rights, such Bank shall apply all such involuntary payments first to obligations of the Borrowers to the Banks hereunder and under the Notes and the Security Documents and then to such other indebtedness owed to it by the Borrowers. In addition, it is further agreed that any and all proceeds resulting from a sale or other disposition of any collateral which may be hereafter granted for the benefit of the Banks to secure the obligations of the Borrowers hereunder, shall be applied first to obligation of the Borrowers to the Banks hereunder and under the Notes and the Security Documents, and then ratably to any other indebtedness owed by the Borrowers to the Banks which is secured by such collateral. E-37 9.14 Determination of Borrowing Base, Etc . (a) As of the Effective Date, the Borrowing Base shall be equal to $280,000,000, the Threshold Amount shall be equal to $220,000,000 and the Borrowing Base shall reduce monthly in accordance with the following table (such monthly reductions in the Borrowing Base, and any other monthly reductions in the Borrowing Base redetermined at any time in under this Section 9.14, are defined as the "Monthly Borrowing Base Reductions"): Monthly Borrowing Effective on the last Base Reduction day of the following month - -------------- -------------------------- $1,000,000 February, 1999 $2,000,000 March, 1999 $3,000,000 April, 1999 $3,000,000 May, 1999 $4,000,000 June, 1999 $4,000,000 July, 1999 $4,000,000 August, 1999 $4,000,000 September, 1999 $5,000,000 October, 1999 and each month thereafter until the Borrowing Base is equal to or less than the Threshold Amount Notwithstanding anything herein to the contrary and in addition to the above reductions to the Borrowing Base, the Borrowing Base shall further reduce as follows: (i) effective as of the scheduled redetermination of the Borrowing Base based upon the receipt of the reserve report to be delivered by the Borrowers within 90 days after July 1, 1999 pursuant to Section 7.1(d)(vii)(B), the Borrowing Base shall not exceed the Threshold Amount by more than $20,000,000 and (ii) on the first Business Day of January, 2000, the Borrowing Base shall not exceed the Threshold Amount, and the Borrowing Base shall automatically reduce on such date to the amount of the Threshold Amount and any amount by which the Advances exceed such reduced Borrowing Base shall be due and payable on the first Business Day of January, 2000. (b) Any redetermination of the Borrowing Base, the Threshold Amount and the Monthly Borrowing Base Reductions shall be made by the Agent and submitted to the Banks. If the Borrowing Base is greater than the Threshold Amount, such redetermined Borrowing Base, Threshold Amount and Monthly Borrowing Base Reductions shall then be effective when approved by all of the Banks. If the Borrowing Base is equal to or less than the Threshold Amount, such redetermined Borrowing Base, Threshold Amount and Monthly Borrowing Base Reductions shall then be effective when approved by Banks holding not less than 75% of the aggregate principal amount of the Advances then outstanding (or 75% of the Commitments if no Advances are then outstanding). If any of such redetermined Borrowing Base, Threshold Amount and Monthly Borrowing Base Reductions when the Borrowing Base is equal to or less than the Threshold Amount are not approved by Banks holding not less than 75% of the aggregate principal amount of the Advances then outstanding (or 75% of the Commitments if no Advances are then outstanding) within ten (10) days after they are submitted to the Banks, each Bank shall submit to the Agent, on or within ten (10) days after the Agent notifies the Banks that such Banks have not approved any such redetermined Borrowing Base, Threshold Amount or Monthly Borrowing Base Reductions, its determination of each of the foregoing which was not so approved, and the redetermined amount of each of the foregoing which was not so approved will be based on the weighted average of the redetermined amount thereof of each Bank which properly submits such redetermination to the Agent, weighted according to each Bank's Commitment. Notwithstanding anything herein to the contrary, any increase in the Borrowing Base or the Threshold Amount from the amount thereof most recently determined shall require the approval of all of the Banks. E-38 (c) The Borrowing Base, the Threshold Amount and the Monthly Borrowing Base Reductions may be redetermined from time to time as requested by the Required Banks, and will be redetermined upon the request of the Borrowers (provided that the Borrowers cannot request a redetermination of the Borrowing Base, the Threshold Amount or the Monthly Borrowing Base Reductions more than once between the mandatory redeterminations hereinafter provided for), and, in addition, at least twice each year as follows: upon receipt of the reserve reports referred to in Section 7.1(d)(vii) hereof (and in connection with such twice per year redeterminations of the Borrowing Base, the Threshold Amount and the Monthly Borrowing Base Reductions the Agent shall submit the redetermined Borrowing Base, the Threshold Amount and the Monthly Borrowing Base Reductions as required under this Section 9.14 on or prior to 30 days after the receipt of each (i) reserve report referred to in Section 7.1(d)(vii) (A) hereof and (ii) reserve report referred to in Section 7.1(d)(vii)(B)). Each redetermination of the Monthly Borrowing Base Reductions shall determine such reductions for each of the six months following such determination, provided the Monthly Borrowing Base Reductions described in Section 9.14(a) above may not be modified without the consent of all the Banks. Except for the scheduled redeterminations of the Borrowing Base, the Threshold Amount and the Monthly Borrowing Base Reductions, each Bank requesting a redetermination of the Borrowing Base, the Threshold Amount and the Monthly Borrowing Base Reductions agrees to give notice to the Agent and the Borrowers of such request. 9.15 Syndication Agent. Toronto Dominion (Texas), Inc., as Syndication Agent hereunder, shall have no duties or liabilities. SECTION 10. Miscellaneous. 10.1 Amendments; Etc . (a) This Agreement and any term or provision hereof may be amended, waived or terminated by an instrument in writing executed by the Borrowers and the Required Banks, and to the extent any rights or duties of the Agent may be affected thereby, the Agent, provided, that, notwithstanding anything in this Agreement to the contrary, except by an instrument in writing executed by the Borrowers and all of the Banks, no such amendment, waiver or termination shall authorize or permit the extension of the time or times of payment of the principal of, or interest on, the Notes or the reduction in principal amount thereof or the rate of interest thereon, or any fees payable hereunder, or increase or extend the aggregate Commitments or the respective Commitments of any Bank, or change the percentage of Banks required for approvals of the Borrowing Base as specified in Section 9.14, or release any Borrower from any of its obligations hereunder or under any other Loan Document, or release any material amount of the Collateral from the Liens granted pursuant hereto or the Security Documents, or amend this Section 10.1. (b) Any such amendment, waiver or termination shall be effective only in the specific instance and for the specific purpose for which given. (c) Notwithstanding anything herein to the contrary, any Bank that has failed to fund any Advance or other amount required to be funded by such Bank hereunder shall not be entitled to vote (whether to consent or to withhold its consent) with respect to any amendment, modification, termination or waiver of any provision of any Loan Document or a departure therefrom or any direction from the Banks to the Agent and, for purposes of determining the Required Banks, the Commitments and Advances of such Bank shall be disregarded. 10.2 Notices . (a) Except as otherwise provided in Section 10.2(c) hereof, all notices, requests, consents and other communications hereunder shall be in writing and shall be delivered or sent to the Borrowers, the Banks and the Agent at the respective addresses for notices set forth on the signature pages hereof, or to such other address as may be designated by the Borrowers, the Agent or any Bank by notice to the other parties hereto. All notices shall be deemed to have been given at the time of actual delivery thereof to such address, or if sent by the Agent or any Bank to the Borrowers by certified or registered mail, postage prepaid, to such address, on the fifth day after the date of mailing. E-39 (b) Notices by the Borrowers to the Agent with respect to requests for Advances pursuant to Section 3.1 and notices of prepayment pursuant to Section 4.1(c) shall be irrevocable and binding on the Borrowers. (c) Any notice to be given by the Borrowers to the Agent pursuant to Section 4.1(c) or Section 3.1 and any notice to be given by the Agent or any Bank hereunder, may be given by telephone, by telex or by facsimile transmission and must be immediately confirmed in writing in the manner provided in Section 10.2(a). Any such notice given by telephone, telex or facsimile transmission shall be deemed effective upon receipt thereof by the party to whom such notice is given. 10.3 Conduct No Waiver; Remedies Cumulative . No course of dealing on the part of the Agent or the Banks, nor any delay or failure on the part of the Agent or any Bank in exercising any right, power or privilege hereunder shall operate as a waiver of such right, power or privilege or otherwise prejudice the Agent's or the Banks' rights and remedies hereunder; nor shall any single or partial exercise thereof preclude any further exercise thereof or the exercise of any other right, power or privilege. No right or remedy conferred upon or reserved to the Agent or the Banks under this Agreement is intended to be exclusive of any other right or remedy, and every right and remedy shall be cumulative and in addition to every other right or remedy given hereunder or now or hereafter existing under any applicable law. Every right and remedy given by this Agreement or by applicable law to the Agent or the Banks may be exercised from time to time and as ofte as may be deemed expedient by them. 10.4 Reliance on and Survival of Various Provisions . All terms, covenants, agreements, representations and warranties of the Borrowers made herein or in any certificate or other document delivered pursuant hereto shall be deemed to be material and to have been relied upon by the Banks, notwithstanding any investigation heretofore or hereafter made by any Bank or on any Bank's behalf, and those covenants and agreements of the Borrowers set forth in Section 10.5 hereof shall survive the repayment in full of the Advances and other obligations of the Borrowers hereunder and under Security Documents and the termination of the Commitments. 10.5 Expenses; Indemnification . (a) The Borrowers agree to pay and save the Agent harmless from liability for the payment of the reasonable fees and expenses of any counsel the Agent shall employ, in connection with the preparation, execution and delivery of this Agreement, the Notes and the Security Documents and the consummation of the transactions contemplated hereby and in connection with any amendments, waivers or consents and other matters in connection therewith, and all reasonable costs and expenses of the Agent and the Banks (including reasonable fees and expenses of counsel) in connection with any enforcement of this Agreement, the Notes or the Security Documents. (b) Each of the Borrowers hereby indemnifies and agrees to hold harmless the Banks and the Agent, and their respective officers, directors, employees and agents, from and against any and all claims, damages, losses, liabilities, costs or expenses of any kind or nature whatsoever which the Banks or the Agent or any such Person may incur or which may be claimed against any of them by reason of or in connection with any Letter of Credit, and neither any Bank nor the Agent or any of their respective officers, directors, employees or agents shall be liable or responsible for: (i) the use which may be made of any Letter of Credit or for any acts or omissions of any beneficiary in connection therewith; (ii) the validity, sufficiency or genuineness of documents or of any endorsement thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; (iii) payment by the Agent to the beneficiary under any Letter of Credit against presentation of documents which do not comply with the terms of any Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit; (iv) any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit; or (v) any other event or circumstance whatsoever arising in connection with any Letter of Credit; provided, however, that the Borrowers shall not be required to indemnify the Agent and such other Persons, and the Agent shall be liable to the Borrowers to the extent, but only to the extent, of any direct, as opposed to consequential or incidental, damages suffered by any Borrower which were caused by (A) the Agent's wrongful dishonor of any Letter of Credit after the presentation to it by the beneficiary thereunder of a draft or other demand for payment and other E-40 documentation strictly complying with the terms and conditions of such Letter of Credit, or (B) the payment by the Agent to the beneficiary under any Letter of Credit against presentation of documents which do not comply with the terms of the Letter of Credit to the extent, but only to the extent, that such payment constitutes gross negligence or wilful misconduct of the Agent. It is understood that in making any payment under a Letter of Credit the Agent will rely on documents presented to it under such Letter of Credit as to any and all matters set forth therein without further investigation and regardless of any notice or information to the contrary, and such reliance and payment against documents presented under a Letter of Credit substantially complying with the terms thereof shall not be deemed gross negligence or wilful misconduct of the Agent in connection with such payment. It is further acknowledged and agreed that a Borrower may have rights against the beneficiary or others in connection with any Letter of Credit with respect to which the Agent is alleged to be liable and it shall be a precondition of the assertion of any liability of the Agent under this Section that such Borrower shall first have taken reasonable steps to enforce remedies in respect of the alleged loss against such beneficiary and any other parties obligated or liable in connection with such Letter of Credit and any related transactions. (c) In consideration of the execution and delivery of this Agreement by each Bank and the extension of the Commitments, the Borrowers hereby indemnify, exonerate and hold the Agent, each Bank and each of their respective officers, directors, employees and agents (collectively, the "Indemnified Parties") free and harmless from and against any and all actions, causes of action, suits, losses, costs, liabilities and damages, and expenses incurred in connection therewit (irrespective of whether any such Indemnified Party is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' fees and disbursements (collectively, the "Indemnified Liabilities"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to: (i) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Advance; (ii) the entering into and performance of this Agreement and any other agreement or instrument executed in connection herewith by any of the Indemnified Parties (including any action brought by or on behalf of the Borrowers as the result of any determination by the Required Banks not to fund any Advance in compliance with this Agreement); (iii) any investigation, litigation or proceeding related to any acquisition or proposed acquisition by the Borrowers or any of their Subsidiaries of any portion of the stock or assets of any Person, whether or not the Agent or such Bank is party thereto; (iv) any investigation, litigation or proceeding related to any environmental cleanup, audit, compliance or other matter relating to any release by the Borrowers or any of their Subsidiaries of any hazardous material or any violations of Environmental Laws; or (v) the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, discharging or releases from, any real property owned or operated by the Borrowers or any Subsidiary thereof of any Hazardous Material (including any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under any Environmental Law), regardless of whether caused by, or within the control of, the Borrowers or such Subsidiary, except for any such Indemnified Liabilities arising for the account of a particular Indemnified Party by reason of the activities of the Indemnified Party on the property of the Borrowers conducted subsequent to a foreclosure on such property by the Banks or by reason of the relevant Indemnified Party's gross negligence or wilful misconduct or breach of this Agreement, and if and to E-41 the extent that the foregoing undertaking may be unenforceable for any reason, the Borrowers hereby agree to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The Borrowers shall be obligated to indemnify the Indemnified Parties for all Indemnified Liabilities subject to and pursuant to the foregoing provisions, regardless of whether the Borrowers or any of their Subsidiaries had knowledge of the facts and circumstances giving rise to such Indemnified Liability. 10.6 Successors and Assigns . (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that the Borrowers may not, without the prior consent of the Banks, assign their rights or obligations hereunder or under the Notes and the Banks shall not be obligated to make any Advance hereunder to any entity other than the Borrowers. (b) Any Bank may sell a participation interest to any financial institution or institutions, and such financial institution or institutions may further sell, a participation interest (undivided or divided) in, the Advances and such Bank's rights and benefits under this Agreement, the Notes and the Security Documents and to the extent of that participation, such participant or participants shall have the same rights and benefits against the Borrowers under Section 6.2(c) as it or they would have had if participation of such participant or participants were the Bank making the Advances to the Borrowers hereunder, provided, however, that (i) such Bank's obligations under this Agreement shall remain unmodified and fully effective and enforceable against such Bank, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of its Note for all purposes of this Agreement, (iv) the Borrowers, the Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement, and (v) such Bank shall not grant to its participant any rights to consent or withhold consent to any action taken by such Bank or the Agent under this Agreement other than action requiring the consent of all of the Banks hereunder. The Agent from time to time in its sole discretion may appoint agents for the purpose of servicing and administering this Agreement and the transactions contemplated hereby and enforcing or exercising any rights or remedies of the Agent provided under this Agreement, the Notes, or otherwise. In furtherance of such agency, the Agent may from time to time direct that the Borrowers provide notices, reports and other documents contemplated by this Agreement (or duplicates thereof) to such agent. The Borrowers hereby consent to the appointment of such agent and agree to provide all such notices, reports and other documents and to otherwise deal with such agent acting on behalf of the Agent in the same manner as would be required if dealing with the Agent itself. (c) Each Bank may, with the prior consent of the Borrowers (which consent shall not be unreasonably withheld and shall not be required upon the occurrence and during the continuance of any Event of Default which is not cured or waived within 30 days (or 0 days in the case of an Event of Default under Section 8.1(g)) after the occurrence of such Event of Default or if such assignment by such Bank is to an Affiliate of such Bank or to another Bank) and the Agent, assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note or Notes and the Security Documents held by it); provided, however, that (i) each such assignment shall be of a uniform, and not a varying, percentage of all rights and obligations, (ii) except in the case of an assignment of all of a Bank's rights and obligations under this Agreement, (A) the amount of the Commitment of the assigning Bank being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000, and in integral multiples of $1,000,000 thereafter, or such lesser amount as the Borrowers and the Agent may consent to and (B) after giving effect to each such assignment, the amount of the Commitment of the assigning Bank shall in no event be less than $5,000,000, and (iii) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance in the form of Exhibit D hereto (an "Assignment and Acceptance"), together with any Note or Notes subject to such assignment and a processing and recordation fee of $3,500. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in such Assignment an Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and (y) the Bank assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment E-42 and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the remaining portion of an assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). (d) By executing and delivering an Assignment and Acceptance, the Bank assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrowers or the performance or observance by the Borrowers of any of their obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 6.7 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance on the Agent, such assigning Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue t make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement as are delegated to the Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Bank. (e) The Agent shall maintain at its address designated on the signature pages hereof a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the Commitment of, and principal amount of the Advances owing to, each Bank from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrowers, the Agent and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrowers or any Bank at any reasonable time and from time to time upon reasonable prior notice. (f) Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and an assignee, together with any Note or Notes subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrowers. Within five Business Days after its receipt of such notice, the Borrowers, at their own expense, shall execute and deliver to the Agent in exchange for the surrendered Note or Notes a new Note to the order of such assignee in an amount equal to the Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Bank has retained a Commitment hereunder, a new Note to the order of the assigning Bank in an amount equal to the Commitment retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit B hereto. (g) The Banks may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 10.6, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrowers, provided that such proposed assignee or participant has agreed to hold such information confidential under the terms described in Section 10.20. (h) Notwithstanding any other provisions set forth in this Agreement, any Bank may at any time create a security interest in, or assign, all or any portion of its rights under this Agreement (including, without limitation, the E-43 Advances owing to it and the Note or Notes held by it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System; provided that such creation of a security interest or assignment shall not release such Bank from its obligations under this Agreement. 10.7 Subsidiaries as Borrowers. In the event that CRI, COG, COGL or Offshore shall create or acquire a Subsidiary, such Subsidiary shall execute a joinder agreement in form and substance satisfactory to the Agent, together with such Security Documents, other documents and opinions as the Agent may reasonably require, and shall become a Borrower hereunder. 10.8 CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 10.9 Table of Contents and Headings. The table of contents and the headings of the various subdivisions hereof are for the convenience of reference only and shall in no way modify any of the terms or provisions hereof. 10.10 Construction of Certain Provisions . All computations required hereunder and all financial terms used herein shall be made or construed in accordance with GAAP unless such principles are inconsistent with the express requirements of this Agreement. If any provision of this Agreement refers to any action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person, whether or not expressly specified in such provision. 10.11 Integration and Severability. This Agreement embodies the entire agreement and understanding between the Borrowers and the Banks, and supersedes all prior agreements and understandings, relating to the subject matter hereof. In case any one or more of the obligations of the Borrowers under this Agreement, the Notes or any Security Documents shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Borrowers shall not in any way be affected or impaired thereby, and such invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of the Borrowers under this Agreement, the Notes or any Security Documents in any other jurisdiction. 10.12 Interest Rate Limitation . Notwithstanding any provisions of this Agreement, the Notes or any Security Documents, in no event shall the amount of interest paid or agreed to be paid by the Borrowers exceed an amount computed at the highest rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of this Agreement, the Notes or any Security Documents at the time performance of such provision shall be due, shall involve exceeding the interest rate limitation validly prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto, the obligations to be fulfilled shall be reduced to an amount computed at the highest rate of interest permissible under applicable law, and if for any reason whatsoever the Banks shall ever receive as interest an amount which would be deemed unlawful under such applicable law such interest shall be automatically applied to the payment of principal of the Advances outstanding and other obligations of the Borrowers hereunder (whether or not then due and payable) and not to the payment of interest, or shall be refunded to the Borrowers if such principal has been paid in full. Anything herein to the contrary notwithstanding, the obligations of the Borrowers under this Agreement shall be subject to the limitation that payments of interest shall not be required to the extent that receipt of any such payment by the Banks would be contrary to provisions of law applicable to the Banks which limits the maximum rate of interest which may be charged or collected by the Banks. E-44 10.13 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 10.14 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any such covenant, the fact that it would be permitted by an exception to, or would be otherwise within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or any event or condition which with notice or lapse of time, or both, could become such an Event of Default if such action is taken or such condition exists. 10.15 Consent to Jurisdiction. Notwithstanding the place where any liability originates or arises, or is to be repaid, any suit, action or proceeding arising out of or relating to this Agreement, any Security Documents, or the Notes may be instituted in any court of competent jurisdiction in the State of Illinois, each Borrower hereby irrevocably waives any objection which it may have or hereafter has to the laying of such venue of any such suit, action or proceeding and any claim that any such suit, action or proceeding has been brought in an inconvenient forum, and each Borrower hereby irrevocably submits its Person and property to the jurisdiction of any such court in any such suit, action or proceedings. Nothing in this Section 10.15 shall affect the right of the Bank to bring proceedings against the Borrowers or any of their property in the courts of any other court of competent jurisdiction. 10.16 JURY TRIAL WAIVER . THE AGENT, THE BANKS AND EACH BORROWER, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE NOTES, THE SECURITY DOCUMENTS, OR ANY RELATED INSTRUMENT OR AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, THE NOTES OR THE SECURITY DOCUMENTS OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY OF THEM. NEITHER THE AGENT, THE BANKS NOR ANY BORROWER SHALL SEEK TO CONSOLIDATE, BY COUNTERCLAIM OR OTHERWISE, ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN MODIFIED IN ANY RESPECT OR RELINQUISHED BY EITHER THE AGENT AND THE BANKS OR THE BORROWERS EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY ALL OF THEM. 10.17 Joint and Several Obligations; Contribution Rights; Savings Clause . (a) Notwithstanding anything to the contrary set forth herein or in any Note or in any other Loan Document, the obligations of the Borrowers hereunder and under the Notes and the other Loan Documents are joint and several. (b) If any Borrower makes a payment in respect of the Bank Obligations, it shall have the rights of contribution set forth below against the other Borrowers; provided that such Borrower shall not exercise its right of contribution until all the Bank Obligations shall have been finally paid in full in cash. If any Borrower makes a payment in respect of the Bank Obligations that is smaller in proportion to its Payment Share (as hereinafter defined) than such payments made by the other Borrowers are in proportion to the amounts of their respective Payment Shares, the Borrower making such proportionately smaller payment shall, when permitted by the preceding sentence, pay to the other Borrowers an amount such that the net payments made by the Borrower in respect of the Bank Obligations shall be shared among the Borrowers pro rata in proportion to their respective Payment Shares. If any Borrower receives any payment that is greater in proportion to the amount of its Payment Shares than the payments received by the other Borrowers are in proportion to the amounts of their respective Payment Shares, the Borrower receiving such proportionately greater payment shall, when permitted by the second preceding sentence, pay to E-45 the other Borrowers an amount such that the payments received by the Borrowers shall be shared among the Borrowers pro rata in proportion to their respective Payment Shares. Notwithstanding anything to the contrary contained in this paragraph or in this Agreement, no liability or obligation of any Borrower that shall accrue pursuant to this paragraph shall be paid nor shall it be deemed owed pursuant to this paragraph until all of the Bank Obligations shall be finally paid in full in cash. For purposes hereof, the "Payment Share" of each Borrower shall be the sum of (a) the aggregate proceeds of the Bank Obligations received by such Borrower plus (b) the product of (i) the aggregate Bank Obligations remaining unpaid on the date such Bank Obligations become due and payable in full, whether by stated maturity, acceleration, or otherwise (the "Determination Date") reduced by the amount of such Bank Obligations attributed to all or such Borrowers pursuant to clause (a above, times (ii) a fraction, the numerator of which is such Borrower's net worth on the effective date of this Agreement (determined as of the end of the immediately preceding fiscal reporting period of such Borrower), and the denominator of which is the aggregate net worth of all Borrowers on such effective date. (c) It is the intent of each Borrower, the Agent and the Banks that each Borrower's maximum Bank Obligations shall be in, but not in excess of: (i) in a case or proceeding commenced by or against such Borrower under the Bankruptcy Code on or within one year from the date on which any of the Bank Obligations are incurred, the maximum amount that would not otherwise cause the Bank Obligations (or any other obligations of such Borrower to the Agent and the Banks) to be avoidable or unenforceable against such Borrower under (A) Section 548 of the Bankruptcy Code or (B) any state fraudulent transfer or fraudulent conveyance act or statute applied in such case or proceeding by virtue of Section 544 of the Bankruptcy Code; or (ii) in a case or proceeding commenced by or against such Borrower under the Bankruptcy Code subsequent to one year from the date on which any of the Bank Obligations are incurred, the maximum amount that would not otherwise cause the Bank Obligations (or any other obligations of such Borrower to the Agent and the Banks) to be avoidable or unenforceable against such Borrower under any state fraudulent transfer or fraudulent conveyance act or statute applied in any such case or proceeding by virtue of Section 544 of the Bankruptcy Code; or (iii) in a case or proceeding commenced by or against such Borrower under any law, statute or regulation other than the Bankruptcy Code (including, without limitation, any other bankruptcy, reorganization, arrangement, moratorium, readjustment of debt, dissolution, liquidation or similar debtor relief laws), the maximum amount that would not otherwise cause the Bank Obligations (or any other obligations of such Borrower to the Agent and the Banks) to be avoidable or unenforceable against such Borrower under such law, statute or regulation including, without limitation, any state fraudulent transfer or fraudulent conveyance act or statute applied in any such case or proceeding. (d) The Borrowers acknowledge and agree that they have requested that the Banks make credit available to the Borrowers with each Borrower expecting to derive benefit, directly and indirectly, from the Advances and other credit extended by the Banks to the Borrowers. 10.18 Consents to Renewals, Modifications and Other Actions and Events . This Agreement and all of the obligations of the Borrowers hereunder shall remain in full force and effect without regard to and shall not be released, affected or impaired by: (a) any amendment, assignment, transfer, modification of or addition or supplement to the Bank Obligations, this Agreement, any Note or any other Loan Document; (b) any extension, indulgence, increase in the Bank Obligations or other action or inaction in respect of any of the Loan Documents or otherwise with respect to the Bank Obligations, or any acceptance of security for, or guaranties of, any of the Bank Obligations or Loan Documents, or any surrender, release, exchange, impairment or alteration of any such security or guaranties including without limitation the failing to perfect a security interest in any such security or abstaining from taking advantage or of realizing upon any guaranties or upon any security interest in any such E-46 security; (c) any default by any Borrower under, or any lack of due execution, invalidity or unenforceability of, or any irregularity or other defect in, any of the Loan Documents; (d) any waiver by the Banks or any other Person of any required performance or otherwise of any condition precedent or waiver of any requirement imposed by any of the Loan Documents, any guaranties or otherwise with respect to the Bank Obligations; (e) any exercise or non-exercise of any right, remedy, power or privilege in respect of this Agreement or any of the other Loan Documents; (f) any sale, lease, transfer or other disposition of the assets of any Borrower or any consolidation or merger of any Borrower with or into any other Person, corporation, or entity, or any transfer or other disposition by any Borrower or any other holder of any shares of capital stock of any Borrower; (g) any bankruptcy, insolvency, reorganization or similar proceedings involving or affecting any Borrower; (h) the release or discharge of any Borrower from the performance or observance of any agreement, covenant, term or condition under any of the Bank Obligations or contained in any of the Loan Documents by operation of law; or (i) any other cause whether similar or dissimilar to the foregoing which, in the absence of this provision, would release, affect or impair the obligations, covenants, agreements and duties of any Borrower hereunder, including without limitation any act or omission by the Agent, or the Bank or any other any Person which increases the scope of such Borrower's risk; and in each case described in this paragraph whether or not any Borrower shall have notice or knowledge of any of the foregoing, each of which is specifically waived by each Borrower. Each Borrower warrants to the Agent and the Banks that it has adequate means to obtain from each other Borrower on a continuing basis information concerning the financial condition and other matters with respect to the Borrowers and that it is not relying on the Agent or the Banks to provide such information either now or in the future. 10.19 Waivers, Etc . Each Borrower unconditionally waives: (a) notice of any of the matters referred to in Section 10.18 above; (b) all notices which may be required by statute, rule or law or otherwise to preserve any rights of the Agent or the Banks including, without limitation, presentment to and demand of payment or performance from the other Borrowers and protect for non-payment or dishonor; (c) any right to the exercise by the Agent or the Banks of any right, remedy, power or privilege in connection with any of the Loan Documents; (d) any requirement that the Agent or the Banks in the event of any default by any Borrower, first make demand upon or seek to enforce remedies against, such Borrower or any other Borrower before demanding payment under or seeking to enforce this Agreement against any other Borrower; (f) any right to notice of the disposition of any security which the Agent or the Banks may hold from any Borrower or otherwise and an right to object to the commercial reasonableness of the disposition of any such security; and (g) all errors and omissions in connection with the Agent's or any Bank's administration of any of the Bank Obligations, any of the Loan Documents, or any other act or omission of the Agent or any Bank which changes the scope of the Borrower's risk, except as a result of the gross negligence or willful misconduct of the Agent or any Bank. The obligations of each Borrower hereunder shall be complete and binding forthwith upon the execution of this Agreement and subject to no condition whatsoever, precedent or otherwise, and notice of acceptance hereof or action in reliance hereon shall not be required. 10.20 Confidentiality . The Banks and the Agent shall hold all confidential information obtained pursuant to the requirements of this Agreement which has been identified as such by any Borrower in accordance with their customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices and in any event may make disclosure to its examiners, affiliates, outside auditors, counsel and other professional advisors in connection with this Agreement or as reasonably required by any bona fide transferee or participant in connection with the contemplated transfer of any Note or participation therein or as required or requested by any governmental agency or representative thereof or pursuant to legal process. Without limiting the foregoing, it is expressly understood that such confidential information shall not include information which, at the time of disclosure is in the public domain or, which after disclosure, becomes part of the public domain or information which any Bank or the Agent had obtained prior to the time of disclosure and identification by any Borrower under this Section 10.20, or information received by any Bank or the Agent from a third party. Nothing in this Section 10.20 or otherwise shall prohibit any Bank or the Agent from disclosing any confidential information to the other Banks or the Agent or render any of them liable in connection with any such disclosure. E-47 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of this 23rd day of December, 1998, which shall be the Effective Date of this Agreement. Address for Notices: COMSTOCK RESOURCES, INC. 5005 LBJ Freeway, Suite 1000 By: /s/M. JAY ALLISON Dallas, Texas 75244 --------------------- Attention: M.Jay Allsion M. Jay Allison, its chairman, president Telephone: (972) 701-2000 and chief executive officer Telephone: (972) 701-2111 Address for Notices COMSTOCK OIL & GAS, INC. 5005 LBJ Freeway, Suite 1000 By: /s/M. JAY ALLISON Dallas, Texas 75244 --------------------- Attention: M.Jay Allsion M. Jay Allison, its chairman, president Telephone: (972) 701-2000 and chief executive officer Telephone: (972) 701-2111 Address for Notices COMSTOCK OIL & GAS, LOUISIANA, INC. 5005 LBJ Freeway, Suite 1000 By: /s/M. JAY ALLISON Dallas, Texas 75244 --------------------- Attention: M.Jay Allsion M. Jay Allison, its chairman, president Telephone: (972) 701-2000 and chief executive officer Telephone: (972) 701-2111 Address for Notices COMSTOCK OFFSHORE, LLC 5005 LBJ Freeway, Suite 1000 By: /s/M. JAY ALLISON Dallas, Texas 75244 --------------------- Attention: M.Jay Allsion M. Jay Allison, its chairman, president Telephone: (972) 701-2000 and chief executive officer Telephone: (972) 701-2111 E-48 One First National Plaza THE FIRST NATIONAL BANK OF CHICAGO, Suite 0362 as a Bank and as Agent Chicago, Illinois 60670 Attention: Carl Skoog By:/s/MARSHA A. CRUZAN Telephone No: (312) 732-8011 ---------------------- Facsimile No: (312) 732-3055 Its: Managing Director Commitment Amount: $50,000,000 Pro Rata Share: 17.857142857% E-49 909 Fannin Street, Ste. 1700 TORONTO DOMINION (TEXAS), INC. Houston, Texas 77010 as a Bank and as Syndication Agent Attention: Manager, Credit Administration Telephone No: (713) 653-8200 Facsimile No: (713) 652-2647 By:/s/SONJA B. JORDAN Commitment Amount: $50,000,000 -------------------------------- Pro Rata Share: 17.857142857% Its: Vice President E-50 1200 Smith Street, Ste. 3100 PARIBAS Houston, Texas 77002 Attention: Mike Fiuzat By:/s/BART SCHOUEST Telephone No: (713) 659-4811 -------------------------------- Facsimile No: (713) 659-6915 Its: Group Vice President Commitment Amount: $35,000,000 Pro Rata Share: 12.5% By: /s/MIKE FIUZAT -------------------------------- Its: Vice President E-51 100 Federal Street BANKBOSTON, N.A. Boston, MA 02110 Attention: Allison Rossi By:/s/GEORGE W. PASSELA Telephone No: (617) 434-4067 -------------------------------- Facsimile No: (617) 434-3652 Its: Managing Director Commitment Amount: $25,000,000 Pro Rata Share: 8.928571429% E-52 11 West 42nd Street, 7th Floor CHRISTIANIA BANK OG KREDITKASSE, ASA New York, New York 10036 Attention: Steve Phillips By:/s/PETER M. DODGE Telephone No: (212) 827-4836 ------------------------------- Facsimile No: (212) 827-4888 Its:Sr. Vice President Commitment Amount: $25,000,000 Pro Rata Share: 8.928571429% By:/s/WILLIAM S. PHILLIPS -------------------------------- Its:First Vice President E-53 1000 Louisiana Street, Ste. 5360 CREDIT LYONNAIS NEW YORK BRANCH Houston, Texas 77002 Attention: Christine Smith Byerley By:/s/PASCAL POUPELLE Telephone No: (713) 751-0500 -------------------------------- Facsimile No: (713) 751-0307 Its: Senior Vice President Commitment Amount: $25,000,000 Pro Rata Share: 8.928571429% E-54 Commitment Amount: $25,000,000 MEESPIERSON CAPITAL CORP. Pro Rata Share: 8.928571429% By:/s/KAREL LOUMAN -------------------------------- Its: Managing Director By: /s/DARRELL W. HOLLEY --------------------------------- Its: Senior Vice President Address for Operational Notices: MeesPierson Capital Corp. 300 Crescent Court, Suite 1750 Dallas, Texas 75201 Yolanda Dittmar Telephone: (214) 754-0009 Telefax: (214) 754-5981 ADDRESSES FOR OTHER NOTICES: MeesPierson Capital Corp. 300 Crescent Court, Suite 1750 Dallas, Texas 75201 Attn: Karel Louman Telephone: (214) 754-0009 Telefax: (214) 754-5981 E-55 565 Fifth Avenue BANK OF SCOTLAND New York, NY 10017 Attention: Annie Chin Tat Telephone No. (212) 450-0871 Facsimile No: (212) 557-9460 By:/s/ANNIE CHIN TAT Commitment Amount: $15,000,000 ------------------------------- Pro Rata Share: 5.357142857% Its: Senior Vice President E-56 2121 San Jacinto, Ste. 1850 NATIONAL BANK OF CANADA Dallas, Texas 75201 Attention: Doug Clark By:/s/LARRY L. SEARS Telephone No: (214) 871-1265 -------------------------------- Facsimile No: (214) 871-2015 Its: Vice President Commitment Amount: $15,000,000 Pro Rata Share: 5.357142857% By:/s/DOUG CLARK -------------------------------- Its: Vice President Lending Office for Floating Rate Loans 125 West 55th Street, 23rd Floor New York, New York 10019 Lending Office for Eurodollar Loans 125 West 55th Street, 23rd Floor New York, New York 10019 E-57 2001 Ross Ave., Ste. 480 SOCIETE GENERALE Dallas, Texas 75201 Attention: Louis P. Laville III By:/s/LOUIS P. LAVILLE III Telephone No: (214) 979-2762 ----------------------------- Facsimile No: (214) 979-1104 Its: Vice President Commitment Amount: $15,000,000 Pro Rata Share: 5.357142857% E-58 EX-21 3 SUBSIDIARIES OF COMSTOCK RESOURCES, INC. EXHIBIT 21
SUBSIDIARIES OF COMSTOCK RESOURCES, INC. Name State of Business Name Incorporation - -------------------------------------- --------------- ------------------------------------ Comstock Oil & Gas, Inc. Nevada Comstock Oil & Gas, Inc. Comstock Oil & Gas - Louisiana, Inc.(1) Nevada Comstock Oil & Gas - Louisiana, Inc. Comstock Management Corporation Nevada Comstock Management Corporation Comstock Offshore, LLC (2) Nevada Comstock Offshore, LLC (1) Subsidiary of Comstock Oil & Gas, Inc. (2) Subsidiary of Comstock Oil & Gas - Louisiana, Inc.
E-59 EX-23 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into Comstock Resources, Inc.'s previously filed registration statements (numbers 33-88962, 333-13675 and 333-20981). ARTHUR ANDERSEN LLP E-60 EX-27 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial data extracted from the Consolidated Financial Statements of Comstock Resources, Inc. and Subsidiaries for the year ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1998 DEC-31-1998 5,176 0 17,861 0 0 24,494 549,456 (145,439) 429,672 72,756 240,000 0 0 12,175 97,488 429,672 92,961 93,235 0 84,053 1,617 17,000 16,977 (26,412) (9,244) (17,168) 0 0 0 (17,168) (0.71) (0.71)
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