-----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, PtgTn/HjEhfA4Lq+BlpQeW8dLTvN7P/IaAieqle6bTwIluOciiWab/6UakGC2Akr CqfG+UmFYSAEQ5039HneCw== 0000930661-96-000273.txt : 19960408 0000930661-96-000273.hdr.sgml : 19960408 ACCESSION NUMBER: 0000930661-96-000273 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960131 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960405 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARCH PETROLEUM INC /NEW/ CENTRAL INDEX KEY: 0000320678 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 830248900 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-09976 FILM NUMBER: 96544809 BUSINESS ADDRESS: STREET 1: 777 TAYLOR ST STE II-A CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8173329209 MAIL ADDRESS: STREET 1: 777 TAYLOR STREET SUITE II-A STREET 2: 777 TAYLOR STREET SUITE II-A CITY: FT WORTH STATE: TX ZIP: 76102 8-K/A 1 AMENDMENT #1 TO FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 8-K/A-1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) January 31, 1996 -------------------- ARCH PETROLEUM INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 0-9976 83-0248900 - ---------------------------------- -------------------- ---------------------- (State or other jurisdiction of (Commission (IRS Employer incorporation) File Number) Identification No.) 777 Taylor Street, Suite II, Fort Worth, Texas 76102 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (817) 332-9209 ----------------- NOT APPLICABLE - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report.) ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS ------------------------------------------------------------------- (a) Audited financial statements of Trax Petroleums Limited for the years ended November 30, 1994, 1993 and 1992. (b) Unaudited balance sheets of Trax Petroleums Limited at August 31, 1995 and unaudited statements of operations of Trax Petroleums Limited for the nine months ended August 31, 1995 and 1994. (c) Pro forma financial information of Arch Petroleum Inc. Unaudited Pro Forma Balance Sheet as of September 30, 1995 Unaudited Pro Forma Statement of Operations for the year ended December 31, 1994, and the nine months ended September 30, 1995 (d) Exhibits
Exhibit Number ------ 10.8 (a) Cash Offer Circular by Arch Petroleum Inc. to purchase all of the Common Shares of Trax Petroleums Limited 10.8 (b) Notice of Guaranteed Delivery 10.8 (c) Letter of Acceptance and Transmittal 10.9 Third Restated Revolving Credit Loan Agreement dated February 20, 1996, among Arch Petroleum Inc. and Bank One, Texas, N.A., as Agent, and other Banks 10.10 Credit Agreement, dated as of February 20, 1996, among Trax Petroleums Limited and Bank of Montreal, as Agent, and other Financial Institutions
2 ARCH PETROLEUM INC. PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) The following unaudited pro forma condensed consolidated balance sheet combines the accounts of Arch Petroleum Inc. ("Arch" or "Registrant") and Trax Petroleums Limited ("Trax"), assuming the acquisition had occurred as of September 30, 1995. The unaudited pro forma consolidated statements of operations for the nine months ended September 30, 1995, and for the year ended December 31, 1994, combine the historical information of the Registrant and Trax, together with the related pro forma adjustments which are based on estimates and assumptions explained in further detail in the accompanying notes. The statements of operations for the nine months ended September 30, 1995, and for the year ended December 31, 1994, reflect the consolidated operations of Arch and Trax as if the acquisition was consummated as of the beginning of fiscal 1994. The unaudited pro forma consolidated financial statements are provided for comparative purposes only and should be read in conjunction with the historical audited consolidated financial statements of the Registrant and the historical audited financial statements of Trax and the related notes thereto included herewith. The pro forma information presented is not necessarily indicative of the combined financial results and the combined financial position as they may be in future periods or as they might have been for the period or as of the date indicated had the acquisition been consummated at the beginning of such period or as of such date. No assumptions have been made to reflect results of exploratory drilling on prospects owned by Trax. 3 ARCH PETROLEUM INC. PRO FORMA BALANCE SHEET
September 30, 1995 ------------------------------------------------------------------------ Historical (Note 1) ------------------------------- Pro Forma Adjustments Arch Trax (Note 3) Pro Forma -------------- ------------- ----------------------- -------------- Assets: Current assets $ 10,471,000 $ 1,129,000 $ 11,600,000 Oil and gas properties and natural gas pipelines, net 65,678,000 6,506,000 1,940,000 74,124,000 Other assets, net 2,773,000 - 2,773,000 -------------- ------------- -------------- Total assets $ 78,922,000 $ 7,635,000 $ 88,497,000 ============== ============= ============== Liabilities: Current liabilities $ 11,270,000 $ 551,000 577,000 $ 12,398,000 Deferred revenue 17,222,000 - 17,222,000 Long-term debt, less current maturities 15,398,000 456,000 7,876,000 23,730,000 Convertible subordinated notes 5,000,000 - 5,000,000 Deferred federal income taxes 1,709,000 - 1,709,000 Other liabilities 332,000 115,000 447,000 -------------- ------------- -------------- Total liabilities 50,931,000 1,122,000 60,506,000 Preferred Stock 20,000,000 - 20,000,000 Shareholders' Equity: Common Stock 171,000 13,214,000 (13,214,000) 171,000 Additional paid-in capital 4,779,000 - 4,779,000 Retained earnings (deficit) 3,041,000 (6,701,000) 6,701,000 3,041,000 -------------- -------------- -------------- Total Shareholders' equity 7,991,000 6,513,000 7,991,000 -------------- -------------- -------------- Total liabilities and shareholders' equity $ 78,922,000 $ 7,635,000 $ 88,497,000 ============== ============= ==============
The accompanying notes are an integral part of this unaudited condensed consolidated pro form balance sheet. 4 ARCH PETROLEUM INC. PRO FORMA STATEMENT OF OPERATIONS
Nine Months Ended September 30, 1995 ------------------------------------------------------------------------ Historical (Note 1) ----------------------------------- Pro Forma Adjustments Arch Trax (Note 3) Pro Forma ---------------- ---------------- ----------------- --------------- REVENUES: Oil and gas sales $ 12,344,000 $ 1,496,000 $ 13,840,000 Pipeline sales 36,537,000 - 36,537,000 Alberta royalty tax credit - 213,000 213,000 Drilling and production overhead fees 156,000 69,000 225,000 Interest and other 563,000 47,000 610,000 ---------------- ---------------- ---------------- 49,600,000 1,825,000 51,425,000 COSTS AND EXPENSES: Leases operations 5,483,000 405,000 5,888,000 Natural gas purchases and pipeline operations 34,829,000 - 34,829,000 Exploration 830,000 1,321,000 2,151,000 Depletion, depreciation and amortization 3,940,000 1,107,000 $ 126,000 5,173,000 General and administrative 3,103,000 614,000 3,717,000 Interest 1,356,000 16,000 530,000 1,902,000 Minority interest in loss of consolidated subsidiaries 317,000 - 317,000 ---------------- ---------------- ----------------- ---------------- 49,858,000 3,463,000 656,000 53,977,000 ---------------- ---------------- ----------------- ---------------- Loss before income taxes and dividends (258,000) (1,180,000) (656,000) (2,552,000) Deferred federal income tax benefit (88,000) - (88,000) ---------------- ---------------- ----------------- ---------------- Net loss (170,000) (1,638,000) (656,000) (2,464,000) Dividends on preferred stock 1,200,000 - 1,200,00 ---------------- ---------------- ----------------- ---------------- Net loss available to shareholders $ (1,370,000) $ (1,638,000) $ (656,000) $ (3,664,000) ================ ================ ================= ================ Net loss available per common share $ (0.08) $ (0.21) ================ ================ Weighted average common and common equivalent shares outstanding 17,198,000 17,198,000 ================ ================
The accompanying notes are an integral part of this unaudited condensed consolidated pro forma statement of operations. 5 ARCH PETROLEUM INC. PRO FORMA STATEMENT OF OPERATIONS
Year Ended December 31, 1994 ----------------------------------------------------------------------- Historical (Note 1) ----------------------------------- Pro Forma Adjustments Arch Trax (Note 3) Pro Forma ---------------- ---------------- ---------------- ---------------- REVENUES: Oil and gas sales $ 8,730,000 $ 2,024,000 $ 10,754,000 Pipeline sales 73,525,000 - 73,525,000 Alberta royalty tax credit - 209,000 209,000 Drilling and production overhead fees 203,000 75,000 278,000 Interest and other 238,000 227,000 465,000 ---------------- ---------------- ---------------- 82,696,000 2,535,000 85,231,000 COSTS AND EXPENSES: Leases operations 3,527,000 516,000 4,043,000 Natural gas purchases and pipeline operations 72,665,000 - 72,665,000 Exploration 1,641,000 2,237,000 3,878,000 Depletion, depreciation and amortization 2,907,000 891,000 $ 164,000 3,962,000 General and administrative 3,617,000 724,000 4,341,000 Interest 1,634,000 18,000 611,000 2,263,000 Minority interest in loss of consolidated subsidiaries (524,000) - (524,000) ---------------- ---------------- ----------------- ---------------- 85,467,000 4,386,000 775,000 90,628,000 ---------------- ---------------- ----------------- ---------------- Loss before income taxes and dividends (2,771,000) (1,851,000) (775,000) (5,397,000) Deferred federal income tax benefit (941,000) - (941,000) ---------------- ---------------- ----------------- ---------------- Net loss (1,830,000) (1,851,000) (775,000) (4,456,000) Dividends on preferred stock 311,000 - 311,000 ---------------- ---------------- ----------------- ---------------- Net loss available to shareholders $ (2,141,000) $ (1,851,000) $ (775,000) $ (4,767,000) ================ ================ ================= ================ Net loss available per common share $ (0.12) $ (0.28) ================ ================ Weighted average common and common equivalent shares outstanding 17,244,000 17,244,000 ================ ================
The accompanying notes are an integral part of this unaudited condensed consolidated pro forma statement of operations. 6 ARCH PETROLEUM INC. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1995 AND DECEMBER 31, 1994 1. BASIS OF PRESENTATION The accompanying unaudited pro forma financial information is presented to reflect Arch's acquisition of Trax as reported in Arch's initial 8-K filing on February 13, 1996. The unaudited consolidated balance sheet combines Arch's balance sheet at September 30, 1995, with Trax's balance sheet at August 31,1995, and is presented as if the acquisition occurred on September 30, 1995. The unaudited consolidated statement of operations as of September 30, 1995, combines Arch's statement of operations for the nine months ended September 30, 1995, with Trax's statement of operations for the nine months ended August 31, 1995. The unaudited consolidated statement of operations as of December 31, 1994, combines Arch's statement of operations for the year ended December 31, 1994, with Trax's statement of operations for the year ended November 30, 1994. Both unaudited consolidated statements of operations are presented as if the acquisition occurred as of the beginning of fiscal 1994. Generally accepted accounting principles and practices in Canada are similar to those of the United States ("U.S."). The financial information of Trax presented herein would not be materially different if accounted for under U.S. generally accepted accounting principles. The functional currency for Trax is the local currency (Canadian dollar). The Trax balance sheet accounts have been translated into U.S. dollars at the rate of exchange in effect at September 30, 1995. The Trax income and expense accounts are translated into U.S. dollars at the average rates of exchange in effect during the periods presented. 2. METHOD OF ACCOUNTING FOR THE ACQUISITION The net assets acquired have been accounted for at their estimated "fair values" as required by the purchase method of accounting for business combinations. The purchase price has been allocated to individual assets acquired based on Arch's estimates of such assets' relative fair value. Trax's tax basis combined with its net operating loss carryforwards exceed its book basis. However, any tax benefit would be fully reserved since Trax has historically been in a loss position. 3. PRO FORMA ADJUSTMENTS The accompanying unaudited consolidated pro forma balance sheet and statements of operations reflect the following pro forma adjustments: (a) Arch borrowed approximately $7.9 million on its bank credit line to fund the 7 acquisition: approximately $7.4 million to purchase 100% of Trax's common stock and approximately $0.5 million to pay related professional expenses. Additional unpaid costs incurred in the acquisition are recorded as current liabilities. (b) The $1.9 million addition to oil and gas properties represents the estimated excess of the acquisition price over the net book value of the assets acquired and has been allocated based upon the estimated fair value of said properties. (c) Additional interest expense was computed for each of the periods reflecting approximately $7.9 million additional borrowings to finance the acquisition. Interest expense was accrued at rates in effect on Arch's line of credit during each period presented. A one percent increase or decrease in interest rates would have increased or decreased interest expense by $59,000 and $79,000 for the nine months ended September 30, 1995, and the year ended December 31, 1994, respectively. (d) Depreciation, depletion and amortization expense has been computed using the units of production method. The additional expense reflects the stepped-up basis of Trax's oil and gas properties. (e) No tax benefit associated with Trax's loss or the pro forma adjustments related thereto has been recognized since it is more likely than not that such benefits will not be realized based upon Trax's historical loss position. The realization and recognition of tax benefits associated with Trax is dependent upon the future profitability of Trax. 4. EARNINGS PER SHARE Earnings per share is based on the number of Arch's common shares and common equivalent shares outstanding during the nine months ended September 30, 1995 and the year ended December 31, 1994. 8 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ARCH PETROLEUM INC. -------------------------------------- (Registrant) /s/ Fred Cantu --------------------------------------- By: Fred Cantu, Treasurer and Chief Financial Officer Date: March 26, 1996 -------------- 9 AUDITORS' REPORT TO THE SHAREHOLDERS We have audited the balance sheets of Trax Petroleums Limited as at November 30, 1994 and 1993 and the statements of loss and deficit and changes in financial position for the years then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at November 30, 1994 and 1993 and the results of its operations and the changes in its financial position for the years then ended in accordance with generally accepted accounting principles. Chartered Accountants Calgary, Canada February 10, 1995 10 TRAX PETROLEUMS LIMITED Balance Sheets November 30, 1994 and 1993
==================================================================================== 1994 1993 - ------------------------------------------------------------------------------------ Assets Current assets: Cash and term deposits................................. $ 3,351,396 $ 3,698,321 Cash held in trust..................................... -- 7,500,000 Accounts and royalty tax credit receivable (note 5).... 637,041 668,281 Note receivable........................................ 275,000 -- Prepaid expenses and cash calls........................ 121,213 2,324 ---------------------------------------------------------------------------------- 4,384,650 11,868,926 Capital assets (note 2).................................. 7,668,860 4,647,356 - ------------------------------------------------------------------------------------ $12,053,510 $16,516,282 ==================================================================================== Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities (note 5)...... $ 766,980 $ 2,071,076 Accrued Special Warrant issue costs.................... -- 650,000 Current portion of long-term debt (note 3)............. 180,000 180,000 ---------------------------------------------------------------------------------- 946,980 2,901,076 Long-term debt (note 3).................................. 35,000 215,000 Provision for future removal and site restoration costs.. 113,000 50,000 Shareholders' equity: Share capital (note 4)................................. 17,695,972 10,719,916 Special Warrants....................................... -- 6,850,000 Deficit................................................ (6,737,442) (4,219,710) ---------------------------------------------------------------------------------- 10,958,530 13,350,206 - ------------------------------------------------------------------------------------ $12,053,510 $16,516,282 ====================================================================================
See accompanying notes to financial statements. 11 TRAX PETROLEUMS LIMITED Statements of Loss and Deficit Years ended November 30, 1994 and 1993
==================================================================================== 1994 1993 - ------------------------------------------------------------------------------------ Revenues: Oil and gas sales (net of royalties)................... $2,754,161 $1,380,820 Alberta royalty tax credit............................. 284,764 130,881 Property operating fees................................ 102,144 29,502 Interest and other income.............................. 308,790 103,514 ---------------------------------------------------------------------------------- 3,449,859 1,644,717 Costs and expenses: General and administrative............................. 984,452 697,466 Lease operating........................................ 702,294 251,334 Depletion and depreciation............................. 1,212,496 786,000 Dry hole and surrendered lease costs................... 2,770,544 476,409 Geological and geophysical costs....................... 273,560 47,815 Interest (note 3)...................................... 24,245 28,116 ---------------------------------------------------------------------------------- 5,967,591 2,287,140 - ------------------------------------------------------------------------------------ Net loss................................................. 2,517,732 642,423 Deficit, beginning of year............................... 4,219,710 3,577,287 - ------------------------------------------------------------------------------------ Deficit, end of year..................................... $6,737,442 $4,219,710 ==================================================================================== Loss per share $0.20 $0.09 ====================================================================================
See accompanying notes to financial statements. 12 TRAX PETROLEUMS LIMITED Statements of Changes in Financial Position Years ended November 30, 1994 and 1993
==================================================================================== 1994 1993 - ------------------------------------------------------------------------------------ Cash provided by (used in): Operating Activities: Net loss................................................ $(2,517,732) $ (642,423) Items not requiring cash: Depletion and depreciation............................. 1,212,496 786,000 Dry hole and surrendered lease costs................... 2,770,544 476,409 Geological and geophysical costs....................... 273,560 47,815 - ------------------------------------------------------------------------------------ 1,738,868 667,801 Changes in non-cash working capital (note 7)............ (1,666,745) 1,219,581 - ------------------------------------------------------------------------------------ 72,123 1,887,382 Financing Activities: Share and warrant issue costs........................... (523,944) (732,535) Repayment of long-term debt............................. (180,000) (145,000) Shares issued for cash.................................. -- 6,210,732 Special Warrants issued for cash........................ -- 7,500,000 - ------------------------------------------------------------------------------------ (703,944) 12,833,197 Investing Activities: Expenditures on capital assets.......................... (7,280,104) (3,592,131) Proceeds on sale of capital assets...................... 65,000 61,660 - ------------------------------------------------------------------------------------ (7,215,104) (3,530,471) - ------------------------------------------------------------------------------------ Increase (decrease) in cash and term deposits............ (7,846,925) 11,190,108 Cash and term deposits, beginning of year................ 11,198,321 8,213 - ------------------------------------------------------------------------------------ Cash and term deposits, end of year...................... $ 3,351,396 $11,198,321 ====================================================================================
See accompanying notes to financial statements. 13 TRAX PETROLEUMS LIMITED Notes to Financial Statements Years ended November 30, 1994 and 1993 =============================================================================== 1. SIGNIFICANT ACCOUNTING POLICIES: On June 30, 1993, Trax Petroleums Limited (the "Company") was continued under the Business Corporations Act (Alberta). These financial statements have been prepared in accordance with Canadian generally accepted accounting principles which conform in all material respects, except for disclosure requirements, with United States generally accepted accounting principles. (a) Petroleum and natural gas properties: The Company follows the successful efforts method of accounting for its oil and gas activities. Under this method, lease acquisition costs and the costs of drilling and equipping successful exploratory and development wells are capitalized. Lease rentals, project geological and geophysical costs, costs of drilling unsuccessful wells and costs of leases surrendered are expensed. The carrying values attributable to non-producing leases which subsequently become productive are transferred to producing properties and, together with drilling and equipping costs, are depleted on the unit-of-production method based on proved reserves in the field as estimated by independent engineering consultants. An assessment of non-producing and producing interests is made annually and a provision for impairment is recorded if deemed appropriate. Gains or losses on dispositions of oil and gas properties are included in income. Estimated future removal and site restoration costs, net of salvage values, are provided for using the unit-of-production method based upon estimated proved reserves. These costs are estimated by an independent engineer based on current regulations, costs, technology and industry standards. The annual charge is included in the provision for depletion and depreciation and the related accumulated provision is shown as a non-current liability. Removal and site restoration expenditures are charged to the accumulated provision account as incurred. Substantially all of the Company's exploration and development activities are conducted jointly with others and the accounts reflect only the Company's proportionate interest in such activities. (b) Depreciation: Depreciation of office furniture, equipment and computer software is provided using the declining balance method at rates of 20%, 30% and 50%, respectively. Leasehold improvements are amortized using the straight-line method over the term of the lease. (c) Per share information: Loss per share is calculated using the weighted average number of shares outstanding during the year. Fully diluted per share information is not disclosed when the effect is anti-dilutive. 14 TRAX PETROLEUMS LIMITED Notes to Financial Statements, Page 2 Years ended November 30, 1994 and 1993 =============================================================================== 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (d) Flow-through share financing: The Company finances a portion of its exploration and development programs with flow-through share issues. The Company accounts for the renouncement of tax benefits associated with these expenditures by reducing share capital and capital assets. 2. CAPITAL ASSETS:
============================================================================================== Accumulated depletion and Net book 1994 Cost depreciation value - ---------------------------------------------------------------------------------------------- Oil and gas properties........................... $11,441,985 $3,824,783 $7,617,202 Furniture, fixtures and leaseholds............... 101,365 49,707 51,658 - ---------------------------------------------------------------------------------------------- $11,543,350 $3,874,490 $7,668,860 ============================================================================================== ============================================================================================== Accumulated depletion and Net book 1993 Cost depreciation value - ---------------------------------------------------------------------------------------------- Oil and gas properties........................... $ 7,318,463 $2,696,487 $4,621,976 Furniture, fixtures and leaseholds............... 53,887 28,507 25,380 - ---------------------------------------------------------------------------------------------- $ 7,372,350 $2,724,994 $4,647,356 ==============================================================================================
3. LONG-TERM DEBT:
============================================================================================== 1994 1993 - ---------------------------------------------------------------------------------------------- Bank demand loan bearing interest at the bank's prime rate plus 1 1/2%, secured by a fixed and floating charge over the assets of the Company. Monthly payments are $15,000 plus interest....... $ 215,000 $ 395,000 Less: current portion........................... 180,000 180,000 - ---------------------------------------------------------------------------------------------- $ 35,000 $ 215,000 ==============================================================================================
In addition, the Company has an unused line of credit available of $500,000. Borrowings under this facility, which would bear interest at the bank's prime rate plus 1%, are secured by the Company's term deposits. 15 TRAX PETROLEUMS LIMITED Notes to Financial Statements, Page 3 Years ended November 30, 1994 and 1993 =============================================================================== 4. SHARE CAPITAL: Authorized: Unlimited number of common shares without nominal or par value. Issued:
============================================================================================== Number of Assigned Shares Value - ---------------------------------------------------------------------------------------------- Balance, November 30, 1992........................................ 4,830,755 $ 5,553,469 Issued under flow-through share offering.......................... 62,500 25,000 Issued on exercise of Flow-Through Warrants....................... 1,666,667 700,000 Issued on exercise of Special Warrants............................ 3,662,000 4,943,700 Issued on exercise of director and employee stock options......... 214,000 112,000 Issued on exercise of Broker Warrants............................. 316,200 430,032 Tax effect of flow-through share renouncements.................... -- (311,750) Share and warrant issue costs..................................... -- (732,535) - ---------------------------------------------------------------------------------------------- Balance, November 30, 1993........................................ 10,752,122 10,719,916 Issued on exercise of Special Warrants............................ 2,500,000 7,500,000 Share and warrant issue costs..................................... -- (523,944) - ---------------------------------------------------------------------------------------------- Balance, November 30, 1994........................................ 13,252,122 $17,695,972 ==============================================================================================
Common shares reserved: (i) 20,000 common shares are reserved with respect to an agreement dated April 30, 1984 whereby the Company is to issue 10,000 common shares to a third party upon completion of each phase of a three phase work program to be carried out on its mineral properties. (ii) 30,000 common shares are reserved with respect to an agreement dated December 19, 1984 whereby the Company is to issue these shares to third parties upon a particular area in the Evi field of Alberta attaining commercial production. At November 30, 1994 such commercial production has not been attained. 16 TRAX PETROLEUMS LIMITED Notes to Financial Statements, Page 4 Years ended November 30, 1994 and 1993 =============================================================================== 4. SHARE CAPITAL (CONTINUED): (iii) The Company has the following common shares reserved for directors and employee stock options:
============================================================================================== Exercise Expiry Number of shares Price Date - ---------------------------------------------------------------------------------------------- 70,000................................... $ 0.40 March 31, 1995 285,000.................................. $ 1.50 May 10, 1998 100,000.................................. $ 1.80 December 4, 1998 ==============================================================================================
(iv) The Company has the following common shares reserved for issuance upon the exercise of Broker Warrants:
============================================================================================== Exercise Expiry Number of shares Price Date - ---------------------------------------------------------------------------------------------- 250,000.................................. $ 3.01 February 15, 1995 50,000................................... $ 1.36 July 16, 1995 ==============================================================================================
The Company has a Shareholder Rights Plan which allows the Company, in the event of a non-permitted bid, to issue shares to all existing shareholders, with the exception of the non-permitted bidder, at a discount to the market price. A permitted bid is one that is for all the shares of the Company by a holder of less than 10% of the shares and must remain open for at least 90 days. 5. RELATED PARTY TRANSACTIONS: Certain directors or their corporations participate in oil and gas activities with the Company on the same terms and conditions as other industry partners. Accounts receivable includes $4,811 (1993 - $338) due from a company controlled by a director, officer and shareholder. Accounts payable includes $13,982 (1993 - nil) owing from a company controlled by a director, officer and shareholder. During 1994 the Company acquired geological and geophysical data for $200,000 cash from a company controlled by a director, officer and shareholder. 17 TRAX PETROLEUMS LIMITED Notes to Financial Statements, Page 5 Years ended November 30, 1994 and 1993 =============================================================================== 6. INCOME TAXES: The income tax provision differs from the amount computed by applying the expected income tax rate to the loss before income taxes. The reasons for the difference are as follows:
============================================================================================== 1994 1993 - ---------------------------------------------------------------------------------------------- Expected income tax recovery at 44.34%...................... $(1,116,362) $(284,850) Effect on taxes of: Non-deductible crown charges, net of Alberta Royalty Tax Credit................................. 84,486 31,431 Resource allowance......................................... (171,681) (52,641) Non-deductible depletion and depreciation.................. 203,772 84,821 Unrecognized benefit of losses............................. 997,112 219,022 Other...................................................... 2,673 2,217 - ---------------------------------------------------------------------------------------------- $ -- $ -- ==============================================================================================
The Company has available approximately $23,000 of income tax losses which may be carried forward and applied against future taxable income expiring in 1996. No benefit in respect of this loss has been recognized in these financial statements. The Company has oil and gas interests with a net book value of $2,694,000, the cost of which are not deductible for income tax purposes. The Company's tax basis combined with its net operating loss carryforward exceeds its book basis. 7. CHANGES IN NON-CASH OPERATING WORKING CAPITAL: The following table sets forth the changes in the components of operating working capital
============================================================================================== 1994 1993 - ---------------------------------------------------------------------------------------------- Accounts and royalty tax credit receivable.................. $ 31,240 $ (400,820) Note receivable............................................. (275,000) -- Prepaid expenses and cash calls............................. (118,889) 47,832 Accounts payable and accrued liabilities.................... (1,304,096) 1,572,569 - ---------------------------------------------------------------------------------------------- $(1,666,745) $1,219,581 ==============================================================================================
18 TRAX PETROLEUMS LIMITED FINANCIAL STATEMENTS NOVEMBER 30, 1992 AND 1991 19 RAMSAY, DALTON & CO. CHARTERED ACCOUNTANTS Suite 1100, 800 - 6th Avenue S.W. Calgary, Alberta T2P 3G3 Telephone (403) 265-9464 Fax (403) 263-6523 AUDITORS' REPORT To the Shareholders of Trax Petroleums Limited We have audited the balance sheets of Trax Petroleums Limited as at November 30, 1992 and 1991 and the statements of loss and deficit and changes in financial position for the years then ended. These financial statements are the responsibility of the corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform our audit to obtain reasonable assurance 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. In our opinion, these financial statements present fairly in all material respects, the financial position of the corporation as at November 30, 1992 and 1991 and the results of its operations and the changes in its financial position for the years then ended in accordance with generally accepted accounting principles. /s/ RAMSAY, DALTON & CO. Calgary, Alberta February 12, 1993 Chartered Accountants 20 TRAX PETROLEUMS LIMITED BALANCE SHEETS
November 30, November 30, 1992 1991 ------------ ------------ ASSETS CURRENT ASSETS Cash and term deposits $ 8,213 $ 505,842 Accounts and royalty tax credit receivable - Note 5 267,461 976,483 Prepaid expenses and cash calls 50,156 2,729 ----------- ----------- 325,830 1,485,054 PROPERTY AND EQUIPMENT - Note 2 2,706,859 2,659,097 ----------- ----------- $ 3,032,689 $ 4,144,151 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 498,507 $ 1,583,691 ----------- ----------- NOTE PAYABLE - Note 3 540,000 - ----------- ----------- SITE RESTORATION COSTS 18,000 - ----------- ----------- SHAREHOLDERS' EQUITY Share capital - Note 4 5,553,469 5,553,469 Deficit (3,577,287) (2,993,009) ----------- ----------- 1,976,182 2,560,460 ----------- ----------- $ 3,032,689 $ 4,144,151 =========== ===========
APPROVED BY THE DIRECTORS - ----------------------------------- Director - ----------------------------------- Director See accompanying notes 21 TRAX PETROLEUMS LIMITED STATEMENTS OF LOSS AND DEFICIT
Year ended Year ended November 30, November 30, 1992 1991 ------------ ------------ REVENUES Oil and gas sales $ 671,846 $ 498,530 Alberta royalty tax credit 81,000 55,000 Property operating fees 31,814 111,955 Other income 6,329 52,253 ---------- ---------- 790,989 717,738 ---------- ---------- COSTS AND EXPENSES Depletion and depreciation 643,000 684,339 Office and administration - Note 5 447,849 393,367 Lease operating costs 209,227 143,584 Dry hole costs 43,635 77,235 Geophysical costs 31,556 30,129 ---------- ---------- 1,375,267 1,328,654 ---------- ---------- LOSS FOR YEAR 584,278 610,916 DEFICIT, beginning of year 2,993,009 2,382,093 ---------- ---------- DEFICIT, end of year $3,577,287 $2,993,009 ========== ========== LOSS PER SHARE $0.12 $0.12 ========== ==========
See accompanying notes 22 TRAX PETROLEUMS LIMITED STATEMENTS OF CHANGES IN FINANCIAL POSITION
Year ended Year ended November 30, November 30, 1992 1991 ------------ ------------ CASH USED BY OPERATIONS Loss for the year $ (584,278) $ (610,916) Items not requiring cash: Depletion and depreciation 643,000 684,339 Dry hole costs 43,635 77,235 Geophysical costs 31,556 30,129 ----------- ---------- Cash flow from operations 133,913 180,787 Capital provided (used) by non-cash working capital (423,589) (623,699) ----------- ---------- (289,676) (442,912) ----------- ---------- FINANCING ACTIVITIES Increase in note payable 540,000 - Issue of share capital - 16,000 ----------- ---------- 540,000 16,000 ----------- ---------- CASH AVAILABLE FOR INVESTING 571,574 (426,912) ----------- ---------- INVESTING ACTIVITY Proceeds on sale of property and equipment 321,250 - Acquisition of property and equipment (1,069,203) (405,828) Exploration funds released from trust - 80,763 ----------- ---------- (747,953) (325,065) ----------- ---------- Decrease in cash and term deposits (497,629) (751,977) CASH AND TERM DEPOSITS, beginning of year 505,842 1,257,819 ----------- ---------- CASH AND TERM DEPOSITS, end of year $ 8,213 $ 505,842 =========== ==========
See accompanying notes 23 TRAX PETROLEUMS LIMITED NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1992 AND 1991 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Trax Petroleums Limited (Trax) is incorporated under the laws of the province of British Columbia and is a 42% (1991 - 43%) owned subsidiary of D.W. Axford and Associates Ltd. (Axford). Petroleum and Natural Gas Properties The successful efforts method of accounting is used for oil and gas operations. Under this method, lease acquisition costs are capitalized and lease carrying costs are expensed. The capitalized costs of significant undeveloped leases are reviewed annually, and a charge is made to earnings for impairment of value when necessary. Costs of leases which become productive, together with associated exploration and development and equipment costs are depleted on the unit-of- production method based on estimated proven reserves of oil and gas as prepared by independent consultants. Producing properties are regarded as impaired if projected future revenue less direct operating costs and estimated costs of eventual abandonment is less than the capitalized cost of the property and a write down is recorded if necessary. When undeveloped leases are surrendered, any remaining costs are charged against earnings. Future obligations for site restoration costs, including dismantling and abandoning properties, are accrued using the unit of production method. The annual provision is expensed as depletion and accumulated as a long liability which is reduced as actual expenditures are made. Geological and geophysical costs are expensed as incurred, and the costs associated with unsuccessful drilling are written off when the wells are abandoned. Joint Ventures Substantially all of Trax's exploration and development activities related to oil and gas are conducted jointly with others. The accounts reflect only Trax's proportionate interest in such activities. Depreciation Depreciation of office furniture and equipment is provided using the declining balance method at rates of 20% and 30%. Leasehold improvements are amortized using the straight line method over the term of the lease. 24 TRAX PETROLEUMS LIMITED NOTES CONTINUED NOVEMBER 30, 1992 AND 1991 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Loss Per Share Loss per share is calculated using the weighted average number of shares outstanding during the year. Income Tax The tax allocation method of accounting for income taxes is followed by Trax, whereby deferred taxes are provided to the extent that the taxes otherwise payable are reduced or increased by claiming certain items for tax purposes at different times than the related items are claimed in the statements of loss. Flow-through share financing Trax finances a portion of its exploration and development programs with flow-through share issues. Under this financing arrangement, shares are issued at a fixed price and the proceeds are used to fund exploration work within a defined time period. Exploration funds in trust under these arrangements are recorded as a long-term asset which is then reduced as the funds are spent. NOTE 2 - PROPERTY AND EQUIPMENT
1992 1991 ---------- ---------- Petroleum and natural gas properties $4,360,749 $3,736,696 Oilfield production equipment 289,293 241,340 Office furniture and equipment 22,698 22,498 Leasehold improvements 5,113 4,557 ---------- ---------- 4,677,853 4,005,091 Less accumulated depreciation and depletion 1,970,994 1,345,994 ---------- ---------- $2,706,859 $2,659,097 ========== ==========
NOTE 3 - NOTE PAYABLE The note relates to the purchase of oil and gas properties. The note was replaced with a term loan from a Canadian Chartered Bank, interest at prime plus 1.5%, repayable $15,000 monthly. These financial statements reflect the repayment terms as refinanced. 25 TRAX PETROLEUMS LIMITED NOTES CONTINUED NOVEMBER 30, 1992 AND 1991 NOTE 4 - SHARE CAPITAL Authorized: 20,000,000 common shares without nominal or par value
Issued: Number $ --------- ---------- November 30, 1990 4,790,755 5,537,469 Exercise of directors and employees stock options 40,000 16,000 --------- ---------- November 30, 1991 and 1992 4,830,755 $5,553,469 ========= ==========
Common shares have been reserved: i) 20,000 common shares with respect to an agreement dated April 30, 1984 whereby Trax is to issue 10,000 common shares to a third party upon completion of each phase of a three phase work program to be carried out on its mineral properties. ii) 30,000 common shares with respect to an agreement dated December 19, 1984 whereby Trax is to issue these shares to third parties upon a particular area in the Evi field of Alberta attaining commercial production. At November 30, 1992 such commercial production has not been attained. iii) 110,000 common shares for directors and employee stock options exercisable at $0.40 per share expiring May 13, 1993. iv) 10,000 common shares for an employee exercisable at $0.40 per share expiring December 6, 1993. NOTE 5 - RELATED PARTY TRANSACTIONS Certain directors or their corporations participate in oil and gas activities with Trax on the same terms and conditions as other industry partners. Accounts receivable includes $6,497 (1991 - $130,668) due from Axford. During 1992 Trax acquired property, plant and equipment from Axford for $37,000 cash and liabilities of $126,545 of Trax were assumed by Axford. During 1992 Trax paid approximately $140,000 (1991 - $123,000) in salaries to employees and directors who are also directors of Axford. 26 TRAX PETROLEUMS LIMITED NOTES CONTINUED NOVEMBER 30, 1992 AND 1991 NOTE 6 - INCOME TAXES The following reconciles the difference between income tax recorded and the expected tax expense obtained by applying the expected tax rate to income before income taxes.
1992 1991 ---------- ---------- Expected tax expense (recovery) at 43% $(251,200) $(262,700) Effect on taxes of: Non deductible crown charges, net 19,900 27,800 Resource allowance (15,200) (6,900) Unrecognized tax loss benefits 244,400 240,800 Other 2,100 1,000 --------- --------- Actual tax expense $ - $ - ========= =========
Trax has available approximately $190,000 of income tax losses which may be carried forward and applied against future taxable income expiring; 1994 - $81,000; 1995 - $86,000; 1996 - $23,000. No benefit in respect of these losses has been recognized in these financial statements. Trax has oil and gas interests with a net book value of $430,000 (1991 - $884,000), the cost of which are not deductible for income tax purposes. NOTE 7 - COMMITMENT Trax has a non-cancellable lease for office space expiring February 1995. Annual minimum rent payable is $12,756 plus a proportionate share of property taxes and operating costs. Trax has equipment leases with a cancellation fee of $9,000. NOTE 8 - SUBSEQUENT EVENTS During December 1992 Trax issued 62,500 shares for $25,000 on a flow- through basis. As at the date of these financial statements, all required expenditures had been made. NOTE 9 - CHANGES IN NON-CASH OPERATING WORKING CAPITAL The following table sets forth the changes in the components of operating working capital.
1992 1991 ------------ ---------- Accounts and royalty tax credit receivable $ 709,022 $(577,673) Prepaid expenses and cash calls (47,427) (1,139) Accounts payable (1,085,184) (44,887) ----------- ---------
$ (423,589) $(623,699) =========== ========== NOTE 10 - RECONCILIATION TO UNITED STATES ACCOUNTING PRINCIPLES The financial statements have been prepared in accordance with Canadian generally accepted accounting principles which conform in all material respects with United States generally accepted accounting principles. 27 TRAX PETROLEUMS LIMITED Balance Sheet as at August 31, 1995 (unaudited) Assets Current Assets: Cash and term deposits $ 115,382 Accounts and ARTC receivable 1,072,331 Note receivable 275,000 Prepaid expenses and cash calls 52,961 ----------- 1,515,674 Capital assets 8,738,418 ----------- $10,254,092 =========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 659,846 Current portion of long-term debt 80,000 ----------- 739,846 Long-term debt 612,911 Provision for future removal and site restoration costs 155,000 Shareholders' equity: Share capital 17,745,972 Deficit (8,999,637) ----------- 8,746,335 ----------- $10,254,092 ===========
See accompanying note to the financial statements. 28 TRAX PETROLEUMS LIMITED Statements of Operations and Deficit Nine months ended August 31, (unaudited)
1995 1994 ------------ ------------ Revenues: Oil and gas sales (net of royalties) $ 2,067,417 $ 2,129,772 Alberta royalty tax credit 294,493 200,000 Property operating fees 95,646 80,168 Interest and other income 64,972 265,502 ----------- ----------- 2,522,528 2,675,442 ----------- ----------- Costs and expenses: General and administrative 849,163 741,395 Lease operating 560,143 519,030 Depletion and depreciation 1,529,321 1,200,000 Dry hole and surrendered lease costs 1,774,775 2,334,924 Geological and geophysical 49,580 233,112 Interest 21,741 19,900 ----------- ----------- 4,784,723 5,048,361 ----------- ----------- Net loss (2,262,195) (2,372,919) Deficit at beginning of period (6,737,442) (4,219,710) ----------- ----------- Deficit at end of period $(8,999,637) $(6,592,629) =========== =========== Loss per share $ (0.17) $ (0.19) =========== ===========
See accompanying note to the financial statements. 29 TRAX PETROLEUMS LIMITED Statements of Changes in Financial Position Nine Months ended August 31, (unaudited)
1995 1994 ------------ ------------ Cash provided by (used in): Operating activities: Net loss $(2,262,195) $(2,372,919) Items not requiring cash: Depletion and depreciation 1,529,321 1,200,000 Dry holes and surrendered lease costs 1,774,775 2,334,924 Geological and geophysical costs 49,580 233,112 ----------- ----------- Funds generated from operations 1,091,481 1,395,117 Changes in non-cash working capital (474,172) (2,496,552) ----------- ----------- 617,309 (1,101,435) Financing activities: Issue of shares 50,000 - Share and warrant issue costs - (521,265) Borrowing (repayment) of long-term debt 477,911 (135,000) ----------- ----------- 527,911 (656,265) Investing activities: Expenditures on capital assets (4,381,234) (6,061,988) Proceeds from sale of capital assets - 65,000 ----------- ----------- (4,381,234) (5,996,988) ----------- ----------- Decrease in cash (3,236,014) (7,754,688) Cash, beginning of period 3,351,396 11,198,321 ----------- ----------- Cash, end of period $ 115,382 $ 3,443,633 =========== ===========
See accompanying note to the financial statements. 30 TRAX PETROLEUMS LIMITED CONDENSED NOTE TO FINANCIAL STATEMENTS (Unaudited) In the opinion of Trax Petroleums Limited (the "Company"), the accompanying financial statements, which have not been audited by independent public accountants, contain all adjustments necessary, consisting of normal recurring accruals, to present fairly the Company's financial position, the results of its operations and its cash flows for the periods reported. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the Company's audited financial statements and footnotes thereto for the year ended November 30, 1994, included elsewhere herein. The results of operations for the nine months ended August 31, 1995 and 1994 are not necessarily indicative of the results to be expected for a full year. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles which conform in all material respects, except for disclosure requirements, with United States generally accepted accounting principles. The financial statements are stated in Canadian dollars. 31 EX-10.8(A) 2 OFFER TO PURCHASE EXHIBIT 10.8(a) This document is important and requires your immediate attention. If you are in doubt as to how to deal with it, you should consult your financial, legal or other professional advisor. ________________________________________________________________________________ CASH OFFER by NORTHERN ARCH RESOURCES LTD., A WHOLLY-OWNED SUBSIDIARY OF ARCH PETROLEUM INC. to purchase all of the Common Shares (including the associated rights under the Shareholder Rights Plan Agreement) of TRAX PETROLEUMS LIMITED on the basis of $0.71 (Canadian funds) for each Common Share of Trax Petroleums Limited ______________________________________________________________ THE OFFER IS OPEN FOR ACCEPTANCE UNTIL 4:30 P.M. (LOCAL TIME AT THE PLACE OF DEPOSIT) ON JANUARY 31, 1996 UNLESS EXTENDED OR WITHDRAWN IF THE CONDITIONS SET FORTH IN SECTION 4 OF THE OFFER ARE NOT SATISFIED. The Offer is conditional upon, among other things, at least 662/3% (calculated on a diluted basis) of the common shares ("Common Shares") of Trax Petroleums Limited (the "Company" or "Trax") being tendered under the Offer and there being no material adverse change in the business, operations or assets of the Company prior to the expiry of the Offer. The conditions of the Offer are fully described under Section 4 of the Offer, "Conditions of the Offer". THE BOARD OF DIRECTORS OF TRAX HAS UNANIMOUSLY RECOMMENDED THAT SHAREHOLDERS ACCEPT THE OFFER. Holders of Common Shares who intend to accept the Offer must complete and sign the form of Letter of Acceptance and Transmittal (printed on YELLOW paper), or a manually signed facsimile thereof, which accompanies the Offer and forward it together with the certificate(s) representing such shares and all other documents called for to Montreal Trust Company of Canada, all in accordance with the Instructions in the Letter of Acceptance and Transmittal. A holder of Common Shares who desires to deposit such shares and whose certificates for such Common Shares are not readily available may deposit such certificates by following the procedures for guaranteed delivery set forth under Section 3 of the Offer, "Manner and Time of Acceptance". Persons whose Common Shares are registered in the name of a nominee should contact their broker, investment dealer, bank, trust company or other nominee for assistance in depositing the Common Shares. Additional copies of this document may be obtained from Montreal Trust Company of Canada. THE DEALER MANAGER FOR THE OFFER IS: PETERS & CO. LIMITED (Cover continued on following page) JANUARY 9, 1996 ________________________________________________________________________________ ________________________________________________________________________________ NOTICE TO SHAREHOLDERS WHO ARE U.S. PERSONS This Offer is made for the securities of a foreign issuer and while the Offer is subject to disclosure requirements of Canada, investors should be aware that these requirements are different from those of the United States. The enforcement by investors of civil liabilities under the United States federal securities laws may be affected adversely by the fact that Northern Arch Resources Ltd. (the "Offeror" or "Northern Arch") is incorporated under the laws of Alberta, Canada, that some or all of its officers and directors may be residents of Canada, that the Dealer Manager and the expert named in the Offer or Circular may be residents of Canada, and that all or a substantial portion of the assets of Northern Arch and of said persons may be located outside the United States. Investors should be aware that Northern Arch or its affiliates, directly or indirectly, may bid for or make purchases of the Company's securities subject to the Offer or of the Company's related securities during the period of the Offer, as permitted by applicable Canadian laws or provincial laws or regulations. Shareholders who are resident in or citizens of the United States should be aware that acceptance of the Offer may have tax consequences under United States federal, state and local laws which are not described herein. Such Shareholders are urged to consult with their tax advisors. All references herein to "dollars" and "$" are to the currency of Canada, unless otherwise indicated. This document does not constitute an offer or a solicitation to any person in any jurisdiction in which such offer or solicitation is unlawful. The Offer is not being made to, nor will deposits be accepted from or on behalf of, holders of Common Shares in any jurisdiction in which the making or acceptance thereof would not be in compliance with the laws of such jurisdiction. However, Northern Arch may, in its sole discretion, take such action as it may deem necessary to extend the Offer to holders of Common Shares in such jurisdiction. ________________________________________________________________________________ 2 TABLE OF CONTENTS
PAGE ---- GLOSSARY ............................................................................... 4 SUMMARY................................................................................. 6 OFFER................................................................................... 10 The Offer.......................................................................... 10 Definitions........................................................................ 10 Manner and Time of Acceptance...................................................... 10 Conditions of the Offer............................................................ 12 Payment for Deposited Common Shares................................................ 13 Extension and Variation of the Offer............................................... 14 Rights to Withdraw................................................................. 15 Mail Service Interruption.......................................................... 16 Notice and Delivery................................................................ 16 Market Purchases and Sale of Shares................................................ 16 Acquisition of Common Shares Not Deposited and Appraisal Rights.................... 17 Return of Securities............................................................... 18 Dividends and Distributions........................................................ 19 Other Terms of the Offer........................................................... 19 CIRCULAR .............................................................................. 21 The Offeror....................................................................... 21 Terms and Conditions of the Offer................................................. 21 Competing Offer by Pacalta Resources Ltd.......................................... 21 The Company....................................................................... 21 Capitalization of the Company..................................................... 22 Existing Business Relationship Between the Offeror and the Company................ 22 Purpose of the Offer and Plans for the Company.................................... 22 Canadian Federal Income Tax Considerations - Shareholders Resident in Canada...... 24 Canadian Federal Income Tax Considerations - Shareholders Not Resident in Canada.. 26 Ownership of Common Shares........................................................ 26 Trading in Common Shares.......................................................... 26 Stock Exchange Listing, Price Range and Volumes................................... 27 Arrangements Between the Offeror and the Directors and Officers of the Company.... 27 Arrangements Between the Offeror and Shareholders of the Company.................. 28 Source of Funds................................................................... 28 Expenses of the Offer............................................................. 28 Dividend Policy................................................................... 29 Material Changes in the Affairs of the Company.................................... 29 Acceptance of the Offer........................................................... 29 Dealer Manager.................................................................... 29 Depositary........................................................................ 29 Legal Matters..................................................................... 30 Statutory Rights.................................................................. 30 CONSENT OF SOLICITORS.................................................................. 30 APPROVAL AND CERTIFICATE............................................................... 31
APPENDIX A - PART 16 OF THE BUSINESS CORPORATIONS ACT (ALBERTA) TAKE-OVER BID - COMPULSORY PURCHASE RIGHT 3 GLOSSARY In the Offer, the Circular, the Letter of Acceptance and Transmittal and the Notice of Guaranteed Delivery, the following terms shall have the following meanings: "ABCA" means the Business Corporations Act (Alberta) and the regulations thereto, as the same may be amended from time to time; "Acquisition Agreement" means the agreement between Arch and the Company made as of December 29, 1995 pursuant to which Northern Arch is making the Offer; "Agreement to Tender" means the agreement between Arch and the Tendering Shareholders dated as of December 29, 1995; "Arch" means Arch Petroleum Inc., a Delaware corporation; "Business Day" means any day, other than a Saturday, Sunday or Canadian federal or Alberta provincial holiday, on which banks are open for business in the City of Calgary, Alberta; "Circular" means the circular that accompanies and forms part of the Offer and which is attached hereto; "Common Shares" means the common shares of the Company and, except where the context otherwise requires, the associated Rights; "Company" or "Trax" mean Trax Petroleums Limited; "Competing Offer" means an offer to purchase 50% or more of the outstanding Common Shares of the Company with an offering price per share greater than that offered under the Offer, including any variations to the Offer, which offer is subject to a positive recommendation by the board of directors of Trax; "Dealer Manager" means Peters & Co. Limited; "Depositary" means Montreal Trust Company of Canada; "diluted basis" means, with respect to the outstanding Common Shares at any time, such number of outstanding Common Shares calculated assuming that all outstanding options to purchase Common Shares (other than the Rights) are exercised; "First Directors' Circular" means the directors' circular of the board of directors of Trax dated December 8, 1995 in response to the unsolicited offer by Pacalta to purchase the Common Shares; "Eligible Institution" means a Canadian chartered bank, a trust company in Canada, a commercial bank or trust company having an office or correspondent in the United States, or a member firm of The Toronto Stock Exchange, The Alberta Stock Exchange, The Montreal Exchange, the Vancouver Stock Exchange, a national securities exchange in the United States or the National Association of Securities Dealers, Inc.; "Expiry Date" means January 31, 1996, unless the Offer is extended (pursuant to Section 6 of the Offer), in which event the Expiry Date shall mean the latest date on which the Offer as so extended expires; "Expiry Time" means 4:30 p.m. (local time at the place of deposit) on the Expiry Date, unless the Offer is extended (pursuant to Section 6 of the Offer), in which event the Expiry Time shall mean the latest time on which the Offer as so extended expires; "Foreign Country" means a country other than Canada; 4 "Income Tax Act" means the Income Tax Act (Canada); "Letter of Acceptance and Transmittal" means the letter of acceptance and transmittal prepared by the Offeror for use in connection with the Offer in the form enclosed herewith (printed on yellow paper); "Notice of Guaranteed Delivery" means the notice of guaranteed delivery prepared by the Offeror for use in connection with the Offer in the form enclosed herewith (printed on pink paper); "Offer" means the cash offer to purchase made hereby to Shareholders; "Offeror" and "Northern Arch" mean Northern Arch Resources Ltd.; "Offer Period" means the period commencing on January 9, 1996 and ending at the Expiry Time; "Pacalta" means Pacalta Resources Ltd. and, if applicable, its wholly-owned subsidiary of 660066 Alberta Ltd.; "Pacalta Offer" means the unsolicited offer by Pacalta to purchase all of the Common Shares at a price of $0.55 per share; "Rights" means the rights issued pursuant to the Shareholder Rights Plan; "Second Directors' Circular" means the notice of change to directors' circular of the board of directors of Trax dated December 29, 1995, recommending that the holders of Common Shares not tender to the Pacalta Offer; "Shareholder" or "Shareholders" means, respectively, one or more holders of Common Shares; "Shareholder Rights Plan" means the Shareholder Rights Plan Agreement of Trax dated as of March 31, 1994; "Subsequent Acquisition Transaction" has the meaning ascribed thereto under Section 11 of the Offer, "Acquisition of Common Shares Not Deposited and Appraisal Rights"; "subsidiary" has the meaning ascribed thereto in the Securities Act (Alberta); and "Tendering Shareholders" means, collectively, D.W. Axford & Associates, Ltd., Donald W. Axford and D. Jon Axford. In this Offer, the Circular and the Letter of Acceptance and Transmittal, references to "dollars" and "$" are to the currency of Canada, unless otherwise indicated, and words importing the singular number only shall include the plural and vice versa and words importing the masculine gender shall include the feminine gender and vice versa. 5 ________________________________________________________________________________ SUMMARY The following is intended as a summary only and reference is made to the more detailed provisions and information contained in the attached Offer and the Circular. THE OFFER The Offer is made by Northern Arch for all of the issued and outstanding Common Shares (including the associated Rights) at a price of $0.71 per share, payable in cash. The Offeror understands that Trax currently has issued and outstanding approximately 13,352,122 Common Shares, options to acquire 840,000 Common Shares and no other outstanding securities. NORTHERN ARCH Northern Arch, a wholly-owned subsidiary of Arch, was organized for the sole purpose of making an acquisition in Canada on behalf of Arch. Prior to making the Offer, Northern Arch has carried on no business. Arch is a publicly-held independent oil and gas company headquartered in Fort Worth, Texas. Arch currently operates primarily in the Permian Basin in Texas and New Mexico. Additionally, Arch has gas transmission and marketing operations in south and north central Texas. In the year ended December 1, 1994, Arch's revenues were $83 million (U.S.). Arch's common shares trade on the NASDAQ National Market under the symbol "ARCH". COMPETING OFFER BY PACALTA RESOURCES LTD. Pursuant to an offer to purchase and circular dated December 1, 1995, Pacalta, through its wholly-owned subsidiary, 660066 Alberta Ltd., offered to purchase all of the Common Shares of Trax at a price of $0.55 per Common Share. In the First Directors' Circular, the board of directors agreed with the initial view of its Independent Committee that the Pacalta Offer undervalued Trax. The board of directors of Trax recommended to Shareholders that they not tender their Common Shares to the Pacalta Offer until a further communication is received from the board of directors of Trax. In the Second Directors' Circular the board of directors of Trax recommended that the Shareholders not tender to the Pacalta Offer. PURPOSE OF THE OFFER The purpose of the Offer is to enable Northern Arch to acquire all of the Common Shares. See Section 7 of the Circular, "Purpose of the Offer and Plans for the Company". ACQUISITION OF COMMON SHARES NOT DEPOSITED If the Offeror does not acquire all the issued and outstanding Common Shares, Northern Arch intends to pursue some other means of acquiring such shares, such as invoking the statutory rights contained in Part 16 of the ABCA. See Section 11 of the Offer, "Acquisition of Common Shares Not Deposited and Appraisal Rights". If the Offer is successful, the Offeror will seek to have its nominees elected to the board of directors of Trax such that at least a majority of the directors will be its nominees. Upon the Offeror acquiring at least 662/3% of the issued and outstanding Common Shares pursuant to the Offer, Trax has agreed to cooperate with the Offeror to provide an orderly transition of control. 6 ________________________________________________________________________________ ________________________________________________________________________________ TIMING The Offer is open for acceptance until 4:30 p.m. (local time at the place of deposit) on January 31, 1996 unless extended by the Offeror. See Section 3 of the Offer, "Manner and Time of Acceptance". MANNER OF ACCEPTANCE Shareholders wishing to accept the Offer must properly complete and duly execute the accompanying Letter of Acceptance and Transmittal (printed on YELLOW paper) or a facsimile thereof and deposit it (together with certificates representing their Common Shares and all other documents required by the Letter of Acceptance and Transmittal) at or prior to the Expiry Time, at one of the offices of the Depositary specified in the Letter of Acceptance and Transmittal. SHAREHOLDERS WHOSE COMMON SHARES ARE REGISTERED IN THE NAME OF A BROKER, DEALER, BANK, TRUST COMPANY OR OTHER NOMINEE MUST CONTACT THEIR NOMINEE TO DEPOSIT THEIR COMMON SHARES. If a Shareholder is unable to deposit certificates representing his Common Shares in a timely manner, he may accept the Offer by following the Procedure for Guaranteed Delivery set forth in Section 3 of the Offer, "Manner and Time of Acceptance". TRADING PRICES On December 28, 1995, the last day of trading for Common Shares prior to the public announcement of the Offer, the closing price on The Toronto Stock Exchange for the Common Shares was $0.65. On January 5, 1996, the closing price on The Toronto Stock Exchange for the Common Shares was $0.69. On November 16, 1995, the last day of trading for Common Shares prior to the public announcement of the Pacalta Offer, the closing price on The Toronto Stock Exchange for the Common Shares was $0.50. PROCEDURE FOR GUARANTEED DELIVERY Shareholders are advised that use of the mail to transmit certificates representing their Common Shares and the Letter of Acceptance and Transmittal is at each holder's risk. The Offeror recommends that such documents be delivered by hand to the Depositary and a receipt therefor obtained, or that registered mail be used. If a Shareholder wishes to deposit Common Shares pursuant to the Offer and the certificates representing such Common Shares are not immediately available or such holder cannot deliver the certificates and all other required documents to the Depositary at or prior to the Expiry Time, such Common Shares may nevertheless be deposited pursuant to the Offer. Reference is made to the Procedure for Guaranteed Delivery in Section 3 of the Offer. ALL SIGNATURES ON THE LETTER OF ACCEPTANCE AND TRANSMITTAL, ON CERTIFICATES REPRESENTING COMMON SHARES AND, IF NECESSARY, ON THE NOTICE OF GUARANTEED DELIVERY, MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION, UNLESS OTHERWISE PROVIDED. For detailed information as to the manner in which Shareholders may validly accept the Offer, see Section 3 of the Offer, "Manner and Time of Acceptance" and the Letter of Acceptance and Transmittal. CONDITIONS The Offeror reserves the right to withdraw the Offer or to elect not to take up or accept for payment or pay for any Common Shares properly deposited hereunder unless all of the following conditions are satisfied prior to the Expiry Time: (a) all requisite regulatory approvals shall have been obtained on terms satisfactory to the Offeror in its sole judgment; (b) not less than 662/3% of the Common Shares (calculated on a diluted basis) having been deposited in valid acceptance of the Offer and having not been withdrawn prior the Expiry Date; 7 ________________________________________________________________________________ _______________________________________________________________________________ (c) the terms and provisions of the Shareholder Rights Plan shall have been waived and continue to be waived with respect to the Offer and any Subsequent Acquisition Transaction contemplated by the Offer; (d) (1) no act, action, suit or proceeding shall have been threatened or taken before or by any domestic or foreign court or tribunal or governmental agency or other regulatory authority or administrative agency or commission by any elected or appointed public official or private person (including, without limitation, any individual, corporation, firm, group or other entity) in Canada or elsewhere, whether or not having the force of law; and (2) no law, regulation or policy shall have been proposed, promulgated or applied: (i) which has effect, or may have effect, to cease trade, enjoin, prohibit or impose material limitations or conditions on the purchase by or the sale to the Offeror of the Common Shares, the right of the Offeror to own or exercise full rights of ownership of the Common Shares; or (ii) which, if the Offer were consummated would materially and adversely affect the Company; (e) the Offeror shall have determined in its sole judgment, acting reasonably, that the Company has not taken any action which might make it inadvisable for the Offeror to proceed with the Offer and/or with the taking up and paying for Common Shares under the Offer, including, without limiting the generality of the foregoing, any agreement or understanding relating to the sale, disposition of or other dealing with any of the assets of the Company; (f) the Tendering Shareholders shall not be in default, in any material respect, of any of their obligations under the Agreement to Tender, the representations and warranties made by the Tendering Shareholders in the Agreement to Tender shall be true and correct in all material respects as of the first date of the take up and payment for Common Shares under the Offer and the Agreement to Tender shall not have been otherwise terminated; (g) there shall not have occurred (or, if there shall have previously occurred, there shall not have been disclosed, generally or to the Offeror in writing, prior to the commencement of the Offer) any change (or any condition, event or development involving a prospective change) in the business, operations, assets, capitalization, financial condition, prospects, licenses, permits, rights, privileges or liabilities whether contractual or otherwise, of the Company which, in the sole judgment of the Offeror, acting reasonably, is materially adverse; (h) there shall have not developed, occurred or came into effect or existence any event, action, state, condition, or other financial occurrence of national or international consequence or any action, law or regulation, inquiry or other occurrence of any nature whatsoever which, in the opinion of the Offeror, acting reasonably, seriously adversely affects or involves or may seriously adversely affect or involve the business of the Company; and (i) all stock options of the Company shall have been exercised or cancelled or shall otherwise have ceased to exist or to represent a liability or obligation of the Company. The foregoing conditions are for the exclusive benefit of the Offeror and may be waived by it in whole or in part at its sole option at any time and from time to time, before the Expiry Time, without prejudice to any other rights which the Offeror may have. See Section 4 of the Offer, "Conditions of the Offer", for further particulars of the conditions attached to the Offer. 8 ________________________________________________________________________________ ________________________________________________________________________________ AGREEMENT TO TENDER Pursuant to the Agreement to Tender, the Tendering Shareholders have agreed to tender all of their Common Shares (including Common Shares issuable on exercise of outstanding stock options) consisting of 2,413,147 Common Shares and 500,000 Common Shares issuable on the exercise of stock options, representing approximately 20% of the outstanding Common Shares, within five Business Days of the Offer and not to withdraw such shares unless the said agreement is earlier terminated or a Competing Offer is outstanding 24 hours prior to the Expiry Time and the Offeror has not increased the consideration payable under the Offer to at least equal that under the Competing Offer. See Section 14 of the Circular, "Arrangements Between the Offeror and Shareholders of the Company". PAYMENT FOR DEPOSITED COMMON SHARES Upon fulfilment or waiver of the conditions of the Offer, the Offeror may take up and pay for Common Shares properly deposited under the Offer and not withdrawn commencing on January 31, 1996, or forthwith after the expiration of any withdrawal period if the Offer is changed or varied so as to give rise to withdrawal rights. The Offeror will pay for any Common Shares taken up promptly, but in any event not later than three days after taking up such Common Shares. Any Common Shares deposited pursuant to the Offer after the first date on which Common Shares have been taken up by the Offeror will be taken up and paid for promptly, but in any event within ten days of such deposit. See Section 5 of the Offer, "Payment for Deposited Common Shares". RIGHTS TO WITHDRAW All deposits of Common Shares pursuant to the Offer are irrevocable except as provided in Section 7 of the Offer, "Rights to Withdraw". CANADIAN FEDERAL INCOME TAX CONSIDERATIONS The sale of the Common Shares pursuant to the Offer will be a disposition for Canadian tax purposes and may give rise to tax consequences to Shareholders. See Section 8 of the Circular, "Canadian Federal Income Tax Considerations - Shareholders Resident in Canada". A non-resident Shareholder will only be subject to tax under the Income Tax Act on any realized capital gains if the Common Shares are a taxable Canadian property as defined in the Income Tax Act and the Shareholder is not entitled to relief pursuant to the provisions of any applicable income tax treaty. See Section 9 of the Circular, "Canadian Federal Income Tax Considerations - Shareholders Not Resident in Canada". DEALER MANAGER Peters & Co. Limited has been appointed to form a soliciting dealer group comprised of members of the Investment Dealers Association of Canada and members of Canadian stock exchanges to solicit acceptances of the Offer. The Offeror will pay any member of the soliciting dealer group whose name appears in the appropriate space in the Letter of Acceptance and Transmittal accompanying a deposit of Common Shares a solicitation fee of $0.01 for each such Common Share taken up and paid for, subject to a minimum fee of $75 and a maximum fee of $1,500 in respect of any single beneficial owner. MATERIAL CHANGES IN THE AFFAIRS OF THE COMPANY The Offer is being made on the condition, among others, that the terms of the Shareholder Rights Plan shall have been waived and continue to be waived with respect to the Offer and any Subsequent Acquisition Transaction contemplated by the Offer. Under the terms of the Shareholder Rights Plan, if the Offeror were to take up and pay for Common Shares without the application of the plan to the Offer being waived, the Offeror could suffer significant dilution as a result of the operation of the Shareholder Rights Plan. On January 4, 1996, the Offeror received notice that the board of directors of the Company had waived the application of the Shareholder Rights Plan to the Offer and any Subsequent Acquisition Transaction contemplated by the Offer. 9 ________________________________________________________________________________ OFFER January 9, 1996 TO: THE HOLDERS OF COMMON SHARES 1. THE OFFER The Offeror hereby offers to purchase, on and subject to the terms and conditions hereinafter specified, all of the issued and outstanding Common Shares (and the associated Rights), including Common Shares which may become outstanding on the exercise of outstanding stock options, at a price of $0.71 for each Common Share. The Offer is made only for Common Shares and is not made for any other options to purchase Common Shares. Any holder of such securities who wishes to accept the Offer should exercise the options in order to obtain certificates representing Common Shares and deposit them pursuant to the Offer. THE ACCOMPANYING CIRCULAR, LETTER OF ACCEPTANCE AND TRANSMITTAL AND THE NOTICE OF GUARANTEED DELIVERY ARE INCORPORATED INTO AND FORM PART OF THE OFFER AND CONTAIN IMPORTANT INFORMATION WHICH SHOULD BE READ CAREFULLY BEFORE MAKING A DECISION WITH RESPECT TO THE OFFER. The Offer is subject to certain conditions as detailed in Section 4 of this Offer. If such conditions are met, the Offeror will take up and pay for the Common Shares duly deposited and not withdrawn under the Offer in accordance with the terms hereof. All of the terms and conditions of the Offer may be waived or modified (subject to applicable law) by the Offeror without prejudice to any other right which the Offeror may have by notice in writing delivered to the Depositary at its principal office in Calgary, Alberta. 2. DEFINITIONS Certain terms used in this Offer, the Circular, the Letter of Acceptance and Transmittal and the Notice of Guaranteed Delivery are defined in the Glossary. 3. MANNER AND TIME OF ACCEPTANCE To accept the Offer, certificates representing Common Shares, together with a properly completed and duly executed Letter of Acceptance and Transmittal (printed on YELLOW paper) or facsimile thereof and all other documents required by the Letter of Acceptance and Transmittal, must be received at or prior to the Expiry Time by the Depositary at one of its offices listed in the Letter of Acceptance and Transmittal. Since the application of the Shareholder Rights Plan has been waived by the board of directors of the Company in relation to the Offer, a tender of Common Shares will also constitute a tender of the associated Rights. ALL SIGNATURES ON THE LETTER OF ACCEPTANCE AND TRANSMITTAL, ON CERTIFICATES REPRESENTING COMMON SHARES AND, IF NECESSARY, ON THE NOTICE OF GUARANTEED DELIVERY, MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION, UNLESS OTHERWISE PROVIDED. In lieu of depositing certificates representing Common Shares with the Depositary, such certificates may be deposited in compliance with the Procedure for Guaranteed Delivery set forth below at or prior to the Expiry Time. If a Letter of Acceptance and Transmittal is signed by a person other than the registered holder of the Common Shares deposited therewith, the certificate must be endorsed or accompanied by appropriate security transfer or stock powers of attorney duly and properly completed by the registered holder. THE SIGNATURE ON SUCH CERTIFICATES, TRANSFERS OR POWERS MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION. The deposit of Common Shares pursuant to any of the procedures described above will constitute a binding agreement between the depositing Shareholder and the Offeror upon the terms and subject to the conditions of the Offer. 10 Procedure for Guaranteed Delivery If a Shareholder wishes to deposit Common Shares pursuant to the Offer and the certificates representing such Common Shares are not immediately available or such holder cannot deliver the certificates and all other required documents to the Depositary at or prior to the Expiry Time, such Common Shares may nevertheless be deposited pursuant to the Offer provided that all of the following conditions are met: (a) such deposit is made by or through an Eligible Institution; (b) a properly completed and duly executed Notice of Guaranteed Delivery (printed on PINK paper), in the form enclosed with this document or facsimile thereof, is received by the Depositary at or prior to the Expiry Time at one of its offices listed in the Letter of Acceptance and Transmittal; and (c) the certificates representing deposited Common Shares, in proper form for transfer, together with a properly completed and duly executed Letter of Acceptance and Transmittal or facsimile thereof covering such Common Shares and any other documents required by such Letter of Acceptance and Transmittal, are received at the same office of the Depositary, prior to 4:30 p.m. local time on the third trading day on The Toronto Stock Exchange after the Expiry Date. The Notice of Guaranteed Delivery must be delivered by hand or transmitted by facsimile transmission or mail to the Depositary AND MUST INCLUDE A SIGNATURE GUARANTEED BY AN ELIGIBLE INSTITUTION IN THE FORM SET FORTH IN THE NOTICE OF GUARANTEED DELIVERY. General In all cases, payment for Common Shares deposited and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of certificates representing the Common Shares and a properly completed and duly executed Letter of Acceptance and Transmittal or facsimile thereof covering such shares. THE METHOD OF DELIVERY OF COMMON SHARE CERTIFICATES, THE LETTER OF ACCEPTANCE AND TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF THE DEPOSITING SHAREHOLDER. THE OFFEROR RECOMMENDS THAT SUCH DOCUMENTS BE DELIVERED BY HAND TO THE DEPOSITARY AND A RECEIPT BE OBTAINED; HOWEVER, IF SUCH DOCUMENTS ARE MAILED, THE OFFEROR RECOMMENDS THAT REGISTERED MAIL, RETURN RECEIPT OR ACKNOWLEDGEMENT OF RECEIPT REQUESTED, BE USED AND THAT PROPER INSURANCE BE OBTAINED. Holders of Common Shares registered in the name of a broker, investment dealer, bank, trust company or other nominee should contact the nominee for assistance in depositing Common Shares. The execution of a Letter of Acceptance and Transmittal by a Shareholder irrevocably appoints the Offeror as the true and lawful agent, attorney and attorney-in-fact of such holder with respect to the Common Shares deposited therewith and purchased by the Offeror (the "Purchased Securities"), and with respect to any stock dividends, securities, rights, warrants or other interest or distribution (collectively, as used in this paragraph, "Other Securities"), issued, transferred or distributed on or in respect of the Purchased Securities on or after the date of the Offer, effective from the date that the Offeror purchases the Purchased Securities (the "Effective Date"), with full power of substitution, in the name and on behalf of such Shareholder, to register or record, transfer and enter the transfer of Purchased Securities and any Other Securities on the books of the Company and to exercise any and all of the rights of such Shareholder in respect of the Purchased Securities and any Other Securities including, without limitation, the right to execute and deliver any and all instruments of proxy, authorizations or consents in respect of any or all of the Purchased Securities and Other Securities, revoke any such instruments, authorizations or consents given on or prior to or after the Effective Date and designate in any such instruments of proxy any person or persons as the proxy or the proxy nominee or nominees of the holder thereof, all as set forth in the Letter of Acceptance and Transmittal. Further, a Shareholder who executes the Letter of Acceptance and Transmittal, unless otherwise agreed to by the Offeror, agrees, among other things, from and after the Effective Date: (i) not to vote any of the Purchased Securities or Other Securities at any meeting (whether annual, special or otherwise) of holders of Purchased Securities or Other Securities; (ii) not to exercise any other rights or privileges attached to any Purchased Securities or Other Securities; and (iii) to execute and deliver to the Offeror any and all instruments of proxy, authorizations or consents in respect of any or all of the Purchased 11 Securities or Other Securities and to designate in any such instruments of proxy the person or persons specified by the Offeror as the proxy or proxy nominee or nominees of the holder thereof. At the Effective Date, all prior proxies given by the holder of such Purchased Securities with respect thereto and to such Other Securities shall be revoked and no subsequent proxies may be given by such holder with respect thereto. A Shareholder who executes a Letter of Acceptance and Transmittal covenants to execute, upon request, any additional documents necessary or desirable to complete the sale, assignment and transfer of the Purchased Securities and any Other Securities to the Offeror and acknowledges that all authority therein conferred or agreed to be conferred shall survive the death or incapacity, bankruptcy or insolvency of the Shareholder and all obligations of the Shareholder therein shall be binding upon the heirs, personal representatives, successors and assigns of the Shareholder. The deposit of Common Shares pursuant to the procedures herein will constitute a binding agreement between the depositing Shareholder and the Offeror upon the terms and subject to the conditions of the Offer including the depositing Shareholder's representation and warranty that: (i) such person has full power and authority to deposit, sell, assign and transfer the Common Shares and any Other Securities being deposited; (ii) such Shareholder owns the Common Shares within the meaning of the applicable securities laws; (iii) the deposit of such Common Shares and any Other Securities complies with applicable securities laws; and (iv) when such Common Shares and any Other Securities are taken up and paid for by the Offeror, the Offeror will acquire good title thereto free and clear of all liens, restrictions, charges, encumbrances, claims and equities. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of Common Shares deposited pursuant to the Offer will be determined by the Offeror in its sole discretion and depositing Shareholders agree that such determination shall be final and binding. The Offeror reserves the absolute right to reject any and all deposits which it determines not to be in a proper form or which, in the opinion of its counsel, may be unlawful to accept under the laws of any applicable jurisdiction. The Offeror reserves the right to waive any defect or irregularity in the deposit of any Common Shares. The Offeror's interpretation of the terms and conditions of the Offer will be final and binding. THERE SHALL BE NO OBLIGATION ON THE OFFEROR, THE DEALER MANAGER OR THE DEPOSITARY TO GIVE NOTICE OF ANY DEFECTS OR IRREGULARITIES IN ANY DEPOSIT AND NO LIABILITY SHALL BE INCURRED BY ANY OF THEM FOR FAILURE TO GIVE ANY SUCH NOTICE. 4. CONDITIONS OF THE OFFER The Offeror shall have the right to withdraw the Offer with respect to the Common Shares or to elect not to take up and pay for any Common Shares deposited hereunder unless all of the following conditions are satisfied prior to the Expiry Time: (a) all requisite regulatory approvals shall have been obtained on terms satisfactory to the Offeror in its sole judgment; (b) not less than 662/3% of the Common Shares (calculated on a diluted basis) having been deposited in valid acceptance of the Offer and having not been withdrawn prior the Expiry Date; (c) the terms and provisions of the Shareholder Rights Plan shall have been waived and continue to be waived with respect to the Offer and any Subsequent Acquisition Transaction contemplated by the Offer; (d) (1) no act, action, suit or proceeding shall have been threatened or taken before or by any domestic or foreign court or tribunal or governmental agency or other regulatory authority or administrative agency or commission by any elected or appointed public official or private person (including, without limitation, any individual, corporation, firm, group or other entity) in Canada or elsewhere, whether or not having the force of law; and (2) no law, regulation or policy shall have been proposed, promulgated or applied: (i) which has effect, or may have effect, to cease trade, enjoin, prohibit or impose material limitations or conditions on the purchase by or the sale to the Offeror of the Common 12 Shares, the right of the Offeror to own or exercise full rights of ownership of the Common Shares; or (ii) which, if the Offer were consummated would materially and adversely affect the Company; (e) the Offeror shall have determined in its sole judgment, acting reasonably, that the Company has not taken any action which might make it inadvisable for the Offeror to proceed with the Offer and/or with the taking up and paying for Common Shares under the Offer, including, without limiting the generality of the foregoing, any agreement or understanding relating to the sale, disposition of or other dealing with any of the assets of the Company; (f) the Tendering Shareholders shall not be in default, in any material respect, of any of their obligations under the Agreement to Tender, the representations and warranties made by the Tendering Shareholders in the Agreement to Tender shall be true and correct in all material respects as of the first date of the take up and payment for Common Shares under the Offer and the Agreement to Tender shall not have been otherwise terminated; (g) there shall have not have occurred (or, if there shall have previously occurred, there shall not have been disclosed, generally or to the Offeror in writing, prior to the commencement of the Offer) any change (or any condition, event or development involving a prospective change) in the business, operations, assets, capitalization, financial condition, prospects, licenses, permits, rights, privileges or liabilities whether contractual or otherwise, of the Company which, in the sole judgment of the Offeror, acting reasonably, is materially adverse; (h) there shall not have developed, occurred or came into effect or existence any event, action, state, condition, or other financial occurrence of national or international consequence or any action, law or regulation, inquiry or other occurrence of any nature whatsoever which, in the opinion of the Offeror, acting reasonably, seriously adversely affects or involves or may seriously adversely affect or involve the business of the Company; and (i) all stock options of the Company shall have been exercised or cancelled or shall otherwise have ceased to exist or to represent a liability or obligation of the Company. The conditions described above are for the exclusive benefit of the Offeror and may be asserted by the Offeror regardless of the circumstances or may be waived by the Offeror in its sole discretion, at any time and from time to time before the Expiry Time without prejudice to any other rights which the Offeror may have under the Offer. Any determination by the Offeror concerning the events described in this Section 4 will be final and binding upon all parties. Any waiver of a condition or the withdrawal of the Offer shall be effective upon oral or written notice by the Offeror to that effect to the Depositary at its principal office in Calgary. The Offeror shall, forthwith after giving any such notice, make a public announcement of such waiver or withdrawal and cause the Depositary as soon as practicable thereafter to notify Shareholders in the manner set forth in Section 9 of this Offer and shall provide a copy of the aforementioned notice to the Dealer Manager and The Toronto Stock Exchange. If the Offer is withdrawn, the Offeror shall not be obligated to take up and pay for any Common Shares deposited under the Offer and the Depositary will return promptly all certificates for deposited Common Shares and Letters of Acceptance and Transmittal to the persons by whom they were deposited. 5. PAYMENT FOR DEPOSITED COMMON SHARES Upon fulfilment or waiver of the conditions of the Offer, the Offeror may take up and pay for Common Shares properly deposited under the Offer and not withdrawn commencing on January 31, 1996 or forthwith after the expiration of any withdrawal period if the Offer is changed or varied so as to give rise to withdrawal rights. If the conditions have been fulfilled or waived at the Expiry Time, the Offeror will take up the Common Shares validly deposited under the Offer promptly and, in any event, not later than ten days from the Expiry Date. The Offeror will pay for Common Shares taken up promptly and, in any event, not later than three days after taking up such Common 13 Shares. Any Common Shares deposited pursuant to the Offer after the first date on which Common Shares have been taken up by the Offeror will be taken up and paid for within ten days of such deposit. If the conditions described in Section 4 of this Offer have been fulfilled or waived, the Offeror may not extend the Offer unless all Common Shares then validly deposited and not withdrawn are taken up and paid for. The Offeror will pay for Common Shares purchased by it pursuant to the Offer by providing the Depositary with sufficient funds for transmittal to Shareholders whose Common Shares are purchased. The Depositary will issue or cause to be issued and will forward by first class mail a cheque drawn upon a Canadian chartered bank or trust company payable to such depositing Shareholder or such other person as he may direct in the Letter of Acceptance and Transmittal, representing the amount payable in cash to which such Shareholder is entitled pursuant to the Offer. If no address is specified therein, a cheque issued in respect of registered Common Shares will be forwarded to the address of the Shareholder as shown on the register maintained by the Company. The Depositary will act as the agent of persons who have deposited Common Shares in acceptance of the Offer for the purposes of receiving payment from the Offeror and transmitting payment to such persons. Settlement with Shareholders with respect to each Common Share deposited by each such Shareholder and accepted by the Offeror pursuant to the Offer will be effected by the Depositary forwarding to each Shareholder the amount of $0.71 per Common Share. See Section 9 of the Circular, "Canadian Federal Income Tax Considerations -Shareholders Not Resident in Canada" with respect to payments to those Shareholders who are non-residents of Canada. If any deposited Common Shares are not accepted for payment pursuant to the terms and conditions of the Offer for any reason, or if certificates are submitted for more Common Shares than are deposited, certificates for unpurchased Common Shares will be returned, without expense, to the depositing Shareholder promptly following the Expiry Date or the Offeror's withdrawal and early termination of the Offer. If the Offeror is delayed in its purchase of or payment for Common Shares or is unable to purchase or pay for such Common Shares for any reason then, without prejudice to the Offeror's rights hereunder, deposited Common Shares may be retained by the Depositary on behalf of the Offeror and may not be withdrawn except to the extent that tendering Shareholders are entitled to withdrawal rights as set forth in Section 7 of this Offer or pursuant to any applicable law. The reservation by the Offeror of the rights to delay the purchase of or payment for Common Shares is limited by the securities laws of certain Canadian provinces. Under no circumstances will interest accrue or be paid by the Offeror or the Depositary to persons depositing Common Shares on the purchase price of the Common Shares regardless of any delay in such payment. Cheques which are mailed in accordance with this Section shall be deemed to have been delivered at the time of delivery to the post office. In the event of an interruption of mail services, cheques will be made available in accordance with Section 8 of this Offer. 6. EXTENSION AND VARIATION OF THE OFFER Unless extended, the Offer is open for acceptance at the places of deposit set forth in the Letter of Acceptance and Transmittal until 4:30 p.m. (local time at the place of deposit) on January 31, 1996. Subject to the terms of the Acquisition Agreement, the Offeror may, from time to time during the Offer Period (or otherwise as permitted by law) vary certain terms of the Offer. Any such variation of the Offer or extension of the Expiry Time may be made by the Offeror giving notice to the Depositary at its principal office in Calgary. Upon the delivery of such notice, the Expiry Time and Expiry Date shall be deemed to be extended to the time and date specified in such notice or the Offer shall be deemed to be varied in the manner described therein, as the case may be. The Offeror will, as soon as practicable after giving any such notice, and in any event no later than 9:00 a.m. (Eastern time) on the first Business Day following the previously scheduled Expiry Date, make a public announcement of the extension or variation. In addition, the Offeror will provide a copy of such notice to the Dealer Manager and The Toronto Stock Exchange and will cause the Depositary to mail a copy of any such notice to Shareholders as required by applicable laws. 14 Any notice of extension or variation will be deemed to have been given and to be effective on the day on which it is delivered or otherwise communicated to the Depositary at its principal office in Calgary. The Offeror shall not be entitled to extend the period of time during which the Offer is open where all the terms and conditions of the Offer have been complied with or waived by the Offeror, unless the Offeror first takes up and pays for all the Common Shares deposited under the Offer and not withdrawn. If there is a variation in the terms of the Offer (other than a variation consisting solely of a waiver of a condition) or a change in the information contained in the Offer and Circular which is within the control of the Offeror and which would reasonably be expected to affect a Shareholder's decision to accept or reject the Offer, the period during which Common Shares may be deposited pursuant to the Offer shall not expire before ten days after the notice of variation has been delivered, unless otherwise permitted by applicable law. An extension of the Expiry Time and Expiry Date shall not constitute a waiver by the Offeror of any of its rights under Section 4 of this Offer. If the price being offered for the Common Shares is increased by the Offeror, the increased price will be paid to all Shareholders whose Common Shares are taken up pursuant to the Offer, whether or not such shares were taken up by the Offeror before the variation. 7. RIGHTS TO WITHDRAW All deposits of Common Shares pursuant to the Offer are irrevocable provided that any Common Shares deposited in acceptance of the Offer may be withdrawn by or on behalf of the depositing Shareholder: (a) at any time before 11:00 a.m. (Calgary time) on January 31, 1996; and (b) at any time after February 23, 1996, provided that the Common Shares have not been taken up and paid for prior to the receipt by the Depositary of a notice of withdrawal in respect of such Common Shares. In addition, if a notice of change in respect of the information contained in this Offer and the Circular or in respect of any notice of change or variation is delivered to the Shareholders whose Common Shares were not taken up at the date of the occurrence of the change or there is a variation of the terms of the Offer (other than by an increase in the consideration offered for the Common Shares with any extension of the time for deposit being for a period not greater than ten days after the notice of variation is delivered or a variation consisting solely of the waiver of a condition of the Offer), any deposited Common Shares not then taken up and paid for may be withdrawn by or on behalf of the depositing Shareholder at their place of deposit at any time up to and including the tenth day after the day on which the notice of change or variation is mailed, delivered or otherwise communicated, subject to abridgement of that period pursuant to such order or orders as may be granted by Canadian courts or securities regulatory authorities. Pursuant to the terms of the Agreement to Tender, the Tendering Shareholders have agreed to tender their Common Shares to the Offer and not to withdraw any of their Common Shares tendered unless the Agreement to Tender has been duly terminated prior to the time of the Offeror taking up and paying for such shares or a Competing Offer is outstanding 24 hours prior to the Expiry Time and the Offeror has not increased the consideration payable under the Offer to at least equal that under the Competing Offer. See Section 14 of the Circular, "Arrangements Between the Offeror and Shareholders of the Company". Withdrawal of deposited Common Shares must be effected by notice of withdrawal which must be made by or on behalf of the Shareholder by whom or on whose behalf such Common Shares were deposited and must be received by the Depositary at the office at which such Common Shares were deposited. Any such notice of withdrawal must (a) be made by a method, including telegraphic communications, that provides the Depositary with a written or printed copy, (b) be signed by or on behalf of the person who signed the Letter of Acceptance and Transmittal accompanying the Common Shares which are being withdrawn, (c) specify such person's name, the number of Common Shares to be withdrawn, the name of the registered holder and the certificate number shown on each certificate representing the Common Shares to be withdrawn and (d) be actually received by the Depositary within the time specified above. For the purpose of obtaining physical possession of the deposited share certificates so withdrawn, the signature on the notice of withdrawal must be guaranteed by an Eligible Institution. 15 NONE OF THE OFFEROR, THE DEPOSITARY, THE DEALER MANAGER, OR ANY OTHER PERSON WILL BE UNDER ANY DUTY TO GIVE NOTIFICATION OF ANY DEFECT OR IRREGULARITY IN ANY NOTICE OF WITHDRAWAL NOR SHALL THEY INCUR ANY LIABILITY FOR FAILURE TO GIVE SUCH NOTIFICATION. In addition to the foregoing rights of withdrawal, Shareholders in certain provinces of Canada are entitled to statutory rights of rescission in certain circumstances. See Section 23 in the Circular, "Statutory Rights". All questions as to the validity (including the time of receipt) and form of notices of withdrawal shall be determined by the Offeror in its sole discretion and such determination shall be final and binding. See Section 3 of this Offer. 8. MAIL SERVICE INTERRUPTION Notwithstanding the provisions of the Offer or the Letter of Acceptance and Transmittal, cheques in payment for the Common Shares purchased pursuant to the Offer and certificates for any Common Shares or other relevant documents to be returned will not be mailed if the Offeror determines that delivery by mail may be delayed, until such time as the Offeror has determined that delivery by mail will no longer be delayed. Persons entitled to cheques, share certificates or documents which are not mailed for the foregoing reason may take delivery thereof at the offices of the Depositary at which the Common Shares in respect of which the cheque is being issued were deposited, upon application to the Depositary. Notwithstanding Section 5 of this Offer, cheques, share certificates or documents not mailed for the foregoing reason will be conclusively deemed to have been delivered on the first day upon which they are available for delivery to the depositing Shareholders at the appropriate office of the Depositary. Notice of any determination regarding mail service delay or interruption made by the Offeror shall be given in accordance with the last sentence of the first paragraph of Section 9 of this Offer. 9. NOTICE AND DELIVERY Without limiting any other lawful means of giving notice, any notice which the Offeror or the Depositary may give or cause to be given under the Offer will be deemed to have been properly given to Shareholders if (a) it is mailed by first class mail postage prepaid to the registered holders of such Common Shares at their respective addresses appearing in the registers for such Common Shares maintained by the Company and will be deemed to have been received on the first Business Day following mailing, or (b) it is given in such other manner as may be permitted by applicable law. These provisions apply notwithstanding any accidental omission to give notice to any one or more Shareholders and notwithstanding any interruption of mail service following mailing. In the event of any interruption of mail service following mailing, the Offeror intends to make reasonable efforts to disseminate the notice by other means such as publication. In the event that post offices in Canada are not open for the deposit of mail, any notice which the Offeror or the Depositary may give or cause to be given under this Offer, except as otherwise provided, will be deemed to have been properly given and to have been received by the Shareholders, as the case may be, if: (i) it is given to The Toronto Stock Exchange for dissemination through its facilities; (ii) it is published once in the nationally circulated edition of The Globe and Mail; or (iii) it is given to the ISDN Wire Service. Wherever the Offer calls for documents to be delivered to the Depositary, such documents will not be considered delivered unless and until they have been physically received at one of the addresses noted for the Depositary as set forth in the Letter of Acceptance and Transmittal. 10. MARKET PURCHASES AND SALE OF SHARES During the Offer Period, subject to applicable law, the Offeror may purchase up to that number of Common Shares that is equal to 5% of the Common Shares outstanding on the date of the Offer. Any such purchases will be made through the facilities of The Toronto Stock Exchange commencing on or after January 12, 1996. Although the Offeror has no present intention to sell Common Shares acquired under the Offer, it reserves the right to make or enter into any arrangement, commitment or understanding at or prior to the Expiry Time to sell Common Shares taken up under the Offer after the Expiry Time. 16 11. ACQUISITION OF COMMON SHARES NOT DEPOSITED AND APPRAISAL RIGHTS The purpose of the Offer is for the Offeror to acquire all outstanding Common Shares, including Common Shares which may become outstanding on the exercise of stock options during the Offer Period. Upon completion of the Offer, if available, the Offeror intends to utilize any statutory rights of purchase pursuant to Part 16 of the ABCA. If at least 90% of the outstanding Common Shares not owned by or on behalf of the Offeror are validly tendered pursuant to the Offer (such shares being referred to herein as "Accepted Securities"), the Offeror may be entitled, but is not obligated, to acquire the remaining Common Shares (the "Remaining Securities") pursuant to Part 16 of the ABCA. In such event the Offeror will send by registered mail to each holder of Remaining Securities (a "Dissenting Offeree"), on or before the earlier of 60 days after the Expiry Date or 180 days after the date hereof, notice (the "Offeror's Notice") of its intention to acquire the Remaining Securities on the terms of the Offer and pursuant to the provisions of Part 16 of the ABCA. Within 20 days after receipt of the Offeror's Notice, each Dissenting Offeree must send the certificates representing Remaining Securities held by such Dissenting Offeree, and may elect either: (i) to transfer such holder's Remaining Securities to the Offeror on the terms on which the Offeror acquired the Accepted Securities; or (ii) to demand payment of the fair value thereof by notifying the Offeror and applying to the Court of Queen's Bench of Alberta to fix the fair value of the holder's Remaining Securities, within 60 days after the date of sending of the Offeror's Notice. A holder of Remaining Securities who fails to notify the Offeror and fails to apply to a court to fix the fair value within the prescribed time will be deemed to have elected to transfer the holder's Remaining Securities to the Offeror on the terms set forth in the Offer. It is the Offeror's current intention to exercise the foregoing compulsory purchase right in the event it acquires 90% or more of the Common Shares under the Offer. If the Offeror does not exercise such right, Shareholders who do not tender under the Offer may remain minority Shareholders in the Company. In the event any Shareholder demands payment of the fair value of the Common Shares, the Offeror has no present intention of applying to a court to fix the fair value of the holder's Remaining Shares. The foregoing is a summary only of the right of acquisition available to the Offeror and the right of appraisal available to Shareholders. The summary is not intended to be complete and is qualified in its entirety by the provisions of Part 16 of the ABCA which are attached as Appendix A to the Circular. THESE PROVISIONS ARE COMPLEX AND MAY REQUIRE STRICT ADHERENCE TO NOTICE AND TIMING PROVISIONS, FAILING WHICH SUCH RIGHTS MAY BE LOST OR ALTERED. SHAREHOLDERS WHO WISH TO BE BETTER INFORMED ABOUT THESE PROVISIONS SHOULD CONSULT THEIR LEGAL ADVISORS. If the Offer is successful, but the Offeror acquires less than 90% of the outstanding Common Shares, then the Offeror intends to propose an amalgamation, statutory arrangement or other transaction involving the Offeror or a wholly-owned subsidiary of the Offeror in order to acquire all of the Common Shares not deposited under the Offer (the "Subsequent Acquisition Transaction"). The Subsequent Acquisition Transaction will be a "going private transaction" within the meaning of the Ontario Securities Commission Policy Statement No. 9.1 ("Policy 9.1") or Policy Q-27 ("Policy Q-27") of the Commission des valeurs mobilieres du Quebec with respect to the holders of a class of participating securities, such as the Common Shares, if it causes the interest of a holder of such class of securities (the "affected securities") to be terminated without consent of the holder and without the substitution therefor of an interest of equivalent value in a participating security which is a security of the Company, the Offeror, an affiliate of the Offeror or a successor body corporate. If the method of acquiring the Common Shares is not a "going private transaction", the transaction could be a "related party transaction" for purposes of Policy 9.1. Policy 9.1 and Policy Q-27 would also require that, in addition to any other required security holder approval, in order to complete the Subsequent Acquisition Transaction, the approval of a simple or two-thirds majority (depending on the nature of the transaction) of the votes cast by minority Shareholders of the affected securities be obtained. In relation to any subsequent going private transaction or related party transaction, the minority Shareholders will, unless discretionary relief is granted by applicable securities commissions, be all Shareholders, other than the Offeror, certain "related parties" of the Offeror and the Company, any person acting jointly or in concert with the foregoing, any affiliate of the foregoing and the Tendering Shareholders. For these purposes, the minority will include directors and senior officers of the Company who would be considered to be independent from the Offeror for the 17 purpose of qualifying to serve as a member of an independent committee appointed to consider the transaction. Policy 9.1 and Policy Q-27 also provide that those of the minority who accept the Offer may be included in the calculation of the minority approval of the going private transaction or related party transaction if the consideration per security in the going private transaction or related party transaction is at least equal in value to the consideration paid pursuant to the Offer. The Offeror presently intends that the consideration offered under any Subsequent Acquisition Transaction proposed by it would be at least equal in value to the consideration offered under the Offer. The Offeror intends that the Common Shares acquired by it pursuant to the Offer will be counted as part of any minority approval in connection with any such transaction. Under Policy 9.1 and Policy Q-27 if, following the Offer, the Offeror and its affiliates are the registered holders of 90% or more of the Common Shares at the time the going private transaction or related party transaction is initiated, the requirement of minority approval would not apply to the transaction if a statutory dissent and appraisal remedy is available to the minority holders or if a substantially equivalent enforceable right is made available to the minority Shareholders. In the event that the Offeror proposes a going private transaction or other Subsequent Acquisition Transaction, the Offeror intends to seek relevant orders, waivers or rulings under the ABCA, Policy 9.1, Policy Q-27, the Regulation under the Securities Act (Ontario) and pursuant to any other similar policy or regulation in any other jurisdiction, exempting the Offeror and the Company, as appropriate, from any requirement to prepare a valuation in connection with such transaction. Pursuant to the ABCA, if the Subsequent Acquisition Transaction is an amalgamation it would require the approval of at least two-thirds of the votes cast by holders of the outstanding Common Shares at a meeting duly called and held for the purpose of approving the amalgamation agreement. The Offeror would cause Common Shares acquired under the Offer to be voted in favour of such a transaction. Depending upon the nature and terms of any Subsequent Acquisition Transaction, Shareholders may have the right to vote in respect of the transaction, and in certain circumstances (including in the case of an amalgamation under the ABCA), the right to dissent in respect of the transaction and demand payment of the fair value of their Common Shares. The exercise of such right, providing that the statutory procedures are complied with by the holder, could lead to a judicial determination of the fair value required to be paid to such dissenting holder for his Common Shares. The fair value so determined could be more or less than the amount paid per Common Share pursuant to the Subsequent Acquisition Transaction or the Offer. Certain judicial decisions may be considered relevant to any going private transaction or related party transaction that may be proposed or effected subsequent to the expiry of the Offer. Prior to the adoption of Policy 9.1 and Policy Q-27, Canadian courts, in a few instances, granted preliminary injunctions to prohibit transactions involving going private transactions. The current trend in both Canadian legislation, such as the enactment of section 190 of the Business Corporations Act (Ontario), and in the American jurisprudence is toward permitting going private transactions to proceed subject to compliance with procedures designed to ensure substantive fairness to the minority Shareholders. Shareholders should consult their legal advisors for a determination of their legal rights with respect to a related party or going private transaction. Reference is also made to Section 8, "Canadian Federal Income Tax Considerations - Shareholders Resident in Canada" and Section 9, "Canadian Federal Income Tax Considerations -Shareholders Not Resident in Canada" in the Circular. 12. RETURN OF SECURITIES Any deposited Common Shares not taken up and paid for by the Offeror for any reason, or if certificates are submitted for more Common Shares than are deposited, certificates for Common Shares not deposited, will be returned at the Offeror's expense by either sending new certificates representing securities not purchased or returning the deposited certificates (and other relevant documents). The certificates (and other relevant documents) will be forwarded by first class insured mail in the name of and to the address specified, in such name and to such address as shown on the registers maintained by the Company as soon as practicable following the Expiry Date or withdrawal or termination of the Offer. 18 13. DIVIDENDS AND DISTRIBUTIONS If, on or after January 9, 1996, the Company should split, combine or otherwise change any of the Common Shares or its capitalization, or shall disclose that it has taken or intends to take any such action, the Offeror may, in its sole discretion, make such adjustments as it considers appropriate to the purchase price and other terms of the Offer (including, without limitation, the type of securities offered to be purchased and the amounts payable therefor) to reflect such split, combination or other change. Common Shares acquired pursuant to the Offer shall be transferred by the Shareholder and acquired by the Offeror free and clear of all liens, restrictions, charges, encumbrances, claims and equities and together with all rights and benefits arising therefrom including the right to any and all dividends, distributions, payments, securities, rights, assets or other interests which may be declared, paid, issued, distributed, made or transferred on or in respect of the Common Shares on or after January 9, 1996. If the Company should declare or pay any cash dividend, stock dividend or make any other distribution on or issue any rights with respect to any of the Common Shares which is or are payable or distributable to the Shareholders of record on a record date which is prior to the date of transfer into the name of the Offeror or its nominees or transferees on the registers maintained by the Company of such Common Shares following acceptance thereof for purchase pursuant to the Offer, then the whole of any such dividend, distribution or right will be received and held by the depositing Shareholder for the account of the Offeror and shall be promptly remitted and transferred by the depositing Shareholder to the Depositary for the account of the Offeror, accompanied by appropriate documentation of transfer. Pending such remittance, the Offeror will be entitled to all rights and privileges as the owner of any such dividend, distribution or right, and may withhold the entire consideration payable by the Offeror pursuant to the Offer or deduct from the consideration payable by the Offeror pursuant to the Offer the amount or value thereof, as determined by the Offeror in its sole discretion. 14. OTHER TERMS OF THE OFFER The Offeror reserves the right to transfer to one or more affiliated companies the right to purchase all or any portion of the Common Shares deposited pursuant to the Offer but any such transfer will not relieve the Offeror of its obligations under the Offer and will in no way prejudice the rights of the persons depositing Common Shares to receive payment for Common Shares validly deposited and accepted for payment pursuant to the Offer. NO BROKER, DEALER OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION ON BEHALF OF THE OFFEROR OTHER THAN AS CONTAINED IN THE OFFER, AND, IF ANY SUCH INFORMATION OR REPRESENTATION IS GIVEN OR MADE, IT MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. NO BROKER, DEALER OR OTHER PERSON SHALL BE DEEMED TO BE THE AGENT OF THE OFFEROR, THE DEPOSITARY OR THE DEALER MANAGER FOR THE PURPOSES OF THE OFFER. IN ANY JURISDICTION IN WHICH THIS OFFER IS REQUIRED TO BE MADE BY A LICENSED BROKER OR DEALER, THIS OFFER SHALL BE MADE ON BEHALF OF THE OFFEROR BY BROKERS OR DEALERS LICENSED UNDER THE LAWS OF SUCH JURISDICTION. The Offer and accompanying Circular and other documents referred to above constitute the take-over bid circular required under applicable Canadian provincial securities legislation with respect to the Offer. The Offeror shall, in its sole discretion, be entitled to make a final and binding determination on all questions relating to the interpretation of the Offer, the Circular, the Letter of Acceptance and Transmittal and the Notice of Guaranteed Delivery, the validity of any acceptance of the Offer, and the validity of any withdrawals of Common Shares. The Offer is not being made to (nor will deposits be accepted from or on behalf of) Shareholders residing in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. The Offeror may, in its sole discretion, take such action as it may deem necessary to make an offer in any such jurisdiction and extend such offer to Shareholders in any such jurisdiction. 19 The Offer and all contracts resulting from the acceptance of the Offer shall be governed by and construed in accordance with the laws of the Province of Alberta and the laws of Canada applicable therein. DATED at Calgary, Alberta, January 9, 1996. NORTHERN ARCH RESOURCES LTD. By: (signed) LARRY KALAS President and Chief Executive Officer 20 CIRCULAR This Circular accompanies the Offer to purchase all of the issued and outstanding Common Shares. The terms, conditions and provisions of the accompanying Offer, the Letter of Acceptance and Transmittal and the Notice of Guaranteed Delivery are incorporated into and form part of the Circular. Terms that are defined in the Offer shall where used in this Circular have the meanings so defined. EXCEPT AS SPECIFICALLY DISCLOSED HEREIN, THE INFORMATION CONCERNING THE COMPANY CONTAINED IN THE CIRCULAR HAS BEEN SUPPLIED BY THE COMPANY OR HAS BEEN TAKEN FROM OR BASED UPON PUBLICLY AVAILABLE DOCUMENTS AND RECORDS ON FILE WITH CANADIAN SECURITIES ADMINISTRATORS AND OTHER PUBLIC SOURCES. ALTHOUGH THE OFFEROR HAS NO KNOWLEDGE THAT WOULD INDICATE THAT ANY STATEMENTS CONTAINED HEREIN TAKEN FROM OR BASED ON SUCH DOCUMENTS AND RECORDS ARE UNTRUE OR INCOMPLETE, THE OFFEROR DOES NOT ASSUME ANY RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED IN SUCH DOCUMENTS AND RECORDS, OR FOR ANY FAILURE BY THE COMPANY TO DISCLOSE PUBLICLY EVENTS OR FACTS THAT MAY HAVE OCCURRED OR MAY AFFECT THE SIGNIFICANCE OR ACCURACY OF ANY SUCH INFORMATION BUT WHICH ARE UNKNOWN TO THE OFFEROR. 1. THE OFFEROR Northern Arch, a wholly-owned subsidiary of Arch, was organized pursuant to the ABCA for the sole purpose of making an acquisition in Canada on behalf of Arch. Prior to making the Offer, Northern Arch has carried on no business. Arch is a publicly-held independent oil and gas company headquartered in Fort Worth, Texas. Arch currently operates primarily in the Permian Basin in Texas and New Mexico. Additionally, Arch has gas transmission and marketing operations in south and north central Texas. For the year ended December 1, 1994, Arch's revenues were $83 million (U.S.). Arch's common shares trade on the NASDAQ National Market under the symbol "ARCH". 2. TERMS AND CONDITIONS OF THE OFFER Reference is made to the Offer for particulars of the terms and conditions of the Offer, including the manner and time of acceptance, the conditions of the Offer and provisions for payment for Common Shares taken up thereunder. 3. COMPETING OFFER BY PACALTA RESOURCES LTD. Pursuant to an offer to purchase and circular dated December 1, 1995, Pacalta, through its wholly-owned subsidiary, 660066 Alberta Ltd., offered to purchase all of the Common Shares of Trax at a price of $0.55 per Common Share. In the First Directors' Circular, the board of directors agreed with the initial view of its Independent Committee that the Pacalta Offer undervalued Trax. The board of directors of Trax recommended to Shareholders that they not tender their Common Shares to the Pacalta Offer until a further communication is received from the board of directors of Trax. In the Second Directors' Circular the board of directors of Trax recommended that the Shareholders not tender to the Pacalta Offer. 4. THE COMPANY The Company was continued under the laws of Alberta by Certificate of Continuance dated June 30, 1993. Its head and registered offices are located at 2120, 530-6th Avenue S.W., Calgary, Alberta, T2P 3S8. 21 5. CAPITALIZATION OF THE COMPANY The authorized capital of the Company consists of an unlimited number of Common Shares. According to the First Directors' Circular, at December 8, 1995, 13,352,122 Common Shares were issued and outstanding. The Company also has outstanding options on an aggregate of 840,000 Common Shares at exercise prices ranging from $0.60 to $0.80 per Common Share. 6. EXISTING BUSINESS RELATIONSHIP BETWEEN THE OFFEROR AND THE COMPANY Except for those resulting from the ordinary course of the oil and gas industry, and as set forth below, there are no existing business relationships between the Offeror, its associates or affiliates and the Company. 7. PURPOSE OF THE OFFER AND PLANS FOR THE COMPANY Background to the Offer Representatives of Arch have been evaluating various potential oil and gas acquisitions, both as asset and corporate acquisitions, in Canada since April, 1995. After the Pacalta Offer was announced, Arch contacted the Company for the purpose of evaluating the Company and its assets to determine whether or not Arch was interested in making a bid to compete with the Pacalta Offer. Arch negotiated and entered into a confidentiality agreement with the Company on December 19, 1995 and gained access to a data room established by the Company to examine non-public information in order to determine whether or not it was interested in making an offer for the Common Shares and, if so, on what terms and conditions. Negotiations between Arch and the Company and their financial and legal advisors commenced December 27, 1995, resulting in each of the Acquisition Agreement and the Agreement to Tender being signed in the evening of Friday, December 29, 1995. On January 4, 1996, the Offeror received notice that the board of directors of the Company had waived the terms and provisions of the Shareholder Rights Plan with respect to the Offer and any Subsequent Acquisition Transaction contemplated by the Offer. This Offer is being made by the Offeror pursuant to its obligations under the Acquisition Agreement and the Agreement to Tender. Pursuant to the terms of the Acquisition Agreement the Company agreed, subject to fiduciary law, among other things, that: (a) the board of directors of the Company had approved the entering into of the Acquisition Agreement; (b) the board of directors of the Company will waive the provisions of the Shareholder Rights Plan with respect to the Offer and any Subsequent Acquisition Transaction, provided the Offer complies with the Acquisition Agreement; (c) the Company would not solicit or cause or facilitate anyone else to solicit any offer or expression of interest to acquire any of its assets outside the ordinary course of business or any of its securities, whether directly or indirectly; (d) the Company would not provide information concerning its securities, assets or business to anyone for or in furtherance of anything mentioned in item (c) above; (e) the Company would not pursue any other material corporate acquisition or disposition, amalgamation, merger, arrangement or purchase or sale of assets or make any other material change to the business, capital or affairs of the Company; 22 (f) the Company would not conduct any activity out of the ordinary course of business for the Company as conducted prior to December 29, 1995 or otherwise detrimental to the Offer; and (g) upon the Offeror taking up and paying for not less than 662/3% of the Common Shares, the Company would cooperate with the Offeror in providing an orderly transition of control. The Acquisition Agreement contained as a condition precedent that the Company obtain a waiver from D. Jon Axford, the Vice President of the Company, to the effect that the Offer will not constitute a "change of control" under his employment contract with the Company. Mr. Axford delivered such a waiver on December 29, 1995. There are no agreements between the Offeror or Arch and Mr. Axford in regard to continued employment if the Offer is successful. Break-up Fee The Acquisition Agreement provides that in the event that: (a) any person should offer to acquire any Common Shares, on or after December 29, 1995 and prior to the Expiry Time, at a price per share in excess of $0.71; (b) the board of directors of the Company does not recommend or withdraws its recommendation to Shareholders to accept the Offer or recommends acceptance of another offer by a person other than the Offeror with respect to some or all of the outstanding Common Shares; (c) there shall be any breach or non-performance by the Company of a material provision of the Acquisition Agreement; or (d) the Company enters into an agreement with respect to any acquisition or purchase of more than 15% of the Common Shares, any liquidation, dissolution, recapitalization, merger, amalgamation or other similar transaction or business combination or the sale of assets material to Trax, then Trax will pay to Arch within two business days following the date of the termination of the Offer, as full reimbursement of the Offeror for any and all expenses paid or required to be paid by Arch in connection with the Acquisition Agreement and the Offer and in recognition of the role the Offer may have played in securing a higher offer for the holders of Common Shares, the sum of $400,000. Purpose of the Offer The purpose of the Offer is to enable the Offeror to acquire all outstanding Common Shares, including Common Shares which may become outstanding on the exercise of stock options during the Offer Period. If at least 90% of the outstanding Common Shares not owned by or on behalf of the Offeror or its affiliates or associates are validly tendered pursuant to the Offer, the Offeror intends to elect to invoke the statutory rights of acquisition contained in Part 16 of the ABCA, the provisions of which are attached as Appendix A to this Circular. If the Offer is successful but the Offeror acquires less than 90% of the outstanding Common Shares, the Offeror intends to pursue a Subsequent Acquisition Transaction to acquire the Common Shares not tendered to the Offer on such terms and conditions as the Offeror, at the time, believes to be fair and equitable to the Company and its Shareholders. The timing and details of any such transaction will necessarily depend upon a variety of factors, including the number of Common Shares acquired pursuant to the Offer. See Section 11 of the Offer, "Acquisition of Common Shares Not Deposited and Appraisal Rights". Plans for the Company If the Offer is successful, it is expected that certain changes will be effected with respect to the composition of the board of directors of the Company to allow nominees of the Offeror to become members of such board. Upon the acquisition of the Common Shares, the Offeror intends to integrate the business carried on by the Offeror and the Company, and may consider certain asset dispositions, if appropriate. If permitted by applicable law, 23 subsequent to the completion of the Offer or the Subsequent Acquisition Transaction, if necessary, the Offeror intends to delist the Common Shares from The Toronto Stock Exchange and cause the Company to cease to be a reporting issuer under the securities laws of each applicable province. 8. CANADIAN FEDERAL INCOME TAX CONSIDERATIONS - SHAREHOLDERS RESIDENT IN CANADA In the opinion of Code Hunter Wittmann, counsel to the Offeror, the following is a summary of the principal Canadian federal income tax considerations generally applicable to Shareholders who dispose of Common Shares pursuant to the Offer or pursuant to a Subsequent Acquisition Transaction involving an amalgamation and who, for purposes of the Income Tax Act: (i) are resident in Canada; (ii) hold their Common Shares as capital property; and (iii) deal at arm's length with the Offeror and the Company. Common Shares will generally constitute capital property to a Shareholder unless the Shareholder either holds such Common Shares in the course of carrying on a business, or has acquired such Common Shares in a transaction or transactions considered to be an adventure in the nature of trade. It is assumed for purposes of this opinion that the Rights have no material cost or value and that the amount of consideration allocable to Rights disposed of will not exceed a nominal amount. THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR SHAREHOLDER. ACCORDINGLY, SHAREHOLDERS SHOULD CONSULT THEIR INDEPENDENT TAX ADVISORS FOR ADVICE WITH RESPECT TO THE INCOME TAX CONSEQUENCES TO THEM OF DISPOSING OF THEIR COMMON SHARES HAVING REGARD TO THEIR OWN PARTICULAR CIRCUMSTANCES. This summary and the Summary on page 6 hereof are based upon the current provisions of the Income Tax Act, the regulations thereunder in force on the date hereof (the "Regulations"), all proposed amendments to the Income Tax Act and Regulations publicly announced by the Minister of Finance prior to December 22, 1995 and counsel's understanding of the current administrative practices of Revenue Canada. No assurance can be given that the Income Tax Act or the Regulations will be amended as proposed. This summary does not otherwise take into account or anticipate changes in the law, whether by way of judicial, governmental or legislative decision or action, nor does it take into account provincial, territorial or foreign tax legislation or considerations. A Shareholder who accepts the Offer will be considered to have made a disposition, for purposes of the Income Tax Act, of Common Shares at the time the Offeror takes up and pays for such shares pursuant to the Offer and will realize a capital gain (or capital loss) to the extent that the proceeds received for such Common Shares, net of any reasonable costs of disposition, exceed (or are less than) the adjusted cost base to him of such Common Shares. The determination of the adjusted cost base of the Common Shares of the Shareholder will be affected by various rules in the Income Tax Act including any elections made by individuals and certain trusts in respect of the elimination of the "$100,000 capital gains exemption" on February 22, 1994. Shareholders should consult with their own advisors in respect of such matters. Three-quarters of a capital gain (a "taxable capital gain") is included in computing income and three-quarters of a capital loss (an "allowable capital loss") is deductible from taxable capital gains. To the extent that a Shareholder has insufficient taxable capital gains in the current taxation year against which to apply an allowable capital loss, the deficiency constitutes a net capital loss for the current taxation year which may generally be carried back to any of the three preceding taxation years or carried forward to any future taxation year, subject to the detailed rules in the Income Tax Act in that regard. In the case of a Shareholder which is a corporation, the amount of any capital loss otherwise determined resulting from the disposition of Common Shares will be reduced by the amount of dividends previously received or deemed to have been received by the corporation to the extent and under the circumstances provided for in the Income Tax Act. Similar rules apply where the corporation is a member of a partnership or a beneficiary of a trust which owns Common Shares and, in the case of individuals, with respect to certain tax free dividends on Common Shares (subject to transitional provisions for estates). Capital gains realized by an individual may be subject to an alternative minimum tax. Shareholders should consult their own tax advisors with respect to the alternative minimum tax provisions. As described in Section 11 of the Offer, "Acquisition of Common Shares Not Deposited and Appraisal Rights", the Offeror may, in certain circumstances, acquire Common Shares not deposited under the Offer pursuant to statutory rights of purchase under Part 16 of the ABCA. A Shareholder whose Common Shares are acquired pursuant 24 to such statutory rights of purchase will generally realize a capital gain (or capital loss) calculated in the manner, and subject to the treatment, described above. As discussed in Section 11 of the Offer, "Acquisition of Common Shares Not Deposited and Appraisal Rights", the Offeror intends to pursue a Subsequent Acquisition Transaction, which may be a going private transaction, if all Common Shares are not deposited pursuant to the Offer or if sufficient Common Shares are not deposited pursuant to the Offer in order for the Offeror to pursue a compulsory acquisition of the remaining Common Shares. In this regard, the Offeror may acquire all of the Common Shares not deposited pursuant to the Offer by way of the amalgamation of the Offeror or an affiliate of the Offeror with the Company followed by an immediate redemption for cash of the shares of the amalgamated corporation ("Amalco") held by persons other than the Offeror or an affiliate of the Offeror. A Shareholder will not realize a capital gain or a capital loss on the amalgamation if the Shareholder receives no other consideration for the Shareholder's Common Shares other than shares of Amalco, or shares of a taxable Canadian corporation that controls Amalco immediately after the amalgamation (the "New Shares"). A Shareholder will be deemed to have acquired the New Shares at an aggregate cost equal to the total of the adjusted cost bases of the Common Shares disposed of on the amalgamation. Upon the redemption of the New Shares for cash, the Shareholder will be deemed to have received a dividend equal to the amount, if any, by which the amount paid on the redemption exceeds the paid-up capital (within the meaning of the Income Tax Act) of the New Shares immediately before such time. In the case of a Shareholder who is an individual, any such dividend will be included in computing the Shareholder's income and will be subject to the gross-up and dividend tax credit rules normally applicable to dividends from taxable Canadian corporations (other than as may be modified for certain trusts with non-resident beneficiaries). Such a deemed dividend received by a corporate Shareholder will be included in computing the corporation's income and will generally be deductible in computing the corporation's taxable income, subject to various exceptions and special circumstances set out in the Income Tax Act. Private corporations and certain other corporations may be liable to pay a 25% refundable tax under Part IV of the Income Tax Act in respect of such dividend. Draft legislation to amend the Income Tax Act (the "Draft Legislation") was released by the Minister of Finance on July 19, 1995 and December 12, 1995 to implement proposals tabled in the February 27, 1995 Federal Budget. The Draft Legislation increases the rate of Part IV tax to 331/3% for dividends received after June, 1995 and also imposes an additional tax of 62/3% on the lesser of investment income (other than exempt income and tax deductible dividends) and taxable income (other than income in respect of which the small business deduction has been claimed) of Canadian controlled private corporations for taxation years ending after June, 1995, with the tax being prorated for taxation years that begin before July 1995. Such new 62/3% tax is to be added to the corporation's refundable dividend tax on hand account. Investment income will include interest, taxable capital gains and other property income but does not include tax deductible dividends or income from an investment business with more than five full time employees. While the redemption of the New Shares may result in a tax deductible dividend which is not subject to the new 62/3% tax; it may in certain circumstances result in proceeds of disposition which, if it results in a capital gain, is subject to the new 62/3% tax. As the rules in the Income Tax Act relating to taxation of dividends received by various types of corporations are complex, corporate Shareholders are encouraged to consult with their own tax advisors in this regard. The difference between the redemption price and the amount of the deemed dividend will be treated as proceeds of disposition of the New Shares for purposes of computing any capital gain or capital loss on disposition; the income tax consequences of capital gains and capital losses are discussed above. As discussed in Section 11 of the Offer, "Acquisition of Common Shares Not Deposited and Appraisal Rights", depending upon the nature and terms of any Subsequent Acquisition Transaction, Shareholders may have the right to dissent in respect of the transaction and demand payment of the fair value of their Common Shares. The tax treatment of such payments is unclear. Such treatment may include a deemed dividend, a capital gain or loss, or both a deemed dividend and a capital gain or loss. 25 9. CANADIAN FEDERAL INCOME TAX CONSIDERATIONS - SHAREHOLDERS NOT RESIDENT IN CANADA In the opinion of Code Hunter Wittmann, counsel to the Offeror, the following summary of Canadian federal income tax considerations is only applicable to those Shareholders who, for purposes of the Income Tax Act, have not been resident in Canada at any time while they held Common Shares, deal at arm's length with the Offeror and the Company, hold their Common Shares as capital property and do not use or hold, and are not deemed to use or hold, their Common Shares in, or in the course of carrying on a business in Canada (referred to as "Non-Resident Shareholder"). It is assumed for purposes of this opinion that the Rights have no material cost or value and that the amount of consideration allocable to Rights disposed of will not exceed a nominal amount. THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR NON- RESIDENT SHAREHOLDER. ACCORDINGLY, NON-RESIDENT SHAREHOLDERS SHOULD CONSULT THEIR OWN INDEPENDENT TAX ADVISORS FOR ADVICE WITH RESPECT TO THE INCOME TAX CONSEQUENCES TO THEM OF DISPOSING OF THEIR COMMON SHARES PURSUANT TO THE OFFER HAVING REGARD TO THEIR OWN PARTICULAR CIRCUMSTANCES. A Non-Resident Shareholder who accepts the Offer will be considered to have made a disposition, for the purposes of the Income Tax Act, of Common Shares at the time the Offeror takes up and pays for such shares pursuant to the Offer. The Non-Resident Shareholder will not be subject to tax under the Income Tax Act in respect of capital gains realized on the disposition of Common Shares pursuant to the Offer or pursuant to the Offeror's statutory rights of purchase described in Section 11 of the Offer, "Acquisition of Common Shares Not Deposited and Appraisal Rights", unless the Common Shares are "taxable Canadian property" (as defined in the Income Tax Act), and the Non-Resident Shareholder is not entitled to relief under an applicable tax treaty. Since the Company is a public corporation for the purposes of the Income Tax Act, the Common Shares will, generally speaking, be taxable Canadian property of a Non-Resident Shareholder if, at any time during the five year period immediately preceding the disposition of the Common Shares, not less than 25% of the issued shares of any class of the share capital of the Company was owned by the Non-Resident Shareholder, by persons with whom the Non-Resident Shareholder did not deal at arm's length or by any combination thereof (and any interest in shares or options in respect of Common Shares will be considered to be the equivalent of ownership of such shares for purposes of the definition of taxable Canadian property). Further, Common Shares may also be taxable Canadian property if acquired pursuant to certain tax deferred exchanges generally involving property which constituted taxable Canadian property or if the Non-Resident Shareholder has elected to have the Common Shares treated as taxable Canadian property on ceasing to be resident in Canada. An acquisition of Common Shares by the Offeror or a Subsequent Acquisition Transaction by way of an amalgamation may result, in whole or in part, in a capital gain, capital loss or deemed dividend as described above in Section 8 of this Circular. If such a transaction or the exercise of any rights of dissent thereunder results in a deemed dividend as discussed above in Section 8 of this Circular, such dividend will be subject to non-resident withholding tax at the rate of 25% or such lower rate as may be provided under the terms of an applicable tax treaty. Further, any taxable capital gain realized by the holder on such a transaction may be subject to Canadian income tax, unless the Non-Resident Shareholder is entitled to relief under an applicable tax treaty. 10. OWNERSHIP OF COMMON SHARES Neither the Offeror nor any director or senior officer of the Offeror beneficially owns, directly or indirectly, controls or exercises direction over, or has the right to acquire, any securities of the Company, other than pursuant to the Agreement to Tender. To the knowledge of the Offeror, after reasonable inquiry, no Common Shares of the Company are owned by, or are under the control or direction of, any associate of any director or senior officer of the Offeror, by any person or company holding more than 10% of any class of equity securities of the Offeror or by any person or company acting jointly or in concert with the Offeror. 11. TRADING IN COMMON SHARES To the knowledge of the Offeror, after reasonable inquiry, no Common Shares have been traded during the six-month period preceding the date of the Offer by the Offeror or any person holding more than 10% of any class of securities of the Offeror, the directors or senior officers of the Offeror, any associate or affiliate of any of the foregoing or by any person or company acting jointly or in concert with the Offeror. 26 12. STOCK EXCHANGE LISTING, PRICE RANGE AND VOLUMES The Common Shares are listed on The Toronto Stock Exchange. The market price range and the volume of trading of the Common Shares on The Toronto Stock Exchange during the periods indicated preceding the date of the Offer by the Offeror as reported in stock exchange publications and other sources believed reliable have been as follows:
High Low Volume --------- --------- ------------ 1994 November $1.00 $0.65 102,960 December 0.85 0.67 1,210,200 1995 January 0.73 0.44 190,135 February 0.73 0.61 122,857 March 0.87 0.61 153,763 April 0.89 0.73 161,200 May 1.08 0.75 598,955 June 1.00 0.70 630,613 July 0.75 0.67 1,005,000 August 0.68 0.51 215,200 September 0.64 0.55 115,400 October 0.70 0.45 147,800 November 0.60 0.45 420,050 December 0.66 0.55 480,140 1996 January 1-5 0.71 0.68 285,800
On December 28, 1995, the last day of trading for Common Shares prior to the public announcement of the Offer, the closing price on The Toronto Stock Exchange for the Common Shares was $0.65. On January 5, 1996, the closing price on The Toronto Stock Exchange for the Common Shares was $0.69. On November 16, 1995, the last day of trading for Common Shares prior to the public announcement of the Pacalta Offer, the closing price on The Toronto Stock Exchange for the Common Shares was $0.50. 13. ARRANGEMENTS BETWEEN THE OFFEROR AND THE DIRECTORS AND OFFICERS OF THE COMPANY There are no arrangements or agreements made or proposed to be made between the Offeror and any of the directors or officers of the Company and no payments or other benefits are proposed to be made or given by way of compensation in respect of loss of office or in respect of such directors or officers remaining in or retiring from office if the Offer is successful. The Company does have agreements in place for compensation for loss of office if there is a "change of control" to Trax. If the Offer is successful, it would constitute a "change of control" for the purpose of the agreements. According to the First Directors' Circular, Trax has entered into an employment agreement with its President, Donald W. Axford. In the event of cessation of employment for any reason other than just cause, the agreement provides for the payment to the President of $300,000. According to the First Directors' Circular, Trax also entered into an employment agreement with D. Jon Axford, Su-hin Chee and Les G. Morris, the Vice President, Chief Financial Officer and Manager, Drilling and 27 Production of Trax, respectively. Mr. Axford's contract includes provision for two years' salary and benefits and six months' out-placement services in the event of termination of employment without cause, due to a merger, a significant change in responsibilities, the acquisition of all or substantially all of the assets of Trax by a third party or because of a change of control of Trax. Messrs. Chee's and Morris' agreements contain similar provisions with the exception that their entitlement to salary and benefits is limited to one year. Aggregate payments under the termination provisions of these three agreements is estimated at $475,180. Mr. D. Jon Axford has agreed with Trax to waive his right to a payment under his employment agreement which may otherwise arise as a result of the proposed acquisition by the Offeror. See Section 7 of the Circular, "Purpose of the Offer and Plans for the Company". 14. ARRANGEMENTS BETWEEN THE OFFEROR AND SHAREHOLDERS OF THE COMPANY Except with respect to the Agreement to Tender as described below, there are no contracts, arrangements or understandings, formal or informal, between the Offeror, or to the knowledge of the Offeror, after reasonable inquiry, by any associate of a director or senior officer of the Offeror, by any person holding more than 10% of any class of equity securities of the Offeror or by any person acting jointly or in concert with the Offeror, and any Shareholder or any other person with respect to any Common Shares in relation to the Offer. On December 29, 1995, Arch entered into the Agreement to Tender with the Tendering Shareholders. The Agreement to Tender provides that Arch, or a wholly-owned subsidiary thereof, would make an offer to purchase all of the Common Shares at a price of at least $0.71 per Common Share, subject to the satisfaction of certain conditions. Pursuant to the Agreement to Tender, the Tendering Shareholders have agreed to tender all of their Common Shares (including Common Shares issuable on exercise of outstanding stock options) consisting of 2,413,147 Common Shares and 500,000 Common Shares issuable on the exercise of stock options, representing approximately 20% of the outstanding Common Shares, within five Business Days of the Offer. The Tendering Shareholders have agreed not to withdraw such shares unless the Agreement to Tender is earlier terminated or a Competing Offer is outstanding 24 hours prior to the Expiry Time and the Offeror has not increased the consideration payable under the Offer to at least equal that under the Competing Offer. In the event that the Common Shares held by any of the Tendering Shareholders are tendered to a Competing Offer and taken up and paid for, are sold by any of the Tendering Shareholders within 90 days of being withdrawn from the Offer or not being tendered thereto, or if sold by Arch within 90 days' after being taken up and paid for, as the case may be, then, in any of the foregoing events, the amount paid for such shares in excess of $0.71 per share will be divided as to 50% for the Tendering Shareholders (proportionate to the number of Common Shares tendered), and 50% for the Offeror. 15. SOURCE OF FUNDS If the Offer is successful and the Offeror acquires all of the Common Shares (on a diluted basis) pursuant to the Offer, the total amount of funds required to purchase such shares and to pay related fees and expenses will be approximately $10.4 million. Arch has committed to capitalize the Offeror with the required funds through the purchase of shares or the making of a shareholder's loan. Such share purchases or loans by Arch will be made from available credit facilities. Arch has a credit facility in the amount of U.S.$50 million, the borrowing base of which, at December 31, 1994, was U.S.$26 million, with its principal banker. The borrowing base is reviewed semi- annually and bears interest at the bank's Base Rate. Arch presently has sufficient funds available under this facility to fund the Offer and related expenses. 16. EXPENSES OF THE OFFER The expenses relating to the Offer, including depository, solicitation, printing, and legal expenses, are estimated at $365,000 and will be paid by the Offeror. 28 17. DIVIDEND POLICY As far as the Offeror is aware, the Company has not paid dividends on its Common Shares. 18. MATERIAL CHANGES IN THE AFFAIRS OF THE COMPANY The Offer is being made on the condition, among others, that the terms of the Shareholder Rights Plan shall have been waived and continue to be waived with respect to the Offer and any Subsequent Acquisition Transaction contemplated by the Offer. Under the terms of the Shareholder Rights Plan, if the Offeror were to take up and pay for Common Shares without the application of the plan to the Offer being waived, the Offeror could suffer significant dilution as a result of the operation of the Shareholder Rights Plan. On January 4, 1996, the Offeror received notice that the board of directors of the Company had waived the application of the Shareholder Rights Plan to the Offer and any Subsequent Acquisition Transaction contemplated by the Offer. Except as set forth above and the Pacalta Offer (see Section 3 of the Circular, "Competing Offer by Pacalta Resources Ltd."), the Offeror has no information, as of the date hereof, which indicates that any material change has occurred in the affairs, financial position or prospects of the Company since August 31, 1995, the date of the Company's last published financial statements. The Offeror has no knowledge of any other matter that has not previously been generally disclosed but which would reasonably be expected to affect a decision of a Shareholder to accept or reject the Offer. 19. ACCEPTANCE OF THE OFFER Except as set forth in Section 7 of the Offer and Section 14 of the Circular, the Offeror has no knowledge regarding whether any Shareholder will accept or reject the Offer. 20. DEALER MANAGER The Offeror has retained Peters & Co. Limited to act as financial advisor to Arch and the offeror in connection with the Offer and has retained Peters & Co. Limited to act as Dealer Manager. The Offeror has agreed to pay to the Dealer Manager fees of $50,000 for forming and managing a soliciting dealer group (comprised of members of the Investment Dealers Association of Canada and members of the stock exchanges in Canada) to solicit acceptances of the Offer. The Dealer Manager will also be reimbursed by the Offeror for out-of-pocket expenses, including fees of legal counsel, and will be indemnified against certain liabilities, including liabilities under securities laws, and expenses in connection therewith. The Offeror will pay any member of the soliciting dealer group whose name appears in the appropriate space in the Letter of Acceptance and Transmittal accompanying a deposit of Common Shares a solicitation fee of $0.01 for each such Common Share taken up and paid for, subject to a minimum fee of $75 and a maximum fee of $1,500 in respect of any single beneficial owner. In the absence of a specification of a soliciting dealer in the Letter of Acceptance and Transmittal the fee will be paid to the Dealer Manager. The Offeror will not pay any fee in respect of Common Shares tendered to the Offer by the Tendering Shareholders. No fee or commission will be payable by any Shareholder who accepts the Offer by transmitting such Shareholder's Common Shares directly to the Depositary or who makes use of the facilities of a soliciting dealer. 21. DEPOSITARY The Offeror has retained Montreal Trust to act as a depositary for the receipt of certificates in respect of Common Shares and related Letters of Acceptance and Transmittal deposited under the Offer and for the payment for Common Shares purchased by the Offeror pursuant to the Offer. The Depositary will receive compensation from the Offeror for its services in connection with the Offer, will be reimbursed for certain out-of-pocket expenses and will be indemnified against certain liabilities, including liabilities under securities laws, and expenses in connection therewith. 29 22. LEGAL MATTERS The legal opinions referred to under "Canadian Federal Income Tax Considerations - Shareholders Resident in Canada" and "Canadian Federal Income Tax Considerations - Shareholders Not Resident in Canada" have been provided by Code Hunter Wittmann. As of January 5, 1996, partners and associates of Code Hunter Wittmann beneficially owned (directly or indirectly) none of the outstanding common shares of the Offeror, less than 1% of the common shares of Arch and less than 1% of the Common Shares. 23. STATUTORY RIGHTS Securities legislation in certain of the provinces and territories of Canada provides Shareholders with, in addition to any other rights they may have at law, rights of rescission or to damages, or both, if there is a misrepresentation in a circular or notice that is required to be delivered to such Shareholders. However, such rights must be exercised within prescribed time limits. Shareholders should refer to the applicable provision of the securities legislation of their province or territory for particulars of those rights or consult with a lawyer. CONSENT OF SOLICITORS TO: The Directors of Northern Arch Resources Ltd. We hereby consent to the reference to our opinions contained under the "Canadian Federal Income Tax Considerations - Shareholders Resident in Canada" and "Canadian Federal Income Tax Considerations - Shareholders Not Resident in Canada" in the Circular accompanying the Offer dated January 9, 1996 made by the Offeror to the Shareholders of the Company. We have read the Circular and have no reason to believe that there are any misrepresentations in it that are derived from our opinions or within our knowledge as a result of services performed by us in connection with our opinions. January 9, 1996 (signed) CODE HUNTER WITTMANN Calgary, Alberta Barristers and Solicitors 30 APPROVAL AND CERTIFICATE January 9, 1996 The contents of the Offer and this Circular have been approved and the sending, communication or delivery thereof to the holders of the Common Shares has been authorized by the board of directors of Northern Arch Resources Ltd. The foregoing contains no untrue statement of material fact and does not omit to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made. In addition, the foregoing does not contain any misrepresentation likely to affect the value or the market price of the securities which are the subject of the Offer. (signed) LARRY KALAS (signed) FRED CANTU President and Chief Executive Officer Chief Financial Officer On behalf of the Board of Directors of Northern Arch Resources Ltd. (signed) JOHNNY VINSON (signed) GARY R. BUGEAUD Director Director 31 APPENDIX A PART 16 OF THE BUSINESS CORPORATIONS ACT (ALBERTA) TAKE-OVER BID - COMPULSORY PURCHASE 187 In this Part, (a) "dissenting offeree" means an offeree who does not accept a take-over bid and a person who acquires from an offeree a share for which a take- over bid is made; (b) "offer" includes an invitation to make an offer; (c) "offeree" means a person to whom a take-over bid is made; (d) "offeree corporation" means a corporation whose shares are the object of a take-over bid; (e) "offeror" means a person, other than an agent, who makes a take-over bid, and includes 2 or more persons who, directly or indirectly, (i) make take-over bids jointly or in concert, or (ii) intend to exercise jointly or in concert voting rights attached to shares for which a take-over bid is made; (f) "share" means a share with or without voting rights and includes (i) a security currently convertible into such a share, and (ii) currently exercisable options and rights to acquire such a share or such a convertible security; (g) "take-over bid" means an offer made by an offeror to shareholders to acquire all of the shares of any class of shares of an offeree corporation not already owned by the offeror, and includes every take- over bid by a corporation to repurchase all of the shares of any class of its shares which leaves outstanding voting shares of the corporation. 188 (1) A take-over bid is deemed to be dated as of the date on which it is sent. (2) If within the time limited in a take-over bid for its acceptance or within 120 days after the date of a take-over bid, whichever period is the shorter, the bid is accepted by the holders of not less than 90% of the shares of any class of shares to which the take-over bid relates, other than shares of that class held at the date of the take-over bid by or on behalf of the offeror or an affiliate or associate of the offeror, the offeror is entitled, on the bid being so accepted and on complying with this Part, to acquire the shares of that class held by the dissenting offerees. (3) The rights of an offeror and offeree under this Part are subject to any unanimous shareholder agreement. 189 (1) An offeror may acquire shares held by a dissenting offeree by sending by registered mail within 60 days after the date of termination of the take-over bid and in any event within 180 days after the date of the take-over bid, an offeror's notice to each dissenting offeree stating that (a) the offerees holding more than 90% of the shares to which the bid relates have accepted the take-over bid, (b) the offeror is bound to take up and pay for or has taken up and paid for the shares of the offerees who accepted the take-over bid, (c) a dissenting offeree is required to elect (i) to transfer his shares to the offeror on the terms on which the offeror acquired the shares of the offerees who accepted the take-over bid, or (ii) to demand payment of the fair value of his shares (A) by notifying the offeror, and (B) by applying to the Court to fix the fair value of the shares of the dissenting offeree, within 60 days after the date of the sending of the offeror's notice, (d) a dissenting offeree who does not notify the offeror and apply to the Court in accordance with clause (c)(ii) is deemed to have elected to transfer his shares to the offeror on the same terms that the offeror acquired the shares from the offerees who accepted the take-over bid, and i (e) a dissenting offeree shall send the share certificates of the class of shares to which the take-over bid relates to the offeree corporation within 20 days after he receives the offeror's notice. (2) Concurrently with sending the offeror's notice under subsection (1), the offeror shall send or deliver to the offeree corporation a notice of adverse claim in accordance with section 73 with respect to each share held by a dissenting offeree. 190 (1) A dissenting offeree to whom an offeror's notice is sent under section 189(1) shall, within 20 days after he receives that notice, send his share certificates of the class of shares to which the take-over bid relates to the offeree corporation. (2) Within 20 days after the offeror sends an offeror's notice under section 189(1), the offeror shall pay or transfer to the offeree corporation the amount of money or other consideration that the offeror would have had to pay or transfer to a dissenting offeree if the dissenting offeree had elected to accept the take-over bid under section 189(1)(c)(i). 191 (1) The offeree corporation is deemed to hold in trust for the dissenting offerees the money or other consideration it receives under section 190(2), and the offeree corporation shall deposit the money in a separate account in a bank or other body corporate any of whose deposits are insured by the Canada Deposit Insurance Corporation or guaranteed by the Quebec Deposit Insurance Board, and shall place the other consideration in the custody of a bank or such other body corporate. (2) Within 30 days after the offeror sends an offeror's notice under section 189(1), the offeree corporation shall, if the offeror has paid or transferred to the offeree corporation the money or other consideration referred to in section 190(2), (a) issue to the offeror a share certificate in respect of the shares that were held by dissenting offerees, (b) give to each dissenting offeree who elects to accept the take-over bid terms under section 189(1)(c)(i) and who sends or delivers his share certificates as required under section 190(1), the money or other consideration to which he is entitled, disregarding fractional shares, which may be paid for in money, and (c) send to each dissenting shareholder who has not sent his share certificates as required under section 190(1) a notice stating that (i) his shares have been cancelled, (ii) the offeree corporation or some designated person holds in trust for him the money or other consideration to which he is entitled as payment for or in exchange for his shares, and (iii) the offeree corporation will, subject to sections 192 to 198, send that money or other consideration to him forthwith after receiving his shares. 192 If a dissenting offeree has elected to demand payment of the fair value of his shares under section 189(1)(c), the offeror may, within 20 days after it has paid the money or transferred the other consideration under section 190(2), apply to the Court to fix the fair value of the shares of that dissenting offeree. 193 A dissenting offeree is not required to give security for costs in an application made under this Part. 194 If more than one application is made under section 189 and 192, the offeror or a dissenting offeree may apply to have the applications heard together. 195 On an application under this Part, the Court shall fix a fair value for the shares of each dissenting offeree who is a party to the application. 196 The Court may in its discretion appoint one or more appraisers to assist the Court to fix a fair value for the shares of a dissenting offeree. ii 197 The final order of the Court shall be made against the offeror in favour of each dissenting offeree who has elected to demand payment of the fair value of his shares for the fair value of his shares as fixed by the Court. 198 In connection with proceedings under this Part, the Court may make any order it thinks fit and, without limiting the generality of the foregoing, it may do any or all of the following: (a) fix the amount of money or other consideration that is required to be held in trust under section 191(1); (b) order that money or other consideration be held in trust by a person other than the offeree corporation; (c) allow a reasonable rate of interest on the amount payable to each dissenting offeree from the date he sends or delivers his share certificates under section 190(1) until the date of payment; (d) order that any money payable to a shareholder who cannot be found be paid to the Provincial Treasurer and section 220(3) applies in respect of money so paid. 199 (1) If the take-over bid is an offer by a corporation to repurchase its own shares section 189(2) does not apply, and section 190(2) does not apply, but the corporation shall comply with section 191(1) within 20 days after it sends an offeror's notice under section 189(1). (2) If (a) the take-over bid is an offer by a corporation to repurchase its own shares, and (b) the corporation is prohibited by section 32 (i) from depositing or placing the consideration for the shares pursuant to section 191(1), or (ii) paying the amount for the shares fixed by the Court pursuant to section 195 the corporation (c) shall re-issue to the dissenting offeree the shares for which the corporation is not allowed to pay, and (d) is entitled to use for its own benefit any money or consideration deposited or placed under section 191(1), and the dissenting offeree is reinstated to his full rights, as a shareholder. ****** iii OFFICE OF THE DEPOSITARY, MONTREAL TRUST COMPANY OF CANADA: BY MAIL, BY HAND AND BY FACSIMILE TRANSMISSION: ATTENTION: STOCK TRANSFER DEPARTMENT 8th Floor, 151 Front Street West 6th Floor, 530 - 8th Avenue S.W. 2nd Floor, 510 Burrard Street Toronto, Ontario Calgary, Alberta Vancouver, British Columbia M5J 2N1 T2P 3S8 V6C 3B9 Telephone: (416) 981-9596 Telephone: (403) 267-6555 Telephone: (604) 661-0222 Facsimile: (416) 981-9600 Facsimile: (403) 266-1490 Facsimile: (604) 661-9480
OFFICE OF THE DEALER MANAGER: Peters & Co. Limited 2500, 350 - 7th Avenue S.W. Calgary, Alberta T2P 4N1 Telephone: (403) 261-4850 Facsimile: (403) 266-4116 EX-10.8(B) 3 NOTICE OF GUARANTEED DELIVERY EXHIBIT 10.8(b) THIS IS NOT A LETTER OF ACCEPTANCE AND TRANSMITTAL NOTICE OF GUARANTEED DELIVERY FOR DEPOSIT OF COMMON SHARES (INCLUDING THE ASSOCIATED RIGHTS UNDER THE SHAREHOLDER RIGHTS PLAN AGREEMENT) OF TRAX PETROLEUMS LIMITED This Notice of Guaranteed Delivery, or manually signed facsimile thereof, must be used by a Shareholder to accept the Offer if: (i) certificate(s) representing Common Shares and the associated Rights under the Shareholder Rights Plan Agreement of Trax Petroleums Limited (collectively, the "Common Shares") to be deposited are not immediately available; or (ii) the Shareholder cannot deliver the certificate(s) and all other required documents to the Depositary at one of the offices listed below at or prior to the Expiry Time. The terms, conditions and definitions used in the accompanying Offer and Circular are incorporated into and form an integral part of this Notice of Guaranteed Delivery. In order to utilize the procedures contemplated by this Notice of Guaranteed Delivery, the following conditions must be met: (i) the deposit must be made by or through a Canadian chartered bank, a trust company in Canada, a commercial bank or trust company having an office or correspondent in the United States or a member firm of The Toronto Stock Exchange, The Alberta Stock Exchange, The Montreal Exchange, the Vancouver Stock Exchange, a national securities exchange in the United States or the National Association of Securities Dealers, Inc. (each an "Eligible Institution"); (ii) a properly completed and duly executed copy of this Notice of Guaranteed Delivery or a facsimile hereof must be received by the Depositary at or prior to the Expiry Date at one of the offices listed below; and (iii) the certificates representing deposited Common Shares in proper form for transfer, together with a properly completed and duly executed Letter of Acceptance and Transmittal or facsimile thereof covering such Common Shares and any other documents required by the Letter of Acceptance and Transmittal, must be received at the same office of the Depositary prior to 4:30 p.m. local time on the third trading day on The Toronto Stock Exchange after the Expiry Date. 2 This Notice of Guaranteed Delivery may be delivered by hand, mail or facsimile transmission to the Depositary and must include a guarantee by an Eligible Institution in the form set out herein. THIS FORM IS NOT TO BE USED TO GUARANTEE SIGNATURES. If a signature on the Letter of Acceptance and Transmittal is required to be guaranteed by an Eligible Institution under the instructions thereto, such signature guarantee must appear in the applicable space provided in the Letter of Acceptance and Transmittal. ________________________________________________________________________________ TO: Northern Arch Resources Ltd., a wholly-owned subsidiary of Arch Petroleum Inc. AND TO: Montreal Trust Company of Canada The undersigned Shareholder hereby tenders the Common Shares described below upon the terms and subject to the conditions set forth in the Offer, the Circular and the Letter of Acceptance and Transmittal, receipt of which is hereby acknowledged, pursuant to the guaranteed delivery procedures set forth in Section 3 of the Offer and Instruction 5 to the Letter of Acceptance and Transmittal. Signature(s) _________________________ Address ___________________________ ______________________________________ ___________________________________ (Postal or Zip Code) Name(s)_______________________________ Area Code and Tel. No. ____________ (Please Print) ______________________________________ ___________________________________ Dated _____________________________1996 ________________________________________________________________________________ ________________________________________________________________________________ Number of Common Shares Deposited: _____________________________________________ ________________________________________________________________________________ _________________________________________________ Certificates to be delivered: _________________________ _________________________ Certificate Nos. _________________________ _________________________ (if available) _________________________________________________ 3 GUARANTEE OF DELIVERY The undersigned Eligible Institution hereby guarantees to the Depositary to deliver to the Depositary at the office listed below to which this Notice of Guaranteed Delivery is delivered the certificates representing the Common Shares tendered hereby, in proper form for transfer, together with a properly completed and duly executed Letter of Acceptance and Transmittal or facsimile thereof covering such Common Shares with any required signatures guaranteed and any other required documents, prior to 4:30 p.m. local time on the day which is the third trading day on The Toronto Stock Exchange after the Expiry Date. ________________________________________________________________________________ Name of Firm ___________________________ _________________________________ Authorized Signature Address ________________________________ Name ____________________________ Please Print ________________________________________ Postal or Zip Code______________________ Title ___________________________ Area Code and Tel. No.__________________ Dated ____________________ , 1996 ________________________________________________________________________________ OFFICE OF THE DEPOSITARY, MONTREAL TRUST COMPANY OF CANADA FOR DELIVERY BY HAND , MAIL, OR FACSIMILE TRANSMISSION: ATTENTION: STOCK TRANSFER DEPARTMENT 8th Floor, 151 Front Street W. 6th Floor, 530 - 8th Avenue S.W. 2nd Floor, 510 Burrard Street Toronto, Ontario Calgary, Alberta Vancouver, British Columbia M5J 2N1 T2P 3S8 V6C 3B9 Telephone: (416) 981-9596 Telephone: (403) 267-6555 Telephone: (604) 661-0222 Fax: (416) 981-9600 Fax: (403) 266-1490 Facsimile: (604) 661-9480
OFFICE OF THE DEALER MANAGER: Peters & Co. Limited 2500, 350 - 7th Avenue S.W. Calgary, Alberta T2P 4N1 Telephone: (403) 261-4850 Fax: (403) 266-4116 For Information Call: Montreal Trust Company of Canada Shareholder Services (403) 267-6555 EX-10.8(C) 4 LETTER OF ACCEPTANCE AND TRANSMITTAL EXHIBIT 10.8(c) NORTHERN ARCH RESOURCES LTD., A WHOLLY-OWNED SUBSIDIARY OF ARCH PETROLEUM INC. LETTER OF ACCEPTANCE AND TRANSMITTAL FOR COMMON SHARES (INCLUDING THE ASSOCIATED RIGHTS UNDER THE SHAREHOLDER RIGHTS PLAN AGREEMENT) OF TRAX PETROLEUMS LIMITED ________________________________________________________________________________ THE OFFER WILL BE OPEN FOR ACCEPTANCE UNTIL 4:30 P.M. LOCAL TIME AT THE PLACE OF DEPOSIT, ON JANUARY 31, 1996 UNLESS THE OFFER IS EXTENDED OR WITHDRAWN ________________________________________________________________________________ The Depositary, the Dealer Manager, (see below for addresses and telephone numbers) your broker or other financial advisor will assist you in completing this Letter of Acceptance and Transmittal PLEASE REVIEW THE INSTRUCTIONS ON PAGE 5 BEFORE COMPLETING THIS LETTER OF ACCEPTANCE AND TRANSMITTAL. This Letter of Acceptance and Transmittal, or a manually signed facsimile hereof, is to be completed only by Shareholders if certificates for Common Shares including the associated Rights are to be deposited herewith. (Unless the context otherwise requires, "Common Shares" means the Common Shares and the associated Rights.) Shareholders whose certificates are not immediately available or who cannot deliver their certificates and all other required documents to the Depositary at or prior to the Expiry Time may, in respect of Common Shares, deposit their Common Shares according to the Procedure for Guaranteed Delivery set forth in Section 3 of the Offer. See Instruction 5 of this Letter of Acceptance and Transmittal. The terms, conditions and definitions used in the accompanying Offer and Circular are incorporated into and form part of this Letter of Acceptance and Transmittal. TO: NORTHERN ARCH RESOURCES LTD., A WHOLLY-OWNED SUBSIDIARY OF ARCH PETROLEUM INC. AND TO: MONTREAL TRUST COMPANY OF CANADA, AS DEPOSITARY The undersigned Shareholder: 1. acknowledges receipt of the Offer and Circular dated January 9, 1996; 2. subject only to the rights of withdrawal set out in the Offer and, if applicable, to the terms and conditions of the Agreement to Tender, irrevocably accepts the Offer, on and subject to its terms and conditions, and deposits, sells, assigns and transfers to the Offeror all right, title and interest in and to the Common Shares described below (the "Purchased Shares") and in and to any and all dividends, stock dividends, securities, rights, warrants or other interest or distribution (collectively, "Other Securities") accrued, declared, paid, issued, distributed, made or transferred on or in respect of the Purchased Shares on and after January 9, 1996, effective the date the Offeror purchases the Purchased Shares (the "Effective Date"); DESCRIPTION OF COMMON SHARES DEPOSITED (if insufficient space, attach a list in the form below)
________________________________________________________________________________ Name(s) and Address(es) of Number of Certificate Numbers(s) Registered Holder(s) Common Shares Deposited* ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ TOTAL ____________________________
*See Instruction 7 3. represents and warrants that (a) the undersigned has good title to the Purchased Shares free and clear of all liens, restrictions, charges, encumbrances, claims and equities, (b) the undersigned has full power and authority to sell, assign and transfer without restriction the Purchased Shares and Other Securities to the Offeror and (c) the Offeror will acquire good and unencumbered title thereto free and clear of all liens, restrictions, charges, encumbrances, claims and equities; 4. covenants that he will execute, upon request, any additional documents necessary or desirable to complete the sale, assignment and transfer of the Purchased Shares and Other Securities to the Offeror; 5. in the case of Shareholders who are residents of Canada, directs the Depositary (a) to issue or cause to be issued a cheque in the full amount of the purchase price to which the undersigned is entitled for his Purchased Shares under the Offer in the name indicated below and to send such cheque to the address, or hold the same for pickup, as indicated below and (b) return any certificates for Common Shares not purchased to the address indicated below (and if no name, address or delivery instructions are indicated, to the undersigned at the address of the undersigned as it appears on the applicable security register of Trax); 6. in the case of Shareholders who are residents or citizens of the United States or residents of any other Foreign Country, directs the Depositary (a) to issue or cause to be issued a cheque or cheques, as provided for herein and in the Offer, in the full amount of the purchase price to which the undersigned is entitled for his Purchased Shares under the Offer, less any applicable withholding taxes as advised by the Offeror in the name indicated below and to send such cheque to the address, or hold for pickup, as indicated below and (b) return any certificates for Common Shares not purchased to the address indicated below (and if no name, address or delivery instructions are indicated, to the undersigned at the address of the undersigned as it appears on the applicable security register of Trax); 7. unless otherwise agreed to in writing with the Offeror or an affiliate of the Offeror, agrees, from and after the Effective Date, (a) not to vote any of the Purchased Shares or Other Securities at any meeting (whether annual, special or otherwise) of holders of Purchased Shares or Other Securities, (b) not to exercise any other rights or privileges attached to any Purchased Shares or Other Securities, and (c) to execute and deliver to the Offeror any and all instruments or proxy, authorizations or consents in respect of any or all of the Purchased Shares or Other Securities and designate in any such instruments of proxy the person or persons specified by the Offeror as the proxy or the proxy nominee or nominees of the undersigned; 8. waives any right to receive notice of purchase of the Purchased Shares; 2 9. irrevocably appoints the Offeror as his true and lawful agent, attorney and attorney-in-fact with respect to the Purchased Shares and the Other Securities, issued, transferred or distributed on or in respect of the Purchased Shares on or after the date of the Offer, effective from the Effective Date, with full power of substitution, in the name and on behalf of the undersigned, to register or record, transfer and enter the transfer of the Purchased Shares and any Other Securities on the books of Trax and to exercise any and all of the rights of the undersigned in respect of the Purchased Shares and Other Securities including, without limitation, to execute and deliver any and all instruments of proxy, authorizations or consents in respect of all or any of the Purchased Shares and Other Securities, revoke any such instrument, authorization or consent given prior to or after the Effective Date and designate in any such instruments of proxy any person or persons as the proxy or proxy nominee or nominees of the undersigned; 10. acknowledges that of the purchase price per Common Share and associated Right, the Offeror has allocated the entire cash consideration to the Common Share and nil value to the associated Right. The undersigned agrees to accept such determinations for all purposes, including for the purpose of completing the undersigned's income tax return under the Income Tax Act (Canada); 11. revokes any and all other authority, whether as agent, attorney-in-fact, proxy or otherwise, previously conferred or agreed to be conferred by the undersigned at any time with respect to the Purchased Shares or Other Securities and agrees no subsequent authority, whether as agent, attorney- in-fact, proxy or otherwise will be granted with respect to the Purchased Shares or Other Securities by or on behalf of the undersigned, unless the Purchased Shares are not taken up and paid for under the Offer; 12. acknowledges that all authority herein conferred or agreed to be conferred shall survive the death or incapacity, bankruptcy or insolvency of the undersigned and all obligations of the undersigned herein shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned; and 13. by virtue of the execution of this Letter of Acceptance and Transmittal, shall be deemed to have agreed with the Offeror and the Depositary that any contract contemplated by the Offer and this Letter of Acceptance and Transmittal as well as all documents relating thereto be drawn up in the English language only. En signant la presente lettre d'acceptation et d'envoi, le soussigne sera repute avoir covenue avec Northern Arch et le depositarie que tous les contrats decoulant de l'Offre et de la presente lettre d'acceptation et d'envoi et tous les documents y afferents, soient rediges exclusivement en anglais. ________________________________________________________________________________ [_] CHECK HERE IF CERTIFICATES FOR DEPOSITED COMMON SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s):_______________________________________________ Date of Execution of Notice of Guaranteed Delivery:____________________________ Name of Eligible Institution that Guaranteed Delivery:_________________________ ________________________________________________________________________________ ________________________________________________________________________________ PLEASE INSERT THE NAME OF THE INVESTMENT DEALER OR BROKER SOLICITING ACCEPTANCE NAME OF FIRM:__________________________________________________________________ NAME OF INDIVIDUAL:____________________________________________________________ ADDRESS OF FIRM:_______________________________________________________________ ________________________________________________________________________________ 3 _________________________________________ ____________________________________ SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (See Instructions 2, 4 and 8) (See Instructions 2, 4 and 8) To be completed ONLY if the cheque in To be completed ONLY if the cheques payment for Common Shares or the for payment of Common Shares or the certificate for Common Shares not certificate for Common Shares not purchased are to be issued in purchased, are to be sent to the name of someone other than the someone other than the undersigned undersigned. or to the undersigned at an address other than that appearing under "Description of Common Shares Issue the cheque in payment for Deposited" or are to be held by the Common Shares and the certificate for Depositary for pick up by the Common Shares not purchased in the name undersigned or by any person of: designated by the undersigned in writing. NAME:___________________________________ Mail the cheque or certificate for (Please Print) Common Shares not deposited or purchased to: ADDRESS:________________________________ NAME:______________________________ (Please Print) ________________________________________ (Include Postal Code) ADDRESS:___________________________ ___________________________________ (Include Postal Code) _________________________________________ Hold the cheque and certificate for Common Shares not purchased for pickup at the following office of the Depositary: ___________________________________ (Specify Office) ____________________________________ ________________________________________________________________________________ SIGNATURE GUARANTEED BY:(SEE SIGN HERE INSTRUCTION 2) DATED:_________, 1996. ________________________________________ ____________________________________ (Authorized Signature) (Signature of Shareholder or Authorized Representative - See Instructions) ________________________________________ ____________________________________ (Name of Eligible Institution) (Name of Shareholder - Please Print) Social Insurance No.:_______________ ________________________________________________________________________________ ________________________________________________________________________________ DO NOT WRITE IN THIS BOX Date Received:_________________________ Certificates Examined by:___________ No. of Common Shares Received:_________ Certificate(s) No.__________________ Amount of Cheque Mailed:_______________ Cheque No.:_________________________ Date Mailed:___________________________ Checked by:_________________________ ________________________________________________________________________________ 4 INSTRUCTIONS 1. DELIVERY OF LETTER OF ACCEPTANCE AND TRANSMITTAL AND CERTIFICATES. To accept the Offer certificate(s) representing such Common Shares, together with a properly completed and duly executed Letter of Acceptance and Transmittal or facsimile thereof and all other documents required by this Letter of Acceptance and Transmittal, must be received by the Depositary at one of the offices listed below at or prior to the Expiry Time. The method of delivery of certificates, this Letter of Acceptance and Transmittal and all other required documents is at the option and risk of the depositing Shareholder. The Offeror recommends that such documents be delivered by hand to the Depositary and a receipt obtained or, if mailed, that registered mail, return receipt or acknowledgement of receipt requested, be used and proper insurance be obtained. No alternative, conditional or contingent deposits will be accepted and no fractional Common Shares will be purchased. 2. GUARANTEE OF SIGNATURES. No signature guarantee is required on this Letter of Acceptance and Transmittal if such Common Shares are deposited for the account of a Canadian chartered bank, a trust company in Canada, a commercial bank or trust company having an office or correspondent in the United States of America or a member firm of The Toronto Stock Exchange, The Alberta Stock Exchange, The Montreal Exchange, the Vancouver Stock Exchange, a national securities exchange in the United States or the National Association of Securities Dealers, Inc. (each an "Eligible Institution"). IN ALL OTHER CASES, ALL SIGNATURES ON THIS LETTER OF ACCEPTANCE AND TRANSMITTAL AND ON CERTIFICATES REPRESENTING COMMON SHARES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION. 3. SIGNATURES ON LETTER OF ACCEPTANCE AND TRANSMITTAL, POWERS AND ENDORSEMENTS. If this Letter of Acceptance and Transmittal is signed by the registered holder(s) of the Common Shares deposited herewith, the signature(s) must correspond with the name(s) as written on the face of the certificate(s) without alteration, enlargement or any change whatsoever and the certificate(s) must be endorsed with the signatures thereon guaranteed by an Eligible Institution. If this Letter of Acceptance and Transmittal is signed by a person other than the registered holder(s) of the Common Shares deposited herewith, the certificates must be endorsed or accompanied by appropriate security transfer or stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear on the certificates. Signatures on such certificates or powers must be guaranteed by an Eligible Institution. If the Common Shares deposited herewith are held of record by two or more joint owners, all such owners must sign this Letter of Acceptance and Transmittal. If any deposited Common Shares are registered in different names on similar certificates, it will be necessary to complete, sign and submit as many separate Letters of Acceptance and Transmittal as there are different registrations of certificates. If this Letter of Acceptance and Transmittal or any certificates or powers are signed by a trustee, executor, administrator, guardian, attorney-in- fact, agent, officer of a corporation or any other person acting in a fiduciary or representative capacity, such person should so indicate when signing and proper evidence satisfactory to the Offeror of their authority so to act must be submitted. 4. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If cheques are to be issued in payment of the Purchased Shares or certificates for Common Shares not deposited or not purchased, are to be: i. issued in the name of a person other than the person signing this Letter of Acceptance and Transmittal; 5 ii. sent to someone other than the person signing this Letter of Acceptance and Transmittal or to the person signing this Letter of Acceptance and Transmittal at an address other than that appearing under "Description of Common Shares Deposited" above; or iii. held by the Depositary for pickup by the undersigned or any person designated by the undersigned in writing; the boxes entitled "Special Payment Instructions" and "Special Delivery Instructions", as applicable, should be completed. 5. PROCEDURE FOR GUARANTEED DELIVERY. If a person wishes to deposit Common Shares pursuant to the Offer and (i) the certificates representing such Common Shares are not immediately available or (ii) such person cannot deliver the certificates and all other required documents to the Depositary at or prior to the Expiry Time, such Common Shares may nevertheless be deposited provided that all of the following conditions are met: i. such a deposit is made by or through an Eligible Institution; ii. a properly completed and duly executed Notice of Guaranteed Delivery, in the form enclosed herewith or a facsimile thereof, is received by the Depositary at or prior to the Expiry Time at one of the offices listed below; and iii. the certificates representing deposited Common Shares, in proper form for transfer, together with a properly completed and duly executed Letter of Acceptance and Transmittal or facsimile thereof covering such Common Shares and any other documents required by such Letter of Acceptance and Transmittal, are received at the same office of the Depositary prior to 4:30 p.m. local time on the day which is the third trading day on The Toronto Stock Exchange after the Expiry Date. The Notice of Guaranteed Delivery may be delivered by hand, mail or facsimile transmission to the Depositary and must include a guarantee by an Eligible Institution in the form set forth in such Notice. 6. INADEQUATE SPACE. If the space provided herein is inadequate, the required information should be set out on a separate signed list attached hereto. 7. PARTIAL DEPOSITS. If fewer than all the Common Shares evidenced by any certificates submitted are to be deposited, fill in the number or amount of Common Shares that are to be deposited in the box entitled "Description of Common Shares Deposited". In such case, new certificate(s) for Common Shares not deposited will be issued and sent to the persons signing this Letter of Acceptance and Transmittal, unless otherwise provided in the boxes entitled "Special Payment Instructions" or "Special Delivery Instructions", as soon as practicable after the expiration or termination of the Offer. All Common Shares evidenced by certificates submitted to the Depositary will be deemed to have been deposited unless otherwise indicated. 8. STOCK TRANSFER TAXES. The Offeror will pay any stock transfer taxes with respect to the transfer and sale of Common Shares to it or its order by the registered holder pursuant to the Offer. If, however, payment of the purchase price is to be made to, or if the certificates for Common Shares not deposited or purchased are to be registered in the name of, any person other than the registered holder, or if certificates for Common Shares are registered in the name of any person other than the person(s) signing this Letter of Acceptance and Transmittal, the amount of any stock transfer taxes (whether imposed on the registered holder or such other person) payable on account of the transfer to such person will be payable by the seller (which may include a deduction from the purchase price) unless satisfactory evidence of the payment of such taxes or an exemption therefrom is submitted. 9. REQUEST FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance may be directed to the Depositary or the Dealer Manager. Additional copies of the Offer and the Circular, this Letter of Acceptance and Transmittal and the Notice of Guaranteed Delivery may be obtained on request and without charge from the Depositary or from the Dealer Manager. Such persons may be contacted at the offices set forth on the last page of this Letter of Acceptance and Transmittal. Shareholders may also contact their local broker, dealer, commercial bank, Canadian chartered bank or trust company for assistance. 6 OFFICE OF THE DEPOSITARY, MONTREAL TRUST COMPANY OF CANADA: FOR DELIVERY BY HAND, MAIL, OR FACSIMILE TRANSMISSION: ATTENTION: STOCK TRANSFER DEPARTMENT
8th Floor, 151 Front Street W. 6th Floor, 530 - 8th Avenue S.W. 2nd Floor, 510 Burrard Street Toronto, Ontario Calgary, Alberta Vancouver, British Columbia M5J 2N1 T2P 3S8 V6C 3B9 Telephone: (416) 981-9596 Telephone: (403) 267-6555 Telephone: (604) 661-0222 Fax: (416) 981-9600 Fax: (403) 266-1490 Facsimile: (604) 661-9480
OFFICE OF THE DEALER MANAGER: Peters & Co. Limited 2500, 350 - 7th Avenue S.W. Calgary, Alberta T2P 4N1 Telephone: (403) 261-4850 Fax: (403) 266-4116 For Information Call: Montreal Trust Company of Canada Shareholder Services (403) 267-6555 7 EX-10.9 5 THIRD RESTATED CREDIT AGREEMENT EXHIBIT 10.9 THIRD RESTATED REVOLVING CREDIT LOAN AGREEMENT dated February 20, 1996 among ARCH PETROLEUM INC., a Delaware corporation and BANK ONE, TEXAS, N.A., as Agent and the BANKS Parties Hereto TABLE OF CONTENTS ----------------- ARTICLE 1. DEFINITIONS 1.1. Defined Terms....................................................1 ------------- 1.2. Other Definitional Provisions...................................12 ----------------------------- ARTICLE 2. THE REVOLVING LOAN 2.1. Revolving Loan..................................................13 -------------- 2.2. Use of Advance Proceeds.........................................16 ----------------------- 2.3. Notes Evidencing Loan...........................................17 --------------------- 2.4. Fees............................................................17 ---- 2.5. Annual Review of Loan...........................................18 --------------------- 2.6. Amendment and Restatement of Prior Loan Agreement...............19 ------------------------------------------------- ARTICLE 3. NOTE PAYMENTS 3.1. Interest on the Notes...........................................19 --------------------- 3.2. Principal Payments..............................................20 ------------------ 3.3. Prepayments.....................................................20 ----------- 3.4. Payment of Interest on the Notes................................20 -------------------------------- 3.5. Calculation of Interest Rates...................................21 ----------------------------- 3.6. Manner and Application of Payments..............................21 ---------------------------------- ARTICLE 4. BORROWING BASE DETERMINATIONS 4.1. Components for Determination of Borrowing Base..................22 ---------------------------------------------- 4.2. Mandatory Redeterminations of Domestic Borrowing Base...........23 ----------------------------------------------------- 4.3. Borrowing Base Deficiency.......................................24 ------------------------- 4.4. Reduction to Commitment.........................................24 ----------------------- 4.5. Special Provisions for Discretionary Increase to the ---------------------------------------------------- Maximum Commitment..............................................25 ------------------ ARTICLE 5. SECURITY 5.1. Liens on Oil and Gas Properties.................................26 ------------------------------- 5.2. Arch (Onyx) Guaranty............................................26 -------------------- 5.3. Arch (Canadian) Guaranty........................................27 ------------------------ 5.4. Onyx Subsidiaries Properties....................................27 ---------------------------- ARTICLE 6. CONDITIONS PRECEDENT 6.1. Conditions Precedent to Loan and Initial Advance................27 ------------------------------------------------ 6.2. Conditions Precedent to All Advances............................28 ------------------------------------ ARTICLE 7. REPRESENTATIONS AND WARRANTIES..................................28 ARTICLE 8. BORROWER'S COVENANTS 8.1. Affirmative Covenants...........................................32 --------------------- 8.2. Negative Covenants..............................................36 ------------------ ARTICLE 9. EVENTS OF DEFAULT 9.1. Event of Default................................................39 ---------------- 9.2. Materiality.....................................................41 ----------- 9.3. Notice of Event of Default......................................41 -------------------------- 9.4. Remedies Upon Event of Default..................................42 ------------------------------ 9.5. Performance by Banks............................................42 -------------------- ARTICLE 10. YIELD PROTECTION; SPECIAL PROVISIONS FOR EURODOLLARLOANS 10.1. Capital Adequacy................................................42 ---------------- 10.2. Special Provisions for Eurodollar Loans.........................43 ---------------------------------------
-3- ARTICLE 11. THE AGENT AND THE BANKS. 11.1. Appointment and Authorization..................................45 ----------------------------- 11.2. Note Holders...................................................45 ------------ 11.3. Consultation with Counsel......................................46 ------------------------- 11.4. Documents......................................................46 --------- 11.5. Resignation or Removal of Agent................................46 ------------------------------- 11.6. Responsibility of Agent........................................46 ----------------------- 11.7. Independent Investigation......................................48 ------------------------- 11.8. Indemnification................................................48 --------------- 11.9. Benefit of Article 11..........................................48 --------------------- 11.10. Pro Rata Treatment.............................................48 ------------------ 11.11. Interests of Banks.............................................48 ------------------ 11.12. Investments....................................................49 ----------- ARTICLE 12. MISCELLANEOUS 12.1. Waiver.........................................................49 ------ 12.2. Payment of Expenses............................................49 ------------------- 12.3. Notices........................................................50 ------- 12.4. Governing Law..................................................50 ------------- 12.5. Invalid Provisions.............................................50 ------------------ 12.6. Interest Rate..................................................51 ------------- 12.7. Amendments.....................................................51 ---------- 12.8. Parties Bound..................................................51 -------------
-4- 12.9. Headings.......................................................51 -------- 12.10. Participations and Sales; Assignments..........................51 ------------------------------------- 12.11. Multiple Counterparts..........................................51 --------------------- 12.12. Consent to Jurisdiction; Service of Process....................52 ------------------------------------------- 12.13. Reasonableness.................................................52 -------------- 12.14. Confidentiality................................................52 --------------- 12.15. Article 15.10(b)...............................................52 ---------------- 12.16. Indemnification................................................52 --------------- 12.17. Survival.......................................................54 --------
EXHIBITS - -------- Exhibit "A" - Request for Borrowing Exhibit "B" - Form of Revolving Promissory Note Exhibit "C" - Borrowing Base Allocation Certificate Exhibit "D" - Form of Legal Opinion of Code Hunter & Wittman Exhibit "E" - Form of Legal Opinion of Murphy Mahon Keffler & Farrier, L.L.P. Exhibit "F" - Form of Compliance Certificate THIRD ----- RESTATED REVOLVING CREDIT LOAN AGREEMENT ---------------------------------------- THIS THIRD REVOLVING CREDIT LOAN AGREEMENT is entered into as of the _____ day of February, 1996, by and between ARCH PETROLEUM INC., a Delaware corporation ("Arch"), ARCH PRODUCTION COMPANY, a Delaware corporation ("APC") (Arch and APC are herein collectively called "Borrower"), each Bank which from time to time became parties hereto, and BANK ONE, TEXAS, N.A., a national banking association, as Agent for Banks to the extent -5- and in the manner provided in Article 11 below (herein called "Agent"), and ---------- amends and restates in its entirety the Prior Loan Agreement (as defined herein). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Borrower and Agent have entered into the Prior Loan Agreement (as defined herein); and WHEREAS, Borrower desires to restructure the credit available under the Prior Loan Agreement and to amend and restate the Prior Loan Agreement in its entirety by entering into this Loan Agreement; and WHEREAS, Borrower and Banks are willing to restructure the credit available under the Prior Loan Agreement and to amend and restate the Prior Loan Agreement in its entirety upon the terms and subject to the conditions set forth in this Loan Agreement. NOW, THEREFORE, in consideration of their mutual promises herein contained and other good and valuable consideration, the parties agree as follows: ARTICLE 1. DEFINITIONS 1.1. Defined Terms. For the purposes of this Loan Agreement, unless ------------- the context otherwise requires, the following terms shall have the respective meanings assigned to them in this Article or in the sections and subsections referred to below. "Additional Properties" shall have the meaning assigned to it in Section ------- 4.5(b) hereof. - ------ "Adjusted InterBank Rate" shall, with respect to each Interest Period, mean on any day thereof the quotient of (a) the InterBank Offered Rate with respect to such Interest Period, divided by (b) the remainder of 1.00 minus the ---------- ----- Eurodollar Reserve Requirement in effect on such day. "Affiliate" shall mean any partner of Borrower and any Person which, directly or indirectly, controls or is controlled by (or is under common control with) Borrower. "Agent" shall have the meaning assigned to it in the preamble hereof. "Allocated Borrowing Base" shall have the meaning assigned to it in Section 4.1(c) hereof. - -------------- "Arch Canada" shall mean Northern Arch Resources, Ltd., a Canadian federation corporation and a wholly-owned Subsidiary of Arch. "Arch (Canadian) Guaranty" shall mean that certain [Guaranty] dated the date hereof -6- executed by Arch in favor of the Canadian Lenders, pursuant to which Arch has guaranteed the indebtedness, obligations, and liabilities of Arch Canada to the Canadian Lenders arising under the Canadian Facility. "Arch (Onyx) Guaranty" shall mean that certain Unconditional Guaranty of Payment dated March 30, 1994 executed by Arch in favor of the Bank of Scotland, pursuant to which Arch has guaranteed the indebtedness, obligations and liabilities of the Onyx Subsidiaries to Bank of Scotland arising under the Onyx Loan Agreement. "Bank" or "Banks" shall mean the Banks identified on the signature pages hereof, and each assignee of a Bank which becomes a Bank pursuant to Section 12.10 and their respective successors. - ------------- "Base Rate" shall mean the base commercial rate of interest as established from time to time by Agent (which may not be the lowest, best or most favorable rate of interest which Agent One may charge on loans to its customers). Each change in the rate of interest charged under the Base Rate shall become effective, without notice to Borrower, on the effective date of each change in the Base Rate. "Borrower" shall have the meaning assigned to it in the preamble hereof. "Borrowing" shall mean the meaning assigned to it in Section 2.01. ------------ "Borrowing Base" shall have the meaning assigned to it in Article 4 hereof. --------- "Borrowing Base Deficiency" shall have the meaning assigned to it in Section 4.3 hereof. - ----------- "Borrowing Base Percentage" shall mean, for the purpose of determining the interest rate payable on a Eurodollar Advance under Section 3.1(a)(ii) ------------------ hereof, the aggregate of the unpaid principal balance of the Loan and the outstanding obligations of the loans and banker's acceptances made under the Canadian Facility then outstanding as a percentage of the Consolidated Borrowing Base then in effect. "Borrowing Base Allocation Certificate" shall have the meaning assigned to it in Section 4.1(c) hereof. -------------- "Business Day" shall mean a day upon which business is transacted by national bank in Fort Worth, Texas, except Saturday or Sunday. "Canadian Agent" shall mean the Bank of Montreal in its capacity as agent for the Canadian Lenders to the extent and in the manner provided in the Credit Agreement evidencing the Canadian Facility. "Canadian Commitment" means the commitment of the Canadian Lenders to make revolving credit loans and obligations under banker's acceptance to Arch Canada pursuant to the Canadian -7- Facility in an aggregate principal amount at any one time outstanding not to exceed $________________, as of the Closing Date. "Canadian Facility" means that certain Credit Agreement, dated the date hereof, by and between Arch Canada and the Canadian Lenders and any and all notes, mortgages, deeds of trust, security agreements, pledge agreements, financing statements, guaranties and other agreements, documents and instruments ever delivered pursuant to or in connection therewith, and all future renewals, extensions, or restatements of, or amendments, modifications or supplements to, all or any part of the foregoing. "Canadian Lenders" shall mean Bank of Montreal for itself and as agent for the other banks or financial institutions who are parties to the Credit Agreement evidencing the Canadian Facility. "Closing Date" shall mean the date of this Loan Agreement as set forth in the preamble hereof. "Collateral Documents" shall have the meaning assigned to it in Section ------- 5.1(c) hereof. - ------ "Commitment" shall have the meaning assigned to it in Section 2.1(a) -------------- hereof. "Consequential Loss" shall, with respect to Borrower's payment of all or any portion of the then-outstanding principal amount of a Bank's Eurodollar Advance on a day other than the last day of the Interest Period related thereto, mean any loss, cost or expense incurred by such Bank as a result of the timing of such payment or in redepositing such principal amount, including the sum of (i) the interest which, but for such payment, such Bank would have earned in respect of such principal amount so paid, for the remainder of the Interest Period applicable to such sum, reduced, if such Bank is able to redeposit such principal amount so paid for the balance of such Interest Period, by the interest earned by such Bank as a result of so redepositing such principal amount plus (ii) any expense or penalty incurred by such Bank on redepositing ---- such principal amount. "Consolidated Borrowing Base" shall have the meaning assigned to it in Section 4.1(b) hereof. - -------------- "Conversion Date" shall have the meaning assigned to it in Section ------- 2.1(c)(iii). - ----------- "Default Rate" shall have the meaning assigned to it in Section 3.1(a)(iii) ------------------- hereof. "Determination Date" shall mean each November 1 and May 1 during the term of the Loan. "Dollars" and the sign "$" shall mean lawful currency of the United States of America. "Environmental Laws" shall mean (a) the following federal laws as they may be cited, referenced and amended from time to time: the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Water Pollution Control Act, the Environmental Pesticides Act, the -8- Comprehensive Environmental Response, Compensation and Liability Act, the Endangered Species Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the Hazardous Materials Transportation Act, the Superfund Amendments and Reauthorization Act, and the Toxic Substances Control Act; (b) any and all equivalent environmental statutes of any state in which Mortgaged Properties are situated, as they may be cited, referenced and amended from time to time; (c) any so-called federal, state or local "Superfund" or "Superlien" statute, (d) any rules or regulations promulgated under or adopted pursuant to the above federal and state laws; and (e) any other equivalent federal, state or local statute or any requirement, rule, regulation, code, ordinance or order adopted pursuant thereto, including, without limitation, those relating to the generation, transportation, treatment, storage, recycling, disposal, handling or release of hazardous substances. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, together with all regulations issued pursuant thereto. "Event of Default" shall have the meaning assigned to it in Article 9 --------- hereof. "Eurodollar Advance" shall mean any principal amount under a Note with respect to which the interest rate is calculated by reference to the Adjusted Interbank Rate for a particular Interest Period. "Eurodollar Borrowing" shall mean any Borrowing composed of Eurodollar Advances. "Eurodollar Business Day" shall mean a Business Day on which dealings in Dollars are carried out in the London interbank market. "Eurodollar Reserve Percentage" shall mean, for any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Eurodollar Advances is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "Existing Letter of Credit" shall have the meaning assigned to it in Section 2.1(d). - -------------- "Floating Base Advance" shall mean any principal amount under a Note with respect to which the interest rate is calculated by reference to the Floating Base Rate. "Floating Base Borrowing" shall mean any Borrowing composed of Floating Base Advances. "Floating Base Rate" shall mean, for any day, a rate per annum equal to the Base Rate for such day. -9- "Generally Accepted Accounting Principles" shall mean those generally accepted accounting principles and practices which are recognized as such by the American Institute of Certified Public Accountants acting through its Accounting Principles Board or by the Financial Accounting Standards Board or through other appropriate boards or committees thereof and which are consistently applied for all periods after the date hereof so as to properly reflect the financial condition, and the results of operations and changes in financial position, of Borrower. "Governmental Authority" shall mean any nation, country, commonwealth, territory, government, state, county, parish, municipality or other political subdivision and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Highest Lawful Rate" shall mean, as of any date, the highest non- usurious rate of interest then applicable to the Notes and the Loan; Banks hereby notify Borrower that, and discloses to Borrower that, for purposes of TEX. REV. CIV. STAT. ANN. Art, 5069-1.04, as it may from time to time be amended, the "applicable rate ceiling" shall be the indicated rate ceiling referred to in Art. 5069-1.04(a)(1), from time to time in effect, as limited by Art. 5069-1.04(b); provided however, that to the extent permitted by applicable law, Banks reserve the right to change the "applicable rate ceiling" from time to time by further notice and disclosure to Borrower; and, provided further, that the highest non-usurious rate of interest permitted by applicable law for purposes hereof shall not be limited to the applicable rate ceiling under Art. 5069-1.04 if federal laws or other state laws now or hereafter in effect and applicable to the Notes (and the interest contracted for, charged and collected thereunder) shall permit a higher rate of interest. "Indebtedness" with respect to any Person shall mean as of any date, all liabilities and contingent liabilities which would be reflected on a balance sheet and related notes thereto of such Person prepared as of such date in accordance with Generally Accepted Accounting Principles, including without limitation: (i) all obligations for money borrowed; (ii) all obligations under conditional sale or other title retention agreements and all obligations issued or assumed as full or partial payment for property, whether or not any such obligations represent obligations for borrowed money; (iii) all indebtedness secured by any lien existing on property owned or acquired by such Person subject to any such lien, whether or not the obligations secured thereby shall have been assumed; (iv) the proportionate share of such Person in all obligations, direct or indirect, to any joint venturer, partnership or other entity of which such Person is a member; (v) all obligations under guaranties, note purchase agreements and other documents having similar effect; (vi) all obligations for accounts payable or trade credit; (vii) indebtedness of any joint venture, partnership or other Person for which Borrower or any other Person is directly or indirectly liable; and (viii) all obligations under capital leases, operating leases or any other leases only to the extent such leases would be treated as indebtedness in accordance with Generally Accepted Accounting Principles. "Interbank Offered Rate" shall mean, with respect to each Interest Period, the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Business Days before the first day of such Interest -10- Period in an amount approximately equal to the principal amount of the Eurodollar Advance of such Reference Banks to which such Interest Period is to apply and for a period of time comparable to such Interest Period. "Interest Period" shall mean, with respect to a Eurodollar Advance, a period commencing: (i) on the borrowing date of such Eurodollar Advance made pursuant to Section 2.1(c) of this Loan Agreement; or -------------- (ii) on the Conversion Date pertaining to such Eurodollar Advance if such Eurodollar Advance is made pursuant to a conversion as described in Section ------- 2.1(c)(iii) hereof; or - ----------- (iii) on the date of borrowing specified in the Request for Borrowing in the case of a rollover to a successive Interest Period, and ending one, two, three or six months thereafter as Borrower shall elect in accordance with Section 2.1(c)(iii) of this Loan Agreement; provided, that: ------------------- (A) any Interest Period which would otherwise end on a day which is not a Business Day (or in the case of a Eurodollar Advance, a Eurodollar Business Day) shall be extended to the next succeeding Business Day or Eurodollar Business Day (as the case may be) unless, in the case of a Eurodollar ------ Advance, such Eurodollar Business Day falls in another calendar month in which case such Interest Period shall end on the next preceding Eurodollar Business Day; (B) in the case of a Eurodollar Advance, any Interest Period which begins on the last Eurodollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month or at the end of such Interest Period) shall, subject to clause (A) above, end on the last Eurodollar Business Day of a calendar month; or (C) if the Interest Period for any Eurodollar Advance would otherwise end after the Maturity Date, such Interest Period shall end on the Maturity Date. "Letter of Credit" shall mean any letter of credit issued by any Bank to Borrower pursuant to Section 2.1(d) hereof. -------------- "Lien" shall mean any lien, mortgage, security interest, tax lien, pledge or encumbrance, or conditional sale or title retention arrangement, or any other interest in property securing the repayment of Indebtedness, whether arising by agreement or under any statute or law, or otherwise, "Loan" shall mean the Revolving Credit Loans. "Loan Agreement" shall mean this Third Restated Revolving Credit Loan Agreement, together with all amendments and modifications hereof and supplements and attachments hereto. -11- "Loan Documents" shall mean this Loan Agreement, the Notes (including any renewals, extensions, modifications and refundings thereof) and the Collateral Documents (and any amendments or supplements thereto or modifications of any of the foregoing) and any agreements or documents executed or delivered pursuant to the terms of this Loan Agreement, the Notes or of the other Loan Documents. "Maturity Date" shall mean May 1, 1997. "Maximum Commitment" shall mean the sum of (i) the Canadian Commitment, plus (ii) the Commitment. - ---- "Mortgaged Properties" shall have the meaning assigned to it in Section ------- 5.1(a) hereof. - ------ "Net Income" shall have the meaning assigned to it in Section 8.2(n) -------------- hereof, as calculated in the manner shown on Borrower's statement of operations. "Net Worth" means the total shareholder equity of Borrower and its Subsidiaries as shown on the consolidated balance sheet of Borrower and its Subsidiaries, including its exchangeable convertible preferred stock. "New Collateral Properties" has the meaning assigned to it in Section 4.3. ----------- "Notes" shall mean the Revolving Promissory Notes executed by Borrower and delivered to Banks pursuant to the terms of this Loan Agreement, together with any renewals, extensions or modifications thereof. "Note" shall mean any of the Notes. "Obligation" shall mean all present and future Indebtedness, obligations and liabilities of Borrower to Banks, or any of them, and all renewals and extensions thereof, or any part thereof, and all interest accruing thereon, and attorneys' fees incurred in the enforcement or collection thereof, regardless of whether such Indebtedness, obligations and liabilities are direct, indirect, fixed, contingent, matured or unmatured. "Onyx Loan Agreement" shall mean that certain Term Loan Agreement dated March 30, 1994 among the Onyx Subsidiaries and Bank of Scotland. "Onyx Subsidiaries" shall mean, collectively, Onyx Pipeline Company, L.C., a Texas limited liability company, Onyx Gathering Company, L.C., a Texas limited liability company, and Onyx Gas Marketing Company, a Texas limited liability company. "PBGC" shall mean the Pension Benefit Guaranty Corporation, and any successor to all or any of the Pension Benefit Guaranty Corporation's functions under ERISA. "Permitted Liens" shall mean, as of any date: (i) liens granted to Banks to secure the Obligation; (ii) pledges or deposits made to secure payment of worker's compensation (or to -12- participate in any fund in connection with worker's compensation), unemployment insurance, pensions or social security programs; (iii) contractual liens for the benefit of operators; (iv) liens imposed by mandatory provisions of law such as for materialmens, mechanic's, warehousemen's and other like liens arising in the ordinary course of business, only to the extent such liens are subordinate to all liens and security interests of Banks; (v) liens for taxes, assessments and governmental charges or levies imposed upon a Person or upon such Person's income or profits or property, if the same are not yet due and payable or if the same are being contested in good faith and as to which adequate reserves have been provided; (vi) good faith deposits in connection with tenders, leases, real estate bids or contracts (other than contracts involving the borrowing of money), pledges or deposits to secure public or statutory obligations, deposits to secure (or in lieu of) surety, stay, appeal or customs bonds and deposits to secure the payment of taxes, assessments, customs duties or other similar charges; (vii) encumbrances consisting of zoning restrictions, easements, or other restrictions on the use of real property, provided that such do not impair the use of real property for the uses intended, and none of which is violated in any material respect by existing or proposed structures or land use; (viii) the terms and provisions of the leases, assignments, unit agreements and other agreements listed, identified or referred to in the Collateral Documents; (ix) the terms and provisions of the assignments and other title transfer documents under which Borrower acquired the Mortgaged Properties including any right retained by a predecessor in title of Borrower to purchase hydrocarbons produced therefrom; (x) that certain Conveyance of Production Payment dated December 1, 1992 from Arch to Cactus Funding Corporation, covering certain Properties of Arch located in Winkler County, Texas; (xi) any Liens created under that certain Purchase and Sale Agreement dated November 24, 1992 between Arch and Enron Reserve Acquisition Corp.; (xii) the Liens granted to Bank of Scotland to secure the Arch (Onyx) Guaranty; (xiii) the Liens granted to the Agent, Canadian Agent or the Canadian Lenders to secure the Arch (Canadian) Guaranty, and (xiv) any other liens or encumbrances to which Banks agree in writing that their Lien shall be subject. "Percentage" shall mean the following: (A) The initial Percentage of each Bank as of the Closing Date (based upon the Borrowing Base Allocation Certificate delivered by Borrower to Agent at the Closing Date) is as follows: Bank Percentage ---- ---------- Bank of Montreal ___________% Bank of Scotland ___________% Bank One, Texas, N.A. ____________% (B) Upon each designation by Borrower of the Allocated Borrowing Base according to Section 4.1(c) hereof, the Percentage of each -------------- Bank, effective as of the effective date of the designated Allocated Borrowing Base, shall be -13- determined as follows: (i) Bank of Montreal. ---------------- (a) If the Allocated Borrowing Base is less than $30,000,000, the Percentage of Bank of Montreal shall be (i) ($10,000,000 minus ----- the amount by which the Borrowing Base exceeds the Allocated Borrowing Base) divided by (ii) the Allocated Borrowing Base; ---------- or (b) If the Allocated Borrowing Base is greater than $30,000,000, the Percentage of Bank of Montreal shall be: (i) ($10,000,000 plus the amount by which the Allocated Borrowing Base exceeds ---- the Borrowing Base) divided by (ii) the Allocated Borrowing ---------- Base. (ii) Bank of Scotland. The Percentage of Bank of Scotland shall be 20% ---------------- times (100% minus the Percentage of Bank of Montreal). - ----- ----- (iii) Bank One, Texas, N.A. The Percentage of Bank One, Texas, N.A. --------------------- shall be 80% times (100% minus the Percentage of Bank of Montreal). ----- ----- The Percentage of each Bank as determined according to subpart (B) above shall remain in effect until the Allocated Borrowing Base is subsequently designated by Borrower according to Section 2.1(c), whereupon the Percentage of each Bank -------------- shall be redetermined according to subpart (B) above. "Plan" shall mean an employee benefit plan or other plan maintained by Borrower for employees of Borrower and covered by Title IV of ERISA, or subject to the minimum funding standards under Section 412 of the Internal Revenue Code of 1954, as amended. "Pledged Shares" shall have the meaning assigned to it in Section 5.1(c). -------------- "Prior Loan Agreement" shall mean that certain Second Restated Revolving Credit Loan Agreement dated March 31, 1994 by and between Borrower and Agent, which restates a prior Restated Revolving Credit Loan Agreement between Arch and Agent dated May 1, 1991, as amended by (i) that certain First Amendment to Second Restated Revolving Credit Loan Agreement dated August 24, 1994 between Borrower and Agent, (ii) that certain Second Amendment to Second Restated Revolving Credit Loan Agreement and to Revolving Promissory Note dated December 30, 1994 between Borrower and Agent, (iii) that certain Second Amendment to Second Restated Revolving Credit Loan Agreement dated May 1, 1995 between Borrower and Agent; and (iv) that certain Third Amendment to Second Restated Revolving Credit Loan Agreement dated September 27, 1995, between Borrower and Agent. "Person" shall mean an individual, corporation, partnership, trust or unincorporated organization, or a government or any agency, or political subdivision thereof. -14- "Property" means any interest in any kind of property or asset. "Proved Developed Producing Reserves" shall have the meaning assigned to that term by the Society of Petroleum Engineers, as it may be amended from time to time, but generally shall mean the subcategory of "Proved Developed Reserves" (as defined by the Society of Petroleum Engineers) which are recoverable by natural reservoir energies from the completion intervals currently open and producing to market. 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 Producing Reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response through existing completions producing to market that increased recovery will be achieved. Proved Developed Producing Reserves shall not include any Proved Developed Non-Producing Reserves. "Proved Developed Non-Producing Reserves" shall have the meaning assigned to that term by the Society of Petroleum Engineers, as it may be amended from time to time, but generally shall mean the subcategory of "Proved Developed Reserves" (as defined by the Society of Petroleum Engineers) which will become "Proved Developed Producing Reserves" upon minor capital expenditures being made with respect to existing wells which will cause formerly non-producing completions or intervals to become open and producing to market. "Proved Undeveloped Reserves" shall have the meaning assigned to that term by the Society of Petroleum Engineers, as it may be amended from time to time, but generally shall mean those 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. Proved Undeveloped Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved Undeveloped 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. "Reference Banks" shall mean Bank One, Texas, N.A. and Bank of Montreal, and with respect to a Eurodollar Borrowing, Reference Banks shall refer to the principal London office, if any, of any Reference Bank. "Reportable Event" shall have the meaning assigned to that term in Title IV of ERISA. "Revolving Credit Loans" shall have the meaning assigned to it in Section ------- 2.1(a) hereof. - ------ "Revolving Period" shall have the meaning assigned to it in Section 2.1(a) -------------- "Request for Borrowing" shall have the meaning assigned to it in Section ------- 2.1(c)(i). - --------- -15- "Rollover Notice" shall have the meaning assigned to it in Section ------- 2.1(c)(iii) hereof. - ----------- "Subsidiary" shall mean Arch Canada, the Onyx Subsidiaries and any other corporation or limited liability company fifty percent (50%) or more of the voting shares or membership interests of which is owned, directly or indirectly, by Borrower. 1.2. Other Definitional Provisions. ----------------------------- (a) All terms defined in this Loan Agreement shall have the above-defined meanings when used in any Loan Document, certificate, report or other document made or delivered pursuant to this Loan Agreement, unless the context therein shall otherwise require. (b) Defined terms used in the singular shall import the plural and vice ---- versa. - ----- (c) The words "hereof," "herein," "hereunder " and similar terms when used in this Loan Agreement shall refer to this Loan Agreement as a whole and not to any particular provision of this Loan Agreement. -16- ARTICLE 2. THE REVOLVING LOAN 2.1. Revolving Loan. -------------- (a) Revolving Loan Commitment. Subject to the terms and conditions of ------------------------- this Loan Agreement, each Bank severally agrees to extend to Borrower, from the date hereof through May 1, 1997 (the "Revolving Period"), a revolving line of credit which shall not exceed at any one time outstanding the Commitment (herein so called); provided, however, that the Banks agreement to extend a revolving line of credit hereunder may be increased to an amount not to exceed the Allocated Borrowing Base according to Sections 2.1(b) and 4.1(c) hereof. The -------------------------- initial Commitment hereunder shall be the sum of $30,000,000. Within the limits of this Section 2.1(a), during the Revolving Period, Borrower may borrow up to -------------- the Commitment (or the Allocated Borrowing Base if Section 2.1(b) is in effect), -------------- prepay pursuant to Section 3.3(a) hereof and reborrow up to the Commitment (or -------------- the Allocated Borrowing Base if Section 2.1(b) is in effect) under this Section -------------- ------- 2.1(a). Each Borrowing pursuant to this Section 2.1(a) shall be funded ratably - ------ -------------- by Banks in proportion to their respective Percentages. Each advance made by a Bank hereunder is herein called an "Advance"; all Advances made by a Bank hereunder are herein collectively called a "Revolving Credit Loan"; the aggregate unpaid principal balance of all Advances made by Banks hereunder are herein collectively called the "Revolving Credit Loans"; and the combined Advances made by Banks on any given day are herein collectively called a "Borrowing". During the term of the Loan, the Commitment at any time outstanding shall never exceed the Allocated Borrowing Base then in effect, but in no event shall the Allocated Borrowing Base exceed the Maximum Commitment. The initial Commitment shall be subject to reduction or increase from time to time to an amount equal to the applicable Allocated Borrowing Base as the Borrowing Base may be redetermined from time to time as set forth in Section 4.4 ----------- hereof or as the Adjusted Borrowing Base may be designated from time to time by Borrower as set forth in Section 4.1(c) hereof and the Commitment is reallocated -------------- according to Section 2.1(b). During the term of the Loan, the Maximum -------------- Commitment may be increased to an amount which Banks shall approve in writing following a request from Borrower for such increase according to Section 4.5 ----------- hereof, but the Maximum Commitment shall never exceed the sum of $50,000,000 plus the Canadian Commitment. (b) Reallocation of Commitment. So long as no Event of Default has -------------------------- occurred and is continuing, Borrower may reallocate all or any portion of the Canadian Commitment to the Commitment, or reallocate all or any portion of the Commitment to the Canadian Commitment, by executing and delivering to Agent a Borrowing Base Allocation Certificate, whereupon Banks shall be bound by and entitled to the benefits of this Agreement with respect to the full amount of the Commitment after giving effect to such reallocation. Each reallocation pursuant to this Section 2.1(b) shall be made contemporaneously with Borrower's -------------- designation of the Allocated Borrowing Base according to Section 4.1(c) hereof; -------------- provided, however, that (i) any reallocation of the Canadian Commitment and the - -------- ------- Commitment shall not increase the Commitment above the Maximum Commitment or the Allocated Borrowing Base, and (ii) the sum of the Canadian Commitment plus the Commitment shall at all times equal the Maximum Commitment and shall never exceed the -17- Consolidated Borrowing Base. The amount derived by allocating any portion of the Canadian Commitment to the Commitment or any portion of the Commitment to the Canadian Commitment shall be deemed the Commitment then in effect under this Loan Agreement. (c) Manner of Borrowing. ------------------- (i) Request for Borrowing. Each request by Borrower to Agent for --------------------- an Advance or Borrowing under Section 2.1 hereof (a "Request for Borrowing") ----------- shall specify the aggregate amount of such requested Advance or Borrowing, the requested date of such Advance or Borrowing, and, when the Request for Borrowing specifies a Eurodollar Borrowing, the Interest Period which shall be applicable thereto; provided, however, that the total number of Eurodollar Borrowings with Interest Periods ending on different dates which may be outstanding at any time shall never exceed six (6). Borrower shall furnish to Agent the Request for Borrowing at least three (3) Eurodollar Business Days prior to the requested Eurodollar Borrowing date (which must be a Eurodollar Business Day). A Floating Base Borrowing may be made the same date on which a Request for Borrowing is received by Agent. Any such Request for Borrowing shall be in the form attached hereto as Exhibit "A". Each Advance or Borrowing shall be in an aggregate minimum principal amount of $500,000 or any integral multiple of $100,000. Any Request for Borrowing received by Agent after 12:00 noon (Fort Worth, Texas time) on any Business Day shall be deemed to have been received on the next succeeding Business Day. After receiving a Request for Borrowing in the manner provided herein, Agent shall promptly notify each Bank by telephone (confirmed immediately by telex, telecopy or cable), telecopy, telex or cable of the amount of the Advance or Borrowing and such Bank's pro rata share of such Advance or Borrowing, the date on which the Advance or Borrowing is to be made, the interest option selected and, if applicable, the Interest Period selected. (ii) Funding. Each Bank shall, before 1:00 P.M. (Fort Worth, Texas ------- time) on the date of such Advance or Borrowing specified in the notice received from Agent pursuant to Section 2.1(c)(i) above, deposit such Bank's ratable ----------------- portion of such Advance or Borrowing in immediately available funds to an account maintained by Agent as designated by Agent. Upon fulfillment of all applicable conditions set forth herein and after receipt by the Agent of such funds, Agent shall pay or deliver such proceeds to or upon the order of Borrower at the principal office of Agent in immediately available funds. The failure of any Bank to make any Advance required to be made by it hereunder shall not relieve any other Bank of its obligation to make its Advance hereunder. If any Bank shall fail to provide its ratable portion of such funds and if all conditions to such Borrowing shall have apparently been satisfied, Agent will make available such funds as shall have been received by it from the other Banks, in accordance with this Section 2.1(c)(ii). Neither Agent nor any Bank ------------------ shall be responsible for the performance by any other Bank of its obligations hereunder. In the event of any failure by a Bank to make an Advance required hereunder, the other Banks may (but shall not be required to) purchase (on a pro rata basis, according to their respective Percentages) such Bank's Note. Upon the failure of a Bank to make an Advance required to be made by it hereunder, Agent may, in its sole discretion, attempt to obtain one or more banks, acceptable to Banks, to replace such Bank, but neither Agent nor any other Bank shall have any liability or obligation whatsoever as a result of the failure to obtain a replacement for such Bank. -18- Unless Agent shall have received notice from a Bank prior to the date of any Advance or Borrowing that such Bank will not make available to Agent such Bank's ratable portion of such Advance or Borrowing, Agent may assume that such Bank has made such portion available to Agent on the date of such Borrowing in accordance with Section 2.1(c)(ii) and Agent may, in reliance upon such ------------------ assumption, make available to or on behalf of Borrower on such date a corresponding amount. If and to the extent such Bank shall not have so made such ratable portion available to Agent, such Bank and Borrower severally agree to repay to Agent forthwith on demand such corresponding amount, for each day from the date such amount is made available to or on behalf of Borrower until the date such amount is repaid to Agent, at the rate per annum equal to the rate applicable to the Advance or Borrowing in question. If such Bank shall repay to Agent such corresponding amount, such amount so repaid shall constitute such Bank's Advance as part of such Borrowing for purposes of this Loan Agreement. (iii) Selection of Interest Option. Upon making a Request for ---------------------------- Borrowing under Section 2.1(c)(i) hereof, Borrower shall advise Agent as to ----------------- whether the Advance or Borrowing shall be (i) a Eurodollar Borrowing, in which case Borrower shall specify the applicable Interest Period therefor, or (ii) a Floating Base Borrowing. At least two (2) Business Days or Eurodollar Business Days, as the case may be, prior to the termination of each Interest Period with respect to a Eurodollar Borrowing (whether such termination occurs before or after the Maturity Date) Borrower shall give Agent written notice (the "Rollover Notice") of the interest option which shall be applicable to such Borrowing upon the expiration of such Interest Period. If Borrower shall specify that such Borrowing shall be a Eurodollar Borrowing, such Rollover Notice shall also specify the length of the succeeding Interest Period selected by Borrower with respect to such Advance. Each Rollover Notice shall be irrevocable and effective upon notification thereof to Agent. If the required Rollover Notice shall not have been timely received by Agent prior to the expiration of the then-relevant Interest Period, then Borrower shall be deemed to have elected to have such Borrowing be a Floating Base Borrowing. With respect to any Floating Base Borrowing, Borrower shall have the right, on any Business Day or Eurodollar Business Day as the case may be (a "Conversion Date") to convert such Floating Base Borrowing to a Eurodollar Borrowing, by giving Agent a Rollover Notice of such selection at least two (2) Business Days or Eurodollar Business Days, as the case may be, prior to such Conversion Date. Notwithstanding anything to the contrary contained herein, Borrower shall have no right to request a Eurodollar Borrowing if the interest rate applicable thereto under Section 3.1(a)(ii) hereof would exceed the Highest ------------------ Lawful Rate in effect on the first day of the Interest Period applicable to such Eurodollar Borrowing. (d) Letters of Credit. On the terms and conditions hereinafter set ----------------- forth, Agent or any other issuing Bank shall from time to time during the period beginning on the Closing Date and ending on the Maturity Date upon request of Borrower issue standby and/or commercial letters of credit for the account of Borrower (the "Letters of Credit") in such face amounts as Borrower may request. As of the Closing Date, the Agent has one (1) Letter of Credit in the face amount of $_________________ issued and outstanding for the account of Borrower (the "Existing Letter of Credit"). The Existing Letter of Credit shall continue in existence and shall be deemed by the -19- Borrower, Banks and Agent to be issued under the provisions of this Section 2.1(d) for all purposes and shall be a "Letter of Credit" as such term is defined herein. The face amount of all Letters of Credit issued and outstanding hereunder shall be considered as Advances under Section 2.1(a) hereof and all -------------- payments made by Agent (or by another issuing Bank) on such Letters of Credit shall be considered as Advances under the Notes. Each Letter of Credit issued for the account of Borrower hereunder shall (i) be in favor of such beneficiaries as specifically requested by Borrower, (ii) have an expiration date not exceeding the Maturity Date, and (iii) contain such other terms and provisions as may be required by Agent or the issuing Bank. Each Bank (other than the issuing Bank) agrees that, upon issuance of any Letter of Credit hereunder, it shall automatically acquire a participation in the issuing Bank's liability under such Letter of Credit in an amount equal to such Bank's Percentage of such liability, and each Bank (other than the issuing Bank) thereby shall absolutely, unconditionally and irrevocably assumes, as primary obligor and not as surety, and shall be unconditionally obligated to the issuing Bank to pay and discharge when due, its Percentage of the issuing Bank's liability under such Letter of Credit. Borrower hereby unconditionally agrees to pay and reimburse the Agent for account of the issuing Bank for the amount of each demand for payment under any Letter of Credit that is in substantial compliance with the provisions of any such Letter of Credit at or prior to the date on which payment is to be made by the issuing Bank to the beneficiary thereunder, without presentment, demand, protest or other formalities of any kind. Upon receipt from any beneficiary of any Letter of Credit of any demand for payment under such Letter of Credit, the issuing Bank shall promptly notify Borrower (through the Agent) of the demand and the date upon which such payment is to be made by the issuing Bank to such beneficiary in respect of such demand. Forthwith upon receipt of such notice from the issuing Bank, Borrower shall advise the Agent whether it intends to borrow hereunder to finance its obligations to reimburse the issuing Bank, and if so, submit a Request for Borrowing as provided in Section 2.1(c)(i) hereof. ----------------- (e) Procedure for Obtaining Letters of Credit. The amount and date of ----------------------------------------- issuance, renewal, extension or reissuance of a Letter of Credit pursuant to the Banks' commitment above in Section 2.1(d) shall be designated by Borrower's -------------- written request delivered to Agent at least three (3) Business Days prior to the date of such issuance, renewal, extension or reissuance. Concurrently with or promptly following the delivery of the request for a Letter of Credit, Borrower shall execute and deliver to the Agent (or other issuing Bank) an application and agreement with respect to the Letters of Credit, said application and agreement to be in the form used by the Agent (or other issuing Bank). The Agent (or other issuing Bank) shall not be obligated to issue, renew, extend or reissue such Letters of Credit if the amount thereof when added to the principal amount of the Loan then outstanding would exceed the Allocated Borrowing Base then in effect. 2.2. Use of Advance Proceeds. ----------------------- (a) Initial Advance. An initial Advance shall be made to Borrower on --------------- the date hereof to refinance all outstanding indebtedness due under the Prior Loan Agreement. (b) Subsequent Advances. The proceeds of any subsequent Advance may ------------------- be used by Borrower to acquire additional oil and gas properties and/or to fund expenditures to drill or recomplete oil and/or gas wells on Borrower's oil and gas properties and for other general corporate -20- purposes. If the proceeds of any subsequent Advance are used to acquire additional oil and gas properties, Borrower shall execute and deliver to Agent, Collateral Documents which grant to Banks a valid, enforceable, and first priority Lien (subject to Permitted Liens) in the properties as provided in Section 5.1. Those properties will thereafter be deemed included as Mortgaged - ----------- Properties. Loan proceeds may be used by Borrower to acquire its own shares of Common Stock for its treasury, provided that the aggregate of the Loan proceeds utilized to acquire such shares and Borrower's earnings, cash or other consideration paid by Borrower for its shares does not exceed $1,000,000 in the aggregate during any consecutive twelve month period. Loan proceeds may be used by Borrower to fund any Letters of Credit issued pursuant to Section 2.1(d) -------------- hereof by any Bank for the benefit of Borrower, in which case the face amount of the Letter of Credit so issued shall be deemed an Advance hereunder. The amount of credit available under the Commitment shall be reduced by the face amount of such Letter of Credit. 2.3. Notes Evidencing Loan. The Loan and each Advance thereunder --------------------- shall be evidenced by a Revolving Promissory Note executed by Borrower and payable to the order of each Bank (herein collectively called, together with any renewals, refundings, extensions and modifications thereof, the "Notes" and each of them a "Note") which Notes shall (i) be dated the date hereof, (ii) be in the amount of such Bank's initial Percentage of $50,000,000, (iii) be payable to the order of such Bank at the office of Agent, (iv) bear interest in accordance with Section 3.1 hereof, and (v) be in the form of Exhibit "B" attached hereto with - ----------- blanks appropriately completed in conformity herewith. The Notes shall renew and extend in their entirety the outstanding indebtedness evidenced by the Prior Loan Agreement. Notwithstanding the principal amount of any Note as stated in the face thereof, the amount of principal actually owing on such Note at any given time shall be the aggregate of all Advances theretofore made by such Bank to Borrower hereunder (plus the face amount of all outstanding letters of credit issued by such Bank for the benefit of Borrower), less all payments of principal thereon theretofore actually received hereunder by such Bank, provided that the aggregate amount of principal at any one time outstanding under the Notes shall never exceed the Commitment then in effect. Each Bank is authorized, but is not required, to endorse on the schedule attached to its Note appropriate notations evidencing the date and amount of each Advance as well as the amount of each payment made by Borrower thereunder. 2.4. Fees. ---- (a) Commitment Fee. In addition to the payments provided for in -------------- Sections 3.3 and 3.4 hereof, Borrower shall pay to Agent, for the account of all - ------------ --- Banks, on the first day of each July, October, January, and April hereafter, commencing April 1, 1996, a commitment fee at the rate of one-half of one percent (0.50%) per annum on the average daily amount of the Commitment which was unused during the three month period ending on each such date. Borrower and Banks acknowledge and agree that the commitment fees payable hereunder are bona fide commitment fees and are intended as reasonable compensation to Banks for committing to make funds available to Borrower as described herein and for no other purpose. (b) Consolidated Borrowing Base Increase Fee. Upon each increase to ---------------------------------------- the Consolidated Borrowing Base made pursuant to Section 4.5 herein, Borrower ----------- shall pay to Agent, for the account -21- of all Banks, a fee equal to 3/8 of 1% (0.375%) of the increase to the Consolidated Borrowing Base (as redetermined pursuant to Section 4.5 herein) ----------- over the Consolidated Borrowing Base that is then in effect, such fee to be proportionately reduced by the amount of the Consolidated Borrowing Base that is allocated to the Allocated Borrowing Base designated by Borrower upon each increase to the Consolidated Borrowing Base. (c) Consolidated Borrowing Base Redetermination Fee. Pursuant to ----------------------------------------------- Section 4.5 hereof, should Borrower request a discretionary redetermination of - ----------- the then existing Consolidated Borrowing Base, Borrower shall pay to Agent, for the account of all Banks, a fee of $5,000 as reasonable compensation to Banks for conducting such redetermination of the Consolidated Borrowing Base. (d) Amendment Fee. For each amendment to this Loan Agreement that is ------------- requested by Borrower which amends, modifies or changes a material or significant term or provision of this Loan Agreement, Borrower shall pay to Agent, for the account of all Banks, an amendment fee equal to $5,000. On the date hereof, Borrower shall pay to Agent, for the account of all Banks, an amendment fee in the amount of $__________________ for the amendment of the Prior Loan Agreement as amended and restated by this Loan Agreement. (e) Letter of Credit Fee. For each letter of credit which is issued -------------------- to Borrower, Borrower shall pay the Bank issuing such letter of credit a fee of $250 plus one percent (1%) of the face amount of the letter of credit. (f) Agency Fee. Borrower shall pay to Agent such fees and other ---------- amounts as Borrower shall be required to pay to Agent from time to time pursuant to any separate agreement between Borrower and Agent setting forth the compensation to be paid to Agent in consideration for acting as Agent hereunder. Such fees and other amounts shall be retained by Agent for its own account, and no Bank (other than Agent) shall have any interest therein. 2.5. Annual Review of Loan. Prior to December 31, 1996, Banks and --------------------- Borrower shall review the Loan and Borrower's performance hereunder, and Banks and Borrower may, at that time, mutually agree to extend the Revolving Period until May 1, 1998. Thereafter, Banks and Borrower shall review the Loan and Borrower's performance hereunder prior to April 1 of each succeeding year and, at the time of each such review, Banks and Borrower may mutually agree to extend the Revolving Period for one additional year, provided that no Event of Default, or event which with notice or lapse of time or both could become an Event of Default, has occurred and is continuing. If, at the time of any of the above- described reviews of the Loan, Banks and Borrower do not mutually agree to extend the Revolving Period of the Loan then the Revolving Period shall not be extended and the unpaid balance of the Notes shall be due and payable in full at the termination of the Revolving Period. If Banks and Borrower mutually agree to extend the Revolving Period, then the Maturity Date shall likewise be extended until the termination of the extended Revolving Period. Banks shall have no obligation whatsoever to extend the Revolving Period. 2.6 Amendment and Restatement of Prior Loan Agreement. This Loan ------------------------------------------------- Agreement -22- amends, restates and supersedes in its entirety the Prior Loan Agreement. Further, the Indebtedness and Obligation of Borrower to Agent as evidenced by the Prior Loan Agreement and any notes executed thereunder, are hereby renewed and extended by the Indebtedness and Obligation of Borrower under this Loan Agreement, the Notes and the other Loan Documents. ARTICLE 3. NOTE PAYMENTS 3.1. Interest on the Notes. --------------------- (a) Interest Rate. ------------- (i) Floating Base Advances. The unpaid principal balance of each ---------------------- Floating Base Advances made under the Notes shall bear interest from the date of advance until paid at a rate per annum which shall from day to day be equal to the lesser of (A) the Highest Lawful Rate, or (B) the Base Rate. (ii) Eurodollar Advances. The unpaid principal balance of each -------------------- Eurodollar Advance made under the Notes shall bear interest from the date of advance until paid at a rate per annum which shall from day to day be equal to the lesser of (A) the Adjusted InterBank Rate for the Interest Period in effect plus (i) one and three-fourths percent (1-3/4%) if the Borrowing Base Percentage - ---- is less than or equal to 25%, (2) two percent (2%) if the Borrowing Base Percentage is more than 25% but less than or equal to 50%, (3) two and one- fourth percent (2-1/4%) if the Borrowing Base Percentage is more than 50% but less than or equal to 75%, or (4) two and one-half percent (2-1/2%) if the Borrowing Base Percentage is greater than 75% or (B) the Highest Lawful Rate. Provided, however, if the Borrowing Base Percentage shall change from the ranges set forth in sub-clauses (1), (2), (3) and (4) above during the Interest Period in effect, then the rate of interest shall be the rate of interest set forth for the applicable range beginning with the day that there is a change in such range of the Borrowing Base Percentage, with subsequent changes in the rate of interest to occur if there are subsequent changes in the ranges of the Borrowing Base Percentage as set forth above, effective as of the date of such change in range. (iii) Default Rate. Provided, however, if any principal of, or ------------- interest on, the Notes is not paid when due, then (in lieu of the interest rate provided above) such past due principal and interest shall bear interest at a rate per annum equal to the lesser of (a) the Base Rate plus five percent (5%), or (b) the Highest Lawful Rate ("the Default Rate"). (b) Limitation on Rate, If at any time and from time to time the rate ------------------ of interest calculated pursuant to Section 3.1(a)(i) or (ii) hereof would cause ------------------------- the interest payable on the Notes to be limited to the Highest Lawful Rate as provided in Section 3.1(a)(i) or (ii) hereof, then any subsequent reduction in ------------------------- the rate specified in Section 3.1(a)(i) or (ii) hereof shall not reduce the rate ------------------------- of interest payable on the Notes below the Highest Lawful Rate until the total amount of interest accrued on the Notes from and after the date hereof equals the amount of interest which would have accrued -23- thereon if the rate specified in Section 3.1(a)(i) or (ii) hereof had at all ------------------------- times been in effect. 3.2. Principal Payments. The unpaid principal amount of the Notes, ------------------ and all accrued but unpaid interest thereon, shall be due and payable on the Maturity Date. 3.3 Prepayments. ----------- (a) Optional Prepayments. Borrower may, without premium or penalty, -------------------- prepay the principal of the Notes then outstanding, in whole or in part, at any time or from time to time; provided, however, that if Borrower prepays any part of the Notes that is represented by a Eurodollar Borrowing prior to the end of the Interest Period applicable to such Eurodollar Lending, Borrower shall also pay all Consequential Losses resulting therefrom; provided, further however, that each prepayment of less than the full outstanding principal balance of the Notes shall be in an amount equal to $100,000 or integral multiples of $100,000 or such lesser amount as Banks agree. (b) Mandatory Prepayments. Unless Borrower executes and delivers --------------------- Collateral Documents covering New Collateral Properties as more particularly set forth in Section 4.3 hereof, Borrower shall make a mandatory prepayment of ----------- principal of the Notes in an amount equal to any Borrowing Base Deficiency within thirty (30) days following the Agent's notice thereof. 3.4. Payment of Interest on the Notes. Interest on the unpaid principal -------------------------------- amount of each Floating Base Advance under the Notes shall be payable monthly as it accrues on the first Business Day of each monthly period hereafter commencing March 1, 1996, and at the Maturity Date. Interest on the unpaid principal amount of each Eurodollar Advance under the Notes shall be payable on the last day of each Interest Period applicable to such Advance or, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. At least three (3) Business Days prior to the due date of any interest payment due hereunder Agent will provide Borrower with written notice setting forth the amount of interest due on such due date, which amount shall be conclusively presumed to be the actual interest due on such date. If Banks or Borrower subsequently determine that the interest amount set forth in Agent's notice is miscalculated, resulting in an underpayment or overpayment of interest due, such party shall provide the other party with written notice of such miscalculation and the amount of underpayment or overpayment resulting therefrom. If such miscalculation results in an underpayment of interest, Borrower shall pay Banks such underpayment of interest within five (5) Business Days following its receipt of such notice of such underpayment. If such miscalculation results in an overpayment of interest due, then Banks shall either refund such overpayment within five (5) Business Days following its receipt of such notice of overpayment or Banks shall credit such overpayment against the next ensuing interest payment due to Banks. 3.5. Calculation of Interest Rates. Interest on the unpaid principal ----------------------------- of the Notes shall be calculated on the basis of a 360-day year. 3.6. Manner and Application of Payments. All payments of principal ---------------------------------- of, and interest on, the Notes to Banks shall be made by Borrower to Agent, for the account of all Banks, before 2:00 -24- p.m. (Fort Worth time), in Federal or other immediately available funds at Agent's principal banking office in Fort Worth. Whenever any payment to be made under this Agreement or the Notes shall be stated to be due and payable on a day other than a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest and the commitment fee, as the case may be; provided, however, in the case of a Eurodollar Advance, if the result of such extension would be to extend such payment to another calendar month, such payment shall be made on the immediately preceding Business Day. To the extent that no Event of Default exists when any payment is made, all payments made on the Notes shall be credited, to the extent of the amount thereof, in the following manner: (i) first to fees, costs and expenses which Borrower agrees to pay under the Loan Documents for which Borrower has received an invoice no later than five (5) days prior to such payment; (ii) second, against the amount of interest accrued and unpaid on the Notes as of the date of such payment; (iii) third, against all principal (if any) due and owing on the Notes as of the date of such payment; (iv) fourth, as a prepayment of any outstanding Floating Base Advances made on the Notes; (v) fifth, as a prepayment of any outstanding Eurodollar Advances made under the Notes and (vi) sixth, as a prepayment of any remaining Obligation. Subject to the foregoing, payments and prepayments of principal of the Notes shall be applied to such outstanding Floating Base Borrowings and Eurodollar Borrowings under such Notes as Borrower shall select; provided, however, that Borrower shall select Floating Base Borrowings and Eurodollar Borrowings to be repaid in a manner designated to minimize the Consequential Loss, if any, resulting from such payments; and provided further that, if Borrower shall fail to select the Floating Base Borrowings and Eurodollar Borrowings to which such payments are to be applied, or if an Event of Default has occurred and is continuing at the time of such payment, then Agent shall be entitled to apply the payment to such Floating Base Borrowings and Eurodollar Borrowings in the manner it shall deem appropriate or as otherwise provided in any intercreditor agreement between Banks and the Canadian Lenders. ARTICLE 4. BORROWING BASE DETERMINATIONS 4.1. Components for Determination of Borrowing Base. ----------------------------------------------- (a) The Borrowing Base. The term "Borrowing Base" shall mean the ------------------ designated loan value established by Agent at its sole discretion and assigned to the Mortgaged Properties, as redetermined from time to time pursuant to the terms hereof, and shall be based upon pertinent economic variables selected by Agent at its sole discretion which evaluate the discounted present value of future net income accruing to the Mortgaged Properties. In determining the Borrowing Base, Agent shall use such combination of Proved Developed Producing Reserves, Proved Developed Non-Producing Reserves, and/or Proved Undeveloped Reserves attributable to the Mortgaged Properties as it deems proper at their sole discretion. The initial Borrowing Base is $30,000,000. (b) Consolidated Borrowing Base. The term "Consolidated Borrowing --------------------------- Base" shall mean the designated loan value jointly agreed to by Banks and the Canadian Lenders after taking into -25- account the aggregate sum of (i) the Borrowing Base as redetermined by Agent --- from time to time pursuant to the terms of Section 4.1(a) hereof plus (ii) the -------------- ---- designated loan value established by the Canadian Agent and assigned to the assets of Arch Canada pursuant to the Credit Agreement evidencing the Canadian Facility, as redetermined from time to time pursuant to such Credit Agreement. The initial Consolidated Borrowing Base is $__________________. (c) Allocated Borrowing Base. Not more than once each calendar ------------------------ quarter, Borrower, at its sole discretion, shall designate (pursuant to a "Borrowing Base Allocation Certificate" in the form attached hereto as Exhibit "C") to Agent that portion of the Consolidated Borrowing Base that will be allocated to the Commitment (that portion of the Consolidated Borrowing Base allocated to the Commitment from time to time is herein called the "Allocated Borrowing Base"), provided however, that the Allocated Borrowing Base shall never be less than the Commitment then in effect. The effective date of each Allocated Borrowing Base shall be the date that Agent receives Borrower's Borrowing Base Allocation Certificate designating the Allocated Borrowing Base. Upon Borrower's designation of the Allocated Borrowing Base, the Commitment shall be contemporaneously reallocated and adjusted to the amount of such Allocated Borrowing Base as provided in Section 2.1(b). Notwithstanding the -------------- foregoing quarterly limitation on Borrower's designation of the Allocated Borrowing Base, Borrower shall designate the Allocated Borrowing Base upon each redetermination of the Borrowing Base according to Section 4.2 or 4.3 hereof or ------------------ if Borrower sells or disposes any Mortgaged Properties for net consideration of $___________ or more; provided, further, Borrower may designate the Allocated Borrowing Base at any time and from time to time during the existence of a Borrowing Base Deficiency. 4.2. Mandatory Redeterminations of Borrowing Base. -------------------------------------------- (a) Semi-Annual Redetermination of Borrowing Base. Borrower's --------------------------------------------- Borrowing Base shall be redetermined as of each Determination Date during the term of the Loan. As of each Determination Date, Agent shall determine at its sole discretion the Borrowing Base based upon the information contained in the most recent annual reserve report required to be delivered to Agent pursuant to Section 8.1(d) hereof and/or such economic variables and production information - -------------- that Agent has available to it at such time. Agent shall provide Borrower with notice of the redetermined Borrowing Base and resulting Consolidated Borrowing Base that has been agreed to by the Banks and the Canadian Lender within thirty (30) days following the applicable Determination Date. Within (___) days after Borrower's receipt of the notice of the redetermined Borrowing Base and Consolidated Borrowing Base, Borrower shall designate the Allocated Borrowing Base. (b) Revised Field Rules. There shall be a mandatory redetermination ------------------- of the Borrowing Base at any time if the Railroad Commission of the State of Texas should impose any modifications, revisions, alterations or amendments to its existing field rules for the Keystone Ellenburger Field, Winkler County, Texas and, as a result, there is a material change in the allowable for, or rates of production from, Borrower's Mortgaged Properties located in the Keystone Ellenburger Field, Winkler County, Texas. Upon such event, Agent shall determine at its sole discretion the Borrowing Base based upon the information contained in the most recent annual reserve report required to be delivered to Agent pursuant to Section 8.1(d) or such other economic variables and production -------------- -26- information that Agent has available at such time, taking into account any actual or anticipated changes in the allowable or rates of production respecting the Mortgaged Properties located in the Keystone Ellenburger Field, Winkler County, Texas. Agent shall provide Borrower with notice of the redetermined Borrowing Base and the resulting Consolidated Borrowing Base that has been agreed to by the Banks and the Canadian Lender within 30 days following such mandatory redetermination. Within (___) days after Borrower's receipt of the notice of the redetermined Borrowing Base and Consolidated Borrowing Base, Borrower shall designate the Allocated Borrowing Base. 4.3. Borrowing Base Deficiency. If, as of any Determination Date, or ------------------------- following a mandatory redetermination of the Borrowing Base as provided in Section 4.2(b), the Allocated Borrowing Base (as designated by Borrower) is less than the unpaid principal amount of the Notes as of the date of such Borrowing Base redetermination (the amount by which the unpaid principal balance of the Notes exceeds the designated Allocated Borrowing Base is herein called a "Borrowing Base Deficiency"), then Agent shall provide Borrower with written notice of such Borrowing Base Deficiency, which notice shall set forth the amount of the Borrowing Base Deficiency. Within thirty (30) days following Borrower's receipt of such notice, Borrower shall remedy the Borrowing Base Deficiency by either (i) designating an Allocated Borrowing Base that exceeds the unpaid principal balance of the Notes, (ii) paying to Banks as a mandatory prepayment of principal under Section 3.3(b) hereof an amount equal to the -------------- Borrowing Base Deficiency, (iii) executing and delivering to Agent such Collateral Documents which will grant to Banks a valid, enforceable and first priority Lien (subject to Permitted Liens) in such additional oil and gas properties of Borrower (herein called "New Collateral Properties") which have a present value of Proved Developed Producing Reserves attributable to such New Collateral Properties which is not less than two times the amount of the Borrowing Base Deficiency, or (iv) providing a combination of subclauses (i) and (iii) above which in their aggregate equal the Borrowing Base Deficiency. In the event that Borrower elects (in whole or in part) to remedy the Borrowing Base Deficiency by providing Bank with Collateral Documents granting a Lien against the New Collateral Properties, Borrower shall also deliver along with such Collateral Documents (i) a reserve report covering the New Collateral Properties prepared by a petroleum engineering firm acceptable to Agent, using parameters set forth in Regulation S-X 210.4-10 of the Securities and Exchange Commission and reflecting that the present value of the Proved Developed Producing Reserves attributable to such New Collateral Properties is not less than two times the Borrowing Base Deficiency (less the amount of principal payment made, if any, on account of such Borrowing Base Deficiency) and (ii) title opinions, title reports and other title information satisfactory to Agent indicating that Borrower has good and defensible title to the New Collateral Properties, subject to Permitted Liens. An Event of Default shall exist if Borrower fails to remedy the Borrowing Base Deficiency within thirty (30) days of its receipt of notice thereof in such manner as provided above. 4.4. Reduction to Commitment. If, as of any Determination Date, or ----------------------- following a mandatory redetermination of the Borrowing Base as provided in Section 4.2(b) hereof, or following any designation by Borrower of the Allocated - -------------- Borrowing Base as provided in Section 4.1(c) the Allocated Borrowing Base (as -------------- redetermined) is less than the Allocated Borrowing Base that was previously in effect, then the Commitment shall be reduced to an amount equal to the redetermined -27- Allocated Borrowing Base. 4.5 Special Provisions for Discretionary Increase to the Maximum ------------------------------------------------------------ Commitment. ----------- (a) In addition to its designating the Allocated Borrowing Base, not more than once during any consecutive 90-day period, Borrower may request that the Consolidated Borrowing Base be redetermined and that the Maximum Commitment be increased to an amount agreed to by Banks and the Canadian Lenders after taking into account the redetermined Borrowing Base plus the Canadian Commitment ---- then in effect. Borrower shall give Agent not less than thirty (30) Business Day's prior notice of the effective date of the requested increase to the Maximum Commitment. (b) With each request to increase to the Maximum Commitment hereunder, Borrower shall deliver to Agent a report prepared within 180 days prior to the date of such request by a firm or firms of independent petroleum engineers acceptable to Agent, in accordance with customary standards and procedures of the petroleum industry, or such other engineering or reserve report reasonably acceptable to Agent. The report shall evaluate the reserves attributable to the oil and gas properties of Borrower which Borrower proposes to include in the Borrowing Base for the purpose of increasing the Maximum Commitment (such properties are herein called the "Additional Properties"), and which such evaluation shall include, without limitation, a description of reserves which relate to the Additional Properties, net revenue interests and working interests attributable to such reserves, rates of production, gross revenues, operating expenses, ad valorem taxes, projected capital expenditures necessary to cause the Additional Properties to achieve the rates of production set forth in the reserve report, net revenues and present value of future net revenues attributable to such reserves and production therefrom, and a statement of the assumptions upon which such determinations were made. (c) Banks shall use every reasonable effort to notify Borrower within 30 Business Days after the receipt of such engineering reports and title information relating to such Additional Properties whether Banks will increase the Maximum Commitment, and if so, the amount of the Maximum Commitment as increased. If the Maximum Commitment is increased, the Borrowing Base shall be redetermined and the Allocated Borrowing Base shall be designated to an amount that does not exceed the Maximum Commitment, as increased. Banks are under no obligation to increase the Commitment unless Banks elects to do so, and any increase shall be at the sole and absolute discretion of Banks. If Banks elect to increase the Maximum Commitment, the increase to the Maximum Commitment shall be effective as of the date upon which Borrower executes and delivers to Bank appropriate documents reflecting an appropriate amendment to this Loan Agreement and Collateral Documents which will grant to Bank a valid, enforceable and first priority Lien (subject to Permitted Liens) against the Additional Properties as security for the Loan. -28- ARTICLE 5. SECURITY 5.1. Liens on Mortgaged Properties, ----------------------------- (a) Mortgaged Properties. As security for the performance by Borrower -------------------- of the Notes and the Obligation of Borrower hereunder, Borrower has previously granted to Agent (subject to Permitted Liens) as security for the Indebtedness under the Prior Loan Agreement a valid, enforceable, perfected, first priority and the only Lien in Borrower's interests in certain oil and gas Properties located in various counties and states, and in related accounts, wells, pipes, personal property and fixtures (herein called the "Mortgaged Properties") as shown by mortgages, deeds of trust and other documents previously executed by Borrower and delivered to Bank according to the Prior Loan Agreement or other loan agreements which have been amended by the Prior Loan Agreement. In the event that Additional Properties and/or New Collateral Properties are pledged to Banks as security for the Notes pursuant to Sections 2.2, 4.3 or 4.5 hereof, ------------------------ then such Properties shall be deemed to be Mortgaged Properties. At all times, the Mortgaged Properties shall consist of Properties of Borrower containing not less than ninety percent (90%) of the Proved Developed Producing Reserves of Borrower utilized to establish the Borrowing Base then in effect. (b) Onyx Subsidiaries Properties. As additional security for the ---------------------------- performance by Borrower of the Notes and Obligation of Borrower hereunder, Borrower has caused the Onyx Subsidiaries to grant to Bank a valid, enforceable, perfected, second priority lien (being secondary, inferior and subject to the Lien and security interest of Bank of Scotland granted to secure the indebtedness, liabilities and obligations of the Onyx Subsidiaries under the Onyx Loan Agreement) in the properties of the Onyx Subsidiaries that are described or referred to as "Mortgaged Properties" in the Onyx Loan Agreement, provided however that such Lien secures the Obligation and the Notes only to the extent of (i) the amounts or proceeds paid by Arch to Bank of Scotland under the Arch (Onyx) Guaranty and/or (ii) the amounts or proceeds paid or allocable to the Bank of Scotland upon foreclosure of any of the Mortgaged Properties or Bank's exercise of any rights or remedies under the Collateral Documents and such amounts or proceeds are attributable to the Arch (Onyx) Guaranty or are applied by Bank of Scotland towards repayment of the indebtedness due under the Onyx Loan Agreement. Notwithstanding anything herein or in the Notes to the contrary, it is specifically provided that none of the Onyx Subsidiaries or any member thereof shall have personal, partnership, or corporate liability for the payment of the Obligations of Borrower hereunder or under the Notes or be liable for a money judgment or otherwise hereunder or under the Notes. (c) Pledge of Arch Canada Stock. As additional security for the --------------------------- performance by Borrower or the Notes and Obligation of Borrower hereunder, API shall grant to Agent (or the Canadian Lender) on behalf of all Banks a valid, enforceable, perfected, first priority Lien in 66 2/3% of the shares of common stock of Arch Canada (the "Pledged Shares"), together with the stock certificates evidencing such shares and stock powers executed in blank. (d) Collateral Documents. All Liens on the Mortgaged Properties, -------------------- Additional Properties, -29- New Collateral Properties, the Pledged Shares and the second lien on the properties of the Onyx Subsidiaries have been or shall be granted pursuant to, and more fully described in, mortgages, pledge agreements, deeds of trust, assignments of production, assignments of notes and liens, financing statements, pledge agreements, stock powers, and other documents (including appropriate amendments to the mortgages and deeds of trust covering the Mortgaged Properties that were executed and delivered pursuant to the Prior Loan Agreement and the second lien of the properties of the Onyx Subsidiaries to reflect that such mortgages and deeds of trust secure payment of the Notes and that all such Liens are held by Agent (or the Canadian Agent) as collateral agent for all Banks) in form and substance satisfactory to Agent and which have been or will be executed by Borrower (and the Onyx Subsidiaries) in favor of Banks (herein called the "Collateral Documents"). 5.2 Arch (Onyx) Guaranty. The Collateral Documents shall also secure -------------------- Arch's obligations to Bank of Scotland arising under the Arch (Onyx) Guaranty. Borrower and Banks hereby acknowledge and agree that the obligations of Arch under the Arch (Onyx) Guaranty shall be pari passu (on a pro rata basis) with the Obligations of Borrower under this Loan Agreement. 5.3 Arch (Canadian) Guaranty. The Collateral Documents shall also ------------------------ secure Arch's obligations to the Canadian Lenders arising under the Arch (Canadian) Guaranty. Borrower and Banks hereby acknowledge and agree that the obligations of Arch under the Arch (Canada) Guaranty shall be pari passu (on a pro rata basis) with the Obligations of Borrower under this Loan Agreement. ARTICLE 6. CONDITIONS PRECEDENT 6.1 Conditions Precedent to Loan and Initial Advance. The obligations ------------------------------------------------ of Banks under this agreement are subject to the condition precedent that Borrower shall have executed and/or delivered to Agent or Banks, as appropriate, all of the following (in such quantities as may be requested by Agent), each dated or effective as of the appropriate date thereof, in form and substance satisfactory to Agent: (a) Notes. A duly executed Note of each Bank, in the form of Exhibit "B" ----- attached hereto with appropriate insertions. (b) Loan Agreement. This Loan Agreement. -------------- (c) Certificate. A certificate from the chief financial officer of ----------- each of Arch and APC that Arch and APC are not in default under the Prior Loan Agreement. (d) Resolution. A copy of a resolution of the board of directors of ---------- each of Arch and APC approving each of Arch's and APC's execution of this Loan Agreement, the Notes and the other Loan Documents, with a certificate of the Secretary of each of Arch and APC that the copy is a true and correct copy of the resolution and that such resolution has not been amended or rescinded and -30- remains in full force and effect. (e) Collateral Documents. Collateral Documents covering the Mortgaged -------------------- Properties and the second lien against the properties of the Onyx Subsidiaries. (f) Canadian Facility/Arch (Canadian) Guaranty. A true and correct ------------------------------------------ copy of the Loan Agreement evidencing Canadian Facility and the Arch (Canadian) Guaranty. 6.2 Conditions Precedent to All Advances. The obligation of Banks to ------------------------------------ make any Advance shall be subject to the following conditions precedent: (a) No Defaults. As of the date of the making of such Advance, there ----------- exists no Event of Default or event which with notice or lapse of time or both could constitute an Event of Default. (b) Compliance with Loan Agreement. Borrower shall have performed and ------------------------------ complied with all covenants, agreements and conditions contained herein which are required to be performed or complied with by Borrower before or at the date of such Advance. (c) Representations and Warranties. The representations and warranties ------------------------------ contained in Article 7 hereof shall be true in all respects on the date of --------- making of such Advance, with the same force and effect as though made on and as of that date. ARTICLE 7. REPRESENTATIONS AND WARRANTIES To induce Banks to enter into this Loan Agreement and to make any Advances hereunder, Borrower represents and warrants to Banks that: (a) Organization and Qualification of Borrower. Each Borrower is a ------------------------------------------ corporation duly organized and validly existing under the laws of the State of Delaware and has all corporate power and authority required to own its property and carry on its business as presently conducted and proposed to be conducted. Each Borrower is duly qualified or licensed to do business in each state where the Mortgaged Properties are located and in each jurisdiction where the nature of the business in which it is engaged makes such qualification or licensing necessary. (b) Authorization and Power of Borrower. Each Borrower has the ----------------------------------- corporate power and requisite authority to execute, deliver and carry out the terms and provisions of the Loan Documents which it has executed, and all of the documents and instruments delivered pursuant to the terms of such Loan Documents, and has taken all corporate action necessary to duly authorize (i) the execution, delivery and performance by each Borrower of the terms and provisions of the Loan Documents which it has executed and (ii) the performance by each Borrower of its obligations under the Loan Documents, including without limitation the borrowing and repayment of money by Borrower under the Notes and the Loan Agreement. -31- (c) Conflicts. Neither the execution and delivery of the Loan --------- Documents, nor consummation of any of the transactions herein or therein contemplated, nor compliance with the terms and provisions hereof or with the terms and provisions thereof by Borrower, will contravene in any material respect any provision of law, statute, rule or regulation to which each Borrower is subject or any judgment, decree, license, order or permit applicable to each Borrower, or will conflict or will be inconsistent with, or will result in any material breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of any Lien (except liens in favor of Banks) upon any of the property or assets of Borrower pursuant to the terms of, any indenture, mortgage, deed of trust, agreement or other instrument to which each Borrower is a party or by which each Borrower may be bound, or to which each Borrower may be subject, or conflict with or contravene any provision of the articles of incorporation and/or bylaws of each Borrower. (d) Consents, Etc. No consent, approval, authorization or order of ------------- any court or governmental authority or third party is required in connection with the execution and delivery by Borrower of the Loan Documents it has executed or to consummate the transactions contemplated hereby or thereby. (e) Enforceable Obligations. The Loan Documents, when duly executed ----------------------- and delivered by Borrower with this Loan Agreement, will be legal and binding obligations of Borrower, enforceable in accordance with their respective terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors' rights. (f) Liens. The Liens granted to Banks pursuant to the Collateral ----- Documents are valid and enforceable first priority Liens securing the Notes and the Obligation applicable to such Collateral Documents, except for Permitted Liens. (g) Financial Condition. The financial statements and information of ------------------- Borrower and its Subsidiaries and all related notes to such financial statements which have been delivered to Agent or Banks pursuant to the terms hereof, fairly present the financial position (including all contingent liabilities) of Borrower as of the dates of such financial statements; no material adverse changes have occurred in the financial condition or business of Borrower since such dates. (h) Other Liabilities. As of the date hereof, there are no material ----------------- obligations, liabilities (including contingent and indirect liabilities and obligations), indebtedness or unusual forward or long-term commitments of Borrower, which have not been disclosed to Agent or Banks in writing prior to the date hereof. (i) No Event of Default. No event has occurred and is continuing ------------------- which constitutes an Event of Default or would, with the lapse of time or giving of notice or both, constitute an Event of Default. (j) Full Disclosure. There is no fact known to Borrower that has not --------------- been disclosed to Agent or Banks in writing which could materially adversely affect the properties, business, prospects -32- or condition (financial or otherwise) of Borrower. (k) Principal Office, etc. The principal office and principal place of --------------------- business of Borrower is in Fort Worth, Texas. (1) No Litigation. Except as previously disclosed in writing by ------------- Borrower to Agent or Banks, there are no actions, suits or legal, equitable, arbitration or administrative proceedings pending, or to the knowledge of Borrower threatened, against Borrower, in equity or before any federal, state, municipal or other governmental department, commission, body, bureau, agency or instrumentality, domestic or foreign which, if determined adversely to Borrower, would have a material adverse effect on the financial or other condition or business of Borrower, and there are no outstanding judgments, injunctions, writs, rulings or orders by any court or governmental body against Borrower. (m) Payment of Taxes. All federal income tax returns and all state ---------------- franchise tax returns required to be filed by Borrower in any jurisdiction have been filed, and no taxes, assessments, fees or other governmental charges upon Borrower or upon any of Borrower's properties, including without limitation the Mortgaged Properties, are delinquent. (n) Compliance with Laws and Regulations. Borrower is in material ------------------------------------ compliance with all statutes, laws, rules, regulations and orders pertaining to its ownership and/or operation of the Mortgaged Properties. (o) Mortgaged Properties. Subject to the Permitted Liens, Borrower -------------------- holds good and defensible title to each of the Mortgaged Properties; Borrower has granted to Banks to secure the Obligation a valid, enforceable, perfected, first priority and the only (except for Permitted Liens) Lien in not less than, and Borrower is entitled to receive not less than, that percentage of oil, gas and other hydrocarbons produced from the land covered by the leases pertaining to the Mortgaged Properties (after deduction of all royalties, overriding royalties and other interests payable from or measured by production) equal to the "net revenue interest" specified in the evaluation of such Mortgaged Properties in the most recent engineering and/or reserve report(s) covering such Mortgaged Properties which are delivered to Agent or Banks hereunder, with the term "net revenue interest" meaning the proportionate share of the production of oil, gas or other minerals to which Borrower is entitled after deduction of all royalties, overriding royalties and other interests payable from or measured by production; Borrower has granted to Banks to secure the Obligation a valid, enforceable, perfected, first priority and the only (except for permitted Liens) Lien in the "working interest" specified in the evaluation of such Mortgaged Properties in the most recent engineering report(s) and/or reserve reports covering such Mortgaged Properties which are delivered to Banks hereunder, with the term "working interest", as used herein, meaning the right to explore for, drill and produce oil, gas or other minerals; Borrower is not obligated to bear more than that percentage of the cost of all operations conducted on the Mortgaged Properties equal to the "working interest" as above described. (p) Environmental Matters. Borrower and any Mortgaged Properties are --------------------- not (i) in -33- violation of, in any material respect, any Environmental Laws, nor are there existing, pending or, to the best of Borrower's knowledge, threatened any investigation or inquiry by any Governmental Authority pursuant to any Environmental Laws, nor are there existing or pending any remedial obligations under any Environmental Laws, or (ii) subject to threatened investigation (other than those the outcome of which would not involve substantial fees, penalties or liability to Borrower) by any Governmental Authority pursuant to Environmental Laws, or any remedial obligation under Environmental Laws (other than remedial obligations that may be customary with respect to the operations or business of the Borrower or that do not involve substantial fines, penalties or liability on the part of the Borrower) and this representation will continue to be true and correct following disclosure to the applicable Governmental Authorities of all relevant facts, conditions and circumstances, if any, pertaining to Borrower or any Mortgaged Property. (q) ERISA. (a) No Reportable Event has occurred and is continuing ----- with respect to any Plan; (b) PBGC has not instituted proceedings to terminate any Plan; (c) neither Borrower, nor any duly-appointed administrator of a Plan (i) has incurred any liability to PBGC with respect to any Plan other than for premiums not yet due or payable or (ii) has instituted or intends to institute proceedings to terminate any Plan under Section 4041 or 4041A of ERISA or withdraw from any Multi-Employer Pension Plan (as that term is defined in Section 3(37) of ERISA); and (d) each Plan of Borrower has been maintained and funded in all material respects in accordance with its terms and with all provisions of ERISA applicable thereto. ARTICLE 8. BORROWER'S COVENANTS 8.1. Affirmative Covenants. So long as the Notes or any part thereof --------------------- is outstanding, and until payment in full of the Notes, the performance of the Obligation thereunder and the termination of the Banks' commitment, Borrower agrees that, unless Banks shall otherwise consent in writing: (a) Financial Statements and Reports of Borrower. Borrower shall -------------------------------------------- furnish to Agent: (i) as soon as available, but in any event within ninety (90) days after the end of each fiscal year of Borrower, commencing with the fiscal year ending December 31, 1995, a consolidated audited balance sheet of Borrower prepared as of the close of such fiscal year and audited statements of operations, changes in shareholders equity and statements of cash flows of Borrower for such year, in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail; such financial statements of Borrower shall be certified by an independent public accountant selected by Borrower and satisfactory to Agent; and (ii) within forty-five (45) days after the end of the first three fiscal quarters of each fiscal year of Borrower, commencing with the fiscal quarter ending March 31, 1996, consolidated unaudited financial information with respect to Borrower of the type described in item (i); such financial information and reports of Borrower specified in items (i) and (ii) to be accompanied by a quarterly certificate of compliance, in the form of Exhibit "D", executed by the chief financial officer of Borrower certifying that the attached financial statements are true and correct and have been prepared in accordance with Generally Accepted Accounting Principles, Borrower has complied with all of the terms and conditions of the -34- Loan Agreement, and no event has occurred which constitutes an Event of Default or would, with the lapse of time or giving of notice, or both, constitute an Event of Default. (b) Financial Statements and Reports of Onyx Subsidiaries. Borrower ----------------------------------------------------- shall furnish to Agent: (i) as soon as available, but in any event within ninety (90) days after the end of each fiscal year of the Onyx Subsidiaries, commencing with the fiscal year ending December 31, 1995, a consolidated audited balance sheet of the Onyx Subsidiaries prepared as of the close of such fiscal year and audited statements of operations, changes in members equity and statements of cash flows of the Onyx Subsidiaries for such year, in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail; such financial statements of the Onyx Subsidiaries shall be certified by an independent public accountant selected by the Onyx Subsidiaries and satisfactory to Agent; and (ii) within forty-five (45) days after the end of the first three fiscal quarters of each fiscal year of the Onyx Subsidiaries, commencing with the fiscal quarter ending March 31, 1996, consolidated unaudited financial information with respect to the Onyx Subsidiaries of the type described in item (i); and a statement setting forth the total volumes of gas, liquid hydrocarbons or products thereof sold by the Onyx Subsidiaries during the preceding fiscal quarter. (c) Financial Statements and Reports of Arch Canada. Borrower shall ----------------------------------------------- furnish to Agent on the identical dates prescribed in the Credit Agreement evidencing the Canadian Facility all financial statements and reports concerning Arch Canada that Arch Canada is required to provide to the Canadian Agent pursuant to such Credit Agreement. (d) Reserve and Production Reports. Borrower shall deliver to Agent ------------------------------ within ninety (90) days after the end of each fiscal year a reserve report, prepared as of the end of such fiscal year, by Ryder Scott and Associates or such firm or firms of independent petroleum engineers designated by Borrower and approved by Agent, evaluating the Mortgaged Properties and prepared in accordance with the customary standards and procedures of the petroleum industry (such evaluation shall include, without limitation, a description of reserves, rates of production, gross revenues, operating expenses, ad valorem taxes, capital costs, net revenues and the discounted present value of future net revenues attributable to the Proved Developed Producing Reserves, Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves and production therefrom and a statement of the assumptions upon which such determinations were made). (e) Payment of Taxes, etc. Borrower shall pay and discharge all --------------------- taxes, assessments, governmental charges, levies and all lawful claims which, if unpaid, might become a Lien or charge upon the Mortgaged Properties; provided, Borrower shall not be deemed in default if any such taxes, assessments, governmental charges, levies or claims are being contested by Borrower in good faith. (f) Insurance and Insurance Summaries. Borrower shall maintain on all --------------------------------- of its assets and properties, now owned or hereafter acquired, and with respect to its personal liability, insurance issued by responsible companies in such amounts and against such risks as it deems prudent. Within sixty (60) days after the end of each fiscal year of Borrower, Borrower shall deliver to Agent a summary of all insurance coverage maintained by Borrower, including a summary of the carriers of such insurance, the properties and risks insured, the amounts of such insurance and other information -35- regarding insurance coverage as is reasonably requested by Bank. (g) Operations and Properties. Borrower shall act prudently and in ------------------------- accordance with customary industry standards in managing or operating its assets, properties, business and investments, including without limitation the Mortgaged Properties; Borrower shall keep in good working order and condition, ordinary wear and tear excepted, all of its assets and properties which are necessary and material to the conduct of its business, including without limitation all wells and equipment necessary or useful in the operation of the Mortgaged Properties; provided, Borrower shall never be deemed obligated to rework, recomplete, redrill or otherwise maintain any well or production facility when, in Borrower's judgment, it would be imprudent or uneconomic to do so. (h) Amendments to Onyx Loan Agreement/Arch (Onyx) Guaranty. Promptly ------------------------------------------------------ after execution of same, Borrower shall provide to Agent true and correct copies of all amendments, supplements, modifications, renewals, extensions or rearrangements of the Onyx Loan Agreement and the Arch (Onyx) Guaranty. (i) Amendments to Canadian Facility/Arch (Canadian) Guaranty. -------------------------------------------------------- Promptly after execution of same, Borrower shall provide to Agent true and correct copies of all amendments, supplements, modifications, renewals, extensions or rearrangements of the Loan Agreement evidencing the Canadian Facility and the Arch (Canadian) Guaranty. (j) Compliance with Applicable Laws. Borrower shall comply with the ------------------------------- requirements of all applicable laws, rules, regulations and orders of any governmental authority, a breach of which could materially and adversely affect the business or credit of Borrower. (k) Litigation. Borrower shall give notice in writing to Agent of the ---------- commencement of, and any material determination in, all litigation and all proceedings before any governmental or regulatory agencies materially affecting Borrower. (l) Changes of Fact. Borrower shall notify Agent in writing of any --------------- change in any material fact or circumstance represented or warranted in this Loan Agreement or the other Loan Documents. (m) Maintenance of Rights. Borrower shall preserve and maintain all --------------------- of its rights, privileges and franchises necessary in the normal conduct of its business, and conduct its business in an orderly and efficient manner consistent with good business practices. (n) Maintenance and Granting of Liens, Mortgages and Security ------------------------------------------------ -------- Interests. Borrower shall execute and deliver to Agent all security agreements, - --------- pledge agreements, stock powers, financing statements, documents and instruments, and do such other things, as are required by Article 5 hereof, or --------- as Agent (or the Canadian Agent) shall reasonably request in order to maintain (subject to Permitted Liens) as valid, enforceable, perfected and first priority Liens, all Liens granted to Banks pursuant to this Loan Agreement. -36- (o) Notice of Default. Borrower shall furnish to Agent, upon becoming ----------------- aware of the existence of any condition or event constituting an Event of Default or any event which, with the lapse of time or giving of notice, or both, would constitute an Event of Default, a written notice specifying the nature and period of existence thereof and the action which Borrower is taking or proposes to take with respect thereto. (p) Compliance with Loan Documents. Borrower shall promptly comply ------------------------------ with any and all applicable covenants and provisions of the Loan Documents. (q) Compliance with Material Agreements. Borrower shall comply in all ----------------------------------- material respects with all material agreements, operating agreements, leases, or other documents binding on Borrower, or affecting its properties or business. (r) Books and Records; Inspection. Borrower and each of its ----------------------------- Subsidiaries shall at all times keep complete and accurate books, records and accounts of transactions, which records shall fairly present its financial position and results of operations; and Borrower shall, upon request by Agent, give any representative or agent of Agent or any Bank access during normal business hours to, and permit such representative to examine, copy or make excerpts from, any and all books, records and documents in the possession of Borrower relating to its or its Subsidiaries' affairs. (s) Agreements Affecting the Mortgaged Property. Borrower shall ------------------------------------------- deliver to Agent upon request by Agent copies of all material operating agreements, pooling or unitization agreements, sales or processing contracts, preferential purchase right agreements, drilling and/or development agreements, pipeline transportation agreements and other material agreements which pertain to the Mortgaged Properties, the operation thereof or the disposition of production attributable thereto. (t) Compliance with Covenants in Collateral Documents. In addition to ------------------------------------------------- the foregoing covenants, Borrower shall comply with all covenants contained in the Collateral Documents, and specifically those covenants dealing with the operation and maintenance of the Mortgaged Properties. (u) Other Notices. Borrower shall promptly notify Agent of (a) any ------------- default or claimed or asserted default under any agreement (including the Onyx Loan Agreement or the Canadian Facility), contract or other instrument to which Borrower is a party or by which any of its properties are bound, or any acceleration of the maturity of any Indebtedness of Borrower in an amount greater than $100,000, and (b) any adverse claim against or affecting Borrower or any of its properties which is in excess of $100,000. (v) Business Plan. Borrower shall furnish to Agent a five-year ------------- business plan within 90 days after the end of each of its fiscal years. The business plans shall contain in reasonable detail projections of revenue and expense, capital expenditures and management's goals and objectives and shall set forth the basis and assumptions utilized in the preparation thereof. The plans shall also include (i) in financial statement format, projected balance sheets, profit and loss statements and sources and uses of funds, and (ii) cash flow projections. -37- (w) Copies of Filings, Etc. Concurrently with transmission thereof, ----------------------- Borrower shall furnish to Agent copies of all financial statements, proxy statements and other statements and reports as Borrower or any Subsidiary sends to its stockholders or members, and copies of all registration statements and all regular, special or periodic reports which Borrower or any Subsidiary files, or any of its officers or directors file with respect to Borrower, any Subsidiary or their securities, with the Securities and Exchange Commission or with any securities exchange on which any of Borrower's securities or its Subsidiaries' securities are then listed, if any, and copies of all press releases and other statements made available generally by Borrower or any Subsidiary to the public concerning material developments in Borrower's or any Subsidiary's business. (x) Environmental. Borrower will provide to Agent copies of all ------------- notices received from or required to be made to (when sent) any Governmental Authority (other than notices routinely received or submitted in the ordinary course of business) relating to the release or threatened release of hazardous substances (as defined in any Environmental Law) by Borrower in connection with any of the Mortgaged Properties that is reportable under any Environmental Law now or hereafter in effect. Borrower agrees to indemnify and hold Banks harmless, from and against any and all fines, penalties, cleanup costs and assessments levied by any Governmental Authority, together with all claims, liabilities, causes of action, damages, costs and expenses (including attorneys' fees and court costs but excluding claims, liabilities, etc. arising out of the gross negligence or willful misconduct of Banks), now existing or hereafter arising, asserted against or incurred by any Bank arising out of or in connection with the presence, storage, discharge, use, disposal, transportation or remediation of any hazardous substances (as defined in any Environmental Law) on or about any of the Mortgaged Properties in violation of any Environmental Laws affecting any of the Mortgaged Properties. 8.2. Negative Covenants. So long as any Bank has any Commitment ------------------ hereunder or the Loan or any part thereof is outstanding and until payment in full of the Notes and the performance of the obligation, Borrower agrees that, unless Banks shall otherwise consent in writing: (a) Limitation on Liens. Borrower shall not create or suffer to exist ------------------- any Lien upon any of its oil and gas properties, except for Permitted Liens. (b) Limitation on Sale of Mortgaged Properties. Without the prior ------------------------------------------ approval of Banks, Borrower shall not sell, convey, exchange, lease or otherwise dispose of any of the Mortgaged Properties having an aggregate value in excess of $100,000, excluding obsolete or worn-out equipment and oil, gas and hydrocarbons sold in the ordinary course of Borrower's business. (c) Certain Transactions. With respect to the Mortgaged Properties, -------------------- Borrower shall not enter into any transaction with any Affiliate except for transactions with Affiliates upon terms not less favorable to Borrower than would be obtainable at the time in comparable transactions of Borrower in arm's length dealings with Persons other than Affiliates. (d) Place of Business. Borrower shall not move its principal place of ----------------- business or chief executive office without giving Agent written notice thereof. -38- (e) Limitation on Consolidation, Merger, Etc. Borrower shall not ----------------------------------------- consolidate with or merge into, or permit any Subsidiary to consolidate with or merge into, any other Person or permit any other Person to consolidate with or merge into it or any Subsidiary, or transfer, or permit any Subsidiary to transfer, all, or substantially all, of its Property. (f) Limitation on Investments and New Businesses. Borrower shall not -------------------------------------------- engage directly or indirectly in any new business or make any acquisitions, investments, or commitments, except such businesses, operations, acquisitions, or investments which are incidental to or reasonably related to the present businesses and operations conducted by Borrower or any Subsidiary and except (A) investment in obligations of the United States government or any agency thereof or obligations guaranteed by the United States government having a maturity not in excess of one year, (B) investments in certificates of deposit of financially sound commercial bank having a maturity not in excess of one year language, (C) investments in commercial paper with a rating of at least "Prime 1" according to Moody's Investors Service, Inc., or a similar rating of a comparable or successor service, having a maturity not in excess of one year. (g) Limitation on Credit Extensions. Borrower shall not extend credit, ------------------------------- credit, make advances or make loans to any Person or entity other than normal and prudent extensions of credit in the ordinary course of business, which extensions shall not be for longer periods than those extended by similar businesses operated in a normal and prudent manner; provided, however, that Borrower shall make no advances, loans or extensions of credit to or for the benefit of any of the Onyx Subsidiaries. (h) Fiscal Year. Borrower shall not change its fiscal year. ----------- (i) Certain Agreements. Borrower shall not enter into any agreement, ------------------ which by its terms would expressly restrict its performance of its obligations pursuant to this Loan Agreement. Further, Borrower shall not enter into any transaction with any of its officers, directors, employees or affiliates (as defined in Rule 405 under Securities Act of 1933, as now or later amended), except for agreements expressly contemplated by this Agreement and except for employment and compensation arrangements entered into on an arms-length basis and containing only reasonable and customary terms. (j) Dividends. Borrower shall not declare or pay or permit any --------- Subsidiary to declare or pay any dividends, other than stock dividends on Borrower's stock; provided, however, to the extent permitted under the Onyx Loan Agreement, the Onyx Subsidiaries may make distributions to their members in the amount of such members' income tax liabilities respecting their respective ownership interests in the Onyx Subsidiaries and, provided, further, so long as no Event of Default exists hereunder, Borrower may declare and pay dividends on the Exchangeable Convertible Preferred Stock that has been issued to Travelers Insurance Company. (k) Net Worth. Borrower shall not permit its Net Worth at the end of --------- each of any fiscal year to be less than $27,000,000. -39- (1) Limitation on Additional Indebtedness. Borrower shall not create, ------------------------------------- incur, assume or otherwise become or remain liable with respect to Indebtedness, except: (1) The Loan. (2) The Indebtedness shown on Borrower's balance sheet for the year ending December 31, 1995; (3) Trade payables not more than sixty (60) days past due; (4) The Arch (Onyx) Guaranty, provided, however, that, without the prior consent of Banks, Arch shall not agree to amend the Arch (Onyx) Guaranty if such amendment would cause the obligations of Arch (Onyx) under the Arch Guaranty to exceed the obligations of Arch under the Arch (Onyx) Guaranty as they exist as of the date hereof; (5) The Arch (Canadian) Guaranty; and (6) $5,000,000 Convertible Subordinated Notes held by Travelers Insurance Company (and affiliates thereof) and Connecticut General Life Insurance Company (and affiliates thereof). (m) Indebtedness to Net Worth Ratio. Borrower shall not permit the ------------------------------- ratio of the consolidated Indebtedness of Borrower and its Subsidiaries to Net Worth to be greater than 2.5:1. (n) Coverage Ratio. Borrower shall not permit the ratio of the -------------- consolidated Net Income of Borrower and its Subsidiaries divided by the total of consolidated interest and principal payments at any fiscal quarter end to be less than 1.0:1.0. "Net Income" means the consolidated net income of Borrower and its Subsidiaries before dividends on preferred stock calculated in the manner shown on its statements of operations plus the following categories of expense as shown on its statements of operations: (i) depreciation, depletion, and amortization expense ("D,D&A"), (ii) current and deferred income tax expense, and (iii) interest expense, less non-cash production payment revenues, calculated on a rolling twelve month basis. (o) Working Capital. Borrower shall not permit the ratio of the --------------- current consolidated assets of Borrower and its Subsidiaries to the current consolidated liabilities of Borrower and its Subsidiaries to be less than 0.9:1 at any time. ARTICLE 9. EVENTS OF DEFAULT 9.1. Event of Default. An "Event of Default" shall exist if any one ---------------- or more of the following events (herein called "Events of Default") shall occur: -40- (a) Failure of Payment. Borrower shall fail to pay or cause to be ------------------ paid when due (whether at stated maturity, by acceleration or otherwise) all or any part of the principal of or interest on the Notes executed hereunder or any other payment required hereunder or under the Loan Documents. (b) False Representation. Any material representation or warranty -------------------- made under the Loan Documents or in any certificate or statement furnished or made to Agent or any Bank pursuant hereto or in connection herewith, shall prove to be untrue in any material respect as of the date on which such representation or warranty is made. (c) Breach of Covenant. Any material default or breach shall occur in ------------------ the performance of any of the covenants or agreements of Borrower, contained herein or in any of the other Loan Documents. (d) Renunciation of Obligation. Borrower renounces its material -------------------------- obligations hereunder or under the Loan Documents, or any of the Loan Documents becomes or is declared invalid or unenforceable. (e) Bankruptcy. Borrower shall (1) apply for or consent to the ---------- appointment of a receiver, trustee, intervenor, custodian or liquidator of itself or of all or a substantial part of its assets, (2) file a voluntary petition in bankruptcy or admit in writing that it is unable to pay its debts as they become due, (3) make a general assignment for the benefit of creditors, (4) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, or (5) file an answer admitting the material allegations of or consent to or default in answering a petition filed against it in any bankruptcy, reorganization or insolvency proceeding, or action shall be taken by such Person for the purpose of effecting any of the foregoing. (f) Bankruptcy Orders, etc. An order, judgment or decree shall be ---------------------- entered by any court of competent jurisdiction or other competent authority approving a petition seeking reorganization of Borrower, an "order for relief" under applicable bankruptcy law, or appointing a receiver, trustee, intervenor, custodian, or liquidator of Borrower or of all or substantially all of its assets. (g) Default Under Other Documents. A material default shall occur ----------------------------- under any other loan agreement, credit agreement or note between Banks and Borrower or under any other collateral document executed by Borrower given to secure payment of Indebtedness owed to Banks by Borrower. (h) Liens Invalid. To a material extent, any of the Liens granted (or ------------- purported to be granted) to Bank pursuant to, or as described in, Article 5 hereof should become invalid or unenforceable or cease to be (subject to Permitted Liens) first priority Liens. (i) Judgments. Any judgment or judgments for the payment of money in --------- the aggregate excess of $100,000 shall be rendered against Borrower and such judgment or judgments shall not be satisfied or discharged at least ten (10) days prior to the date on which any of the assets of such Person could lawfully be sold to satisfy such judgment or judgments. -41- (j) Material Defaults. Borrower should fail to pay when due any ----------------- Indebtedness in the aggregate excess of $100,000 or should default in the performance of Borrower's material obligations under any promissory note, credit agreement, loan agreement or collateral document relating to or securing any such Indebtedness in the aggregate excess of $100,000. (k) Dissolution of Borrower. The occurrence of any event resulting in the ----------------------- dissolution of Borrower. (1) Borrowing Base Deficiency. Upon the occurrence of a Borrowing ------------------------- Base Deficiency, Borrower shall fail to remedy such Borrowing Base Deficiency in the manner and within the time set forth in Section 4.3 hereof. ----------- (m) Default Under Onyx Loan Agreement. A material default shall occur --------------------------------- under the Onyx Loan Agreement and such default is not cured or satisfied within the applicable cure period therefor as set forth in the Onyx Loan Agreement. (n) Default Under Canadian Facility. A material default shall occur ------------------------------- under the Loan Agreement evidencing the Canadian Facility and such default is not cured or satisfied within the applicable cure period therefor as set forth in such Loan Agreement. 9.2. Materiality. With respect to the Events of Default set forth in ----------- Sections 9.1 (b), (c), (d), (g), (h), (m) and (n) the term "material" shall mean - ------------------------------------------------- any event or occurrence which results or may result in a significant adverse effect upon the Borrower, the Mortgaged Properties, Borrower's title to the Mortgaged Properties or Borrower's ability to make payments on the Notes as they come due, or which has an adverse impact on Borrower or Borrower's interest in the Mortgaged Properties which is in excess of $100,000. 9.3. Notice of Event of Default. -------------------------- (a) Monetary Defaults. Upon Agent's or any Bank's becoming aware of ----------------- an Event of Default set forth in Section 9.1(a) hereof, Agent shall immediately -------------- send notice to Borrower of such Event of Default, which notice shall set forth the amount of the payment due from Borrower to Banks. As to an Event of Default for which notice is due under this Section 9.3(a), before pursuing any remedies -------------- to which it is entitled, Banks shall allow Borrower five (5) Business Days from the date of such notice to remedy or cure such Event of Default. (b) Certain Non-Monetary Defaults. Upon Agent's or any Bank's ----------------------------- becoming aware of any Event of Default set forth in Sections 9.1 (b), (c), (d), --------------------------- (g), (h), (i), or (j) hereof, Agent shall immediately send notice to Borrower of - ------------- --- such Event of Default, which notice shall sufficiently describe the circumstances giving rise to such Event of Default. As to such Events of Default for which notice is due under this Section 9.3(b), before pursuing any -------------- remedies to which it is entitled, Banks shall allow Borrower twenty (20) Business Days from the date of such notice within which to remedy or cure such Event of Default. Banks shall not be required to provide to Borrower any notice of any Events of Default set forth in Sections 9.1(e), (f), (k), (l), (m) or (n) ----------------------------------- --- prior to its -42- exercising its remedies. 9.4. Remedies Upon Event of Default. If an Event of Default shall have ------------------------------ occurred and remain uncured or unremedied after the applicable cure periods set forth in Section 9.3 hereof, then Banks may at their option, (i) terminate ----------- their Commitment and any obligations to make Advances hereunder, (ii) declare the principal of, and all interest then accrued on, the Notes and any other liabilities hereunder to be forthwith due and payable, whereupon the same shall forthwith become due and payable without presentment, demand, protest, notice of acceleration or intention to accelerate or other notice of any kind, all of which Borrower hereby expressly waives, anything contained herein or in the Notes to the contrary notwithstanding, (iii) reduce any claim to judgment, and/or (iv) pursue and enforce any of Banks' rights and remedies under the Loan Documents, or otherwise provided under or pursuant to any applicable law or agreement. In addition to the foregoing, the Obligation shall be deemed to be immediately and automatically accelerated upon the occurrence of any Event of Default specified in Sections 9.1(e) and (f) hereof. --------------- --- 9.5. Performance by Banks. Should Borrower fail to perform any -------------------- applicable covenant, duty or agreement contained herein or in any of the Loan Documents, Agent or Banks may, at their option, perform or attempt to perform such covenant, duty or agreement on behalf of such Person. In such event, Borrower shall, at the request of Agent, promptly pay any amount expended by Agent or Banks in such performance or attempted performance to Banks, together with interest thereon from the date of such expenditure until paid at the Default Rate. Notwithstanding the foregoing, it is expressly understood that neither Agent nor Banks assume, and shall never have, any liability or responsibility for the performance of any duties of Borrower or under any of the Loan Documents or other control over the management and affairs of Borrower. ARTICLE 10 YIELD PROTECTION; SPECIAL PROVISIONS FOR EURODOLLAR LOANS 10.1. Capital Adequacy. If, after the date hereof, any Bank shall ---------------- determine that either (i) the adoption of any applicable law, rule, regulation or guideline regarding capital adequacy and applicable to commercial banks or financial institutions generally or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or (ii) compliance by such Bank (or any lending office of such Bank) with any request or directive applicable to commercial banks or financial institutions generally regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency has or would have the effect of reducing the rate of return on such Bank's capital or the capital of such Bank's holding company as a consequence of its obligations hereunder to a level below that which such Bank could have achieved but for such adoption, change or compliance (taking into consideration such Bank's policies with respect to capital adequacy) by an amount reasonably deemed by such Bank to be material, then from time to time, within fifteen (15) days after demand by such Bank (with a copy to Agent), Borrower shall pay to such Bank such additional amount or amounts as will adequately compensate such Bank for such reduction. Each Bank will promptly notify Borrower and Agent of -43- any event of which it has actual knowledge, occurring after the date thereof, which will entitle such Bank to compensation pursuant to this Section 10.1. A ------------ certificate of such Bank claiming compensation under this Section 10.1 and ------------ setting forth the additional amount of amounts to be paid to it hereunder shall be conclusive in the absence of manifest error, and provided that such determination is made on a reasonable basis. 10.2. Special Provisions for Eurodollar Loans. ---------------------------------------- (a) Inadequacy of Eurodollar Loan Pricing. If, with respect to an ------------------------------------- Interest Period for any Eurodollar Borrowing: (i) Agent determines that, by reason of circumstances affecting the interbank eurodollar market generally, deposits in Dollars (in the applicable amounts) are not being offered to the Reference Banks in the interbank eurodollar market for such Interest Period, or (ii) Banks advise Agent that the InterBank Offered Rate as determined by Agent will not adequately and fairly reflect the cost to Banks of maintaining or funding the Eurodollar Borrowing for such Interest Period, then Agent shall forthwith give notice thereof to Borrower and Banks, whereupon until Agent notifies Borrower that the circumstances giving rise to such suspension no longer exist, (a) the obligation of Banks to make Eurodollar Advances shall be suspended and (b) Borrower shall either (i) repay in full the then-outstanding principal amount of the Eurodollar Borrowings, together with accrued interest thereon on the last day of the then-current Interest Period applicable to such Eurodollar Borrowings, or (ii) convert such Eurodollar Borrowings to Floating Base Borrowings in accordance with Section 2.1(c)(iii) of ------------------- this Loan Agreement on the last day of the then-current Interest Period applicable to each such Eurodollar Borrowing. (b) Illegality. If, after the date of this Loan Agreement, the ---------- adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank to make, maintain or fund its Eurodollar Advances, and such Bank shall so notify Agent, Agent shall forthwith give notice thereof to Banks and Borrower. Before giving any notice pursuant to this Subsection, such Bank shall designate a different Eurodollar lending office if such designation will avoid the need for giving such notice and will not be otherwise disadvantageous to any non-trivial extent to such Bank (as determined in good faith by such Bank). Upon receipt of such notice, Borrower shall either (i) repay in full the then outstanding principal amount of the Eurodollar Advance of such Bank, together with accrued interest thereon, or (ii) convert such Eurodollar Advance to a Floating Base Advance, on either (a) the last day of the then current Interest Period applicable to such Eurodollar Advance if such Bank may lawfully continue to maintain and fund such Eurodollar Advance to such day or (b) immediately if such Bank may not lawfully continue to fund and maintain such Eurodollar Advance to such day. -44- (c) Increased Costs for Eurodollar Loans. If any Governmental Authority, ------------------------------------ central bank or other comparable authority, shall at any time impose, modify or deem applicable any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System but excluding any reserve requirement included in the Eurodollar Reserve Requirement of such Bank), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank, or shall impose on any Bank (or its Eurodollar lending office) or the interbank eurodollar market any other condition affecting its Eurodollar Advances, the Notes or its obligation to make Eurodollar Advances; and the result of any of the foregoing is to increase the cost to such Bank of making or maintaining its Eurodollar Advances, or to reduce the amount of any sum received or receivable by such Bank under this Agreement, or under the Notes, by an amount deemed by such Bank to be material, then, within five (5) days after demand by such Bank (with a copy to Agent) Borrower shall pay to Agent, for the account of such Bank, such additional amount or amounts as will compensate such Bank for such increased cost or reduction. Each Bank will promptly notify Borrower and Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section 10.2(c). A certificate of any Bank --------------- claiming compensation under this Section 10.2(c) and setting forth the --------------- additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error and provided that such determination is made on a reasonable basis. If any Bank demands compensation under this Section, then Borrower may at any time, upon at least five (5) Business Days' prior notice to such Bank through Agent, either (i) repay in full the then outstanding Eurodollar Advances of such Bank, together with accrued interest thereon to the date of prepayment or (ii) convert such Eurodollar Advances to Floating Base Advances in accordance with the provisions of this Loan Agreement; provided, however, that Borrower shall be liable for any Consequential Loss arising pursuant to such actions. (d) Effect on Floating Base Loans. If notice has been given pursuant ----------------------------- to Section 10.2(b) or 10.2(c) requiring the Eurodollar Advances of any Bank to -------------------------- be repaid or converted, then unless and until such Bank notifies Borrower that the circumstances giving rise to such repayment no longer apply, all Advances shall be Floating Base Advances. If such Bank notifies Borrower that the circumstances giving rise to such repayment no longer apply, Borrower may thereafter select Advances to be Eurodollar Advances in accordance with Section ------- 2.1(c)(iii) of this Loan Agreement. - ----------- (e) Payments Not At End of Interest Period. If Borrower makes any -------------------------------------- payment of principal with respect to any Eurodollar Borrowing on any day other than the last day of an Interest Period applicable to such Eurodollar Borrowing, then Borrower shall reimburse each Bank on demand the Consequential Loss incurred by it as a result of the timing of such payment. A certificate of each Bank setting forth the basis for the determination of the amount of Consequential Loss shall be delivered to Borrower through Agent and shall, in the absence of manifest error, be conclusive and binding. Any conversion of a Eurodollar Borrowing to a Floating Base Borrowing on any day other than the last day of the Interest Period for such Eurodollar Borrowing shall be deemed a payment for purposes of this Section. ARTICLE 11. -45- THE AGENT AND THE BANKS. 11.1 Appointment and Authorization. Each Bank hereby appoints Agent ----------------------------- as its nominee and agent, in its name and on its behalf: (i) to act as nominee for and on behalf of such Bank in and under all Loan Documents; (ii) to arrange the means whereby the funds of Banks are to be made available to Borrower under the Loan Documents; (iii) to take such action as may be requested by any Bank under the Loan Documents (when such Bank is entitled to make such request under Loan Documents); (iv) to receive all documents and items to be furnished to Agent or Banks under the Loan Documents; (v) to be the secured party, mortgagee, beneficiary, and similar party in respect of, and to receive, as the case may be, any collateral for the benefit of Banks; (vi) to promptly distribute to each Bank all material information, requests, documents and items received from Borrower under the Loan Documents; (vii) to promptly distribute to each Bank such Bank's Percentage of each payment or prepayment (whether voluntary, as proceeds of insurance thereon, or otherwise) in accordance with the terms of the Loan Documents; and (viii) to deliver to the appropriate Persons requests, demands, approvals and consents received from Banks. With respect to its Commitments hereunder and the Notes issued to it, Agent and any successor Agent shall have the same rights under the Loan Documents as any other Bank and may exercise the same as though it were not the Agent; and the term "Bank" or "Banks" shall, unless otherwise expressly indicated, include Agent and any successor Agent in its capacity as a Bank. Agent and any successor Agent and its affiliates may accept deposits from, lend money to, act as trustee under indentures of and generally engage in any kind of business with Borrower, and any person which may do business with Borrower, all as if Agent and any successor Agent were not Agent hereunder and without any duty to account therefor to the Banks; provided that if any payments in respect of any property ------------- (or the proceeds thereof) now or hereafter in the possession or control of Agent which may be or become security for the obligations of Borrower arising under the Loan Documents by reason of the general description of indebtedness secured or of Property contained in any other agreements, documents or instruments related to any such other business shall be applied to reduction of the Obligations of Borrower arising under the Loan Documents, then each Bank shall be entitled to share in such application according to its Percentage thereof. Each Bank, upon request of any other Bank, shall disclose to all other Banks all indebtedness and liabilities, direct and contingent, of Borrower to such Bank as of the time of such request. 11.2 Note Holders. From time to time as other Banks become a party ------------ to this Agreement according to Section 12.10 the Agent shall obtain execution by ------------- Borrower of additional Notes in amounts representing the Commitment of each such new Bank. The obligation of such Bank shall be governed by the provisions of this Agreement, including but not limited to, the obligations specified in Section 2.1 hereof. From time to time, the Agent may require that the Banks - ----------- exchange their Notes for newly issued Notes to better reflect the Commitments of the Banks. Agent may treat the payee of any Note as the holder thereof until written notice of transfer has been filed with it, signed by such payee and in form satisfactory to Agent. 11.3 Consultation with Counsel. Banks agree that Agent may consult ------------------------- with legal counsel selected by Agent and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. -46- 11.4 Documents. Agent shall not be under a duty to examine or pass --------- upon the validity, effectiveness, enforceability, genuineness or value of any of the Loan Documents or any other instrument or document furnished pursuant thereto or in connection therewith, and Agent shall be entitled to assume that the same are valid, effective, enforceable and genuine and what they purport to be. 11.5 Resignation or Removal of Agent. Subject to the appointment and ------------------------------- acceptance of a successor Agent as provided below, Agent may resign at any time by giving written notice thereof to Banks and Borrower, and Agent may be removed at any time with or without cause by Banks. If no successor Agent has been so appointed by Banks (and approved by Borrower) and has accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or removal of the retiring Agent, then the retiring Agent may, on behalf of Banks, appoint a successor Agent, which appointment shall require the approval of the Borrower. 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 and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article 11 shall continue in effect for its benefit in respect to any ---------- actions taken or omitted to be taken by it while it was acting as Agent. 11.6 Responsibility of Agent. It is expressly understood and agreed ----------------------- that the obligations of Agent under the Loan Documents are only those expressly set forth in the Loan Documents and that Agent shall be entitled to assume that no default or Event of Default has occurred and is continuing, unless Agent has actual knowledge of such fact or has received notice from a Bank or Borrower that such Bank or Borrower considers that a default or an Event of Default has occurred and is continuing and specifying the nature thereof. Neither Agent nor any of its directors, officers, attorneys or employees shall be liable for any action taken or omitted to be taken by them under or in connection with the Loan Documents, except for its or their own gross negligence or willful misconduct. Agent shall incur no liability under or in respect of any of the Loan Documents by acting upon any notice, consent, certificate, warranty or other paper or instrument believed by it to be genuine or authentic or to be signed by the proper party or parties, or with respect to anything which it may do or refrain from doing in the reasonable exercise of its judgment, or which may seem to it to be necessary or desirable. Agent shall not be responsible to Banks for any of the Borrowers' recitals, statements, representations or warranties contained in any of the Loan Documents, or in any certificate or other document referred to or provided for in, or received by any Bank under, the Loan Documents, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of or any of the Loan Documents or for any failure by Borrower to perform any of its obligations hereunder or thereunder. Agent may employ agents and attorneys-in- fact and shall not be answerable except as to money or securities received by it or its authorized agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The relationship between Agent and each Bank is only that of agent and principal and has -47- no fiduciary aspects. Nothing in the Loan Documents or elsewhere shall be construed to impose on Agent any duties or responsibilities other than those for which express provision is therein made. In performing its duties and functions hereunder, Agent assumes no and shall not be deemed to have assumed, and hereby expressly disclaims, any obligation or responsibility toward or any relationship of agency or trust with or for Borrower or any of its beneficiaries or other creditors. As to any matters not expressly provided for by the Loan Documents, Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of all Banks and such instructions shall be binding upon all Banks and all holders of the Notes; provided, however, that Agent shall not be required to take any action which is contrary to the Loan Documents or applicable law. Agent shall have the right to exercise or refrain from exercising, without notice or liability to the Banks, any and all rights afforded to Agent by the Loan Documents or which Agent may have as a matter of law; provided, --------- however, Agent shall not (i) without the consent of Banks, designate the amount - ------- of the Consolidated Borrowing Base or the Maximum Commitment, or (ii) without consent of Banks, release any collateral that secures the Loan, or (iii) without the consent of Banks, take any other action with regard to amending the Loan Documents, waiving any default under the Loan Documents or taking any other action with respect to the Loan Documents which requires consent of Banks. Provided further, however, that no amendment shall be effected pursuant to the - ----------------- ------- preceding clause (ii) which: (i) would increase the Commitment Percentage of any Bank, (ii) would reduce any fees hereunder, or the principal of, or the interest on, any Bank's Note, (iii) would postpone any date fixed for any payment of any fees hereunder, or any principal or interest of any Bank's Note, (iv) would increase any Banks obligations hereunder or would materially alter Agent's obligations to any Bank hereunder, or (v) would release Borrower from its obligation to pay any Bank's Note, or (vi) would amend this sentence. For purposes of this paragraph, a Bank shall be deemed to have consented to any such action (excluding any action that would increase the Consolidated Borrowing Base, the Maximum Commitment or altering the manner of the determination of a Bank's Percentage) by Agent upon the passage of ten (10) Business Days after written notice thereof is given to such Bank in accordance with Section 12.3 ------------ hereof, unless such Bank shall have previously given Agent notice, complying with the provision of Section 12.3 hereof, to the contrary. Agent shall have no ------------ liability to Banks for failure or delay in exercising any right or power possessed by Agent pursuant to the Loan Documents or otherwise unless such failure or delay is caused by the gross negligence of Agent. 11.7 Independent Investigation. Each Bank severally represents and ------------------------- warrants to Agent that it has made its own independent investigation and assessment of the financial condition and affairs of Borrower in connection with the making and continuation of its participation hereunder and has not relied exclusively on any information provided to such Bank by Agent in connection herewith, and each Bank represents, warrants and undertakes to Agent that it shall continue to make its own independent appraisal of the credit worthiness of Borrower while the Notes are outstanding or its Commitments hereunder are in force. Agent shall not be required to keep itself informed as to the performance or observance by Borrower of this Agreement or any other document referred to or provided for herein or to inspect the properties or books of Borrower. Other than as provided in this -48- Agreement, Agent shall not have any duty, responsibility or liability to provide any Bank with any credit or other information concerning the affairs, financial condition or business of Borrower which may come into the possession of Agent. 11.8 Indemnification. Banks agree to indemnify Agent (to the extent --------------- not reimbursed by Borrower), ratably according to their Percentage, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any proper and reasonable kind or nature whatsoever which may be imposed on, incurred by or asserted against Agent in any way relating to or arising out of the Loan Documents or any action taken or omitted by Agent under the Loan Documents, provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from Agent's gross negligence or willful misconduct. Each Bank shall be entitled to be reimbursed by Agent or for any amount such Bank paid to Agent under this Section 11.8 to the extent Agent has ------------ been reimbursed for such payments by Borrower or any other Person. 11.9 Benefit of Article 11. The agreements contained in this Article --------------------- 11 are solely for the benefit of Agent and Banks and are not for the benefit of, or to be relied upon by, Borrower, any affiliate of Borrower or any other Person. 11.10 Pro Rata Treatment. Subject to the provisions of this Loan ------------------ Agreement, each payment (including each prepayment) by Borrower and collections by Banks (including offsets) on account of the principal of and interest on the Notes and fees provided for in this Agreement, payable by Borrower shall be made pro rata to Banks according to the then Percentage of each Bank in the Loan outstanding at the date of determination thereof. Notwithstanding the foregoing, all Consequential Losses required to be paid by Borrower shall be paid to the Bank that incurred such losses. 11.12 Interests of Banks. Nothing in this Loan Agreement shall be ------------------ construed to create a partnership or joint venture between Banks for any purpose. Agent, Banks and Borrower each recognize that the respective obligations of Banks under the Commitment shall be several and not joint and that neither Agent nor any Banks shall be responsible or liable to perform any of the obligations of the other under this Loan Agreement. Each Bank is deemed to be the owner of an undivided interest in and to all rights, titles, benefits and interests belonging and accruing to Agent under this Loan Agreement, including, without limitation, the Notes, Liens and security interests in any Collateral Documents, fees and payments of principal and interest by Borrower under the Commitment in the proportion that each Banks' Percentage bears to the total of all of such loan commitments of all Banks taken in the aggregate. Each Bank shall perform all duties and obligations of Banks under this Loan Agreement in the same proportion as its Percentage in the Loan outstanding at the date of determination thereof. 11.13 Investments. Whenever Agent in good faith determines that it ----------- is uncertain about how to distribute to Banks any funds which it has received, or whenever Agent in good faith determines that there is any dispute among the Banks about how such funds should be distributed, Agent may choose to defer distribution of the funds which are the subject of such uncertainty or dispute. If Agent in good faith believes that the uncertainty or dispute will not be promptly resolved, or if Agent -49- is otherwise required to invest funds pending distribution to the Banks, Agent may invest such funds pending distribution (at the risk of Borrower); all interest on any such investment shall be distributed upon the distribution of such investment and in the same proportions and to the same Persons as such investment. All monies received by Agent for distribution to Banks (other than to the Person who is the Agent in its separate capacity as a Bank) shall be held by the Agent pending such distribution solely as Agent for such Banks, and Agent shall have no equitable title to any portion thereof. ARTICLE 12. MISCELLANEOUS 12.1. Waiver. No failure to exercise, and no delay in exercising, on ------ the part of Banks, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of Banks hereunder and under the Loan Documents shall be in addition to all other rights provided by law. No modification or waiver of any provision of this Loan Agreement or any Loan Document, nor consent to departure therefrom, shall be effective unless in writing and no such consent or waiver shall extend beyond the particular case and purpose involved. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. 12.2. Payment of Expenses. Except as otherwise provided herein, ------------------- Borrower agrees to pay all costs and expenses of Agent and Banks (including without limitation the reasonable attorneys' fees of Agent's legal counsel (but no other legal counsel for any Bank retained separately by such Bank), and the reasonable fees incurred with respect to appraisers, expert witnesses and accountants) in connection with the administration, enforcement, or preservation of Bank's rights under this Loan Agreement and any other Loan Documents and, furthermore, Borrower shall pay all costs and expenses of Agent (including without limitation the reasonable attorneys' fees of Agent's legal counsel) (but no other legal counsel for any Bank retained separately by such Bank) in connection with the preparation, execution and delivery of this Loan Agreement and the Loan Documents and any and all amendments, modifications and supplements thereof or thereto. 12.3. Notices. Except for telephonic notices permitted herein, any ------- notices or other communications required or permitted to be given by this Loan Agreement or any other documents and instruments referred to herein must be (i) given in writing and personally delivered or mailed by prepaid certified or registered mail, or (ii) made by telecopy or facsimile delivered or transmitted, to the party to whom such notice or communication is directed and if between any Bank or Agent and Borrower, confirmed by a hard copy sent by overnight delivery service for delivery the following day, to the address of such party as follows: (a) Arch: Arch Petroleum Inc., 777 Taylor Street, Penthouse IIA, Fort Worth Club Tower, Fort Worth, Texas 76102 (Attention: Larry Kalas); Telecopy No. (817) 332-9249; (b) APC: Arch Production Company, 777 Taylor Street, Penthouse IIA, Fort Worth Club -50- Tower, Fort Worth, Texas 76102 (Attention: Larry Kalas); Telecopy No. (817) 332- 9249; and (c) Agent or any Bank: at its address shown below its name on the signature pages hereof. Any notice to be personally delivered may be delivered to the principal offices (determined as of the date of such delivery) of the party to whom such notice is directed. Any such notice or other communication shall be deemed to have been given (whether actually received or not) on the day it is personally delivered as aforesaid or, if mailed, on the third day after it is mailed as aforesaid; or, if transmitted by telecopy, on the day that such notice is transmitted as aforesaid; provided, however, that any telephonic or other notice received by Agent or any Bank after 12:00 noon Fort Worth time on any day from Borrower pursuant to Section 2.1(c)(i) (with respect to a Request for Borrowing) shall be ----------------- deemed for the purposes of such Section to have been given by Borrower on the next succeeding Business Day. Any party may change its address for purposes of this Loan Agreement by giving notice of such change to the other parties pursuant to this Section 12.3. 12.4. GOVERNING LAW. THIS LOAN AGREEMENT IS BEING EXECUTED AND ------------- DELIVERED, AND IS INTENDED TO BE PERFORMED, IN THE STATE OF TEXAS, AND THE SUBSTANTIVE LAWS OF SUCH STATE SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS LOAN AGREEMENT AND ALL OTHER LOAN DOCUMENTS, UNLESS OTHERWISE SPECIFIED THEREIN OR UNLESS THE LAWS GOVERNING NATIONAL BANK SHALL HAVE APPLICATION. 12.5. Invalid Provisions. If any provision of this Loan Agreement is ------------------ held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Loan Agreement, such provision shall be fully severable and this Loan Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Loan Agreement, and the remaining provisions of this Loan Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Loan Agreement, unless such continued effectiveness of this Loan Agreement, as modified, would be contrary to the basic understandings and intentions of the parties as expressed herein. 12.6. Interest Rate. Regardless of any provisions contained in this ------------- Loan Agreement, the Notes or in any other Loan Document, Banks shall never be deemed to have contracted for or be entitled to receive, collect or apply as interest on the Notes, any amount in excess of the Highest Lawful Rate, and in the event that any Bank ever receives, collects or applies as interest any such excess, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of such Bank's Note, and, if the principal balance of such Bank's Note is paid in full, any remaining excess shall forthwith be paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds the Highest Lawful Rate, Borrower and Banks shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment (other than payments which are expressly designated as interest payments hereunder) as an expense or fee, rather than as interest, (ii) exclude voluntary prepayments and the -51- effect thereof, and (iii) spread the total amount of interest throughout the entire contemplated term of the Notes so that the interest rate is uniform throughout such term. 12.7. Amendments. This Loan Agreement and the other Loan Documents ---------- may be amended only by an instrument in writing executed by an authorized officer or other representative of the parties to such documents. 12.8 Parties Bound. Except as provided in Section 12.10 below, this ------------- ------------- Loan Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and legal representatives; provided however, that Borrower may not, without the prior written consent of Bank, assign any rights, powers, duties or obligations hereunder. 12.9. Headings. Section headings are for convenience of reference -------- only and shall in no way affect the interpretation of this Loan Agreement. 12.10. Participations and Sales; Assignments. Without Borrower's ------------------------------------- consent, Banks shall have the right to enter into a participation agreement with any other party or parties with respect to the Notes and this Loan Agreement, which agreement may provide for the granting to such other party or parties of any or all rights of Banks hereunder; provided, however, that Borrower shall provide such notices or consents required by Borrower hereunder only to Banks, or the Agent, as the case may be, and not to any participants or partial assignees of Banks. No Bank may assign all or a portion of its rights and obligations under this Loan Agreement and the Loan Documents to any other bank or Person who, as a result of such assignment, would become a Bank party to this Loan Agreement without the prior written consent of Borrower, which consent shall not be unreasonably withheld. 12.11. Survival. All representations and warranties made by Borrower -------- herein shall survive delivery of the Notes and the making of the Loan. 12.12. Multiple Counterparts. This Loan Agreement may be executed in --------------------- any number of counterparts, all of which taken together shall constitute one and the same agreement, and any of the parties hereto may execute this Loan Agreement by signing any such counterpart. 12.13. Consent to Jurisdiction; Service of Process. Borrower hereby ------------------------------------------- waives any objection which it may have to the jurisdiction of the courts of the State of Texas and of the United States of America for the Northern District of Texas and agrees that any legal action or proceeding against Borrower with respect to the Loan Documents may be brought in the courts of the State of Texas or of the United States of America for the Northern District of Texas as Bank may elect, and, by execution and delivery of this Loan Agreement, Borrower accepts and submits to, for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Nothing herein shall affect Banks' right to serve process in any other manner permitted by law or Banks' right to bring any legal action or proceeding in any other court of competent jurisdiction. Borrower agrees to be bound by the determination of the aforesaid courts and hereby waives any rights which it might have under the law of any other state or federal jurisdiction or otherwise to -52- relitigate issues determined by the aforesaid courts or to raise new issues not raised by it in the aforesaid courts. 12.14. Reasonableness. In exercising its rights hereunder, Banks -------------- agree to act in a reasonable manner and consistent with standard banking practices. However, if Banks exercise such rights in the manner specified herein, it shall be deemed to be acting in a reasonable manner. 12.15. Confidentiality. All non-public and proprietary information --------------- obtained by Agent or any Bank from Borrower pursuant to this Loan Agreement or the other Loan Documents shall be held in confidence by Agent or such Bank, and Agent or any Bank shall not disclose such information to any Person without Borrower's consent, except that without Borrower's consent Agent or Banks may disclose such information to Persons with whom Banks have entered into, or is proposing to enter into, participation agreements concerning the Loan and/or banking regulatory authorities except that without Borrower's consent, Agent or Banks may disclose such information to any of their examiners, Affiliates, outside auditors, counsel and other professional advisors in connection wit this Loan Agreement or as reasonably required by any transferee, participant, or assignee, or any prospective transferee, participant or assignee, or as required by any governmental agency or representative thereof or pursuant to legal process; provided, however, that all such information disclosed to such Persons shall remain confidential and may not be subsequently disclosed by such Persons except as permitted by this Section 12.15. ------------- 12.16 Article 15.10(b). Borrower and Banks hereby agree that, except ---------------- for Article 15.10(b) thereof, the provisions of Chapter 15 of Title 79 of the Revised Civil Statutes of Texas, 1925, as amended (regulating certain revolving credit loans and revolving tri-party accounts) shall not apply to the Loan or the Loan Documents. NOTICE: THIS LOAN AGREEMENT AND ALL OTHER LOAN DOCUMENTS RELATING TO ------ THIS LOAN CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENT THE FINAL AGREEMENT BETWEEN BORROWER AND BANKS AND MAY NOT BE CONTRADICTED BY EVIDENCE OR PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF BORROWER AND BANK. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN BORROWER AND BANK RELATING TO THIS LOAN. -53- Signed in multiple originals on the date first written above. BORROWER: ARCH: ----- ARCH PETROLEUM INC., a Delaware corporation By: __________________________ Name Larry Kalas Title: President APC: --- ARCH PRODUCTION COMPANY, a Delaware corporation By:___________________________ Name: Larry Kalas Title: President AGENT: BANK ONE, TEXAS, N.A., a national banking association By:___________________________ Name: Brad Bartek Title: Vice President Address for Notice Purposes: --------------------------- Bank One, Texas, N.A. 500 Throckmorton Street Post Office Box 2050 Fort Worth, Texas 76113-2059 Attn: Brad Bartek Telecopy no.: (817) 884-5627 BANKS: ----- -54- BANK ONE, TEXAS, N.A., a national banking association By:_______________________________ Name: Brad Bartek Title: Vice President Address for Notice Purposes: --------------------------- Bank One, Texas, N.A. 500 Throckmorton Street Post Office Box 2050 Fort Worth, Texas 76113-2059 Attn: Brad Bartek Telecopy no.: (817) 884-5627 BANK OF MONTREAL By:_______________________________ Name:_____________________________ Title:____________________________ Address for Notice Purposes: --------------------------- Bank of Montreal 700 Louisiana Street Suite 4400 Houston, Texas 77002 Attn: Robert L. Roberts Telecopy no.: (713) 223-4007 ______________________________ BANK OF SCOTLAND By:_______________________________ Name:_____________________________ Title:____________________________ Address for Notice Purposes: --------------------------- Bank of Scotland 1200 Smith Street Two Allen Center, Suite 1750 Houston, Texas 77002 -55- Attn: Rex McSwain, Vice President Telecopy no.: (713) 651-9714 and Bank of Scotland 565 Fifth Avenue New York, New York 10017 Attn: Catherine Oniffrey, Vice President Telecopy no.: (212) 557-9460 -56- EX-10.10 6 CREDIT AGREEMENT EXHIBIT 10.10 U.S.$11,000,000 CREDIT AGREEMENT, dated as of February 20, 1996 among TRAX PETROLEUMS LIMITED as the Borrower, and CERTAIN FINANCIAL INSTITUTIONS, as the Lenders, and BANK OF MONTREAL, as the Agent for the Lenders. TABLE OF CONTENTS
Page I DEFINITIONS AND ACCOUNTING TERMS.................................... 1 1.1 Defined Terms................................................. 1 1.2 Use of Defined Terms.......................................... 20 1.3 Cross-References.............................................. 20 1.4 Accounting and Financial Determinations....................... 20 1.5 Currency References........................................... 21 II REVOLVING CREDIT FACILITY........................................... 21 2.1 Commitment.................................................... 21 2.1.1 Revolving Credit Commitment............................ 21 2.1.2 Lenders Not Permitted or Required to Make Borrowings Available.............................................. 21 2.1.3 Several Obligations.................................... 22 2.1.4 Funding Borrowings Under Commitments................... 22 2.2 Borrowing Procedure; Disbursement............................. 22 2.3 Conditions Applicable to Bankers' Acceptances................. 23 2.3.1 Purchase of Bankers' Acceptances by a Lender........... 23 2.3.2 Payment to Borrower.................................... 23 2.3.3 Waiver of Presentment and Other Conditions............. 23 2.3.4 Terms of Each Bankers' Acceptance...................... 24 2.3.5 Delivery of Blank Bankers' Acceptances................. 24 2.3.6 Failure to Give Notice of Repayment (Automatic Rollover or Conversion)................................ 25 2.3.7 Execution of Bankers' Acceptances...................... 25 2.3.8 Advice to the Lenders.................................. 26 2.3.9 Agent's Confirmation of Bankers' Acceptance Issuance... 26 2.3.10 Completion of Bankers' Acceptance...................... 26 2.3.11 Prepayment of Bankers' Acceptances..................... 26 2.3.12 Bankers' Acceptance Fees............................... 26 2.3.13 Borrower's Absolute Obligation to Repay Bankers' Acceptances............................................ 27 2.4 Certain Procedural Matters.................................... 27 2.4.1 Revolving Loans and Bankers' Acceptance................ 27 2.4.2 Conversions............................................ 27 2.4.3 Rollovers.............................................. 28 2.4.4 Rollovers and Conversions not Prepayment............... 28 2.4.5 Limitation on Number of Borrowings..................... 28 2.4.6 Notice of Expiration of LIBOR Interest Periods......... 28 2.5 Intentionally Omitted......................................... 28
i 2.6 Interest and Fees............................................. 28 2.6.1 Rates and Payment of Interest.......................... 28 2.6.2 Acknowledgement........................................ 29 2.6.3 Intentionally Omitted.................................. 29 2.6.4 Interest Calculation................................... 29 2.6.5 Clawback............................................... 29 2.6.6 Default Rate........................................... 30 2.6.7 Interest Act Disclosure................................ 30 2.6.8 No Deemed Reinvestment................................. 30 2.7 Principal Payments on Stated Maturity Date.................... 30 2.8 Extension, Place and Application of Payments.................. 30 2.9 Mandatory Payment of Loans.................................... 31 2.9.1 Outstandings Exceed Facility Amount.................... 31 2.9.2 Deposits with Respect to Bankers' Acceptances.......... 31 2.9.3 Acceleration........................................... 31 2.9.4 Borrowing Base Deficiency.............................. 31 2.10 Voluntary Principal Prepayments............................... 31 2.11 Order of Application.......................................... 32 2.12 Commitment Fee................................................ 32 2.13 Evidence of Borrowings........................................ 33 2.14 Additional Fees............................................... 33 2.14.1 Agent's Fee............................................ 33 2.14.2 Intentionally Omitted.................................. 33 2.14.3 Consolidated Borrowing Base Redetermination Fee........ 33 2.14.4 Amendment Fee.......................................... 34 III BORROWING BASE...................................................... 34 3.1 Components for Determination of Trax Borrowing Base........... 34 3.2 Canadian Allocated Borrowing Base............................. 34 3.3 Semi-Annual Redetermination of Trax Borrowing Base............ 35 3.4 Borrowing Base Deficiency..................................... 36 3.5 Special Provisions for Discretionary Increase to the Consolidated Borrowing Base................................... 36 3.6 Interim Sales of Borrowing Base Properties.................... 37 IV CERTAIN ADDITIONAL PROVISIONS CONCERNING LOANS, BANKERS' ACCEPTANCES AND CURRENCY MATTERS.................................... 38 4.1 Lending Unlawful.............................................. 38 4.2 Deposits Unavailable.......................................... 38 4.3 Increased LIBO Rate Loan Costs, etc........................... 39 4.4 Additional Costs.............................................. 39 4.5 Prime Rate Loans or Base Rate Loans........................... 40 4.6 Compensation.................................................. 41
ii 4.7 Taxes ........................................................ 41 4.8 Payments, Computations, etc................................... 42 4.9 Sharing of Payments........................................... 43 4.10 Setoff........................................................ 43 4.11 Use of Proceeds............................................... 44 4.12 Currency Conversion and Currency Indemnity.................... 44 4.12.1 Payments in Agreed Currency............................ 44 4.12.2 Conversion of Agreed Currency into Judgment Currency... 44 4.12.3 Circumstances Giving Rise to Indemnity................. 44 4.12.4 Indemnity Separate Obligation.......................... 45 V CONDITIONS TO BORROWING............................................. 45 5.1 Initial Borrowing............................................. 45 5.1.1 Resolutions, etc....................................... 45 5.1.2 Arch Agreement......................................... 46 5.1.3 Payment of Outstanding Indebtedness, etc............... 46 5.1.4 Offer Consummated; Copies of Document and Other Material Agreements and Consents; Control of Trax's Board.................................................. 46 5.1.5 Guaranty............................................... 46 5.1.6 Pledge Agreement....................................... 46 5.1.7 Security Agreements.................................... 47 5.1.8 Opinions of Counsel.................................... 47 5.1.9 Closing Fees, Expenses, etc............................ 48 5.1.10 Acquisition............................................ 48 5.1.11 Pro forma.............................................. 48 5.1.12 Regulatory Approvals................................... 48 5.1.13 Intercreditor Agreement................................ 48 5.1.14 Effectiveness Notice................................... 48 5.1.15 Due Diligence.......................................... 48 5.1.16 Other Matters.......................................... 49 5.2 All Borrowings................................................ 49 5.2.1 Compliance with Warranties, No Default, etc............ 49 5.2.2 Borrowing Notice, Conversion Notice or Rollover Notice................................................. 50 5.2.3 Satisfactory Legal Form................................ 50 VI REPRESENTATIONS AND WARRANTIES...................................... 50 6.1 Organization and Qualification of Borrower.................... 50 6.2 Authorization and Power of Borrower........................... 50 6.3 Financial Condition........................................... 51 6.4 No Litigation................................................. 51 6.5 No Breach..................................................... 51 6.6 No Consents................................................... 52 6.7 Validity...................................................... 52
iii 6.8 Subsidiaries.................................................. 52 6.9 Status of Title to Assets..................................... 52 6.10 Taxes......................................................... 53 6.11 Other Indebtedness or Liens................................... 53 6.12 Own Expertise................................................. 53 6.13 Environmental Warranties...................................... 54 6.14 Intentionally Omitted......................................... 55 6.15 Accuracy of Information....................................... 55 6.16 Full Disclosure............................................... 55 VII COVENANTS........................................................... 55 7.1 Affirmative Covenants......................................... 55 7.1.1 Financial Statements and Reports of Borrower........... 56 7.1.2 Reserve, Production and Operating Reports.............. 56 7.1.3 Payment of Taxes, etc.................................. 57 7.1.4 Insurance and Insurance Summaries...................... 57 7.1.5 Operations and Properties.............................. 57 7.1.6 Compliance with Applicable Laws........................ 57 7.1.7 Litigation............................................. 58 7.1.8 Changes of Fact........................................ 58 7.1.9 Maintenance of Rights.................................. 58 7.1.10 Maintenance of Properties.............................. 58 7.1.11 Maintenance and Granting of Liens, Mortgages and Security Interests..................................... 58 7.1.12 Notice of Default...................................... 58 7.1.13 Compliance with Loan Documents......................... 59 7.1.14 Compliance with Material Agreements.................... 59 7.1.15 Books and Records; Inspection.......................... 59 7.1.16 Agreements Affecting the Borrowing Base Properties..... 59 7.1.17 Other Notices.......................................... 59 7.1.18 Value of Properties.................................... 59 7.1.19 Copies of Filings, etc................................. 60 7.1.20 Environmental Covenant................................. 60 7.1.21 Additional Security Documents.......................... 60 7.1.22 Intentionally Omitted.................................. 61 7.1.23 Other Information...................................... 61 7.2 Negative Covenants............................................ 61 7.2.1 Limitation on Liens.................................... 61 7.2.2 Disposition of Assets.................................. 61 7.2.3 Certain Transactions................................... 62 7.2.4 Place of Business...................................... 62 7.2.5 Consolidation, Amalgamation or Merger.................. 62 7.2.6 Limitation on Investments and New Businesses........... 62 7.2.7 Limitation on Credit Extensions........................ 63
iv 7.2.8 Fiscal Year............................................ 63 7.2.9 Certain Agreements..................................... 63 7.2.10 Restrictions on Payment of Dividends; Issuance of Capital Stock.......................................... 63 7.2.11 Financial Condition.................................... 64 7.2.12 Limitation on Additional Indebtedness.................. 64 7.2.13 Negative Pledges, Restrictive Agreements, etc.......... 64 VIII EVENTS OF DEFAULT................................................... 65 8.1 Listing of Event of Default................................... 65 8.1.1 Failure of Payment..................................... 65 8.1.2 False Representation................................... 65 8.1.3 Breach of Covenant..................................... 65 8.1.4 Renunciation of Obligation............................. 65 8.1.5 Bankruptcy............................................. 65 8.1.6 Bankruptcy Orders, etc................................. 66 8.1.7 Default Under Other Documents.......................... 66 8.1.8 Liens Invalid.......................................... 66 8.1.9 Judgments.............................................. 66 8.1.10 Material Defaults...................................... 67 8.1.11 Dissolution............................................ 67 8.1.12 Borrowing Base Deficiency.............................. 67 8.1.13 Default Under Arch Agreement........................... 67 8.1.14 Change of Control...................................... 67 8.2 Materiality; Notice of Defaults............................... 68 8.2.1 Materiality............................................ 68 8.2.2 Notice of Monetary Defaults............................ 68 8.2.3 Notice of Certain Non-Monetary Defaults................ 68 8.3 Acceleration.................................................. 68 8.4 Preservation of Rights........................................ 70 IX THE AGENT........................................................... 70 9.1 Actions....................................................... 70 9.2 Funding Reliance, etc......................................... 71 9.3 Repayment by Lenders to Agent................................. 71 9.4 Exculpation................................................... 72 9.5 Successor..................................................... 72 9.6 Extensions of Credit by the Bank of Montreal.................. 73 9.7 Credit Decisions.............................................. 73 9.8 Copies, etc................................................... 73 X MISCELLANEOUS PROVISIONS............................................ 74 10.1 Waivers, Amendments, etc...................................... 74 10.2 Notices....................................................... 75 10.3 Payment of Costs and Expenses................................. 75 10.4 Indemnification............................................... 76 10.4.1 General Provisions of Indemnification.................. 76
v 10.4.2 Negligence Expressly Indemnified....................... 78 10.5 Survival...................................................... 78 10.6 Severability.................................................. 78 10.7 Headings...................................................... 78 10.8 Execution in Counterparts, Effectiveness, etc................. 78 10.9 Governing Law; Entire Agreement............................... 79 10.10 Successors and Assigns........................................ 79
vi 10.11 Sale and Transfer of Borrowings; Participations in Borrowings.................................................... 79 10.11.1 Assignments......................................... 79 10.11.2 Participations...................................... 81 10.11.3 Further Documentations in Event of Assignments or Participation....................................... 81 10.12 No Oral Agreements............................................ 81 10.13 Other Transactions............................................ 82 10.14 Forum Selection and Consent to Jurisdiction................... 82 10.15 Certain Matters............................................... 82 10.16 Time of the Essence........................................... 83
vii EXHIBITS EXHIBIT A - Form of API Guaranty EXHIBIT B - Form of Northern Guaranty EXHIBIT C - Form of Borrowing Notice EXHIBIT D - Form of Conversion Notice EXHIBIT E - Form of Lender Assignment Agreement EXHIBIT F - Form of Pledge Agreement EXHIBIT G-1 - Form of Security Agreement (Stock) EXHIBIT G-2 - Form of Security Agreement (General) EXHIBIT G-3 - Form of Debenture EXHIBIT G-4 - Form of Instrument of Pledge EXHIBIT H - Form of Opinion of Borrower's Canadian Counsel EXHIBIT I - Form of Opinion of Borrower's U.S. Counsel EXHIBIT J - Form of Opinion of Agent's Canadian Counsel EXHIBIT K - Form of Borrowing Base Allocation Certificate EXHIBIT L - Form of Compliance Certificate EXHIBIT M - Form of Acceptance EXHIBIT N - Form of Rollover Notice SCHEDULES SCHEDULE I - DISCLOSURE SCHEDULE viii CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of February 20, 1996, is among TRAX PETROLEUMS LIMITED, a corporation organized under the laws of Alberta, Canada ("Trax" or the "Borrower"), the various financial institutions as are or may ---- -------- become parties hereto as lenders (collectively, the "Lenders"), and BANK OF ------- MONTREAL, as agent (the "Agent") for the Lenders. ----- W I T N E S S E T H: WHEREAS, pursuant to that certain Cash Offer dated January 9, 1996 (the "Offering Document") by Northern Arch Resources Ltd., a corporation organized ----------------- under the laws of Alberta, Canada ("Northern"), Northern offered to purchase -------- (the "Offer") all the issued and outstanding common shares (including the ----- associated rights under the Shareholder Rights Plan Agreement) (the "Shares") of ------ the Borrower and as of the close of such Offer more than 90% (but less than 100%) of the Shares had been tendered to Northern (excluding any Shares owned by Northern at the commencement of the Offer), and Northern following the Close of the Offer has acquired the remaining Shares of the Borrower, such that the Borrower is a wholly-owned Subsidiary of Northern (the Offer and such subsequent transactions are referred to herein as the "Acquisition"); and ----------- WHEREAS, the Borrower desires to obtain commitments from the Lenders pursuant to which extensions of credit in the form of Revolving Loans and Bankers' Acceptances will be made in the amounts and currencies herein provided and pursuant to the terms and provisions herein set forth; and WHEREAS, the proceeds of the Revolving Loans and the Bankers' Acceptances will be used to fund an intercompany loan from the Borrower to Northern in an amount up to $8,000,000 and for general corporate purposes of the Borrower and its Subsidiaries (including payment of those amounts described in Section ------- 5.1.9); and - ------ WHEREAS, the Lenders are willing, on the terms and subject to the conditions hereinafter set forth (including Article V), to extend such --------- commitments and make such extensions of credit to the Borrower; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.1 Defined Terms. The following terms (whether or not ------------- underscored) when used in this Agreement, including its preamble and recitals, shall, except where the context otherwise requires, have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof): "Acceptance" means a bill of exchange drawn by the Borrower and accepted ---------- and purchased by a Lender, substantially in the form attached hereto as Exhibit ------- M. - - "Acquisition" is defined in the first recital. ----------- ------------- "Acquisition Documents" means (i) individually, each of the Offering --------------------- Document and each other document, instrument and agreement executed and delivered pursuant thereto, including all assignments and conveyances thereunder, and (ii) collectively, any two or more of the foregoing. "Affiliate" of any Person means any other Person which, directly or --------- indirectly, controls, is controlled by or is under common control with such Person. A Person shall be deemed to be "controlled by" any other Person if such other Person possesses, directly or indirectly, power (a) to vote 10% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managing general partners or managers; or (b) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "Agent" is defined in the preamble and includes each other Person as shall ----- -------- have subsequently been appointed as the successor Agent pursuant to Section 9.5. ----------- "Agent's Branch of Account" means the Bank of Montreal, First Canadian ------------------------- Place, 350 - 7th Avenue S.W., Calgary, Alberta T2P 3N9 (Fax No. (403) 234 - 3644) or such other office or branch of the Agent in Canada as the Agent may from time to time advise the Borrower and the Lenders in writing. "Aggregate Outstandings" means, at any time, the sum, without duplication, ---------------------- of all Outstandings and all Arch Outstandings. "Agreed Currency" is defined in Section 4.12.1. --------------- -------------- 2 "Agreement" means, on any date, this Credit Agreement as originally in --------- effect on the Effective Date and as thereafter from time to time amended, supplemented, and restated, or otherwise modified and in effect on such date. "Alternate Base Rate" means, on any date and with respect to all Base Rate ------------------- Loans, a floating rate of interest per annum equal to the higher of --- ----- (a) the floating rate of interest most recently announced by the Agent at its Canadian Office as the reference rate of interest it will use to determine rates of interest for U.S. Dollar loans in Canada and referred to by it as its "U.S. base rate"; and (b) the Federal Funds Rate for such date as determined by the Agent plus 1/2%. The Alternate Base Rate is not necessarily intended to be the lowest rate of interest determined by the Agent in connection with extensions of credit. Changes in the rate of interest on that portion of any Loans maintained as Base Rate Loans (and in the rate of interest of any other Obligations from time to time bearing interest at a rate determined by reference to the Alternate Base Rate) will take effect simultaneously with each change in the Alternate Base Rate. "APC" means Arch Production Company, a Delaware corporation. --- "API" means Arch Petroleum Inc., a Delaware corporation. --- "Applicable Lending Office" means, for each Lender and for each Type of ------------------------- Loan, the Canadian Office or LIBOR Office, as the case may be, of such Lender (or of an Affiliate of such Lender) designated for such Type of Loan on the signature pages hereof or designated in the Lender Assignment Agreement or such other office of such Lender (or of an Affiliate of such Lender) as such Lender may from time to time specify to the Agent and the Borrower as the office by which its Loans of such Type are to be made and maintained. "Applicable Margin" means, at such times and from time to time as the ratio ----------------- of Aggregate Outstandings to the Consolidated Borrowing Base is in one of the following ranges, with respect to any Borrowing, the percentage per annum set --- ----- forth below opposite the relevant Type of Borrowing and the relevant range: 3
Type of Borrowing Applicable Margin - ----------------- ----------------- Base Rate Loans 0.00% At all times Prime Rate Loans Range 1: the Aggregate Outstandings are more 1.50% than 75% of the Consolidated Borrowing Base Range 2: the Aggregate Outstandings are more 1.25% than 50%, but equal to or less than 75%, of the Consolidated Borrowing Base Range 3: the Aggregate Outstandings are more 1.00% than 25%, but equal to or less than 50%, of the Consolidated Borrowing Base Range 4: the Aggregate Outstandings are equal to 0.75% or less than 25% of the Consolidated Borrowing Base LIBO Rate Loans and Bankers' Acceptances During any period that Range 1: the Aggregate Outstandings are more 2.50% than 75% of the Consolidated Borrowing Base Range 2: the Aggregate Outstandings are more 2.25% than 50%, but equal to or less than 75%, of the Consolidated Borrowing Base Range 3: the Aggregate Outstandings are more 2.00% than 25%, but equal to or less than 50%, of the Consolidated Borrowing Base Range 4: the Aggregate Outstandings are equal to 1.75% or less than 25% of the Consolidated Borrowing Base
Changes in the Applicable Margin on account of the ratio of Aggregate Outstandings to the Consolidated Borrowing Base being in a different range will occur automatically without prior notice, provided that for Bankers' Acceptances -------- and LIBO Rate Loans such margin shall be determined at the time of purchase of the applicable Bankers' Acceptance or commencement of the applicable LIBOR Interest Period, as the case may be. "Arch Agreement" means that certain Third Restated Revolving Credit Loan -------------- Agreement dated as of February 20, 1996 among API, the 4 Arch Banks and BankOne, as Agent, as amended, restated, supplemented or otherwise modified from time to time. "Arch Banks" shall mean the "Banks" as such term is defined in the Arch ---------- Agreement. "Arch Outstandings" means, at any time, the aggregate of the principal ----------------- amount of all then outstanding "Obligations" as defined under the Arch Agreement (including, without duplication, the face amount of all then outstanding letters of credit issued thereunder). "Asset" means, as to any Person, all property of any kind, name or nature, ----- real or personal, tangible or intangible, legal or equitable, whether now owned or hereafter acquired, including, without limitation, money, stock, contract rights, franchises, value as a going concern, causes of action, undivided fractional ownership interests, and anything of any value which can be made available for, or may be appropriated to, the payment of debts. "Assignee Lender" is defined in Section 10.11.1. --------------- --------------- "Authorization" is defined in Section 10.15. ------------- ------------- "Authorized Officer" means, relative to the Borrower or a Guarantor, those ------------------ of its officers whose signatures and incumbency shall have been certified to the Agent and the Lenders pursuant to a certificate delivered under Section 5.1.1. ------------- "Available Unfunded Borrowing Base" means, on any date, the positive --------------------------------- difference, if any, of the Canadian Allocated Borrowing Base minus the Outstandings. "BA Reference Banks" means Bank of Montreal and the Schedule II Reference ------------------ Lenders, if any. "Bankers' Acceptance Fee" is defined in Section 2.3.12. ----------------------- -------------- "Bankers' Acceptances" means the Borrowings or any portion thereof made -------------------- available by a Lender to the Borrower by way of Acceptances denominated in Canadian Dollars which are issued by the Borrower and accepted and purchased by a Lender hereunder. "BankOne" means Bank One, Texas, N.A. ------- "Base Rate Loan" means a Loan denominated in U.S. Dollars bearing interest -------------- at a fluctuating rate determined by reference to the Alternate Base Rate. 5 "Borrower" is defined in the preamble and includes its successors and -------- -------- permitted assigns, including the amalgamated entity resulting from any amalgamation of Northern and Trax. "Borrowing" means any extension of credit made by the Lenders by way of --------- Revolving Loans or arising upon a Conversion to or Rollover of Revolving Loans, or Bankers' Acceptances purchased by the Lenders. For the purposes of this Agreement, the "same Borrowing" or "one Borrowing" shall refer to any extension of credit of the same Type and, in the case of LIBO Rate Loans and Bankers' Acceptances, accepted, continued or converted, as applicable, by all the Lenders on the same Business Day and pursuant to the same Borrowing Notice, Conversion Notice or Rollover Notice, as the case may be. "Borrowing Base Allocation Certificate" means a certificate duly executed ------------------------------------- by an Authorized Officer of the Borrower, appropriately completed and substantially in the form of Exhibit K hereto. --------- "Borrowing Base Deficiency" is defined in Section 3.4. ------------------------- ----------- "Borrowing Base Properties" means, as of any date, all of Borrower's ------------------------- interest in and to (i) oil, gas and/or mineral leases, royalty and overriding royalty interests, production payments, net profits interests and mineral fee interests, (ii) unitization, communitization and pooling arrangements (and all properties covered and units created thereby), whether arising by contract or operation of law, which include all or any part of the foregoing, (iii) lands subject to any of the foregoing, (iv) equipment, fixtures, rights-of-way, easements, goods, chattels, accounts, accounts receivable, contract rights, chattel paper, general intangibles, and other items of personal property related to, located on or used in connection with the foregoing; and (v) processing facilities, pipelines, salt water disposal wells and facilities, transportation rights and facilities, and other equipment, machinery, rights or facilities related to or used in connection with the marketing, transporting, producing, processing or gathering of oil, gas or hydrocarbons. "Borrowing Notice" means a notice to effect a Borrowing delivered under ---------------- Section 2.2 and substantially in the form of Exhibit C with all applicable - ----------- --------- blanks completed and duly executed and completed by an Authorized Officer of the Borrower. 6 "Business Day" means ------------ (a) relative to the making, continuing, prepaying, repaying, conversion or acceptance of a Loan (other than a LIBO Rate Loan), a Bankers' Acceptance, or the determination of the Equivalent Amount of any currency in another currency, or relative to any other matter except those set forth in clause (b) of this ---------- definition, any day which is neither a Saturday nor a Sunday nor a legal holiday on which banks are authorized or required to be closed in Calgary, Alberta; and (b) relative to the making, continuing, prepaying, repaying or conversion of any LIBO Rate Loans, any day described in clause (a) of this definition which ---------- is also a day on which dealings in U.S. Dollars are carried on in the London interbank market. "Canadian Allocated Borrowing Base" is defined in Section 3.2. --------------------------------- ----------- "Canadian Dollars" and "Cdn. $" each means lawful money of Canada. ---------------- ------ "Canadian Office" means, relative to any Lender or the Agent, the office of --------------- such Lender or the Agent, as applicable, designated as such below its signature hereto or designated in the Lender Assignment Agreement or such other office of such Lender or the Agent, as applicable (or any successor or assign of such Lender or any successor of the Agent), within Canada as may be designated from time to time by notice from such Lender or the Agent, as the case may be, to each other Person party hereto. "CDOR Rate" means, on any day, the annual rate of interest which is the --------- average of the rates applicable to Canadian Dollar bankers' acceptances having identical issue and comparable maturity dates as the Bankers' Acceptances proposed to be issued by the Borrower displayed and identified as such on the Reuters' Screen CDOR Page at approximately 10:00 a.m. (Toronto, Canada time) on such day, or if such day is not a Business Day then on the immediately preceding Business Day (as adjusted by the Agent after 10:00 a.m. (Toronto, Canada time) to reflect any error in a posted rate of interest or in the posted average annual rate of interest); provided, however, if such rates do not appear on the -------- ------- Reuter's Screen CDOR Page, then the "CDOR Rate" shall be the average of the discount rates applicable to such Canadian Dollar bankers' acceptances in a comparable amount to the BA Reference Banks' Percentages of the Bankers' Acceptances proposed to be issued by the Borrower quoted to the Agent by the BA Reference Banks as of 10:00 a.m. (Toronto, Canada time) on such day, or if such day is not a Business Day, on the immediately preceding Business Day. 7 "Collateral Agent" means BankOne, in its capacity as collateral agent for ---------------- the Lenders and the Arch Banks. "Collateral Documents" is defined in Section 7.1.21. -------------------- -------------- "Commitment" means the commitment of a Lender to make Revolving Loans to, ---------- and/or purchase Bankers' Acceptances from, the Borrower pursuant to Section 2.1. ----------- "Commitment Termination Date" means the earliest of (a) May 1, 1997; (b) --------------------------- the date on which the Facility Amount is terminated in full; and (c) the date on which any Commitment Termination Event occurs. Upon the occurrence of any event described in clause (b) or (c), the Commitments shall terminate automatically ---------- --- and without any further action. "Commitment Termination Event" means ---------------------------- (a) the occurrence of any Default described in Section 8.1.5, 8.1.6 or -------------------- 8.1.11; or - ------ (b) the occurrence and continuance of any other Event of Default and either (i) the declaration of all or any part of the Obligations of the Borrower to be due and payable pursuant to Section 8.3, or ----------- (ii) in the absence of such declaration, the giving of notice by the Agent to the Borrower that the Commitments have been terminated. "Consequential Loss" is defined in Section 4.6. ------------------ ----------- "Consolidated Borrowing Base" has the meaning assigned to such term in the --------------------------- Arch Agreement. "Contract Rate" means a rate of interest based upon the LIBO Rate, the ------------- Prime Rate or Alternate Base Rate in effect at any time pursuant to the terms hereof. "Conversion" means a conversion of a Borrowing, or portion thereof, to ---------- another Type of Borrowing. "Conversion Date" means a Business Day on which a Conversion is to be made --------------- pursuant to a Conversion Notice. 8 "Conversion Notice" means a notice to effect a Conversion delivered under ----------------- Section 2.4.2 and in substantially the form of Exhibit D with all applicable - ------------- --------- blanks completed and duly executed and completed by an Authorized Officer of the Borrower. "Current Ratio" means the ratio of ------------- (a) consolidated current assets of the Borrower and its Subsidiaries to - -- (b) consolidated current liabilities of the Borrower and its Subsidiaries. "Debenture" means that certain Fixed and Floating Charge Debenture in the --------- principal amount of Cdn. $35,000,000, and dated as of the date hereof, executed by the Borrower in favor of Bank of Montreal in its capacity as Agent for the Lenders and delivered pursuant to Section 5.1.7, substantially in the form of ------------- Exhibit G-3 hereto as amended, supplemented, restated or otherwise modified from - ----------- time to time. "Default" means any Event of Default or any condition, occurrence or event ------- which, with the giving of notice or lapse of time or both, would constitute an Event of Default. "Default Rate" means a rate of interest per annum equal to the lesser of ------------ (i) the Maximum Rate from time to time, or (ii) 5% in excess of the Alternate Base Rate, if a Loan or other Obligation is denominated in U.S. Dollars, and 5% in excess of the Prime Rate if such Loan or other Obligation is denominated in Canadian dollars. "Determination Date" means each November 1 and May 1 occurring prior to the ------------------ Commitment Termination Date. "Discount Proceeds" means, in respect of any Bankers' Acceptance required ----------------- to be accepted and purchased by a Lender hereunder, an amount (rounded to the nearest whole cent with one-half of one cent being rounded up) in Canadian Dollars determined as of the applicable Borrowing Date, Rollover Date or Conversion Date which is equal to: Face Amount x Price ----------- 100 where the "Face Amount" is the face amount of such Bankers' Acceptance and "Price" is equal to: 9 100 ----------------------- 1 + (Rate x Term) ---- #Days where: the "Rate" is the Discount Rate expressed as a decimal on the day of purchase; the "Term" is the term of such Bankers' Acceptance expressed as a number of days; "# Days" is the number of days in the 12 month period commencing on the date of issuance of such Bankers' Acceptance; and the Price as so determined is rounded up or down to the fifth decimal place with .000005 being rounded up. "Discount Rate" means, with respect to each Bankers' Acceptance which is ------------- required to be accepted and purchased by a Lender hereunder, the percentage discount rate (expressed to three decimal places) determined by the Agent at approximately 10:00 a.m. Toronto time on the applicable Drawdown Date, Conversion Date or Rollover Date, as the case may be, as being the arithmetic average of the discount rates respectively announced by the BA Reference Banks on such date, for Canadian Dollar bankers' acceptances in amounts comparable to the Borrowing having an identical issue date to the Borrowing and a maturity date comparable to the Borrowing. Each determination of the Discount Rate shall be conclusive and binding, absent manifest error. "Dollars" and the sign(s) "U.S.$" or "$" mean lawful currency of the United ------- ----- - States of America. "Domestic Borrowing Base" has the meaning assigned to such term in the Arch ----------------------- Agreement. "Drawdown Date" means a Business Day on which a Borrowing is to be made ------------- pursuant to a Borrowing Notice and as defined in Section 2.2. "Effective Date" means the date this Agreement becomes effective pursuant -------------- to Section 10.8. ------------ "Environmental Laws" means, with respect to any Person, ------------------ (a) any federal, state, provincial, regional, municipal or local statute (including the Environmental Protection and Enhancement Act (Alberta) and the Canadian Environmental Protection Act), or rule or regulation promulgated thereunder; (b) any administrative order (including any consent order), judgment, order, decree, or award of any court or written administrative request to which such Person or any Subsidiary of 10 such Person is party or which are applicable to such Person or any Subsidiary of such Person (whether or not by consent); and (c) any provision or condition of any ordinance, code, guideline, permit, license or other governmental operating authorization, relating to (i) protection of the environment, persons or the public welfare from actual or potential discharge, spill or emission (whether past or present) of, or regarding the manufacture, processing, production, gathering, transportation, importation, use, treatment, storage or disposal of, any chemical, raw material, pollutant, contaminant or toxic, corrosive, hazardous, or non-hazardous substance or waste, including petroleum; or (ii) occupational or public health or safety in connection with the manufacture, processing, production, gathering, transportation, importation, use, treatment, storage or disposal of, any chemical, raw material, pollutant, contaminant or toxic, corrosive, hazardous, or non-hazardous substance or waste, including petroleum. "Equivalent Amount" in one currency (the "first currency") of an amount in ----------------- another currency (the "other currency") means the amount of the first currency which is required to purchase such amount of the other currency at the rate determined on the basis of the Spot Rate of Exchange for the other currency against the first currency at the time of determination. "Event of Default" is defined in Section 8.1. ---------------- ----------- "Facility Amount" means, on any date, Eleven Million U.S. Dollars --------------- (U.S.$11,000,000) or the Equivalent Amount in Canadian Dollars of such amount on such date. "Federal Funds Rate" means, for any date, a fluctuating interest rate per ------------------ --- annum equal to - ----- (a) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York; or (b) if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three federal funds brokers of recognized standing selected by it. "F.R.S. Board" means the Board of Governors of the Federal Reserve System ------------ or any successor thereto. 11 "GAAP" is defined in Section 1.4. ---- ----------- "General Security Agreement" means that certain Security Agreement dated -------------------------- the date hereof, between the Borrower and Bank of Montreal in its capacity as Agent for the Lenders and delivered pursuant to Section 5.1.7, substantially in ------------- the form of Exhibit G-2 hereto, as amended, supplemented, restated or otherwise ----------- modified from time to time. "Guarantor" means each of API and Northern. --------- "Guaranty" means each of the Guaranty executed and delivered by API -------- pursuant to Section 5.1.5, substantially in the form of Exhibit A hereto, and ------------- --------- the Guaranty executed and delivered by Northern pursuant to Section 5.1.5, ------------- substantially in the form of Exhibit B hereto, each as amended, supplemented, --------- restated or otherwise modified and in effect from time to time. "Hazardous Materials" means any pollutant or contaminant or any waste or ------------------- substance defined or regulated as such from time to time by any Environmental Law. "herein", "hereof", "hereto", "hereunder" and similar terms contained in ------ ------ ------ --------- this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular section, paragraph or provision of this Agreement or such other Loan Document. "including" means including without limiting the generality of any --------- description preceding such term, and, for purposes of this Agreement and each other Loan Document, the parties hereto agree that the rule of ejusdem generis ------- ------- shall not be applicable to limit a general statement, which is followed by or referable to an enumeration of specific matters, to matters similar to the matters specifically mentioned. "Indebtedness" means, with respect to any Person as of any date, all ------------ liabilities and contingent liabilities which would be reflected on a balance sheet and related notes thereto of such Person prepared as of such date in accordance with GAAP, including without limitation: (i) all obligations for money borrowed; (ii) all obligations under conditional sale or other title retention agreements and all obligations issued or assumed as full or partial payment for property, whether or not any such obligations represent obligations for borrowed money; (iii) all indebtedness secured by any Lien existing on property owned or acquired by such Person subject to any such Lien, whether or not the obligations secured thereby shall have been assumed; (iv) the proportionate share of 12 such Person in all obligations, direct or indirect, to any joint venture, partnership or other entity of which such Person is a member; (v) all obligations under guaranties, note purchase agreements and other documents having similar effect; (vi) all obligations for accounts payable or trade credit; (vii) indebtedness of any joint venture, partnership or other Person for which such Person is directly or indirectly liable; and (viii) all obligations under capital leases, operating leases or any other leases only to the extent such leases would be treated as indebtedness in accordance with GAAP. "Instrument of Pledge" means that certain Instrument of Pledge dated as of -------------------- the date hereof, executed by the Borrower in favor of Bank of Montreal in its capacity as Agent for the Lenders and delivered pursuant to Section 5.1.7, ------------- substantially in the form of Exhibit G-4 hereto, as amended, supplemented, ----------- restated or otherwise modified from time to time. "Intercreditor Agreement" means that certain Intercreditor Agreement dated ----------------------- as of February 20, 1996 among the Lenders, the Agent, the Collateral Agent, the Arch Banks, BankOne, as Agent under the Arch Agreement and Bank of Scotland as Lender under the Onyx Loan Agreement (as defined in the Arch Agreement). "Interest Payment Date" means, in the case of any Prime Rate Loan and any --------------------- Base Rate Loan, (a) the last day of each calendar quarter during the term hereof, commencing March 31, 1996, and (b) the Stated Maturity Date, unless sooner matured or terminated pursuant to the terms hereof. "Judgment Currency" is defined in Section 4.12.2. ----------------- -------------- "Lender Assignment Agreement" means a Lender Assignment Agreement --------------------------- substantially in the form of Exhibit E hereto. --------- "Lenders" is defined in the preamble and includes their respective ------- -------- successors and permitted assigns. "LIBO Business Day" means a day on which dealings in Dollars are carried ----------------- out in the London interbank market. "LIBO Rate" means, with respect to each LIBOR Interest Period, on any day --------- thereof the rate of interest per annum determined by the Agent (in accordance with its customary general practice) to be the per annum rate at which deposits in immediately available funds in U.S. Dollars are quoted by the Agent at approximately 10:00 a.m. Toronto time two (2) Business Days prior to the first day of such LIBOR Interest Period for the offering by the Agent to leading 13 banks in the London interbank market for delivery on the first day of such LIBOR Interest Period, such deposits being for a period of time equal or comparable to such LIBOR Interest Period and in an amount equal to or comparable to the principal amount of the LIBO Rate Loan to which such LIBOR Interest Period relates. "LIBO Rate Loan" means any principal balance of Revolving Loans which, -------------- pursuant to a Borrowing Notice, Conversion Notice or Rollover Notice and subject to the provisions hereof, bears interest at a rate based upon the LIBO Rate for a LIBOR Interest Period specified in such Borrowing Notice, Conversion Notice or Rollover Notice. "LIBOR Interest Period" means, with respect to any LIBO Rate Loan, a period --------------------- commencing: (i) on any date upon which, pursuant to a Borrowing Notice, Conversion Notice or Rollover Notice, the principal amount of such LIBO Rate Loan begins to accrue interest at the LIBO Rate, or (ii) on the last day of the immediately preceding LIBOR Interest Period in the case of a Rollover to a successive LIBOR Interest Period, and (in either (i) or (ii)) ending one (1) month, two (2) months, three (3) months or six (6) months thereafter, as the Borrower shall elect in accordance with the provisions hereof; provided, -------- however, that: (A) any LIBOR Interest Period which would otherwise end on a day - ------- which is not a LIBO Business Day shall be extended to the next succeeding LIBO Business Day unless such LIBO Business Day falls in another calendar month, in which case such LIBOR Interest Period shall end on the next preceding LIBO Business Day; (B) any LIBOR Interest Period which begins on the last LIBO Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such LIBOR Interest Period) shall, subject to clauses (C) below and (A) above, end on the last LIBO Business Day of a calendar month; and (C) any LIBOR Interest Period which would otherwise end after the Stated Maturity Date, shall end on the Stated Maturity Date. "LIBOR Office" means, relative to any Lender, the office of such Lender ------------ designated as such below its signature hereto or designated in the Lender Assignment Agreement or such other office of a Lender as designated from time to time by notice from such Lender to the Borrower and the Agent, within Canada, which shall be making or maintaining LIBO Rate Loans of such Lender hereunder. "Lien" means any lien, mortgage, security interest, tax lien, pledge or ---- encumbrance, charge or conditional sale or title retention arrangement, or any other interest in property securing the repayment or performance of an obligation, whether arising by agreement or under any statute or law, or otherwise. 14 "Loan" means, as the context may require, a Revolving Loan of any Type. ---- "Loan Document" means (i) individually, each of this Agreement, the ------------- Bankers' Acceptances, the Guaranties, the Pledge Agreement, the Debenture, the Instrument of Pledge, the General Security Agreement, the Security Agreement (Stock), the Intercreditor Agreement, any Collateral Document, any letter agreement concerning fees of the type described in Section 2.14.1, each -------------- Borrowing Notice, each Conversion Notice, each Rollover Notice, each officer's certificate, and each financing statement from time to time executed and delivered in connection with this Agreement, and each other agreement, document, certificate or instrument from time to time executed and delivered in connection with this Agreement and (ii) collectively, any two or more of the foregoing. "Majority Lenders" means, at any time, Lenders having 100% of the aggregate ---------------- amount of the Commitments; provided that, if the Commitments shall have been terminated, "Majority Lenders" shall mean Lenders holding 100% of the then aggregate outstanding principal amount and face amount of the Borrowings. "Maximum Rate" means the maximum nonusurious interest rate, if any, that at ------------ any time, or from time to time, may be contracted for, taken, reserved, charged, or received on any Revolving Loan under the laws in effect in Alberta including the laws of Canada applicable therein. "Net Worth" of any Person means the total consolidated shareholder equity --------- of such Person and its Subsidiaries as shown on its balance sheet, including such Person's exchangeable convertible preferred stock. "Obligations" means (i) the obligation of the Borrower for the due and ----------- punctual payment to the Lender of the face amount of outstanding Bankers' Acceptances upon their maturity, and the principal of and interest on Revolving Loans when due, whether at maturity, by acceleration, by notice of voluntary prepayment or otherwise, (ii) all other obligations (including in respect of out-of-pocket expenses) and indemnities now or hereafter existing of the Borrower to the Lenders and the Agent under this Agreement, (iii) all out-of- pocket costs and expenses, now or hereafter existing, that may be incurred by the Lender or the Agent in connection with the administration and enforcement of the Loan Documents, (iv) the obligations of each of the Guarantors or other Persons obligated to the Lenders under the Loan Documents, and (v) all obligations of the Borrower under Article IV hereof. ---------- 15 "Offer" is defined in the first recital. ----- ------------- "Offering Document" is defined in the first recital. ----------------- ------------- "One Month BA Rate" means, on any day, the annual rate of interest which is ----------------- a rate determined as being the arithmetic average of the "BA 1 month" rate applicable to Canadian Dollar bankers' acceptances for Schedule I banks under the Bank Act (Canada) displayed and identified as such on the Reuters' Screen CDOR Page as at approximately 10:00 a.m. (Toronto, Canada time) on such day, or if such day is not a Business Day, then on the immediately preceding Business Day (as adjusted by the Agent after 10:00 a.m. (Toronto, Canada time) to reflect any error in a posted rate of interest or in the posted average annual rate of interest); provided, however, if such a rate does not appear on the Reuter's -------- ------- Screen CDOR Page as contemplated, the "One Month BA Rate" on any day shall be the average of the thirty (30) day discount rate of the Reference Banks notified to the Agent (determined as of 10:00 a.m. Toronto, Canada time on such day) which would be applicable in respect of an issuance of bankers' acceptances with a term to maturity of one month in an aggregate amount of Cdn. $500,000 issued on such day, or if such day is not a Business Day, then on the immediately preceding Business Day. "Other Currency" is defined in Section 4.12.1. -------------- -------------- "Outstandings" means, at any date, the aggregate of: (i) the Equivalent ------------ Amount in U.S. Dollars of the principal amount of, and interest which is overdue and unpaid in respect of, any outstanding Prime Rate Loan; (ii) the Equivalent Amount in U.S. Dollars of the face amounts of outstanding Bankers' Acceptances; and (iii) the principal amount of, and interest which is overdue and unpaid in respect of, outstanding LIBO Rate Loans and Base Rate Loans. "Participant" is defined in Section 10.11.2. ----------- --------------- "Percentage" means, relative to any Lender, the percentage set forth ---------- opposite its signature hereto or set forth in the Lender Assignment Agreement, as such percentage may be adjusted from time to time pursuant to Lender Assignment Agreement(s) executed by such Lender and its Assignee Lender(s) and delivered pursuant to Section 10.11. ------------- "Permitted Liens" means, as of any date: (i) liens granted in favor of the --------------- Agent for the benefit of the Lenders to secure any Obligations granted under any of the Loan Documents; (ii) pledges or deposits made to secure payment of worker's compensation (or to participate in any fund in connection with worker's compensation), 16 unemployment insurance, pensions or social security programs; (iii) contractual liens for the benefit of operators; (iv) liens imposed by provisions of law such as for materialmen's, builders', carriers', warehousemen's and other like liens arising in the ordinary course of business, to the extent such liens are subordinate to all liens and security interests of the Lenders and related to obligations not due or delinquent at that time; (v) liens for taxes, assessments and governmental charges or levies imposed upon a Person or upon such Person's income or profits or property, if the same are not yet due and payable or if the same are being contested in good faith and as to which adequate reserves have been provided; (vi) good faith deposits in connection with tenders, leases, real estate bids or contracts (other than contracts involving the borrowing of money), pledges or deposits to secure public or statutory obligations, deposits to secure (or in lieu of) surety, stay, appeal or customs bonds and deposits to secure the payment of taxes, assessments, customs duties or other similar charges; (vii) encumbrances consisting of zoning restrictions, easements, or other restrictions on the use of real property, provided that such do not impair the use of real property for the uses intended, and none of which is violated in any material respect by existing or proposed structures or land use; (viii) the terms and provisions of the leases, assignments, unit agreements and other agreements listed, identified or referred to in the Collateral Documents; (ix) the terms and provisions of the assignments and other title transfer documents under which Borrower acquired the Borrowing Base Properties including any right retained by a predecessor in title of Borrower to purchase hydrocarbons produced therefrom; and (x) any other liens or encumbrances to which the Lenders agree in writing that their Lien shall be subject. "Person" means any natural person, corporation, joint venture, partnership, ------ firm, association, trust, government, governmental agency or any other entity, whether acting in an individual, fiduciary or other capacity. "Pledge Agreement" means the Pledge Agreement executed and delivered ---------------- pursuant to Section 5.1.6, substantially in the form of Exhibit F hereto, as ------------- --------- amended, supplemented, restated or otherwise modified from time to time. "Present Value" means a calculation by an independent engineering firm ------------- specified in or otherwise satisfying the requirements of this Agreement of the net present value of the net cash flow of petroleum and natural gas reserves of the Borrower calculated on a basis satisfying the requirements of National Policy No. 2-B Guide for Engineers and Geologists Submitting Oil 17 and Gas Reports to Canadian Securities Administrators in relation to the petroleum and natural gas reserves of the Borrower and based on the following: (a) a description of net revenue interests and working interests attributable to such reserves; (b) escalation or de-escalation of commodity prices and capital, operating and other costs (including abandonment and reclamation costs) over the economic life of the relevant reserves; (c) specified assumptions as to foreign exchange rates; (d) calculated on a pre-income tax basis; (e) calculated including applicable Alberta Royalty Tax Credits; (f) descriptions and assumptions as to royalties, burdens of all kinds, taxes (including those based on volume or value of production or reserves), rates of production, recoverability and deliverability of reserves and demand for production; and (g) descriptions of the reserves and of such assumptions and other factors as were used in making the above determinations. "Prime Rate" means, on any day, the greater of (i) a fluctuating rate per ---------- annum equal to the floating rate of interest per annum then most recently announced by the Agent as the reference rate it will use to determine rates of interest on Canadian Dollar commercial loans made by it to borrowers in Canada and referred to by it as its "prime rate" and (ii) the aggregate of (a) the One Month BA Rate, plus (b) one hundred ten basis points (1.10%). Changes in the ---- rate of interest on that portion of any Loans maintained as Prime Rate Loans (and in the rate of interest of any other Obligations from time to time bearing interest at a rate determined by reference to the Prime Rate) will take effect simultaneously with each change in the Prime Rate. "Prime Rate Loan" means a Loan denominated in Canadian Dollars to which the --------------- Prime Rate applies. "Probable Additional Reserves" means those reserves which analysis of ---------------------------- drilling, geological, geophysical and engineering data does not demonstrate to be proved under current technology and existing economic conditions, but where such analysis suggests the likelihood of their existence and future recovery. Probable additional reserves to be obtained by the application of enhanced recovery processes will be the increased recovery over and above that estimated in the proved category which can be realistically estimated for the pool on the basis of enhanced recovery processes which can be reasonably expected to be instituted in the future. "Proved Producing Reserves" means those Proved Reserves that are actually ------------------------- on production or, if not producing, that could be recovered from existing wells or facilities and where the reasons for the current non-producing status is the choice of the owner rather than the lack of markets or some other reasons. An 18 illustration of such a situation is where a well or zone is capable but is shut- in because its deliverability is not required to meet contract commitments. "Proved Non-Producing Reserves" means those Proved Reserves that are not ----------------------------- currently producing either due to lack of facilities and/or markets. "Proved Reserves" means those reserves estimated as recoverable under --------------- current technology and existing economic conditions, from that portion of a reservoir which can be reasonably evaluated as economically productive on the basis of analysis of drilling, geological, geophysical and engineering data, including the reserves to be obtained by enhanced recovery processes demonstrated to be economic and technically successful in the subject reservoir. "Regulatory Change" means, with respect to any Lender, any change after the ----------------- Effective Date in any Canadian or foreign federal, state or provincial law, regulations (including regulations relating to reserve requirements), rule, treaty, decree or regulatory requirement or the adoption or making after such date of any interpretations, directives, requests, guidelines or orders applying to a class of lenders including such Lender of or under any Canadian or foreign federal, state or provincial law, regulations, rules, treaties, decrees or regulatory requirements (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reserve Requirement" means, for any LIBOR Interest Period for any LIBO ------------------- Rate Loan, the average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such LIBOR Interest Period under applicable federal, state or provincial law, regulation, directive, order, guideline or other regulatory requirement imposed by Bank of Canada, the Office of the Superintendent of Financial Institutions, the F.R.S. Board or any other governmental or monetary authority having or asserting jurisdiction. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by reason of any Regulatory Change against (i) any category of liabilities which includes deposits by reference to which the LIBO Rate is to be determined as provided in the definition of "LIBO Rate" in this Section 1.1 or (ii) any ----------- category of extensions of credit or other assets which includes any LIBO Rate Loan. "Revolving Loans" has the meaning set forth in Section 2.1.1. --------------- ------------- 19 "Rollover" means, in respect of (i) maturing Bankers' Acceptances, the -------- purchase by the Lenders of further Bankers' Acceptances the proceeds of which are to be applied to the repayment of the maturing Bankers' Acceptances, or (ii) the end of a LIBOR Interest Period applicable to all or a portion of a LIBO Rate Loan, selection by the Borrower of a further LIBOR Interest Period to be applicable thereto, as applicable. "Rollover Date" means the date that a Rollover is to be made pursuant to a ------------- Rollover Notice. "Rollover Notice" means a notice to effect a Rollover delivered under --------------- Section 2.4.3 and in substantially the form of Exhibit N with all applicable - ------------- --------- blanks completed and duly executed and completed by an Authorized Officer of the Borrower. "Schedule II Lender" means any Lender which is a bank chartered under and ------------------ referred to in Schedule II of the Bank Act (Canada). "Schedule II Reference Lenders" means (i) at any time when there are three ----------------------------- or more Schedule II Lenders, two Schedule II Lenders, one to be selected from time to time by the Agent with the consent of the Borrower (which consent will not be unreasonably withheld or delayed) and the other to be selected from time to time by the Borrower with the consent of the Agent (which consent will not be unreasonably withheld or delayed); and (ii) at any other time, such Schedule II Lenders, if any, or such other financial institutions as the Agent and the Borrower shall agree. "Security Agreement (Stock)" means the Security Agreement executed and -------------------------- delivered pursuant to Section 5.1.7, substantially in the form of Exhibit G-1 ------------- ----------- hereto, as amended, supplemented, restated or otherwise modified from time to time. "Shares" is defined in the first recital. ------ ------------- "Spot Rate of Exchange" means, on any date, the rate of exchange between --------------------- two currencies which is quoted on the Reuters' Screen page BOFC at or about noon Toronto time on that day. "Stated Maturity Date" means May 1, 1997. -------------------- "Subsidiary" means, with respect to any Person, (a) any corporation of ---------- which 50% or more of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation 20 shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person, by such Person and one or more Subsidiaries of such Person, or by one or more other Subsidiaries of such Person, (b) any partnership of which such Person, or one or more other Subsidiaries of such Person is a general partner, and (c) any limited liability company in which such Person, such Person and one or more other Subsidiaries of such Person, or one or more other Subsidiaries of such Person is a member or manager and with an aggregate interest of 50% or more. "Taxes" is defined in Section 4.7. ----- ----------- "Trax Borrowing Base" is defined in Section 3.1. ------------------- ----------- "Type" means, relative to any Borrowing, the portion thereof, if any, being ---- maintained as a Base Rate Loan, a BA Equivalent Loan, a Bankers' Acceptance, a Prime Rate Loan or a LIBO Rate Loan. "United States" or "U.S." means the United States of America, its fifty ------------- ---- States and the District of Columbia. "U.S. Allocated Borrowing Base" has the meaning assigned to such term in ----------------------------- the Arch Agreement. SECTION 1.2 Use of Defined Terms. Unless otherwise defined or the -------------------- context otherwise requires, terms for which meanings are provided in this Agreement shall have such meanings when used in each Borrowing Notice, Conversion Notice, Rollover Notice, Loan Document, notice and other communication delivered from time to time in connection with this Agreement or any other Loan Document. SECTION 1.3 Cross-References. Unless otherwise specified, references in ---------------- this Agreement and in each other Loan Document to any Article or Section are references to such Article or Section of this Agreement or such other Loan Document, as the case may be, and, unless otherwise specified, references in any Article, Section or definition to any clause are references to such clause of such Article, Section or definition. SECTION 1.4 Accounting and Financial Determinations. Unless otherwise --------------------------------------- specified, all accounting terms used herein or in any other Loan Document shall be interpreted, all accounting determinations and computations hereunder or thereunder shall be made, and all financial statements required to be delivered hereunder or thereunder shall be prepared in accordance with, those generally accepted accounting principles as applied to U.S. financial 21 statements ("GAAP") applied in the preparation of the financial statements ---- referred to in Section 5.1.12. -------------- SECTION 1.5 Currency References. Unless otherwise specified herein, all ------------------- dollar amounts expressed herein shall refer to U.S. Dollars. Except as otherwise herein specified, for purposes of calculating compliance with the terms of this Agreement and the other Loan Documents (including for purposes of calculating compliance with the covenants), any other obligation or calculation shall be converted to its Equivalent Amount in U.S. Dollars. ARTICLE II REVOLVING CREDIT FACILITY SECTION 2.1 Commitments. ----------- SECTION 2.1.1 Revolving Credit Commitment. Subject to and in reliance --------------------------- upon the terms, conditions, representations and warranties contained in this Agreement, each Lender severally agrees to make revolving credit loans to the Borrower in one or more advances ("Revolving Loans") of LIBO Rate Loans, Prime --------------- Rate Loans, Base Rate Loans and/or purchase Bankers' Acceptances and deliver the Discount Proceeds in respect thereof (less the applicable fee payable in respect thereof pursuant to Section 2.3.12) in a principal amount equal to such Lender's -------------- Percentage of the aggregate amount of the Borrowings requested by the Borrower on any date. The Commitment of each Lender described in this Section 2.1.1 is herein referred to as its "Commitment". SECTION 2.1.2 Lenders Not Permitted or Required to Make Borrowings ---------------------------------------------------- Available. No Lender shall be permitted or required to make any Loan or accept - --------- any Bankers' Acceptance, or otherwise make any Borrowing under its Commitment available to the Borrower if, after giving effect thereto and to all other Borrowings to be made on such date, and to all reductions of the Commitments, the Outstandings of all Lenders would exceed the lesser of (v) the Facility Amount and (x) the Canadian Allocated Borrowing Base then in effect, or the aggregate amount of such Lender's Borrowings would exceed the lesser of (y) such Lender's Percentage of the Facility Amount and (z) such Lender's Percentage of the Canadian Allocated Borrowing Base then in effect. If the amount of a Lender's Outstandings exceeds its Commitment, the amount of such excess shall immediately be repaid except to the extent that any excess arises solely as a result of fluctuations in the rate of 22 exchange for conversion of Canadian Dollars against U.S. Dollars, in which case the Borrower shall only be required to repay the amount of any such excess on each Borrowing Date, Conversion Date, Rollover Date and the last Business Day of each fiscal quarter of Borrower, provided, that if the amount required to be -------- ---- repaid on any day exceeds the amount of the Revolving Loans, then the Borrower shall make a deposit of an amount of the excess in an account under Section ------- 2.9.2. No Lender shall have any obligation to make or effect any Borrowing (i) - ------ on a non-Business Day, or (ii) after the Commitment Termination Date; provided, -------- however, that Borrower's Obligations and Lender's rights under the Loan - ------- Documents shall continue in full force and effect until the Obligations are indefeasibly paid and performed in full. Prior to the Commitment Termination Date, Borrower may request the Lender to purchase Bankers' Acceptances, borrow, repay and reborrow Revolving Loans in whole or part, and effect Conversions and Rollovers all in accordance with terms and conditions of this Agreement. SECTION 2.1.3 Several Obligations. No Lender shall be responsible for the ------------------- failure of any other Lender to make a Loan to be made by such other Lender or to accept any Bankers' Acceptance to be accepted by any other Lender. SECTION 2.1.4 Funding Borrowings Under Commitments. ------------------------------------ (a) On or before 11:00 a.m. Toronto time on each Drawdown Date on which a Loan is requested to be made to a Borrower, each Lender shall deposit with the Agent immediately available funds in an amount equal to such Lender's Percentage of the requested Loans and in the currency specified in the relevant Borrowing Notice. Such deposit will be made to accounts in Canada which the Agent shall specify from time to time by notice to the Lenders. To the extent funds on account of Loans made to or for the account of the Borrower are received by the Agent from the Lenders pursuant to this Section 2.1.4, the Agent shall make ------------- funds available to the Borrower by depositing such funds to the accounts at the Agent's Branch of Account. No Lender's obligation to make any Loan or otherwise fund any Borrowing shall be affected by any other Lender's failure to make any other Loan or otherwise fund any Borrowing. (b) In the event of any failure by a Lender to make a Loan required hereunder, the other Lenders may (but shall not be required to) purchase (on a pro rata basis, according to their respective Percentages) such Lender's Loan. Upon the failure of a Lender to make a Loan required to be made by it hereunder, the Agent may (but shall not be required to) obtain one or more banks, acceptable to Borrower, to replace such Lender, but neither the 23 Agent nor any other Lender shall have any liability or obligation whatsoever as a result of the failure to purchase a Loan or to obtain a replacement for such Lender. SECTION 2.2 Borrowing Procedure; Disbursement. --------------------------------- (a) Subject to the provisions hereof, each Borrowing shall be made on Borrower's delivery of a Borrowing Notice to the Agent requesting an advance of a Revolving Loan or purchase by the Lender of Bankers' Acceptances on a certain date (the "Drawdown Date"). Each Borrowing Notice shall be irrevocable and ------------- binding and must be received by the Agent no later than: (i) 10:00 a.m. (Toronto time), on the Drawdown Date in the case of Prime Rate Loan or Base Rate Loan; (ii) 10:00 a.m. (Toronto time) one (1) Business Day prior to the Borrowing Date in the case of a Borrowing by way of Bankers' Acceptances; and (ii) 1:00 p.m. (Toronto time) three (3) Business Days prior to the Drawdown Date in the case of a requested Borrowing by way of a LIBO Rate Loan. (b) Prior to submitting a Borrowing Notice, the Borrower may (without specifying whether the anticipated Borrowing shall be a Base Rate Loan, LIBO Rate Loan, Prime Rate Loan or Bankers' Acceptance) request that the Agent provide the Borrower with the most recent Alternate Base Rate, Prime Rate and Discount Rate available to the Agent. The Agent shall endeavor to provide such quoted rates to the Borrower on the date of such request. The Borrower acknowledges and agrees that such quoted rates are subject to change from the time provided by the Agent to the time specified for determining the Alternate Base Rate, Prime Rate and Discount Rate in accordance with this Agreement. SECTION 2.3 Conditions Applicable to Bankers' Acceptances. --------------------------------------------- SECTION 2.3.1 Purchase of Bankers' Acceptances by a Lender. Subject to -------------------------------------------- the provisions hereof, each Lender hereby agrees to purchase (at the applicable Discount Rate) its Lender's Percentage of Bankers' Acceptances as requested by the Borrower pursuant to a Borrowing Notice, Conversion Notice or Rollover Notice delivered under Section 2.2, 2.4.2 or 2.4.3. Any Lender may at any time ----------- ----- ----- and from time to time hold, sell, rediscount or otherwise dispose of any or all such Acceptances purchased by it. SECTION 2.3.2 Payment to Borrower. On the Borrowing Date, Rollover Date ------------------- or Conversion Date relating to any issue of Bankers' Acceptances, each Lender shall deposit with the Agent in immediately available funds at the Agent's Branch of Account in an amount equal to the Discount Proceeds of such Bankers' Acceptances (less any fees payable to the Lender in respect thereof pursuant to 24 Section 2.3.12). Such deposit will be made to accounts in Canada which the - -------------- Agent shall specify from time to time by notice to the Lenders. To the extent funds on account of Discount Proceeds are received by the Agent from the Lenders pursuant to this Section 2.3.2, the Agent shall make funds available to the ------------- Borrower by depositing such funds to the accounts at the Agent's Branch of Account or, if applicable, the Agent may apply such amount to the Borrower's obligations in respect of any Borrowing which is being converted under Section ------- 2.4.2 or rolled over under Section 2.4.3. - ----- ------------- SECTION 2.3.3 Waiver of Presentment and Other Conditions. The Borrower ------------------------------------------ waives presentment for payment and, except to the extent of the gross negligence or wilful misconduct of the Lenders referred to in Section 2.3.5, any other ------------- defense to payment of any amounts due to the Lender in respect of a Bankers' Acceptance purchased by it pursuant to this Agreement and the Borrower agrees not to claim any days of grace if a Lender as holder demands payment of the Bankers' Acceptance on the maturity date thereof. On the specified maturity date of a Bankers' Acceptance, the Borrower shall pay each Lender holding any Bankers' Acceptance (as original purchaser, on any repurchase or purchase in the market or as a result of having honored its obligations as the drawee therefor to pay the payee thereof), the full face amount of such Bankers' Acceptance, which payment, subject to the provisions hereof, may be from the proceeds of a Conversion or Rollover. SECTION 2.3.4 Terms of Each Bankers' Acceptance. Each Bankers' Acceptance --------------------------------- shall: (a) have a maturity date which shall be on a Business Day prior to or on the Stated Maturity Date; (b) unless the Lender agrees otherwise, have a term of not less than ten (10) and not more than one hundred eighty (180) days; (c) be in the form set forth in Exhibit M; and --------- (d) be denominated in the minimum amount of Cdn. $500,000 and whole multiples of Cdn. $100,000. SECTION 2.3.5 Delivery of Blank Bankers' Acceptances. As a condition -------------------------------------- precedent to any Lender's obligation to accept Bankers' Acceptances hereunder, the Borrower shall have delivered to the Lender through the Agent at the Agent's Branch of Account sufficient Acceptances endorsed and executed by the Borrower in blank in sufficient time for such Lender to forward to and hold same at its Toronto offices (or any other office in Canada as 25 specified from time to time by such Lender) for issuance in accordance with a request from the Borrower. No Lender shall be responsible or liable for any failure to make credit available by way of Bankers' Acceptances if such failure is due to the failure of the Borrower to return duly pre-signed and pre-endorsed bankers' acceptance forms to the Lender on a timely basis. No Lender shall be liable for any damage, loss or other claim arising by reason of any loss or improper use of any such Acceptance endorsed and executed in blank except any loss arising by reason of the gross negligence or wilful misconduct of such Lender or its officers, employees, agents or representatives or any loss arising by reason of such Lender or its officers, employees, agents or representatives failing to use the same standard of care in the custody of such Acceptances endorsed and executed in blank as such Lender uses in the custody of its own property of a similar nature. In addition to, and not by way of limitation of all other indemnities contained in this Agreement and/or in any other Loan Document, the Borrower agrees to indemnify and hold each Lender and the Agent harmless from any loss or expense with respect to any Bankers' Acceptance dealt with by such Lender or Agent, as the case may be, in accordance with this Agreement, arising from any act by or failure to act on the part of the Borrower. Each Lender shall maintain a record with respect to such Acceptances endorsed and executed in blank that are received from the Borrower and with respect to such Acceptances that are: (a) voided by the Lender for any reason; (b) accepted by the Lender hereunder; or (c) cancelled by the Lender at the maturity thereof. Each Lender agrees to provide such record to the Agent upon request therefor by the Agent as well as concurrently with any request by such Lender to the Agent for such additional acceptances endorsed in blank which are required from the Borrower. The Agent shall provide a report of such records received by the Agent to the Borrower upon request from the Borrower. SECTION 2.3.6 Failure to Give Notice of Repayment (Automatic Rollover or ---------------------------------------------------------- Conversion). If the Borrower fails to give timely notice to the Agent at the - ----------- Agent's Branch of Account of a Rollover Notice, Conversion Notice or other notice of the method of repayment of the full face amounts of maturing Bankers' Acceptances ("Maturing Bankers' Acceptances") in accordance with the provisions hereof, prior to the date of maturity of such Maturing Bankers' Acceptances in accordance with the period of notice required for 26 the original issuance of such Maturing Bankers' Acceptances as set forth in Section 2.2, then the full face amounts of such Maturing Bankers' Acceptances - ----------- (or so much thereof for which the Borrower has not made provision) shall be converted to Prime Rate Loans on their maturity. SECTION 2.3.7 Execution of Bankers' Acceptances. Acceptances of the --------------------------------- Borrower which are endorsed or executed in blank and are to be purchased as Bankers' Acceptances hereunder shall be signed by a duly authorized signatory or duly authorized signatories of the Borrower, and may, at the option of the Borrower, be signed by way of affixing a reproduction of the signature or signatures of such duly authorized signatory or signatories. Notwithstanding that any person whose signature appears on any Bankers' Acceptance as a signatory may no longer be an authorized signatory of the Borrower at the date of issuance of a Bankers' Acceptance, and notwithstanding that the signature affixed may be a reproduction only, such signature shall nevertheless be valid and sufficient for all purposes as if such authority had remained in force at the time of such issuance and as if such signature had been manually applied, and any such Bankers' Acceptance so signed shall be binding on the Borrower. SECTION 2.3.8 Advice to the Lenders. The Agent, promptly following --------------------- receipt of a notice of Borrowing by way of Bankers' Acceptance in the form of Exhibit C, a notice of conversion of a Borrowing to a Bankers' Acceptance in the - --------- form of Exhibit D, or a notice of Rollover in the form of Exhibit N shall so --------- --------- advise the Lenders and shall advise each Lender of the face amount of each Bankers' Acceptance to be purchased by it and the term thereof, which term shall be identical for all Lenders. By no later than 10:30 a.m. (Toronto time) on each Drawdown Date, Conversion Date or Rollover Date on which the Lenders are required to purchase Bankers' Acceptances hereunder, the Agent shall determine the applicable CDOR Rate in respect of such Bankers' Acceptances. SECTION 2.3.9 Agent's Confirmation of Bankers' Acceptance Issuance. On or ---------------------------------------------------- prior to 11:30 a.m. (Toronto time) on the Drawdown Date, Rollover Date or Conversion Date relating to Bankers' Acceptances to be purchased by the Lenders on such date, the Agent shall provide telephone advice to the Borrower and each Lender confirming the particulars with respect to such Bankers' Acceptances. SECTION 2.3.10 Completion of Bankers' Acceptance. Each Lender is --------------------------------- authorized to complete blank Acceptances executed by the Borrower held by it in accordance with the particulars determined under Section 2.3.9. ------------- 27 SECTION 2.3.11 Prepayment of Bankers' Acceptances. A Bankers' Acceptance ---------------------------------- may only be repaid on its maturity date. SECTION 2.3.12 Bankers' Acceptance Fees. The Borrower shall pay to the ------------------------ Lender fees in Canadian Dollars forthwith upon the purchase by the Lender of each Bankers' Acceptance hereunder at a rate per annum equal to the product of (i) the Applicable Margin with respect to Bankers' Acceptances in effect at the time of purchase of such Bankers' Acceptance, (ii) the face amount of such Bankers' Acceptance and (iii) the number of days in the term of such Bankers' Acceptance, divided by the actual number of days in the twelve (12) month period commencing on the date of purchase; provided that for the purpose of this Section 2.3.12 the Applicable Margin for any Bankers' Acceptance shall not - -------------- exceed an amount such that the sum of such margin plus the Discount Rate with respect to such Bankers' Acceptance for the term thereof exceeds the sum of (x) the CDOR Rate with respect to such Bankers' Acceptance, (y) the Applicable Margin with respect to such Bankers' Acceptance and (z) ten basis points (0.10%). Fees payable to the Lender pursuant to this Section 2.3.12 shall be paid in the -------------- manner specified in Section 2.4. ----------- SECTION 2.3.13 Borrower's Absolute Obligation to Repay Bankers' ------------------------------------------------ Acceptances. The obligations of the Borrower with respect to Bankers' - ----------- Acceptances under this Agreement shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement in all circumstances, including, without limitation, any lack of validity or enforceability of any Acceptance accepted by a Lender as a Bankers' Acceptance, or the existence of any claim, set-off, defense or other right which the Borrower may have at any time against the holder of a Bankers' Acceptance, the Agent or any other Lender or Person, whether in connection with this Agreement or otherwise. 2.4 Certain Procedural Matters -------------------------- SECTION 2.4.1 Revolving Loans and Bankers' Acceptance. Utilizations of --------------------------------------- credit hereunder, whether arising upon a Borrowing, Conversion (including any portion of the Borrowing which is not converted) or Rollover shall be in the following minimum amounts: (a) in the case of Bankers' Acceptances having common issue and maturity dates, a minimum aggregate amount of Cdn. $500,000 and in an integral multiple of Cdn. $100,000; and 28 (b) in the case Revolving Loans, a minimum aggregate principal amount of Cdn. or U.S. $500,000 and in an integral multiple of Cdn. or U.S. $100,000, as the case may be. SECTION 2.4.2 Conversions. Subject to the provisions hereof, and in ----------- particular Section 2.4.1, the Borrower may effect a Conversion of all or part of ------------- a Borrowing upon giving a Conversion Notice to the Agent in accordance with the period of notice and other requirements set out in Section 2.2 applicable to a ----------- Borrowing of the Type to which the Conversion is to be made; provided, however, that a Bankers' Acceptance may only be converted on its maturity date and a LIBO Rate Loan may only be converted at the end of a LIBOR Interest Period or upon the Borrower paying to each Lender Consequential Loss under Section 4.6. ----------- Accordingly, on each Conversion Date, but subject to the terms hereof, the obligation of the Borrower to repay to a Lender the amount and Type of the Borrowing which is being converted shall be replaced with an obligation to repay the amount and Type of the Borrowing into which such Conversion is being effected. No Conversion of all or part of a Borrowing shall be effected, without the consent of the Agent, at any time when any Default or Event of Default has occurred and is continuing. The Borrower may not (i) convert U.S.$ Borrowings to Cdn$ Borrowings or (ii) convert Cdn$ Borrowings to U.S.$ Borrowings. SECTION 2.4.3 Rollovers. Subject to the provisions hereof, the Borrower --------- may effect a Rollover of all or, subject to Section 2.4.1, part of a Borrowing ------------- upon giving a Rollover Notice to the Agent in accordance with the period of notice and other requirements set out in Section 2.2 applicable to a Borrowing ----------- of the same Type. SECTION 2.4.4 Rollovers and Conversions not Prepayment. Any Conversion or ---------------------------------------- Rollover, and any repayment in connection therewith, shall not constitute a prepayment or repayment for the purposes hereof. SECTION 2.4.5 Limitation on Number of Borrowings. There shall not be more ---------------------------------- than six (6) LIBOR Interest Periods or six (6) Borrowings by way of Bankers' Acceptances outstanding at any one time. SECTION 2.4.6 Notice of Expiration of LIBOR Interest Periods. At least ---------------------------------------------- three (3) Business Days prior to the termination of any LIBOR Interest Period, Borrower shall give the Agent a Rollover Notice or Conversion Notice, or notice of repayment or prepayment with respect thereto. If, with respect to any LIBO Rate Loan or 29 portion thereof, no such notice has been timely received by Lender, Borrower shall be deemed to have selected a Conversion of such LIBO Rate Loan or portion to a Base Rate Loan on the expiration of such LIBOR Interest Period and to have given the Agent a Conversion Notice in respect thereof. SECTION 2.5 Intentionally Omitted. SECTION 2.6 Interest and Fees. ----------------- SECTION 2.6.1 Rates and Payment of Interest. Until the Stated Maturity ----------------------------- Date, (i) the unpaid principal of any Prime Rate Loan shall bear interest at a rate per annum which shall from day to day be equal to the lesser of (A) the sum of the Applicable Margin with respect to Prime Rate Loans in effect from day to day plus the Prime Rate in effect from day to day or (B) the Maximum Rate; (ii) ---- the unpaid principal of each LIBO Rate Loan shall bear interest at a rate per annum for each day of each LIBOR Interest Period applicable to such LIBO Rate Loan which shall from day to day be equal to the lesser of (A) the sum of the Applicable Margin for LIBO Rate Loans with respect to such LIBOR Interest Period plus the LIBO Rate for such LIBOR Interest Period or (B) the Maximum Rate; and (iii) the unpaid principal of any Base Rate Loan shall bear interest at a rate per annum which shall from day to day be equal to the lesser of (A) the sum of the Applicable Margin with respect to Base Rate Loans in effect from day plus ---- the Alternate Base Rate in effect from day to day or (B) the Maximum Rate. Interest accrued on the principal amount from time to time outstanding of each Revolving Loan shall be payable, without duplication: (i) on the Stated Maturity Date; (ii) on the date and to the extent of any payment or prepayments, in whole or in part, of principal outstanding on such Revolving Loan; (iii) with respect to Base Rate Loans and Prime Rate Loans, on each Interest Payment Date occurring after the Effective Date; (iv) with respect to LIBO Rate Loans, the last day of each applicable LIBOR Interest Period (and with respect to LIBO Rate Loans, if such LIBOR Interest Period shall exceed ninety (90) days, on the last Business Day of each ninety (90) day period during such LIBOR Interest Period); (v) with respect to any Base Rate Loan converted in whole or in part into a LIBO Rate Loan, or any Prime Rate Loan converted in whole or in part into Bankers' Acceptances, on a day when interest would not otherwise have been payable pursuant to clause (iii), on the date of such conversion; and (vi) on that ------------ portion of any Revolving Loan the Stated Maturity Date of which is accelerated pursuant to Section 8.3, immediately upon such acceleration. ----------- 30 Interest accrued on Revolving Loans or other monetary Obligations arising under this Agreement or any other Loan Document after the date such amount is due and payable (whether on the Stated Maturity Date, upon acceleration or otherwise) shall be payable upon demand. SECTION 2.6.2 Acknowledgement. The Borrower acknowledges that the --------------- determination of the Applicable Margin is dependent upon the Consolidated Borrowing Base and that the Consolidated Borrowing Base is an amount specified by the Lenders and the Arch Banks. The Borrower agrees to be bound by the Consolidated Borrowing Base and any resulting change in the Applicable Margin hereunder. SECTION 2.6.3 Intentionally Omitted. --------------------- SECTION 2.6.4 Interest Calculation. The Agent shall as soon as -------------------- practicable notify Borrower of the effective date and the amount of each change in the Contract Rate. Each determination of an interest rate by Agent pursuant to any provision of this Agreement shall be presumptively conclusive and binding on the Borrower in the absence of manifest error. SECTION 2.6.5 Clawback. Notwithstanding anything to the contrary herein -------- or in any other Loan Document contained, in the event that any rate of interest hereunder should ever exceed the Maximum Rate, thereby causing the interest accruing on any of the indebtedness hereunder to be limited to such Maximum Rate, then any subsequent reduction in such rate of interest shall not reduce the rate of interest charged hereunder below the Maximum Rate until the total amount of interest accrued on such indebtedness, equals the amount of interest which would have accrued on such indebtedness if the rate of interest hereunder had been in effect at all times in the period during which the rate charged thereon was limited to the Maximum Rate. SECTION 2.6.6 Default Rate. At the Majority Lenders' option and to the ------------ extent permitted by applicable Law, all past due Obligations and accrued interest thereon and related fees shall bear interest from maturity (stated or by acceleration) at the Default Rate until paid, regardless of whether such payment is made before or after entry of a judgment. SECTION 2.6.7 Interest Act Disclosure. Where in this Agreement a rate of ----------------------- interest or a fee or other amount is to be calculated on the basis of a year of 360 or 365 days, the yearly rate to which the said rate is equivalent, for the purposes of the Interest Act (Canada) is the said rate multiplied by a fraction, the numerator of which is the number of days in the twelve month period commencing on the first day of the period for which such 31 calculation is made, and the denominator of which is 360 or 365, as applicable. SECTION 2.6.8 No Deemed Reinvestment. The theory of deemed re-investment ---------------------- of interest shall not apply to the calculation or payment of interest or fees or other amounts hereunder, notwithstanding anything contained herein or in any Loan Document or any other instrument. All interest and fees payable hereunder shall accrue from day to day, computed as described herein in accordance with the "nominal rate" method of calculation and not the "effective rate" or any similar method of calculation. SECTION 2.7 Principal Payments on Stated Maturity Date. On the Stated ------------------------------------------ Maturity Date, the Commitments shall reduce to nil and the Borrower shall repay all Borrowings then outstanding, together with all interest, fees and other amounts owing hereunder. SECTION 2.8 Extension, Place and Application of Payments. Subject to -------------------------------------------- the terms of the definition of LIBOR Interest Period, should the principal of, or any interest on, a Revolving Loan become due and payable on any day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day, and interest shall be payable with respect to such extension, provided, however, that if the repayment of the Obligations on the -------- ------- Stated Maturity Date, or on an earlier date due to an acceleration pursuant to Section 8.3 hereof, is on a day other than a Business Day, all outstanding - ----------- principal and interest shall be due and payable on the immediately preceding Business Day. All payments of principal of, and interest on, the Obligations shall be made by Borrower to the Agent to the appropriate account at the Agent's Branch of Account in immediately available funds. SECTION 2.9 Mandatory Payment of Loans. -------------------------- SECTION 2.9.1 Outstandings Exceed Facility Amount. If, at any time prior ----------------------------------- to the Commitment Termination Date, the total amount of all Outstandings exceeds the Facility Amount, then, Borrower shall immediately repay, without premium or penalty Borrowings in an amount equal to such excess, along with accrued unpaid interest on the amount so repaid to the date of such repayment together with any Consequential Loss under Section 4.6. ----------- SECTION 2.9.2 Deposits with Respect to Bankers' Acceptances. If the --------------------------------------------- amount of the excess under Section 2.9.1 exceeds the outstanding amount of ------------- Revolving Loans hereunder, or if required by Section 2.1.2, Section 2.9.3 or ---------------------------- Section 2.9.4, then in any such case the Borrower shall deposit with the Agent, - ------------- or such other financial institution stipulated by the Agent, in an account from 32 which Borrower has no withdrawal rights (except to apply the same to maturing Bankers' Acceptances) an amount equal to the remaining excess, or outstanding Bankers' Acceptances, as the case may be, and interest on such amount shall be for the account of Borrower and such amount shall be applied to maturing Bankers' Acceptances. The Agent shall have a first and paramount charge and Lien on all such funds in such account for payment of the Obligations. SECTION 2.9.3 Acceleration. The Borrower shall, immediately upon any ------------ acceleration of the Stated Maturity Date of any Borrowings outstanding pursuant to Section 8.3, repay all Borrowings then outstanding, or, in the case of ----------- outstanding Bankers' Acceptances, immediately make a payment in accordance with Section 2.9.2 in the face amount of each Bankers' Acceptance then outstanding, - ------------- unless pursuant to Section 8.3 only a portion of all Borrowings are so ----------- accelerated. SECTION 2.9.4 Borrowing Base Deficiency. Unless the Borrower cures the ------------------------- Borrowing Base Deficiency by designating a new Canadian Allocated Borrowing Base, the Borrower shall, within thirty (30) days following the Agent's notice of a Borrowing Base Deficiency, (i) first make a mandatory prepayment of the principal amount of all outstanding Revolving Loans and (ii) second make a mandatory payment in the face amount of Bankers' Acceptances in accordance with Section 2.9.2, for such prepayments and payments to be equal, in the aggregate, - ------------- to the Borrowing Base Deficiency. SECTION 2.10 Voluntary Principal Prepayments. ------------------------------- (a) Upon giving the Agent at least three (3) but no more than five (5) Business Day's notice, Borrower shall be entitled to prepay the Obligations from time to time and at any time, in whole or in part, without penalty; provided, -------- however, (i) any such prepayment shall be made pro rata among Loans of the same - ------- Type outstanding and, if applicable, having the same LIBOR Interest Period, and made on the same day and constituting one (1) Borrowing of all Lenders, (ii) all such voluntary partial prepayments of the Loans shall be in an aggregate minimum amount of Cdn. or U.S. $500,000 and an integral multiple of Cdn. or U.S. $100,000, as the case may be, (iii) outstanding Bankers' Acceptances may only be repaid on their respective maturity dates, and (iv) Borrower shall only be entitled to make a prepayment if all accrued interest on the amount prepaid and any and all fees and other sums (including, without limitation, past due interest, if any) payable to the Lenders hereunder shall be paid to the date of such prepayment. Prior to the Commitment Termination Date, the Revolving Loans prepaid may, subject to the conditions of this Agreement, be reborrowed hereunder, and this Agreement shall not be deemed to be 33 terminated or cancelled prior to the expiration or termination of each Lender's Commitment to lend hereunder solely because the Obligations may from time to time be paid in full. After the Commitment Termination Date, Revolving Loans may not be reborrowed and the Lenders shall not be obliged to purchase Bankers' Acceptances hereunder. (b) Any prepayment of Revolving Loans made hereunder shall be made together with interest accrued through the date of such prepayment. If any portion of any LIBO Rate Loan should for any reason be repaid prior to the expiry of the applicable LIBOR Interest Period, including as a result of any Conversion, any mandatory prepayment under Section 2.1.2 or Section 2.9, any ------------- ----------- voluntary prepayment under this Section 2.10, or any Default or Event of ------------ Default, the Borrower shall reimburse each Lender on demand for the Consequential Loss incurred by any Lender as a result of the timing of such payment. A certificate of a Lender as to the amount of any Consequential Loss shall be presumptively conclusive and binding on the Borrower in the absence of manifest error. SECTION 2.11 Order of Application. Each Lender may apply all payments -------------------- and prepayments of the Obligations in such order as such Lender deems appropriate; provided that so long as no Default or Event of Default has -------- occurred and is continuing, all payments and prepayments of the Obligations shall be applied first to accrued and unpaid fees, second to accrued and unpaid interest and third to principal. SECTION 2.12 Commitment Fee. The Borrower shall pay to the Agent for the -------------- account of each Lender, for the period (including any portion thereof when any Lender's Commitment is suspended by reason of the Borrower's inability to satisfy any condition of Article V) commencing on the Effective Date and --------- continuing through the Commitment Termination Date, a commitment fee in U.S.$, at the rate of 1/2 of 1 percent (0.5%) per annum, calculated daily (on the basis of a year consisting of 365 days or, if appropriate, 366 days) on such Lender's Percentage of the average daily Available Unfunded Borrowing Base. Such commitment fees shall be payable in arrears on the last day of each calendar quarter, commencing with the first such day following the Effective Date, and on the Commitment Termination Date. SECTION 2.13 Evidence of Borrowings. The Agent is hereby directed and ---------------------- authorized by the Borrower to open and maintain accounts on the books of the Agent to evidence the Borrowings and other amounts owing by the Borrower to the Agent and each Lender under this Agreement. Each Lender shall open and maintain accounts 34 evidencing its Lender's Percentage of the Borrowings and other amounts owing by the Borrower to the Lender under this Agreement. The Agent or Lender, as applicable, shall debit therein the amount of such Borrowings or Lender's Percentage thereof, as applicable, and shall enter therein each payment of principal of and interest on the Borrowings or Lender's Percentage thereof, as applicable, and fees and other amounts payable pursuant to this Agreement and shall record the Bankers' Acceptances purchased by each Lender or, in the case of a Lender, such Lender, and all other amounts becoming due to the Agent and each Lender or, in the case of a Lender, such Lender, under this Agreement and, upon request, shall provide the Borrower a copy of such accounts and records, as applicable. The accounts and records of the Agent in the case of amounts owing to it as such, or the Lender's so kept shall constitute conclusive and binding evidence, absent demonstrable error, of the foregoing matters, the information contained therein and the Outstandings hereunder at any time; provided that the obligation of the Borrower to pay any Outstandings in accordance with the Loan Documents shall not be affected by the failure of the Agent or any Lender to make any such recording or to provide a copy thereof to the Borrower. SECTION 2.14 Additional Fees. --------------- SECTION 2.14.1 Agent's Fee. The Borrower agrees to pay to the Agent for ----------- its own account the fees payable on such dates and in such amounts as the Agent and the Borrower shall agree in writing. SECTION 2.14.2 Intentionally Omitted. --------------------- SECTION 2.14.3 Consolidated Borrowing Base Redetermination Fee. Pursuant ----------------------------------------------- to Section 3.5, should the Borrower request a discretionary redetermination of ----------- the then existing Consolidated Borrowing Base, the Borrower shall pay to the Agent, for the account of each Lender, a fee of such Lender's Percentage of U.S.$5,000 as reasonable compensation to the Lenders for conducting such redetermination of the Consolidated Borrowing Base. SECTION 2.14.4 Amendment Fee. For each amendment to this Agreement that is ------------- requested by the Borrower which amends, modifies or changes a material or significant term or provision of this Agreement (excluding any amendments to this Agreement entered into to reflect the redetermination of the Trax Borrowing Base pursuant to Section 3.5), the Borrower shall pay to the Agent, for the ----------- account of each Lender, an amendment fee equal to such Lender's Percentage of U.S.$5,000. 35 ARTICLE III BORROWING BASE SECTION 3.1 Components for Determination of Trax Borrowing Base. The --------------------------------------------------- term "Trax Borrowing Base" shall mean the designated loan value (as calculated ------------------- by the Agent in accordance with then-current practices, customary procedures, and standards used by the Agent for its petroleum industry customers) determined by the Agent in its sole discretion and assigned to the Borrowing Base Properties, as redetermined from time to time pursuant to the terms hereof, and shall be based upon pertinent economic variables selected by the Agent in its sole discretion and upon the Agent's consideration and review of the Present Value of the Borrowing Base Properties. In determining the Trax Borrowing Base, the Agent shall utilize (i) the pertinent economic parameters customarily used by the Agent with respect to credits of a similar size and nature, (ii) the information that the Agent has available to it at the time of each determination, including assets, liabilities, cash flow and other financial information regarding the Borrower and the Borrowing Base Properties and the business, properties, prospects, management and ownership of the Borrower, (iii) such combination of Proved Producing Reserves, Proved Non-Producing Reserves, and/or Probable Additional Reserves attributable to the Borrowing Base Properties as it deems proper in its sole discretion and (iv) in considering the Present Value, a discount rate determined by the Agent in its sole discretion. The initial Trax Borrowing Base is U.S. $0. SECTION 3.2 Canadian Allocated Borrowing Base. As of the first Business --------------------------------- Day of each calendar quarter (commencing April 1, 1996), and upon each redetermination of the Trax Borrowing Base made pursuant to Section 3.5 and upon ----------- each redetermination of the Domestic Borrowing Base made pursuant to Section 4.2(b) or Section 4.5 of the Arch Agreement, the Borrower at its sole discretion shall designate, pursuant to a Borrowing Base Allocation Certificate, to Agent that portion of the Consolidated Borrowing Base that will be allocated to this Agreement (that portion of the Consolidated Borrowing Base allocated to this Agreement from time to time is herein called the "Canadian Allocated Borrowing ---------------------------- Base"); provided, however, that the Canadian Allocated Borrowing Base (i) shall - ---- -------- ------- not be less than the Outstandings at such time and (ii) shall not be greater than the lesser of (a) the Facility Amount then in effect and (b) the difference of (x) the Consolidated Borrowing Base then in effect minus (y) the U.S. ----- Allocated Borrowing Base. The effective date of each Canadian Allocated Borrowing Base that is not a result of a redetermination of the Trax Borrowing Base according to Section 3.5 or of the Domestic ----------- 36 Borrowing Base according to Section 4.2(b) or Section 4.5 of the Arch Agreement shall be the first Business Day of the calendar quarter that the Agent receives the Borrower's Borrowing Base Allocation Certificate designating the Canadian Allocated Borrowing Base. Borrower may designate the Canadian Allocated Borrowing Base at any time and from time to time during the existence of a Borrowing Base Deficiency (in which case the effective date of such Canadian Allocated Borrowing Base shall be the first Business Day of the calendar month that succeeds the date that the Agent receives Borrower's Borrowing Base Allocation Certificate designating the Canadian Allocated Borrowing Base). The effective date of each Canadian Allocated Borrowing Base that is a result of a redetermination of the Trax Borrowing Base according to Section 3.5 shall be as provided in Section 3.5(c), and the effective date of each Canadian Allocated -------------- Borrowing Base that is a result of a redetermination of the Domestic Borrowing Base according to Section 4.2(b) or Section 4.5 of the Arch Agreement shall be the first Business Day of the calendar month that succeeds the date the Borrower provides notice to the Agent its notice of the designated Canadian Allocated Borrowing Base. As of the Effective Date, the Canadian Allocated Borrowing Base shall be $10,000,000. SECTION 3.3 Semi-Annual Redetermination of Trax Borrowing Base. The -------------------------------------------------- Trax Borrowing Base shall be redetermined as of each Determination Date occurring prior to the Commitment Termination Date. As of each Determination Date, the Agent shall determine at its sole discretion the Trax Borrowing Base based upon the information contained in the most recent annual reserve report required to be delivered to the Agent pursuant to Section 7.1.2(i), the ---------------- information provided to the Agent pursuant to Section 7.1.2(ii), and/or such ----------------- economic variables and production information that the Agent has available to it at such time. The Agent shall provide the Borrower with notice of the redetermined Trax Borrowing Base and the resulting Consolidated Borrowing Base that has been agreed to by the Lenders and the Arch Banks within thirty (30) days following the applicable Determination Date. Within ten (10) Business Days after Borrower's receipt of the notice of the redetermined Trax Borrowing Base and Consolidated Borrowing Base, the Borrower shall designate the Canadian Allocated Borrowing Base. The effective date of such Canadian Allocated Borrowing Base shall be the first Business Day of the calendar quarter that succeeds the date that the Borrower provides to the Agent its notice of the Canadian Allocated Borrowing Base. SECTION 3.4 Borrowing Base Deficiency. If, as of any Determination Date ------------------------- or following a mandatory redetermination of the Domestic Borrowing Base pursuant to Section 3.6 hereof, or Section 4.2(b) of the Arch Agreement, the Canadian ----------- Allocated Borrowing Base 37 (as designated by the Borrower) is less than the Outstandings as of such redetermination (the amount by which the Outstandings exceeds the Canadian Allocated Borrowing Base is herein called a "Borrowing Base Deficiency"), then ------------------------- the Agent shall provide the Borrower with written notice of such Borrowing Base Deficiency, which notice shall set forth the amount of the Borrowing Base Deficiency. Within thirty (30) days following the Borrower's receipt of such notice, the Borrower shall remedy the Borrowing Base Deficiency by either (i) designating a Canadian Allocated Borrowing Base that exceeds the Obligations, or (ii) paying to the Lenders as a mandatory prepayment under Section 2.9.4 an ------------- amount equal to the Borrowing Base Deficiency or (iii) providing a combination of subclauses (i) and (ii) above which in their aggregate equal the Borrowing -------------- ---- Base Deficiency. An Event of Default shall exist if the Borrower fails to remedy the Borrowing Base Deficiency within thirty (30) days of its receipt of notice thereof in such manner as provided above. SECTION 3.5 Special Provisions for Discretionary Increase to the ---------------------------------------------------- Consolidated Borrowing Base. (a) In addition to its designating the Canadian - --------------------------- Allocated Borrowing Base, not more than once during any consecutive 90-day period (inclusive of any such requests by Arch pursuant to Section 4.5 of the Arch Agreement), the Borrower may request that the Consolidated Borrowing Base be redetermined and increased to an amount agreed to by the Lenders and the Arch Banks after taking into account the redetermined Trax Borrowing Base and the commitments of the Arch Banks under the Arch Agreement then in effect. Borrower shall give the Agent not less than thirty (30) Business Day's prior notice of the effective date of the requested increase to the Consolidated Borrowing Base. (b) With each request to increase to the Consolidated Borrowing Base hereunder, the Borrower shall deliver to the Agent a report prepared within one hundred eighty (180) days prior to the date of such request by a firm or firms of independent petroleum engineers acceptable to the Agent evaluating the Present Value of the reserves attributable to the additional properties of the Borrower which the Borrower proposes to include in the Trax Borrowing Base for the purposes of increasing the Consolidated Borrowing Base (the "Additional ---------- Properties") or such other engineering or reserve report reasonably acceptable - ---------- to the Agent, together with title opinions, title reports and other title information satisfactory to the Agent indicating that the Borrower has good and defensible title to the Additional Properties, subject to Permitted Liens. (c) The Agent shall use every reasonable effort to notify Borrower within thirty (30) Business Days after the receipt of such 38 engineering reports and title information relating to such Additional Properties whether the Lenders and the Arch Banks have agreed to increase the Consolidated Borrowing Base, and if so, the amount of the Consolidated Borrowing Base as increased. If the Consolidated Borrowing Base is so increased, the Canadian Allocated Borrowing Base shall be designated by the Borrower to an amount that is not less than the Outstandings and does not exceed the lesser of (a) the Facility Amount then in effect and (b) the difference of (x) the Consolidated Borrowing Base minus (y) the U.S. Allocated Borrowing Base. The effective date ----- of such Canadian Allocated Borrowing Base shall be the first Business Day of the calendar month that the Borrower provides to the Agent its notice of the designated Canadian Allocated Borrowing Base. The Lenders are under no obligation to increase the Consolidated Borrowing Base unless the Lenders and the Arch Banks elects to do so, and any increase shall be at the sole and absolute discretion of the Lenders and subject to approval by the Arch Banks. If the Lenders and the Arch Banks agree to increase the Consolidated Borrowing Base, the increase to the Consolidated Borrowing Base shall be effective as of the date upon which the Borrower executes and delivers to the Agent appropriate documents reflecting an appropriate amendment (if any) to this Agreement and appropriate Collateral Documents which will grant to the Agent, for the benefit of the Lenders, a valid, enforceable and first priority Lien (subject to Permitted Liens) against the Additional Properties which comprise ninety percent (90%) of the Present Value attributable to the Additional Properties as security for the Obligations. SECTION 3.6 Interim Sales of Borrowing Base Properties. Once the ------------------------------------------ Consolidated Borrowing Base and the Canadian Allocated Borrowing Base are determined for any period, upon the subsequent sale by Borrower of any Borrowing Base Properties (other than the sale of hydrocarbons in the ordinary course of business), the Consolidated Borrowing Base and the Canadian Allocated Borrowing Base shall be reduced, effective on the first Business Day of the calendar month that succeeds the date of consummation of such sale, by an amount which is equal to seventy-five percent (75%) of the Present Value assigned to such Borrowing Base Property according to the most recent reserve report; provided further, -------- ------- that no such reduction shall be required with respect to aggregate net sale proceeds of up to $100,000 during any calendar year prior to the Commitment Termination Date, and provided further, that all such sales shall be subject to -------- ------- the provisions of Section 7.2.2. In the event that the provisions of this ------------- Section 3.6 cause the Trax Borrowing Base to be reduced by an amount in excess - ----------- of five percent (5%) of the Present Value of all Borrowing 39 Base Properties according to the most recent reserve report delivered to the Agent prior to a subsequent redetermination of the Consolidated Borrowing Base according to this Agreement, the Lenders may cause a mandatory redetermination (which redetermination shall be in addition to a redetermination under Section ------- 3.3) of the Consolidated Borrowing Base, in which case the Consolidated - ---- Borrowing Base and the Canadian Allocated Borrowing Base shall be redetermined substantially in the manner provided in Section 3.3. ----------- ARTICLE IV CERTAIN ADDITIONAL PROVISIONS CONCERNING LOANS, BANKERS' ACCEPTANCES AND CURRENCY MATTERS SECTION 4.1 Lending Unlawful. If any Lender shall determine (which ---------------- determination shall, upon notice thereof to the Borrower, be conclusive and binding on the Borrower) that the introduction of or any change in or in the interpretation of any law, regulation, guideline or order makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender to make, continue or maintain any Borrowing as, or to convert any Borrowing into, a Loan of a certain Type or a Bankers' Acceptance, or in a certain currency, the obligations of all Lenders to make, continue, maintain, convert or Rollover any such Loans or accept any such Bankers' Acceptances shall, upon such determination, forthwith be suspended until such Lender shall notify the Agent that the circumstances causing such suspension no longer exist, and all Loans of such Type payable to each Lender shall automatically convert into, if such Loan is in U.S. Dollars, Base Rate Loans or, if such Borrowings are in Canadian Dollars, Prime Rate Loans, at the end of the then current LIBOR Interest Periods with respect thereto, or term of the applicable Bankers' Acceptance, or sooner, if required by such law or assertion. SECTION 4.2 Deposits Unavailable. If (a) any Lender shall have -------------------- determined that U.S. Dollar deposits in the relevant amount and for the relevant LIBOR Interest Period are not available to such Lender in its relevant market; or (b) the Agent shall have determined that by reason of circumstances affecting the Agent's relevant market, adequate means do not exist for ascertaining the interest rate applicable hereunder to LIBO Rate Loans or U.S. Dollar Loans of a certain Type, then, upon notice from such Lender or the Agent to the Borrower, ---- the obligations of all Lenders under Section 2.1 and Section 2.4 to make or ----------- ----------- continue any Borrowings as, or to convert any Loans into, LIBO Rate Loans or U.S. Dollar Loans of such Type, as the case may be, shall forthwith be suspended until such Lender or the Agent shall notify the 40 Borrower and the Lenders that the circumstances causing such suspension no longer exist. SECTION 4.3 Increased LIBO Rate Loan Costs, etc. The Borrower agrees ----------------------------------- to reimburse each Lender for any increase in the cost to such Lender of, or any reduction in the amount of any sum receivable by such Lender in respect of, making, continuing or maintaining (or of its obligation to make, continue or maintain) any Loans as, or of converting (or of its obligation to convert) any Loans into, LIBO Rate Loans. Such Lender shall promptly notify the Agent and the Borrower in writing of the occurrence of any such event, such notice to state, in reasonable detail, the reasons therefor and the additional amount required fully to compensate such Lender for such increased cost or reduced amount. Such additional amounts shall be payable by the Borrower directly to such Lender within five (5) days of its receipt of such notice, and such notice shall, in the absence of manifest error, be conclusive and binding on the Borrower. SECTION 4.4 Additional Costs. ---------------- (a) If any change in, or the introduction, adoption, effectiveness, interpretation, reinterpretation or phase-in of, any law or regulation, directive, guideline, decision or request (whether or not having the force of law) of any court, central bank, regulator or other governmental authority affects or would affect the amount of capital required or expected to be maintained by any Lender or any Person controlling such Lender, and such Lender determines (in its sole and absolute discretion) that the rate of return on such Lender's or such controlling Person's capital as a consequence of its Commitment, its Loans or its Bankers' Acceptances is reduced to a level below that which such Lender or such controlling Person could have achieved but for the occurrence of any such circumstance, then, in any such case upon notice from time to time by such Lender to the Borrower, the Borrower shall immediately pay directly to such Lender additional amounts sufficient to compensate such Lender or such controlling Person for such reduction in rate of return. A statement of such Lender as to any such additional amount or amounts (including calculations thereof in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Borrower. In determining such amount, such Lender may use any method of averaging and attribution that it (in its sole and absolute discretion) shall deem applicable. (b) 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 reasonable interpretation thereof, or compliance of any Lender with such, 41 (i) imposes or increases or deems applicable any reserve (including, without limitation, any imposed by the Office of the Superintendent of Financial Institutions), assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (other than reserves and assessments taken into account in determining the interest rate applicable to LIBO Rate Loans), or (ii) imposes any other condition, the result of which is to increase the cost to any Lender of making, funding or maintaining Loans or reduces any amount receivable by any Lender or its Applicable Lending Office in connection with Loans or other Borrowings, or requires any Lender to make any payment calculated by reference to the amount of Loans or other Borrowings held or interest received, then, within fifteen (15) days following written demand by such Lender, the Borrower shall pay such Lender that portion of such increased expense incurred or reduction in an amount received which such Lender reasonably determines is attributable to making, funding and maintaining its Loans and other Borrowings and its Commitment. A statement of such Lender as to any such increased expense incurred or reduction in an amount received (including calculations thereof in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Borrower. (c) Without limiting the effect of the provisions of Section 4.4 hereof, ----------- in the event that, by reason of any Regulatory Change, any Lender becomes subject to restrictions on the amount of any category of liabilities or assets which it may hold, then, if such Lender so elects by notice to the Borrower (with a copy to the Agent), the obligation of such Lender to make additional Borrowings shall be suspended (in which case the provisions of Section 4.5 shall ----------- be applicable) until such Regulatory Change ceases to be in effect. SECTION 4.5 Prime Rate Loans or Base Rate Loans. If the obligation of ----------------------------------- any Lender to make Borrowings of any Type shall be suspended pursuant to Section ------- 4.2 or 4.4 hereof (Borrowings of such Type being herein called "Affected - --- --- -------- Borrowings" and such Type being herein called the "Affected Type"), all - ---------- ------------- Borrowings which would otherwise be made by such Lender as Borrowings of the Affected Type which are denominated as U.S. Dollar Borrowings shall be made instead as Base Rate Loans and Borrowings of the Affected Type which are denominated as Canadian Dollar Borrowings shall be made instead as Prime Rate 42 Loans or, in Canadian Dollars, such Lender's Borrowings shall continue as Base Rate Loans and, (a) if an event referred to in Section 4.2(b) or 4.4(c) hereof -------------- ------ has occurred and such Lender so requests by notice to the Borrower with a copy to the Agent, or (b) in any such case, if the Borrower so requests by notice to the Agent with a copy to each Lender, all Affected Borrowings of such Lender then outstanding shall be automatically converted into Prime Rate Loans or Base Rate Loans, as the case may be, in a principal amount equal to the principal amount of Affected Borrowings made as Loans in Canadian Dollars or U.S. Dollars, as the case may be, on the date specified by such Lender or by the Borrower in such notice and, to the extent that Affected Borrowings are so made as (or converted into) Prime Rate Loans, all payments of principal which would otherwise be applied to such Lender's Affected Borrowings shall be applied instead to its Prime Rate Loans. SECTION 4.6 Compensation. The Borrower shall pay to the Agent for ------------ account of each Lender, upon the request of such Lender through the Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate it for any loss, cost or expense (including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain the relevant LIBO Rate Loan) (any and all such loss, cost or expense referred to herein as "Consequential Loss") which such Lender determines ------------------ is attributable to: (a) Any payment, prepayment or conversion of a Borrowing made by such Lender for any reason (including, without limitation, acceleration pursuant to Section 8.3 hereof) on a date other than the last day of the LIBOR Interest - ----------- Period or the Interest Payment Date for such Borrowing; or (b) Any failure by the Borrower for any reason (including, without limitation, the failure of any of the conditions precedent specified in Article ------- V hereof to be satisfied) to borrow a LIBO Rate Loan from, or issue a Bankers' - - Acceptance to be accepted by, such Lender on the date for such Borrowing specified in the relevant Borrowing Notice, Conversion Notice or Rollover Notice. SECTION 4.7 Taxes. All payments by the Borrower of principal of, and ----- interest on, the Borrowings and all other amounts payable hereunder and in connection herewith shall be made free and clear of and without deduction for any present or future income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, but excluding franchise taxes and taxes imposed on or measured by the Agent's or any Lender's, as applicable, overall taxable income, capital or receipts (such non-excluded items being called "Taxes"). In the ----- event that any 43 withholding or deduction from any payment to be made by the Borrower hereunder or under any other Loan Document is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Borrower will: (a) pay directly to the relevant authority the full amount required to be so withheld or deducted; (b) promptly forward to the Agent an official receipt or other documentation satisfactory to the Agent or the relevant Lender evidencing such payment to such authority; and (c) pay to the Agent for the account of the Agent and the Lenders such additional amount or amounts as is necessary to ensure that the net amount actually received by the Agent and each Lender will equal the full amount the Agent or such Lender would have received had no such withholding or deduction been required. Moreover, if any Taxes are directly asserted against the Agent or any Lender, with respect to any payment received by it hereunder or in connection herewith, the Agent or the relevant Lender may paysuch Taxes and the Borrower will promptly pay such additional amounts (including any penalties, interest or expenses) as is necessary in order that the net amount received by such Person after the payment of such Taxes (including any taxes on such additional amount) shall equal the amount such Person would have received had not such Taxes been asserted. If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Agent, for the account of the respective Lenders, the required receipts or other required documentary evidence, the Borrower shall indemnify the Agent and the Lenders for any incremental Taxes, interest or penalties that may become payable by the Agent or any Lender as a result of any such failure. For purposes of this Section 4.7, a payment ----------- hereunder by the Agent or any Lender to or for the account of any other Person which is the Agent or any Lender shall be deemed a payment by the Borrower. SECTION 4.8 Payments, Computations, etc. Unless otherwise expressly ---------------------------- provided, all payments by the Borrower pursuant to this Agreement or any other Loan Document shall be made by the Borrower to the Agent for the pro rata --- ---- account of the Lenders entitled to receive such payment. All such payments required to be made to the Agent shall be made, without setoff, deduction or counterclaim, not later than 2:00 p.m. Toronto time, on the date due, in immediately available funds, to the Agent's Branch of Account or to such other account as the Agent shall specify from time to time by notice to the Borrower. Funds received after that time shall be deemed to 44 have been received by the Agent on the next succeeding Business Day. The Agent shall promptly remit in immediately available funds to each relevant Lender its share, if any, of such payments received by the Agent for the account of such Lender. All interest and fees shall be computed on the basis of the actual number of days (including the first day but excluding the last day) occurring during the period for which such interest or fee is payable over a year comprised of 365 days or, if appropriate, 366 days (or, in the case of interest on a LIBO Rate Loan, 360 days). Whenever any payment to be made shall otherwise be due on a day which is not a Business Day, such payment shall (except as otherwise required by the definition of the term "LIBOR Interest Period" with --------------------- respect to LIBO Rate Loans) be made on the next succeeding Business Day and such extension of time shall be included in computing interest and fees, if any, in connection with such payment. SECTION 4.9 Sharing of Payments. If any Lender shall obtain any payment ------------------- or other recovery (whether voluntary, involuntary, by application of setoff or otherwise) on account of any Borrowing (other than pursuant to the terms of Sections 4.3, 4.4, 4.6 and 4.7) in excess of its pro rata share of payments then - ------------ --- --- --- --- ---- or therewith obtained by all Lenders, such Lender shall purchase from the other Lenders such participations in Borrowings held by them as shall be necessary to cause such purchasing Lender to sharethe excess payment or other recovery ratably with each of them; provided, however, that if all or any portion of the -------- ------- excess payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and each Lender which has sold a participation to the purchasing Lender shall repay to the purchasing Lender the purchase price to the ratable extent of such recovery together with an amount equal to such selling Lender's ratable share (according to the proportion of (a) the amount of such selling Lender's required repayment to the purchasing Lender to (b) the total amount so--recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section may, to the fullest extent permitted by law, exercise all its rights of payment (including pursuant to Section 4.10) with respect to such participation as fully as if ------------ such Lender were the direct creditor of the Borrower in the amount of such participation. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section to share in the benefits of any recovery on such secured claim. 45 SECTION 4.10 Setoff. Each Lender shall, upon the occurrence of any ------ Default described in Section 8.1.5, 8.1.6 or 8.1.11 or any other Event of ------------- ----- ------ Default, have the right to setoff, appropriate and apply to the payment of the Obligations owing to it (whether or not then due), and (as security for such Obligations) the Borrower hereby grants to each Lender and to the Agent on behalf of each Lender a continuing security interest in, any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter maintained with the Agent or such Lender; provided, however, that any such -------- ------- setoff, appropriation and application shall be subject to the provisions of Section 4.9. Each Lender agrees promptly to notify the Borrower and the Agent - ----------- after any such setoff and application made by such Lender; provided, however, -------- ------- that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff under applicable law or otherwise) which such Lender may have. SECTION 4.11 Use of Proceeds. The proceeds of each Borrowing may be used --------------- by the Borrower to fund the loan referred to in the third recital, to acquire ----- ------- additional Borrowing Base Properties, to fund expenditures to drill or recomplete oil and/or gas wells on Borrower's Borrowing Base Properties and for other general corporate purposes. SECTION 4.12 Currency Conversion and Currency Indemnity. ------------------------------------------ SECTION 4.12.1 Payments in Agreed Currency. The Borrower shall make --------------------------- payment relative to each Borrowing in the currency (the "Agreed Currency") in --------------- which the Borrowing was effected. If any payment is received on account of any Borrowing in any currency (the "Other Currency") other than the Agreed Currency -------------- (whether voluntarily or pursuant to an order or judgment or the enforcement thereof or the realization of any security or the liquidation of the Borrower or otherwise howsoever), such payment shall constitute a discharge of the liability of the Borrower hereunder and under the other Loan Documents in respect of such obligation only to the extent of the amount of the Agreed Currency which the relevant Lender or the Agent, as the case may be, is able to purchase with the amount of the Other Currency received by it on the Business Day next following such receipt in accordance with its normal procedures and after deducting any premium and costs of exchange. SECTION 4.12.2 Conversion of Agreed Currency into Judgment Currency. If, ---------------------------------------------------- for the purpose of obtaining or enforcing judgment in any court in any jurisdiction, it becomes necessary to convert into a particular currency (the "Judgment Currency") any amount due in the Agreed Currency then the conversion - ------------------ shall be made on the 46 basis of the rate of exchange prevailing on the Business Day next preceding the day on which judgment is given and in any event the Borrower shall be obligated to pay the Agent and the Lenders any deficiency in accordance with Section ------- 4.12.1. For the foregoing purposes "rate of exchange" means the rate at which - ------ the relevant Lender or the Agent, as applicable, in accordance with its normal banking procedures is able on the relevant date to purchase the Agreed Currency with the Judgment Currency after deducting any premium and costs of exchange. SECTION 4.12.3 Circumstances Giving Rise to Indemnity. If (i) any Lender -------------------------------------- or the Agent receives any payment or payments on account of the liability of the Borrower hereunder pursuant to any judgment or order in any Other Currency, and (ii) the amount of the Agreed Currency which the relevant Lender or the Agent, as applicable, is able to purchase on the Business Day next following such receipt with the proceeds of such payment or payments in accordance with its normal procedures and after deducting any premiums and costs of exchange is less than the amount of the Agreed Currency due in respect of such obligations immediately prior to such judgment or order, then the Borrower on demand shall, and the Borrower hereby agrees to, indemnify and save the Lenders and the Agent harmless from and against any loss, cost or expense arising out of or in connection with such deficiency. SECTION 4.12.4 Indemnity Separate Obligation. The agreement of indemnity ----------------------------- provided for in Section 4.12.3 shall constitute an obligation separate and -------------- independent from all other obligations contained in this Agreement, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted by the Lenders or the Agent or any of them from time to time, and shall continue in full force and effect notwithstanding any judgment or order for a liquidated sum in respect of an amount due hereunder or under any judgment or order. ARTICLE V CONDITIONS TO BORROWING SECTION 5.1 Initial Borrowing. The obligations of the Lenders and the ----------------- Agent to effectuate the initial Borrowing shall be subject to the prior or concurrent satisfaction of each of the conditions precedent set forth in this Section 5.1. All documents executed or submitted pursuant to this Article V by - ----------- --------- or on behalf of the Borrower or any of its respective Subsidiaries or any Guarantor (including all Acquisition Documents) shall be reasonably satisfactory in form and substance to the Agent and its counsel. 47 SECTION 5.1.1 Resolutions, etc. The Agent shall have received from each ----------------- of the Borrower and the Guarantors a certificate, dated the date of the initial Borrowing (or such other date acceptable to the Agent), of its Secretary or Assistant Secretary as to (a) resolutions of its Board of Directors then in full force and effect authorizing the execution, delivery and performance of this Agreement and each other Loan Document to be executed by it; (b) its charter or articles and by-laws; (c) the incumbency and signatures of those of its officers authorized to act with respect to this Agreement and each other Loan Document executed by it; and (d) such other factual matters as may be reasonably required by the Agent; and upon which certificate each Lender may conclusively rely until it shall have received a further certificate of the Secretary of such Borrower or Guarantor, as applicable, cancelling or amending such prior certificate. SECTION 5.1.2 Arch Agreement. The Agent shall have received a true, -------------- correct and complete copy of fully executed Arch Agreement. SECTION 5.1.3 Payment of Outstanding Indebtedness, etc. All Indebtedness ----------------------------------------- identified in Item 7.2.12 ("Indebtedness to be Paid") of the Disclosure ----------- Schedule, together with all interest, all prepayment premiums and other amounts due and payable with respect thereto, shall have been paid in full (including, to the extent necessary, from proceeds of the initial Borrowing); and all Liens, (other than those in favor of Hong Kong Bank of Canada ("HKBC")) securing ---- payment of any such Indebtedness have been released and the Agent shall have received all financing change statements, discharges or other instruments as may be suitable or appropriate in connection therewith and HKBC shall have executed and delivered to the Agent an undertaking in form and substance satisfactory to the Agent whereby HKBC agrees either to release the Liens in its favor on the assets of the Borrower or to assign such Liens to the Agent for the benefit of the Lenders. SECTION 5.1.4 Offer Consummated; Copies of the Offering Document and Other ------------------------------------------------------------ Material Agreements and Consents; Control of Trax's Board. The Borrower shall - --------------------------------------------------------- have delivered to the Agent certified copies of the Offering Document and each of the other Acquisition Documents, if any, and of all opinions, certificates, instruments and agreements, if any, required to be delivered 48 thereunder certified by an authorized officer of any of the Guarantors as being true, complete and correct copies of such agreements and as being in full force and effect. Northern shall provide evidence satisfactory to the Agent that it has succeeded in having sufficient of its nominees elected to the Board of Directors of the Borrower such that such nominees, when added to any existing director remaining on the Board of Directors of the Borrower after such election who was a nominee of Northern prior to the commencement of the Offer, constitute a majority of the Board of Directors of the Borrower. SECTION 5.1.5 Guaranty. The Agent shall have received the Guaranties, -------- each dated the Effective Date (or such other date acceptable to the Agent), duly executed by each of API and Northern. SECTION 5.1.6 Pledge Agreement. The Collateral Agent shall have received ---------------- executed counterparts of the Pledge Agreement, dated as of the date hereof, duly executed by API, pledging 65% (calculated on a fully diluted basis) of the issued and outstanding capital stock of Northern, together with the certificates, evidencing all of the issued and outstanding shares of capital stock pledged pursuant to the Pledge Agreement, which certificates shall in each case be accompanied by undated stock powers duly executed in blank. SECTION 5.1.7 Security Agreements. The Agent shall have received: ------------------- (a) executed counterparts of the Security Agreement (Stock), dated as of the date hereof, duly executed by Northern, pledging all of the issued and outstanding capital stock of Trax, together with (i) satisfactory evidence of the completion of all recordings and filings of the Security Agreement (Stock) as may be necessary, or in the reasonable opinion of the Agent, desirable to create a valid, perfected, first priority Lien against the collateral as therein described, and (ii) the certificates, evidencing all of the issued and outstanding shares of capital stock pledged pursuant to the Security Agreement (Stock), which certificates shall in each case be accompanied by undated stock powers duly executed in blank; (b) executed counterparts of the General Security Agreement, dated as of the date hereof, duly executed by the Borrower, together with satisfactory evidence of completion of all recordings and filings of the General Security Agreement as may be necessary, or in the reasonable opinion of the Agent, desirable to create a valid, perfected first priority Lien (subject to Permitted Liens) against the collateral as therein described; 49 (c) executed counterparts of the Debenture, dated as of the date hereof, duly executed by the Borrower in favor of the Agent; and (d) executed counterparts of the Instrument of Pledge, dated as of the date hereof, duly executed by the Borrower in favor of the Agent, pledging the Debenture as security for the Obligations of the Borrower. SECTION 5.1.8 Opinions of Counsel. The Agent shall have received ------------------- opinions, dated the date of the initial Borrowing (or such other date acceptable to the Agent) and addressed to the Agent and all Lenders, from (a) Code Hunter Wittman, Canadian counsel to the Borrower and the Guarantors, substantially in the form of Exhibit H hereto, together with all --------- backup opinions on which such counsel shall have relied in connection therewith; (b) Murphy Mahon Keffler & Farrier, L.L.P., U.S. counsel to the Borrower and the Guarantors, substantially in the form of Exhibit I hereto, together with --------- all backup opinions on which such counsel shall have relied in connection therewith; and (c) Burnet, Duckworth & Palmer, Canadian counsel to the Agent, substantially in the form of Exhibit J hereto, together with all backup opinions --------- on which such counsel shall have relied in connection therewith. SECTION 5.1.9 Closing Fees, Expenses, etc. The Agent shall have received ---------------------------- for its own account, or for the account of each Lender, as the case may be, all fees, costs and expenses due and payable pursuant to Section 2.14.1, and if then -------------- invoiced, 10.3. ---- SECTION 5.1.10 Acquisition. Northern shall have acquired 100% of the ----------- issued and outstanding Shares. SECTION 5.1.11 Pro forma. The Agent shall have received a copy of the --------- pro forma balance sheet of the Borrower dated as of the Effective Date and giving effect to the consummation of the Offer and the initial Borrowing hereunder. SECTION 5.1.12 Regulatory Approvals. The Borrower and the Guarantors shall -------------------- have obtained all authorizations and approvals and taken all other actions required by, and notices to, each governmental authority, regulatory body or other Person required, and all waiting periods, if any, shall have expired, for the execution, delivery and performance of this Agreement and the consummation of the Offer. 50 SECTION 5.1.13 Intercreditor Agreement. The Agent, the Lenders, the Arch ----------------------- Banks, Bank One as agent and the other parties thereto shall have entered into the Intercreditor Agreement, together with a joinder thereto duly executed by the Borrower and the Guarantors. SECTION 5.1.14 Effectiveness Notice. The Agent shall have received from -------------------- the Borrower a certificate, in sufficient number of counterparts to provide one for each Lender, signed by an Authorized Officer of the Borrower, satisfactory to the Agent, addressed to the Agent and the Lenders, stating (i) that the Borrower has satisfied all of the conditions precedent to the initial Borrowing under the foregoing provisions of Section 5.1 hereto and (ii) that on the date ----------- of such initial Borrowing no Default or Event of Default exists. SECTION 5.1.15 Due Diligence. The Agent and the Lenders shall be satisfied ------------- with the scope of and results of their due diligence with respect to the Borrower, the Acquisition and Northern. SECTION 5.1.16 Other Matters. The Agent and its counsel shall have ------------- received all information, approvals, opinions, documents or instruments as the Agent or its counsel may reasonably request. SECTION 5.2 All Borrowings. The obligation of each Lender to fund, -------------- convert or rollover any Borrowing on the occasion of the drawdown, conversion or rollover of any Borrowing (including the initial Borrowing) shall be subject to the satisfaction of each of the conditions precedent set forth in this Section ------- 5.2. - --- SECTION 5.2.1 Compliance with Warranties, No Default, etc. Both before ------------------------------------------- and after giving effect to any Borrowing (but, if any Default of the nature referred to in Section 8.1.10 shall have occurred with respect to any other -------------- Indebtedness, without giving effect to the application, directly or indirectly, of the proceeds thereof) the following statements shall be true and correct (a) the representations and warranties set forth in Article VI (excluding, ---------- however, those contained in Section 6.4) or in any other Loan Document shall be ----------- true and correct with the same effect as if then made (unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date); (b) except as disclosed by the Borrower to the Agent and the Lenders pursuant to Section 6.4 ----------- 51 (i) no labor controversy, litigation, arbitration or governmental investigation or proceeding shall be pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries which might materially adversely affect the Borrower's consolidated business, operations, assets, revenues, properties or prospects or which purports to affect the legality, validity or enforceability of this Agreement or any other Loan Document; and (ii) no development shall have occurred in any labor controversy, litigation, arbitration or governmental investigation or proceeding disclosed pursuant to Section 6.4 which might materially adversely affect ----------- the consolidated businesses, operations, assets, revenues, properties or prospects of the Borrower and its Subsidiaries; and (c) no Default shall have then occurred and be continuing, and neither the Borrower nor any of its Subsidiaries nor any Guarantor are in material violation of any law or governmental regulation or court order or decree. SECTION 5.2.2 Borrowing Notice, Conversion Notice or Rollover Notice. The ------------------------------------------------------ Agent shall have received a Borrowing Notice, Conversion Notice or Rollover Notice, as the case may be, for such Borrowing. Each of the delivery of a Borrowing Notice, Conversion Notice or Rollover Notice and the acceptance by a Borrower of the proceeds of such Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Borrowing (both immediately before and after giving effect to such Borrowing and the application of the proceeds thereof) the statements made in Section 5.2.1 are true and correct in ------------- all material respects. SECTION 5.2.3 Satisfactory Legal Form. All documents executed or ----------------------- submitted pursuant hereto by or on behalf of the Borrower or any of its Subsidiaries shall be satisfactory in form and substance to the Agent and its counsel; the Agent and its counsel shall have received all information, approvals, opinions, documents or instruments as the Agent or its counsel may reasonably request. ARTICLE VI REPRESENTATIONS AND WARRANTIES In order to induce the Lenders and the Agent to enter into this Agreement and to make Borrowings hereunder, the Borrower represents and warrants unto the Agent and each Lender as set forth in this Article VI. ---------- 52 SECTION 6.1 Organization and Qualification of Borrower. The Borrower is ------------------------------------------ a corporation, and each of its Subsidiaries is a corporation or other legal entity, in either case duly incorporated or otherwise organized and validly existing under the laws of its jurisdiction of incorporation or organization and has all corporate power and authority required to own its property and carry on its business as presently conducted and proposed to be conducted. The Borrower and each of its Subsidiaries is duly qualified or licensed to do business in each jurisdiction where the Borrowing Base Properties are located and in each jurisdiction where the nature of the business in which it is engaged makes such qualification or licensing necessary. SECTION 6.2 Authorization and Power of Borrower. The Borrower has ----------------------------------- the corporate power and requisite authority to execute, deliver and carry out the terms and provisions of the Loan Documents which it has executed, and all of the documents and instruments delivered pursuant to the terms of such Loan Documents, and has taken all corporate action necessary to duly authorize (i) the execution, delivery and performance by the Borrower of the terms and provisions of the Loan Documents which it has executed and (ii) the performance by the Borrower of its obligations under the Loan Documents, including without limitation the Borrowings under this Agreement. SECTION 6.3 Financial Condition. The annual financial statements and ------------------- information of the Borrower as at November 30, 1994 and the interim financial statements of the Borrower as at October 31, 1995 and all related notes to all such financial statements which have been delivered to the Agent and each Lender fairly present the financial position (including all contingent liabilities) of the Borrower as of the dates of such financial statements; no material adverse changes have occurred in the financial condition, operations, assets, business, properties or prospects of the Borrower or of the Borrower and its Subsidiaries since such dates. SECTION 6.4 No Litigation. Except as set forth in Item 6.4 ------------- -------- ("Litigation") of the Disclosure Schedule, there are no actions, suits or legal, equitable, arbitration or administrative proceedings pending, or to the knowledge of the Borrower threatened, against the Borrower or any of its Subsidiaries in equity or before any federal, provincial, state, municipal or othergovernmental department, commission, body, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to the Borrower or any of its Subsidiaries, would have a material adverse effect on the financial or other condition or business of the Borrower or any of its Subsidiaries or which purports to affect the legality, validity or enforceability of this 53 Agreement or any other Loan Document, and there are no outstanding judgments, injunctions, writs, rulings or orders by any court or governmental body against the Borrower or any of its Subsidiaries. SECTION 6.5 No Breach. Neither the execution and delivery by the --------- Borrower of this Agreement and each other Loan Document executed or to be executed by it, the consummation of the transactions herein or therein contemplated nor compliance with the terms and provisions hereof or thereof, will conflict with or result in a breach of any of the terms, conditions or provisions of the articles of incorporation, by-laws or other organizational documents of the Borrower or any of its Subsidiaries of any law, rule or regulation, order, writ, injunction or decree of any court or governmental instrumentality, or of any indenture, mortgage, deed of trust, agreement or instrument to which the Borrower or any of its Subsidiaries is a party or by which any of them is bound or to which any of them is subject, or constitute a default thereunder or result in the creation or imposition of any Lien (except Liens in favor of the Agent), upon any of the property of the Borrower or any of its Subsidiaries pursuant to the terms of any such agreement or instrument. Each of the Borrower and its Subsidiaries is in material compliance with all statutes, laws, rules, regulations and orders pertaining to its ownership and/or operation of the Borrowing Base Properties. SECTION 6.6 No Consents. No consent, approval, authorization, order ----------- or other action by, and no notice to or filing with, any governmental authority or regulatory body or court or other Person is required in connection with the due execution, performance or delivery by the Borrower, any of its Subsidiaries or any Guarantor of the Loan Documents or to consummate the transactions contemplated hereby or thereby. SECTION 6.7 Validity. This Agreement has been duly and validly -------- executed and delivered by the Borrower and constitutes, and the other Loan Documents will, when duly executed and delivered by the Borrower pursuant to the provisions hereof, constitute, the legal, valid and binding obligations of the Borrower, enforceable against the Borrower, in accordance with their respective terms, except as limited by bankruptcy, insolvency or other similar laws of general application relating to the enforcement of creditors' rights at law or in equity. SECTION 6.8 Subsidiaries. The Borrower has no Subsidiaries, except ------------ those Subsidiaries which are identified in Item 6.8 ("Existing Subsidiaries") of -------- the Disclosure Schedule. SECTION 6.9 Status of Title to Assets. Subject to the Permitted Liens, ------------------------- the Borrower holds good and defensible title to 54 each of the Borrowing Base Properties. Upon execution and delivery of the Collateral Documents the Borrower will have granted to the Agent, for the benefit of the Lenders, to secure the Obligations, a valid, enforceable, and the only (except for Permitted Liens) Lien, and upon registration a perfected first priority (except for Permitted Liens) Lien, in not less than, and the Borrower is entitled to receive not less than, that percentage of oil, gas and other hydrocarbons produced from the land covered by the leases pertaining to the Borrowing Base Properties (after deduction of all royalties, overriding royalties and other interests payable from or measured by production) not less than the "net revenue interest" specified in the evaluation of such Borrowing Base Properties in the most recent engineering and/or reserve report(s) covering such Borrowing Base Properties which are delivered to the Agent hereunder, with the term "net revenue interest" meaning the proportionate share of the production of oil, gas or other minerals to which the Borrower is entitled after deduction of all royalties, overriding royalties and other interests payable from or measured by production. Upon execution and delivery of the Collateral Documents, the Borrower will have granted to the Agent, for the benefit of the Lenders, to secure the Obligations, a valid, enforceable, and the only (except for Permitted Liens) Lien, and upon registration a perfected first priority (except for Permitted Liens) Lien, in the "working interest" specified in the evaluation of such Borrowing Base Properties in the most recent engineering report(s) and/or reserve reports covering such Borrowing Base Properties which are delivered to the Agent hereunder, with the term "working interest", as used herein, meaning the right to explore for, drill and produce oil, gas or other minerals; neither the Borrower nor any of its Subsidiaries is obligated to bear more than that percentage of the cost of all operations conducted on the Borrowing Base Properties equal to the "working interest" as above described. SECTION 6.10 Taxes. Each of the Borrower and its Subsidiaries have ----- filed all tax returns and reports required by law to have been filed by it and have paid all taxes, assessments, fees and other governmental charges thereby shown to be owing, except any such taxes, assessments, fees or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. SECTION 6.11 Other Indebtedness or Liens. As of the date hereof, --------------------------- except for Permitted Liens there are no material Indebtedness, obligations, liabilities (including contingent and indirect liabilities and obligations), Liens, charges, encumbrances or unusual forward or long-term commitments of the Borrower or any of its Subsidiaries, which have not been previously disclosed in 55 the Disclosure Schedule or the pro forma balance sheet delivered pursuant to Section 5.1.12. - -------------- SECTION 6.12 Own Expertise. Each of the Borrower and its Subsidiaries ------------- (i) is not relying (for purposes of making any investment or financing decision or otherwise) upon any advice, counsel or representations (whether written or oral) of any Lender or the Agent; (ii) has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisors to the extent it has deemed necessary, and it has made its own investment and financing decisions (including decisions regarding the structure and suitability of the transactions contemplated by this Agreement and the other Loan Documents) based upon its own judgment and upon any advice from such advisors as it has deemed necessary and not upon any view expressed by any Lender or the Agent; (iii) has full understanding of all the terms, conditions and risks (economic, tax and otherwise) of this Agreement, each Loan Document, and the transactions contemplated hereby and thereby and is capable of assuming and willing to assume (financially and otherwise) those risks; and (vi) neither any Lender nor the Agent is acting as a fiduciary or financial, investment or tax advisor for the Borrower or any of its Subsidiaries or has given to the Borrower or any of its Subsidiaries (directly or indirectly through any other Person) any assurance, guarantee or representation whatsoever as to the merits (either legal, regulatory, tax, financial, accounting or otherwise) of this Agreement, any other Loan Document, or any transaction contemplated hereby or thereby. SECTION 6.13 Environmental Warranties. Except as set forth in Item 6.13 ------------------------ --------- ("Environmental Matters") of the Disclosure Schedule: (a) all facilities and property (including underlying groundwater) owned, leased or operated by the Borrower or any of its Subsidiaries have been, and continue to be, owned, leased or operated by the Borrower and its Subsidiaries in Material compliance with all Environmental Laws; (b) there have been no past, and there are no pending or threatened (i) Material claims, complaints, notices or inquiries to, or requests for information received by the Borrower or any of its Subsidiaries with respect to 56 any alleged violation of any Environmental Law, or (ii) Material claims, complaints, notices or inquiries to, or requests for information received by, the Borrower or any of its Subsidiaries regarding potential liability under any Environmental Law or under any common law theories relating to operations or the condition of any facilities or property (including underground water) owned, leased or operated by the Borrower or any of its Subsidiaries; (c) there have been no releases of Hazardous Materials at, on or under any property now or previously owned, leased or operated by, or on behalf of, the Borrower or any of its Subsidiaries nor any landfill or waste disposal site located thereon, that singly or in the aggregate, have, or may reasonably be expected to have, a Material adverse effect on the financial condition, operations, assets, business, properties or prospects of the Borrower and its Subsidiaries; (d) the Borrower and its Subsidiaries have been issued and are in Material compliance with all permits, certificates, approvals, licenses and other authorizations relating to environmental matters and necessary or desirable for their businesses; (e) there are no underground storage tanks, active or abandoned, including petroleum storage tanks, on or under any property now or previously owned, leased or operated by the Borrower or any of its Subsidiaries that, singly or in the aggregate, have, or may reasonably be expected to have, a Material adverse effect on the financial condition, operations, assets, business, properties or prospects of the Borrower and its Subsidiaries; (f) neither the Borrower nor any Subsidiary of the Borrower has directly transported or directly arranged for the transportation of any Hazardous Material to any location except in Material accordance with and in Material compliance with Environmental Law; (g) there are no polychlorinated biphenyls, radioactive materials or friable asbestos present at any property now or previously owned or leased by the Borrower or any Subsidiary of the Borrower that, singly or in the aggregate, have, or may reasonably be expected to have, a Material adverse effect on the financial condition, operations, assets, business, properties or prospects of the Borrower and its Subsidiaries; and (h) no conditions exist at, on or under any property now or previously owned or leased by the Borrower which, with the passage of time, or the giving of notice or both, would give rise to Material liability under any Environmental Law. "Material" as used in -------- this Section 6.13 only, shall mean $100,000 or more or, as the context requires, ------------ any circumstances, state of facts, breach, non-compliance or matters which have, or may reasonably be expected to have, an adverse effect, individually or in the aggregate, of $100,000 or more (whether for remedial measures, penalties or otherwise). SECTION 6.14 Intentionally Omitted. --------------------- 57 SECTION 6.15 Accuracy of Information. All factual information heretofore ----------------------- or contemporaneously furnished by or on behalf of the Borrower in writing to any Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby (including the financial statements described in Section 6.3 ----------- and the engineering and reserve reports delivered hereunder, true and complete copies of which were furnished to any Lender in connection with its execution and delivery hereof) is, and all other such factual information hereafter furnished by or on behalf of the Borrower to any Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified and as of the date of execution and delivery of this Agreement by any Lender, and such information is not, or shall not be, as the case may be, incomplete by omitting to state any material fact necessary to make such information not misleading. SECTION 6.16 Full Disclosure. There is no fact known to the Borrower or --------------- any of its Subsidiaries that has not been disclosed to the Agent in writing which could materially adversely affect the properties, business, prospects or condition (financial or otherwise) of the Borrower or its Subsidiaries. ARTICLE VII COVENANTS SECTION 7.1 Affirmative Covenants. The Borrower agrees with the Agent and --------------------- each Lender that, until all Commitments have terminated and all Obligations have been paid and performed in full, the Borrower will perform the obligations set forth in this Section 7.1 unless the Agent shall otherwise consent in writing. ----------- SECTION 7.1.1 Financial Statements and Reports of Borrower. The Borrower -------------------------------------------- will furnish, or will cause to be furnished, to the Agent and each Lender copies of the following financial statements, reports, notices and information: (i) as soon as available, but in any event within ninety (90) days after the end of each fiscal year of the Borrower, commencing with the fiscal year ending December 31, 1996, consolidated and consolidating balance sheets for the Borrower and its Subsidiaries, on an unaudited basis, prepared as of the close of such fiscal year and statements of operations, changes in shareholders' equity and changes in cash flows of the Borrower and its Subsidiaries on a consolidated and consolidating basis for such year, in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail, and (ii) as soon as available, but in any event within forty-five (45) days after the end of the first three fiscal quarters of each fiscal year of the Borrower, commencing with the 58 fiscal quarter ending March 31, 1996, consolidated and consolidating balance sheets of the Borrower and its Subsidiaries, on an unaudited basis, with respect to the Borrower and its Subsidiaries of the type described in clause (i); such ---------- financial information and reports of the Borrower specified in clauses (i) and ----------- (ii) to be accompanied by (a) a quarterly certificate of compliance, in the form - ---- of Exhibit L, executed by the chief financial Authorized Officer of the Borrower --------- certifying that the attached financial statements are true and correct and have been prepared in accordance with GAAP, the Borrower has complied with all of the terms and conditions of the Agreement, and no event has occurred which constitutes an Event of Default or would, with the lapse of time or giving of notice, or both, constitute an Event of Default, and (b) a statement setting forth the total volume of gas, liquid hydrocarbons or products thereof sold by the Borrower and its Subsidiaries during the preceding fiscal quarter. SECTION 7.1.2 Reserve, Production and Operating Reports. The Borrower ----------------------------------------- shall deliver to the Agent (i) within ninety (90) days after the end of each fiscal year a reserve report, prepared as of the end of such fiscal year, by Sproule Associates Limited, Ryder Scott and Associates or such firm or firms of independent petroleum engineers designated by the Borrower and approved by the Agent, evaluating the Present Value attributable to the Proved Producing Reserves, Proved Non-Producing Reserves and Probable Additional Reserves and production therefrom attributable to the Borrowing Base Properties; (ii) no later than thirty (30) days before each Determination Date, (a) to the extent available to the Borrower, complete revenue, expense and production information for the Borrowing Base Properties for the most recent twelve-month period preceding such Determination Date, and (b) detailed revenue, expense and production information for the same time period, on a property-by-property or well-by-well basis, for Borrower's oil and gas wells producing seventy-five percent (75%) of the Borrower's oil and gas revenue for the applicable time period; and (iii) at such times as Agent may from time to time request, an oil and gas operating statement concerning Borrower's operation and production from its Borrowing Base Properties, prepared on a basis reasonably acceptable to Agent, reflecting for the period requested, net production volume, prices received, severance taxes, and capital and operating expenses, including a calculation of net operating income. SECTION 7.1.3 Payment of Taxes, etc. The Borrower will, and will cause ---------------------- each of its Subsidiaries to, pay and discharge all taxes, assessments, governmental charges, levies and all lawful claims which, if unpaid, might become a Lien or charge upon the Borrowing Base Properties or any other of their properties; provided, the Borrower shall not be deemed in default if any such 59 taxes, assessments, governmental charges, levies or claims are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. SECTION 7.1.4 Insurance and Insurance Summaries. The Borrower will, and --------------------------------- will cause each of its Subsidiaries to, maintain or cause to be maintained on all of their assets and properties, now owned or hereafter acquired, and with respect to their personal liability insurance issued by responsible insurance companies and against such risks and in such amounts as it deems prudent and naming Agent as co-insured. Within sixty (60) days after the end of each fiscal year of the Borrower, the Borrower shall deliver to the Agent a summary of all insurance coverage maintained by the Borrower, including a summary of the carriers of such insurance, the properties and risks insured, the amounts of such insurance and other information regarding insurance coverage as is reasonably requested by the Agent. SECTION 7.1.5 Operations and Properties. The Borrower will, and will ------------------------- cause each of its Subsidiaries to, act prudently and in accordance with customary industry standards in managing or operating its assets, properties, business and investments, including, the Borrowing Base Properties; the Borrower shall keep in good working order and condition, ordinary wear and tear excepted, all of its assets and properties which are necessary and material to the conduct of its business, including without limitation all wells and equipment necessary or useful in the operation of the Borrowing Base Properties; provided, the -------- Borrower shall never be deemed obligated to rework, recomplete, redrill or otherwise maintain any well or production facility when, in the Borrower's judgment, it would be imprudent or uneconomic to do so. SECTION 7.1.6 Compliance with Applicable Laws. The Borrower will, and ------------------------------- will cause each of its Subsidiaries to, comply in all material respects with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, a breach of which could materially and adversely affect the business or credit of the Borrower or any of its Subsidiaries. Such compliance shall include (without limitation) (i) the maintenance and preservation of its corporate or business existence and qualification as a foreign corporation or other business entity; and (ii) the payment, before delinquency, of all taxes, assessments or governmental charges as required by Section 7.1.3. - ------------- SECTION 7.1.7 Litigation. The Borrower will, and will cause each of its ---------- Subsidiaries to, give notice in writing to the Agent of the commencement of, and any material determination in, all litigation and all proceedings before any governmental or 60 regulatory agencies materially affecting the Borrower or any of its Subsidiaries. SECTION 7.1.8 Changes of Fact. The Borrower will, and will cause each of --------------- its Subsidiaries to, notify the Agent in writing of any change in any material fact or circumstance represented or warranted in this Agreement or the other Loan Documents. SECTION 7.1.9 Maintenance of Rights. The Borrower will, and will cause --------------------- each of its Subsidiaries to, preserve and maintain all of its rights, privileges and franchises necessary in the normal conduct of its business, and conduct its business in an orderly and efficient manner consistent with good business practices. SECTION 7.1.10 Maintenance of Properties. The Borrower will, and will ------------------------- cause each of its Subsidiaries to, maintain, preserve, protect and keep its properties in good repair, working order and condition, and make necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times unless the Borrower determines in good faith that the continued maintenance of any of its properties is no longer economically desirable. SECTION 7.1.11 Maintenance and Granting of Liens, Mortgages and Security --------------------------------------------------------- Interests. The Borrower will, and will cause each of its Subsidiaries to, - --------- execute and deliver to the Agent for the benefit of the Lenders, all security agreements, pledge agreements, mortgages, debentures, assignments, financing statements, documents and instruments, and do such other things as are required by Article III, Article V or Section 7.1.21, or as the Agent shall reasonably ----------- --------- -------------- request in order to maintain (subject, in the case of the Collateral Documents, to Permitted Liens) as valid, enforceable, perfected and first priority Liens, all Liens granted to the Agent for the benefit of the Lenders pursuant to the Loan Documents. SECTION 7.1.12 Notice of Default. The Borrower will, and will cause each ----------------- of its Subsidiaries to, furnish to the Agent, upon becoming aware of the existence of any condition or event constituting a Default or an Event of Default, a written notice specifying the nature and period of existence thereof and the action which the Borrower is taking or proposes to take with respect thereto. SECTION 7.1.13 Compliance with Loan Documents. The Borrower will, and will ------------------------------ cause each of its Subsidiaries to, comply promptly with any and all applicable covenants and provisions of the Loan Documents, including all covenants contained in the Collateral 61 Documents, and specifically those covenants dealing with the operation and maintenance of the Borrowing Base Properties. SECTION 7.1.14 Compliance with Material Agreements. The Borrower will, and ----------------------------------- will cause each of its Subsidiaries to, comply in all material respects with all material agreements, operating agreements, leases, or other documents binding on the Borrower, or affecting its properties or business. SECTION 7.1.15 Books and Records; Inspection. The Borrower will, and will ----------------------------- cause each of its Subsidiaries to, at all times keep complete and accurate books, records and accounts of transactions, which records shall fairly present its financial position and results of operations, and upon request by the Agent, give any representative or agent of the Agent or any Lender access during normal business hours to, permit such representative or agent to examine, copy or make excerpts from, any books, records and documents in the possession of the Borrower or any of its Subsidiaries relating to any of their affairs. SECTION 7.1.16 Agreements Affecting the Borrowing Base Properties. The -------------------------------------------------- Borrower will, and will cause each of its Subsidiaries to, deliver to the Agent upon request by the Agent copies of all material operating agreements, pooling or unitization agreements, sales or processing contracts, preferential purchase right agreements, drilling and/or development agreements, pipeline transportation agreements and other material agreements which pertain to the Borrowing Base Properties, the operation thereof or the disposition of production attributable thereto. SECTION 7.1.17 Other Notices. The Borrower will, and will cause each of ------------- its Subsidiaries to, promptly notify the Agent of (a) any default or claimed or asserted default under any agreement, contract or other instrument to which the Borrower or any of its Subsidiaries is a party or by which any of its or their properties are bound, or any acceleration of the maturity of any Indebtedness of the Borrower in an amount greater than $100,000, and (b) any adverse claim against or affecting the Borrower or any of its Subsidiaries or any of its or their properties which is in excess of $100,000. SECTION 7.1.18 Value of Properties. The Borrower will ensure that (i) at ------------------- all times the Borrowing Base Properties, and (ii) at all times after the execution and delivery of the supplemental debentures to the Debenture or other documents creating a fixed charge pursuant to Section 7.1.21, the properties described in, and subject to the first fixed charges (subject only to Permitted Liens) created by, the Debenture, supplemental debenture to the Debenture and such other documents, shall consist of Assets of the 62 Borrower containing not less than ninety percent (90%) of the Present Value of the Borrower's Borrowing Base Properties reflected in the most recent reserve report. SECTION 7.1.19 Copies of Filings, etc. Concurrently with transmission ----------------------- thereof, the Borrower will furnish to the Agent copies of all financial statements, proxy statements and other statements and reports as the Borrower sends to its stockholders, and copies of all registration statements and all regular, special or periodic reports which the Borrower or any of its Subsidiaries files, or any of their officers or directors file with respect to the Borrower or any of its Subsidiaries or their respective securities, with any securities regulatory authority or with any securities exchange on which any of the Borrower's or such Subsidiary's securities are then listed, if any, and copies of all press releases and other statements made available generally by the Borrower or any of its Subsidiaries to the public concerning material developments in the Borrower's or any of its Subsidiary's business. SECTION 7.1.20 Environmental Covenant. The Borrower will, and will cause ---------------------- each of its Subsidiaries to, (a) use, operate and maintain all of its facilities and properties in material compliance with all Environmental Laws, keep all necessary permits, approvals, certificates, licenses and other authorizations relating to environmental matters in effect and remain in material compliance therewith, and handle all Hazardous Materials in material compliance with all applicable Environmental Laws; (b) immediately notify the Lenders and provide copies upon receipt of all written claims, complaints, notices, liens or inquiries relating to the condition of its facilities and properties or compliance with Environmental Laws (other than notices which are routinely received or submitted in the ordinary course of business and which do not involve substantial fines, penalties or liabilities to the Borrower or any of its Subsidiaries), and shall promptly cure and have dismissed with prejudice to the satisfaction of the Agent any actions and proceedings relating to compliance with Environmental Laws; and (c) provide such information and certifications which the Lender may reasonably request from time to time to evidence compliance with this Section 7.1.20. -------------- SECTION 7.1.21 Additional Security Documents. Promptly, and in any event ----------------------------- within forty-five (45) days following the Effective Date, and whenever required pursuant to Section 3.5, the Borrower will mortgage, pledge, assign or grant to ----------- the Agent for the benefit of the Lenders, pursuant to duly authorized, executed, delivered and registered supplemental debentures to the Debenture and such other security agreements, financing statements, mortgages, debentures, deeds of trust or other applicable security documents as the Agent may require, all in form and substance satisfactory to 63 the Agent, a first fixed charge (subject only to Permitted Liens) on the Borrowing Base Properties of the Borrower, and all products and proceeds thereof (all the foregoing documents delivered pursuant to this Section 7.1.21 or -------------- pursuant to Section 3.5 or Section 5.1.7 herein collectively called the ----------- ------------- "Collateral Documents"), and the Borrower shall also deliver to the Agent at the -------------------- same times (a) a reserve report dated within ninety (90) days of delivery, prepared by a petroleum engineering firm acceptable to the Agent setting forth the Present Value of the Borrowing Base Properties described in, and subject to the Lien created by, such Collateral Documents, and (b) title opinions, title reports and other title information covering not less than eighty percent (80%) of the Present Value of the Proved Producing Reserves of the Borrower utilized to establish the Trax Borrowing Base then in effect and providing confirmation satisfactory to the Agent that Borrower has good and defensible title to the Borrowing Base Properties, subject only to Permitted Liens. The Borrower shall further deliver any and all instruments, opinions of counsel or documents reasonably requested by the Agent in connection with any additional security document required to be executed pursuant to the foregoing provisions of this Section 7.1.21. - -------------- SECTION 7.1.22 Intentionally Omitted. --------------------- SECTION 7.1.23 Other Information. The Borrower will furnish, or will cause ----------------- to be furnished, to the Agent such other information respecting the condition or operations, financial or otherwise, of the Borrower or any of its Subsidiaries as any Lender through the Agent may from time to time reasonably request. SECTION 7.2 Negative Covenants. So long as any Lender has any Commitment ------------------ hereunder or the Borrowings or any part thereof remain outstanding and until payment in full of the Borrowings and the payment and performance of the other Obligations, the Borrower agrees that, unless the Majority Lenders shall otherwise consent in writing: SECTION 7.2.1 Limitation on Liens. The Borrower will not, and will not ------------------- permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon its property, revenues or assets (including the Borrowing Base Properties), whether now owned or hereafter acquired, except for the Permitted Liens. SECTION 7.2.2 Disposition of Assets. Without the prior approval of the --------------------- Majority Lenders, the Borrower will not, and will not permit any of its Subsidiaries to, sell, convey, exchange, lease or otherwise dispose of any of its Assets having an aggregate value in excess of $100,000 for all such sales, conveyances, exchanges, leases or dispositions during the period from the date 64 hereof until all Obligations are paid in full and all Commitments are terminated, except obsolete or worn out equipment and oil, gas and hydrocarbons sold in the ordinary course of the business of the Borrower and its Subsidiaries. SECTION 7.2.3 Certain Transactions. With respect to the Borrowing Base -------------------- Properties, the Borrower will not, and will not permit any of its Subsidiaries to, enter into any transaction with any Affiliate except for transactions with Affiliates upon terms not less favorable to the Borrower than would be obtainable at the time in comparable transactions of the Borrower in arm's length dealings with Persons other than Affiliates. SECTION 7.2.4 Place of Business. The Borrower will not move its principal ----------------- place of business or chief executive office without giving the Agent prior written notice thereof. SECTION 7.2.5 Consolidation, Amalgamation or Merger. Except as expressly ------------------------------------- provided in this Section 7.2.5, the Borrower will not, and will not permit any ------------- of its Subsidiaries to, amalgamate with, consolidate with or merge into, any other Person, permit any other Person to amalgamate with, consolidate with or merge into the Borrower or any Subsidiary of the Borrower, or transfer or lease all, or substantially all, of its Assets except the Borrower may amalgamate with Northern so long as the surviving entity is the Borrower, no Default or Event of Default has occurred and is continuing or will occur as a result of such amalgamation and the Obligations do not exceed the Canadian Allocated Borrowing Base after giving effect thereto. SECTION 7.2.6 Limitation on Investments and New Businesses. The Borrower -------------------------------------------- will not, and will not permit any of its Subsidiaries to, engage directly or indirectly in any new business or make any acquisitions, investments, or commitments, except such businesses, operations, acquisitions, or investments which are incidental to or reasonably related to the present businesses and operations conducted by the Borrower or any Subsidiary of the Borrower and except (a) investment in obligations of the government of Canada or any agency thereof, or obligations guaranteed by the government of Canada, having a maturity not in excess of one year, (b) investments in certificates of deposit of a bank listed under Schedule I or Schedule II of the Bank Act (Canada) and which has a combined capital and surplus and undivided profits of not less than $500,000,000, having a maturity not in excess of one year, (c) investments in commercial paper with a rating of at least "Prime 1" according to Moody's Investors Service, Inc., or a similar rating of a comparable or successor service, having a maturity not in excess of one year. 65 SECTION 7.2.7 Limitation on Credit Extensions. The Borrower will not, and ------------------------------- will not permit any of its Subsidiaries to, extend credit, make advances or make loans to any Person or entity other than normal and prudent extensions of credit in the ordinary course of business, which extensions shall not be for longer periods than those extended by similar businesses operated in a normal and prudent manner; provided, however, that neither Borrower nor any of its -------- ------- Subsidiaries shall make any advances, loans or extensions of credit to or for the benefit of Northern, API, APC or any of the Onyx Subsidiaries (as defined in the Arch Agreement) except for the loan from the Borrower to Northern described in the third recital. ------------- SECTION 7.2.8 Fiscal Year. The Borrower will not, and will not permit any ----------- of its Subsidiaries to, change its fiscal year except for a change by the Borrower to the same fiscal year as API. SECTION 7.2.9 Certain Agreements. The Borrower will not, and will not ------------------ permit any of its Subsidiaries to, enter into any agreement, which by its terms would expressly restrict its performance of its obligations pursuant to this Agreement, or any arrangement for the purchase of materials, supplies, other property or services if such arrangement by its express terms requires that payment be made by the Borrower or such Subsidiary regardless of whether such materials, supplies, other property or services are delivered or furnished to it. Further, the Borrower will not, and will not permit any of its Subsidiaries to, enter into any transaction with any of its officers, directors, employees or affiliates (as defined in Rule 405 under Securities Act of 1933, as now or later amended), except for employment and compensation arrangements entered into on an arms-length basis and containing only reasonable and customary terms. SECTION 7.2.10 Restrictions on Payment of Dividends; Issuance of Capital --------------------------------------------------------- Stock. On and at all times after the Effective Date: - ----- (a) the Borrower will not declare, pay or make any dividend or distribution (in cash, property or obligations) on any shares of any class of capital stock (now or hereafter outstanding) of the Borrower or on any warrants, options or other rights with respect to any shares of any class of capital stock (now or hereafter outstanding) of the Borrower (other than dividends or distributions payable in its common stock or warrants to purchase its common stock or splitups or reclassifications of its stock into additional or other shares of its common stock) or apply, or permit any of its Subsidiaries to apply, any of its funds, property or assets to the purchase, redemption, sinking fund or other retirement of, or agree or permit any of its Subsidiaries to purchase or redeem, any shares of any class of capital stock (now or hereafter outstanding) of the Borrower, or warrants, options or other rights with respect to any 66 shares of any class of capital stock (now or hereafter outstanding) of the Borrower; and (b) the Borrower will not, and will not permit any of its Subsidiaries to, make any deposit for any of the foregoing purposes. SECTION 7.2.11 Financial Condition. The Borrower will not, at any time, ------------------- permit its Current Ratio to be less than 1:1. SECTION 7.2.12 Limitation on Additional Indebtedness. The Borrower will ------------------------------------- not, and will not permit any of its Subsidiaries to, create, incur, assume or otherwise become or remain liable with respect to Indebtedness, except: (a) Indebtedness incurred pursuant to this Agreement or any of the Loan Documents; (b) Indebtedness of the Borrower consisting of advances, loans or extensions of credit owing to Northern to the extent permitted by Section 4.2.7 of the Guaranty of API; (c) until the date of the initial Borrowing, Indebtedness identified in Item 7.2.12 ("Indebtedness to be Paid") of the Disclosure ----------- Schedule; (d) trade payables not more than sixty (60) days past due; (e) Indebtedness of the Borrower's Subsidiaries owing to the Borrower; provided, -------- however, that no Indebtedness otherwise permitted by clauses (b) or (e) shall be - ------- ----------- --- permitted if, after giving effect to the incurrence thereof, any Default or Event of Default shall have occurred and be continuing. SECTION 7.2.13 Negative Pledges, Restrictive Agreements, etc. The Borrower --------------------------------------------- will not, and will not permit any of its Subsidiaries to, enter into any agreement (excluding this Agreement, any other Loan Document and any agreement governing any Indebtedness permitted by clause (c) of Section 7.2.12 as in ---------- -------------- effect on the Effective Date) prohibiting (a) the creation or assumption of any Lien upon its properties, revenues or assets, whether now owned or hereafter acquired, or the ability of the Borrower or any of its Subsidiaries to amend or otherwise modify this Agreement or any other Loan Document; or (b) the ability of any Subsidiary to make any payments, directly or indirectly, to the Borrower by way of dividends, advances, repayments of loans or advances, reimbursements of management and other intercompany charges, expenses and accruals or other returns on investments, or any other agreement or arrangement which restricts the ability of any such Subsidiary to make any payment, directly or indirectly, to the Borrower. 67 ARTICLE VIII EVENTS OF DEFAULT SECTION 8.1 Listing of Event of Default. An "Event of Default" shall --------------------------- exist if any one or more of the following events (herein called "Events of --------- Default") shall occur: - ------- SECTION 8.1.1 Failure of Payment. Borrower shall fail to pay or cause to ------------------ be paid when due (whether at stated maturity, by acceleration or otherwise) all or any part of the principal of or interest on any Loan, any Bankers' Acceptance or any fee or any other Obligation. SECTION 8.1.2 False Representation. Any material representation or -------------------- warranty made or deemed to be made under the Loan Documents or in any certificate or statement furnished to made to Agent or any Lender pursuant to this Agreement or any other Loan Document or in connection herewith or therewith (including any other writing or certificate furnished by or on behalf of the Borrower or any Guarantor to Agent or any Lender), shall prove to be untrue in any material respect as of the date on which such representation or warranty is made. SECTION 8.1.3 Breach of Covenant. Any default or breach shall occur in ------------------ the performance of the covenants set forth in Section 7.2.11 or 7.2.12 hereof or -------------- ------ in Section 4.2.11 or 4.2.12 of the Guaranty of API, or any material default or breach shall occur in the performance of any of the covenants (other than those listed above) or agreements of the Borrower contained herein or in any of the other Loan Documents. SECTION 8.1.4 Renunciation of Obligation. Borrower or any Guarantor -------------------------- renounces its material obligations hereunder or under the Loan Documents, or any of the Loan Documents becomes or is declared, in whole or in part, invalid or unenforceable. SECTION 8.1.5 Bankruptcy. Borrower, any of its Subsidiaries, any ---------- Guarantor or any Subsidiary of any Guarantor shall (1) pursuant to bankruptcy, insolvency, arrangement or similar laws, apply for or consent to the appointment of a receiver, trustee, intervenor, custodian, liquidator, interim receiver, receiver-manager, assignee, sequestrator or similar official of itself or of all or a substantial part of its assets, (2) file a voluntary petition in bankruptcy or admit in writing that it is unable to pay its debts as they become due, (3) make a general assignment for the benefit of creditors, (4) commence any proceeding or file a petition, answer, consent, proposal or plan, or give any notice of its intention to do so, seeking any liquidation, winding-up or 68 reorganization or seeking any arrangement, compromise, adjustment, composition, moratorium or other relief whatsoever in respect of its indebtedness and liabilities to its creditors, or any class or classes thereof, under any applicable bankruptcy, insolvency, arrangement or similar law (including the Companies Creditors Arrangement Act (Canada), the Bankruptcy and Insolvency Act (Canada) and the Canada Business Corporations Act), or consent to the filing of any such petition, proposal, plan or proceeding, or (5) file an answer admitting the material allegations of or consent to or default in answering a petition filed against it in any bankruptcy, reorganization or insolvency proceeding, or action shall be taken by such Person for the purpose of effecting any of the foregoing. SECTION 8.1.6 Bankruptcy Orders, etc. An order, judgment or decree shall ----------------------- be entered by any court of competent jurisdiction or other competent authority approving a petition, proposal, plan or plan of arrangement seeking reorganization of Borrower, any of its Subsidiaries, any Guarantor or any Subsidiary of any Guarantor, an "order for relief" or stay of proceeding under applicable bankruptcy or insolvency law, or appointing a receiver, receiver- manager, interim receiver, trustee in bankruptcy, trustee, intervenor, custodian, or liquidator of Borrower, any of its Subsidiaries, any Guarantor or any Subsidiary of any Guarantor, or of all or substantially all of the assets of Borrower, any of its Subsidiaries, any Guarantor or any Subsidiary of any Guarantor. SECTION 8.1.7 Default Under Other Documents. A material default shall ----------------------------- occur under any other loan agreement, credit agreement or note between Lenders or Arch Banks and Borrower, any of its Subsidiaries, any Guarantor or any Subsidiary of any Guarantor, or under any other collateral document executed by Borrower, any of its Subsidiaries, any Guarantor (other than a default constituting an Event of Default under Section 8.1.3) or any Subsidiary of any ------------- Guarantor, given to secure payment of Indebtedness owed to Lenders or Arch Banks by Borrower, any of its Subsidiaries, any Guarantor or any Subsidiary of any Guarantor. SECTION 8.1.8 Liens Invalid. To a material extent, any of the Liens ------------- granted (or purported to be granted) to the Collateral Agent for the benefit of the Lenders and the Arch Banks or to Agent for the benefit of the Lenders pursuant to any Loan Document should become invalid or unenforceable or cease to be (subject, in the case of the Collateral Documents, to Permitted Liens) first perfected priority Liens; or Northern or the Borrower is or becomes a party to any unanimous shareholder agreement, or other shareholder agreement which in any manner restricts or limits the transferability of the collateral granted (or purported to be 69 granted) pursuant to the Pledge Agreement or the Security Agreement (Stock). SECTION 8.1.9 Judgments. Any judgment or judgments for the payment of --------- money in the aggregate excess of $100,000 shall be rendered against Borrower, any of its Subsidiaries, any Guarantor or any Subsidiary of any Guarantor, and (i) such judgment or judgments shall not be satisfied or discharged, or proceedings to enforce any such judgment are not stayed, at least ten (10) days prior to the date on which any of the assets of such Person could lawfully be sold to satisfy such judgment or judgments or (ii) any such stay shall not be in effect. SECTION 8.1.10 Material Defaults. Borrower, any of its Subsidiaries, any ----------------- Guarantor or any Subsidiary of any Guarantor, should fail to pay when due any Indebtedness (including any production and royalty payments burdening oil and gas properties of such Person, whether or not such payments constitute "Indebtedness") in the aggregate in excess of $100,000 or should default in the performance of any material obligations of Borrower, any of its Subsidiaries or any Guarantor or any Subsidiary of any Guarantor, under any promissory note, credit agreement, loan agreement or collateral document relating to or security for any such Indebtedness (including any such production and royalty payments) in the aggregate in excess of $100,000. SECTION 8.1.11 Dissolution. The occurrence of any event resulting in the ----------- dissolution, winding-up or reorganization of Borrower, any of its Subsidiaries, any Guarantor or any Subsidiary of any Guarantor, other than as permitted by Section 7.2.5. - ------------- SECTION 8.1.12 Borrowing Base Deficiency. Upon the occurrence of a ------------------------- Borrowing Base Deficiency, Borrower shall fail to remedy such Borrowing Base Deficiency in the manner and within the time set forth in Section 3.4. ----------- SECTION 8.1.13 Default Under Arch Agreement. A default (including an "Event ---------------------------- of Default" as defined in the Arch Agreement) shall occur under the Arch Agreement and such default (including such "Event of Default") is not cured or satisfied within the applicable cure period therefor as set forth in the Arch Agreement. SECTION 8.1.14 Change of Control. API shall cease to own, directly or ----------------- indirectly, free and clear of all Liens and other encumbrances (other than Liens in favor of the Collateral Agent for the benefit of the Lenders), 100% of the issued and outstanding shares of capital stock of Northern; or prior to the amalgamation of Northern and Trax permitted by Section 7.2.5, Northern shall ------------- cease to own, directly or indirectly, free and clear of all Liens 70 and other encumbrances (other than Liens in favor of the Agent), 100% of the issued and outstanding shares of capital stock of Trax. SECTION 8.2 Materiality; Notice of Defaults. ------------------------------- SECTION 8.2.1 Materiality. With respect to the Events of Default set ----------- forth in Sections 8.1.2, 8.1.3, 8.1.4, 8.1.7 and 8.1.8, the term "material" -------------- ----- ----- ----- ----- shall mean any event or occurrence which results or may result in a significant adverse effect upon the Borrower, any Subsidiary of the Borrower, any Guarantor, any Subsidiary of any Guarantor, the Borrowing Base Properties, title of the Borrower to the Borrowing Base Properties or Borrower's ability to make payments on its Obligations as they come due, or any Guarantor's ability to make payments on its Guaranty, or which has an adverse impact on Borrower, any Subsidiary of the Borrower, any Guarantor, any Subsidiary of any Guarantor which is in excess of $100,000 or the interest of the Borrower in the Borrowing Base Properties which is in excess of $100,000. SECTION 8.2.2 Notice of Monetary Defaults. Upon Agent's or any Lender's --------------------------- becoming aware of an Event of Default set forth in Section 8.1.1 hereof, Agent ------------- shall immediately send notice to Borrower of such Event of Default, which notice shall set forth the amount of the payment due from Borrower to Lenders. As to an Event of Default for which notice is due under this Section 8.2.2, before ------------- pursuing any remedies to which it is entitled, Lenders shall allow Borrower five (5) Business Days from the date of such notice to remedy or cure such Event of Default. SECTION 8.2.3 Notice of Certain Non-Monetary Defaults. Upon Agent's or --------------------------------------- any Lender's becoming aware of any Event of Default set forth in Sections 8.1.2, -------------- 8.1.3, 8.1.4, 8.1.7, 8.1.8, 8.1.9, or 8.1.10, hereof Agent shall immediately - ----- ----- ----- ----- ----- ------ send notice to Borrower of such Event of Default, which notice shall sufficiently describe the circumstances giving rise to such Event of Default. As to such Events of Default for which notice is due under this Section 8.2.3, ------------- before pursuing any remedies to which it is entitled, Lenders shall allow Borrower twenty (20) Business Days from the date of such notice within which to remedy or cure such Event of Default. Lenders shall not be required to provide to Borrower any notice of any Events of Default set forth in Sections 8.1.5, -------------- 8.1.6, 8.1.11, 8.1.12, 8.1.13 or 8.1.14 hereof prior to exercising its remedies. - ----- ------ ------ ------ ------ SECTION 8.3 Acceleration. ------------ (a) If any Event of Default described in Sections 8.1.5, 8.1.6 or -------------- ----- 8.1.11 occurs with respect to the Borrower: ------ 71 (i) the Commitments of the Lenders, including all obligations of the Lenders to make Loans and extend credit with respect to other Borrowings hereunder shall automatically terminate; (ii) the Obligations shall immediately become due and payable without any election or action on the part of the Agent or any Lender and without presentment, demand, protest or notice of any kind, including without notice of acceleration or notice of intent to accelerate, all of which the Borrower hereby expressly waives; (iii) the Borrower shall immediately pay to the Agent for the benefit of the applicable Lenders the full face amount of all outstanding Bankers' Acceptances issued by such Lender, whether or not such Bankers' Acceptances have by their terms matured, in accordance with the provisions of Section 2.9.2, the Borrower ------------- acknowledging that such Lenders would not have an adequate remedy at law for failure by the Borrower to honor any such demand; and (iv) the Agent and the Lenders and each of them shall be able to exercise any rights available to it or them under the Loan Documents or by law. (b) If any other Event of Default occurs and remains uncured or unremedied after the applicable cure periods set forth in Sections 8.2.2 -------------- and 8.2.3: ----- (i) the Majority Lenders may terminate or suspend all or any portion of the Commitments of the Lenders, including obligations of the Lenders to extend credit with respect to any Borrowings and make Loans hereunder, or declare all or any portion of the Obligations to be due and payable, or both, whereupon the Obligations which shall be so declared due and payable shall become immediately due and payable, without presentment, demand, protest or notice of any kind, including without notice of acceleration or notice of intent to accelerate, all of which the Borrower hereby expressly waives; (ii) the Majority Lenders may demand that the Borrower immediately pay to the Agent for the benefit of the applicable Lenders the full face amount of all outstanding Bankers' Acceptances, whether or not such Bankers' Acceptances have by their terms matured, in 72 accordance with the provisions of Section 2.9.2, and the Borrower ------------- agrees to immediately make such payment and acknowledges and agrees that such Lenders would not have an adequate remedy at law for failure of the Borrower to honor any such demand; and (iii) the Agent and the Lenders shall be able to exercise any rights available to it or them under the Loan Documents or by law. The Agent hereby agrees, at the written direction of the Majority Lenders, subject to the provisions of Article IX, to exercise any of ---------- the foregoing rights available to it. SECTION 8.4 Preservation of Rights. All remedies contained in the Loan ---------------------- Documents or afforded by law shall be cumulative and all shall be available to the Agent and the Lenders until the Obligations have been paid in full. No delay or omission of the Lenders, the Agent or any of them to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or an acquiescence therein, and the making of a Loan or acceptance of a Bankers' Acceptance notwithstanding the existence of a Default or the inability of the Borrower to satisfy the conditions precedent to such Loan or other Borrowing shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by the Lenders and the Agent required pursuant to Section 10.1, and then only to the extent specifically set ------------ forth in such writing. ARTICLE IX THE AGENT SECTION 9.1 Actions. Each Lender hereby irrevocably appoints Bank of ------- Montreal as its Agent under and for purposes of this Agreement and each other Loan Document. Each Lender authorizes the Agent to act on behalf of such Lender under this Agreement and each other Loan Document and, in the absence of other written instructions from the Majority Lenders received from time to time by the Agent (with respect to which the Agent agrees that it will comply, except as otherwise provided in this Section or as otherwise advised by counsel), to exercise such powers hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. Each Lender hereby indemnifies (which indemnity shall survive any termination of this 73 Agreement) the Agent, from and against such Lender's ratable share of any and all liabilities, obligations, losses, damages, claims, costs or expenses of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against, the Agent in any way relating to or arising out of this Agreement or any other Loan Document, including reasonable fees of counsel (on a solicitor and his own client basis) and court costs, and as to which the Agent is not reimbursed by the Borrower; provided, however, that no Lender shall be -------- ------- liable for the payment of any portion of such liabilities, obligations, losses, damages, claims, costs or expenses which are determined by a court of competent jurisdiction in a final proceeding to have resulted solely from the Agent's gross negligence or wilful misconduct. The Agent shall not be required to (a) exercise any discretion or to take or to refrain from taking any action in any manner which is contrary in any manner to this Agreement, the Loan Documents, any other agreement between the Lenders or to applicable law; or (b) take any action hereunder or under any other Loan Document, or to prosecute or defend any suit in respect of this Agreement or any other Loan Document, unless it is indemnified hereunder to its satisfaction. If any indemnity in favor of the Agent shall be or become, in the Agent's determination, inadequate, the Agent may call for additional indemnification from the Lenders and cease to do the acts indemnified against hereunder until such additional indemnity is given. SECTION 9.2 Funding Reliance, etc. Unless the Agent shall have been ---------------------- notified by telephone, confirmed in writing, by any Lender by 5:00 p.m., Toronto time, on the Business Day prior to a Borrowing to be made by the Borrower, that such Lender will not make available the amount which would constitute its relevant percentage, if any, of such Borrowing on the date specified therefor, the Agent may assume that such Lender has made such amount available to the Agent and, in reliance upon such assumption, make available to the Borrower a corresponding amount. If and to the extent that such Lender shall not have made such amount available to the Agent, such Lender and the Borrower severally agree to repay the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date the Agent made such amount available to such Borrower to the date such amount is repaid to the Agent, at the interest rate applicable at the time to Loans comprising such Borrowing or at a rate equal to the stamping fee applicable at the time to Bankers' Acceptances comprising such Borrowing, as the case may be. SECTION 9.3 Repayment by Lenders to Agent. Unless the Agent has been ----------------------------- notified in writing by the Borrower at least one (1) Business Day prior to the date on which any payment to be made by 74 the Borrower hereunder is due that the Borrower does not intend to remit such payment, the Agent may, in its discretion, assume that the Borrower has remitted such payment when so due and the Agent may, in its discretion and in reliance upon such assumption, make available to each Lender on such payment date an amount equal to the amount of such payment which is due to such Lender pursuant to this Agreement. If the Borrower does not in fact remit such payment to the Agent, the Agent shall promptly notify each Lender and each such Lender shall forthwith on demand repay to the Agent the amount of such assumed payment made available to such Lender, together with interest thereon until the date of repayment thereof at a rate determined by the Agent (such rate to be conclusive and binding on such Lender) in accordance with the Agent's usual banking practice for similar advances to financial institutions of like standing to such Lender. SECTION 9.4 Exculpation. Neither the Agent nor any of its directors, ----------- officers, employees or agents shall be liable to any Lender for any action taken or omitted to be taken by it or any of them under this Agreement or any other Loan Document, or in connection herewith or therewith, except for its or their own wilful misconduct or gross negligence, nor responsible for any recitals or warranties herein or therein, nor for the effectiveness, enforceability, validity or due execution of this Agreement or any other Loan Document, nor for the creation, perfection or priority of any Liens purported to be created by or pursuant to any of the Loan Documents, or the validity, genuineness, enforceability, existence, value or sufficiency of any collateral security, nor to make any inquiry respecting the performance by the Borrower, the Guarantor or any other obligor of its respective obligations hereunder or under any other Loan Document. Any such inquiry which may be made by the Agent shall not obligate it to make any further inquiry or to take any action. The Agent shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which the Agent believes to be genuine and to have been presented by a proper Person. SECTION 9.5 Successor. The Agent may resign as such at any time upon at --------- least 30 days' prior notice to the Borrower and all Lenders. If the Agent at any time shall resign, the Majority Lenders may appoint another Lender as a successor Agent which shall thereupon become the Agent hereunder. If no successor Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent's giving notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent. Any successor Agent appointed hereunder shall be one of the Lenders and a commercial banking institution organized under the laws of Canada 75 or a Canadian branch or agency of a commercial banking institution, and having a combined capital and surplus of at least U.S. $500,000,000 or an Equivalent Amount of Canadian Dollars. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall be entitled to receive from the retiring Agent such documents of transfer and assignment as such successor Agent may reasonably request, and shall thereupon succeed to and become vested with all rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation as the Agent, the provisions of (a) this Article IX shall inure to its benefit as to any actions taken or ---------- omitted to be taken by it while it was the Agent under this Agreement; and (b) Section 10.3 and Section 10.4 shall continue to inure to its benefit. ------------ ------------ SECTION 9.6 Extensions of Credit by the Bank of Montreal. Bank of -------------------------------------------- Montreal shall have the same rights and powers with respect to the Loans made and the Bankers' Acceptances accepted and purchased by it or any of its Affiliates as any other Lender and may exercise the same as if it were not the Agent. Bank of Montreal and its Affiliates may accept deposits from, lend money to, enter into swaps, futures and other contracts with and/or accept bankers' acceptances for the account of, and generally engage in any kind of business with, the Borrower or any Subsidiary or Affiliate of the Borrower as if Bank of Montreal were not the Agent or Lender hereunder. SECTION 9.7 Credit Decisions. Each Lender acknowledges that it has, ---------------- independently of the Agent and each other Lender, and based on such Lender's review of the financial information of the Borrower, the Guarantors, this Agreement, the other Loan Documents (the terms and provisions of each of the foregoing which being satisfactory to such Lender) and such other documents, information and investigations as such Lender has deemed appropriate, made its own credit decision to extend its Commitments. Each Lender also acknowledges that it will, independently of the Agent and each other Lender, and based on such other documents, information and investigations as it shall deem appropriate at any time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement or any other Loan Document. SECTION 9.8 Copies, etc. The Agent shall give prompt notice to each ------------ Lender of each notice or request required or permitted to 76 be given to the Agent by the Borrower pursuant to the terms of this Agreement (unless concurrently delivered to the Lenders by the Borrower). The Agent will distribute to each Lender each document or instrument received for its account and copies of all other communications received by the Agent from the Borrower or any Guarantor for distribution to the Lenders by the Agent in accordance with the terms of this Agreement. ARTICLE X MISCELLANEOUS PROVISIONS SECTION 10.1 Waivers, Amendments, etc. The provisions of this Agreement ------------------------- and of each other Loan Document may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by the Borrower and the Majority Lenders; provided, however, that no such -------- ------- amendment, modification or waiver which would: (a) modify any requirement hereunder that any particular action be taken by all the Lenders or by the Majority Lenders shall be effective unless consented to by each Lender; or (b) modify this Section 10.1, change the definitions of "Majority ------------ Lenders", increase the Facility Amount or the "Percentage" of any Lender, reduce ---------- any fees described in Article II or Article III or release any collateral ---------- ----------- security (including any Guaranty), except as otherwise specifically provided in any Loan Document or extend the Commitment Termination Date without the written consent of each Lender; or (c) extend the due date for, or reduce the amount of, any scheduled repayment or prepayment of principal of, or interest on, any Borrowing (or reduce the principal amount of, or face amount of, or rate of interest or fees on or payable with respect to, any Borrowing), shall be made (i) without the written consent of each Lender that made such Borrowing in the case of any such extensions or reductions relating to Loans or (ii) without the written consent of all Lenders and the Agent in the case of any such extensions or reductions relating to Bankers' Acceptances; or (d) affect adversely the interests, rights or obligations of the Agent qua the Agent, shall be made without the written consent of the Agent. - --- No failure or delay on the part of the Agent or any Lender in exercising any power or right under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any 77 single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Borrower in any case shall entitle such Borrower to any notice or demand in similar or other circumstances. No waiver or approval by the Agent or any Lender under this Agreement or any other Loan Document shall, except as may be otherwise stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. SECTION 10.2 Notices. All notices and other communications provided to ------- any party hereto under this Agreement or any other Loan Document shall be in writing or by facsimile and addressed, delivered or transmitted to such party at its address or facsimile number set forth below its signature hereto or set forth in the Lender Assignment Agreement or at such other address or facsimile number as may be designated by such party in a notice to the other parties. Any notice, if mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any notice, if transmitted by facsimile, shall be deemed given when transmitted. SECTION 10.3 Payment of Costs and Expenses. The Borrower agrees to pay on ----------------------------- demand all reasonable expenses of the Agen (including the reasonable fees and out-of-pocket expenses of Messrs. Mayer, Brown & Platt and Messrs. Burnet, Duckworth & Palmer (on a solicitor and his own client basis), counsel to the Agent, and of local counsel, if any, who may be retained by counsel to the Agent and of engineers, accountants, geologists, and consultants) in connection with (a) the negotiation, preparation, execution, delivery, syndication and publicity with respect to this Agreement and of each other Loan Document, including schedules and exhibits, and any amendments, waivers, consents, supplements or other modifications to this Agreement or any other Loan Document as may from time to time hereafter be required, whether or not the transactions contemplated hereby are consummated, (b) the filing, recording, refiling or rerecording of any Collateral Documents, the Pledge Agreement, the Security Agreement (Stock), the General Security Agreement, the Debenture, the Instrument of Pledge, any other Loan Document and/or any and all Uniform Commercial Code financing statements, Personal Property Security financing statements, security notices, caveats or other instruments or notices relating thereto and all amendments, supplements and modifications to any thereof and any and all other documents or instruments of further assurance required to be filed 78 or recorded or refiled or rerecorded by the terms hereof or of the Loan Documents, and (c) the preparation and review of the form of any document or instrument relevant to this Agreement or any other Loan Document including any engineering and reserve report and any accounting review of the books and records and accounting procedures of the Borrower, and any other review of the business, assets and operations of the Borrower as the Agent shall in its sole and absolute discretion deem necessary or desirable. The Borrower further agrees to pay, and to save the Agent and the Lenders harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Agreement, the Borrowings hereunder, or any other Loan Document. The Borrower also agrees to reimburse the Agent and each Lender upon demand for all reasonable out-of-pocket expenses (including reasonable attorneys' fees and legal expenses (on a solicitor and his own client basis)) incurred by the Agent or such Lender in connection with (x) the negotiation of any restructuring or "work-out", whether or not consummated, of any Obligations and (y) the enforcement of any Obligations. SECTION 10.4 Indemnification. SECTION 10.4.1 General Provisions of Indemnification. In consideration of ------------------------------------- the execution and delivery of this Agreement by each Lender and the extension of the Commitments, the Borrower hereby indemnifies, exonerates and holds the Agent and each Lender 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, fees, penalties, assessments, liabilities and damages, and expenses incurred in connection therewith (irrespective of whether any such Indemnified Party is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' fees and disbursements (collectively, the "Indemnified ----------- Liabilities"), incurred by the Indemnified Parties or any of them as a result - ----------- of, or arising out of, or relating to (a) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Loan; (b) the entering into and performance of this Agreement and any other Loan Document by any of the Indemnified Parties (including any action brought by or on behalf of the Borrower as the result of any determination by 79 the Majority Lenders pursuant to Article V not to fund any Borrowing, but --------- excluding any claims, losses, liabilities and damages resulting from any Lender's breach of its Commitment or other obligations hereunder); (c) any investigation, litigation or proceeding related to any acquisition or proposed acquisition by the Borrower or any of its Subsidiaries of all or any portion of the stock or assets of any Person, whether or not the Agent or such Lender is party thereto; (d) any investigation, litigation or proceeding related to any environmental cleanup, audit, compliance or other matter relating to the protection of the environment or the release by the Borrower or any of its Subsidiaries of any Hazardous Material, any Environmental Law or the condition of any facility or property owned, leased or operated by the Borrower or any of its Subsidiaries; or (e) the presence, storage or disposal on or under, or the escape, seepage, leakage, spillage, discharge, emission, transportation, discharging or releases from, any facility, property owned, leased or operated by the Borrower 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 Borrower or such Subsidiary; or (f) any misrepresentation, inaccuracy or any breach in or of Section ------- 6.13 or Section 7.1.20; ---- -------------- except for any such Indemnified Liabilities arising for the account of a particular Indemnified Party by reason of the relevant Indemnified Party's gross negligence, wilful misconduct or breach in performing its Commitment or obligations to the Borrower under this Agreement. If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. If Agent or any Lender shall have knowledge of any claim or liability required to be indemnified against under this Section 10.4, Agent or such Lender ------------ shall give reasonably prompt written notice thereof to Borrower after becoming aware of such claim, but the failure of Agent or such Lender so to notify Borrower shall not relieve Borrower from any liability that it would otherwise have to Lenders hereunder. Borrower and Borrower's 80 insurers shall have the right, at their sole cost and expense, to investigate, defend or, except as limited hereinafter, compromise any claim for which indemnification is sought under this Section 10.4. Borrower shall assume all ------------ responsibility for any claim covered by the foregoing indemnity, and the Agent and Lenders shall provide reasonable assistance and cooperation during the defense or settlement of the claim, and, except as limited hereafter, Borrower shall have control of the defense or settlement of such claim or compromise thereof; provided, that counsel selected by Borrower shall be completely acceptable to Agent in its sole discretion, and no compromise or settlement of any claim may be effected by Borrower without Agent's consent, which consent shall not be unreasonably withheld; provided, no consent shall be required if (i) there is no finding or admission of any violation of any law by Agent or any Lender or any violation of the rights of any Person by Agent or any Lender, (ii) there is no effect on any claim that may be made by any Lender, and (iii) the relief provided is the sole responsibility of Borrower. Agent or any Lender shall have the right, but not the duty, at its own expense, to participate in the defense and/or settlement of any claim with counsel of its own choosing without relieving Borrower of any obligations hereunder. Borrower and its counsel shall cooperate with Agent's and/or any Lender's counsel and shall supply Agent and such Lender with such information reasonably requested by Agent and such Lender. Notwithstanding anything to the contrary contained herein, if Agent, in its sole discretion, determines that a conflict of interest exists with respect to Agent and/or any Lender and Borrower, Agent, at its option, may terminate, or if Borrower's assumption of the defense has not begun, refuse to permit, Borrower or Borrower's insurer's representation, defense, and control of the indemnity matter. In such event, Borrower shall remain completely and fully liable for all indemnity matters, including the then existing indemnity matter, as provided above. SECTION 10.4.2 Negligence Expressly Indemnified. Without limiting any -------------------------------- provision of this Agreement or any of the other Loan Documents, it is the express intention of the parties hereto that each Indemnified Party shall be indemnified and held harmless against any and all losses, liabilities, claims or damages arising out of or resulting from the sole or contributory negligence but not the gross negligence of such Indemnified Party. SECTION 10.5 Survival. The obligations of the Borrower under -------- Sections 4.3,4.4, 4.6, 4.7, 9.1, 10.3 and 10.4, and the obligations of the - ------------ --- --- --- --- ---- ---- Lenders under Section 10.15, shall in each case survive any termination of ------------- this Agreement and each other Loan Document, the payment in full of all Obligations and the termination of all Commitments. The representations and warranties made by the Borrower and each Guarantor in this Agreement and in 81 each other Loan Document shall survive the execution and delivery of this Agreement and each such other Loan Document. SECTION 10.6 Severability. Any provision of this Agreement or any other ------------ Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or such Loan Document or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 10.7 Headings. The various headings of this Agreement and of -------- each other Loan Document are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or such other Loan Document or any provisions hereof or thereof. SECTION 10.8 Execution in Counterparts, Effectiveness, etc. This --------------------------------------------- Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. This Agreement shall become effective when counterparts hereof executed on behalf of the Borrower, the Agent and each Lender (or notice thereof satisfactory to the Agent) shall have been received by the Agent and notice thereof shall have been given by the Agent to the Borrower and each Lender. SECTION 10.9 Governing Law; Entire Agreement. THIS AGREEMENT AND EACH ------------------------------- OTHER LOAN DOCUMENT (OTHER THAN THOSE CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE PROVINCE OF ALBERTA AND THE LAWS OF CANADA APPLICABLE THEREIN. This Agreement and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. SECTION 10.10 Successors and Assigns. This Agreement shall be binding ---------------------- upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that: (a) except in compliance with -------- ------- Section 7.2.5 the Borrower may not assign or transfer its rights or obligations - ------------- hereunder without the prior written consent of the Agent and all Lenders; and (b) the rights of sale, assignment and transfer of the Lenders are subject to Section 10.11. - ------------- SECTION 10.11 Sale and Transfer of Borrowings; Participations in -------------------------------------------------- Borrowings. Each Lender may assign, or sell participations in, - ---------- 82 its Loans and to one or more other Persons in accordance with this Section ------- 10.11. - ----- SECTION 10.11.1 Assignments. Any Lender, (a) with the written consent ----------- of the Borrower and the Agent (which consents shall not be unreasonably withheld or delayed and which consent, in the case of the Borrower, shall be deemed to have been given in the absence of a written notice delivered by the Borrower to the Agent, on or before the fifth Business Day after receipt by the Borrower of such Lender's request for consent, stating, in reasonable detail, the reasons why the Borrower proposes to withhold such consent, and which consent of the Borrower shall not be required after the occurrence of an Event of Default that is continuing) may at any time assign and delegate to one or more commercial banks or other financial institutions or to any of its Affiliates or to any other Lender, in each case where such assignee is organized under the laws of and resident in Canada for purposes of the Income Tax Act (Canada), or (b) with notice to the Borrower and the Agent, but without the consent of the Borrower or the Agent, may assign and delegate to any of its Affiliates or to any other Lender, in each case where such assignee is organized under the laws of and resident in Canada for purposes of the Income Tax Act (Canada), (each Person described in either of the foregoing clauses as being the Person to whom such assignment and delegation is to be made, being hereinafter referred to as an "Assignee Lender"), all or any fraction of such Lender's total Borrowings and --------------- Commitments (which assignment and delegation may be of a varying percentage of all or a portion of the assigning Lender's Borrowings and Commitments) in a minimum aggregate amount of U.S.$ 5,000,000 (or the Equivalent Amount thereof in Canadian Dollars) and, if assigned in part only, such assignor Lender would thereafter retain for its own account a Commitment of at least U.S.$10,000,000; provided however, that anything herein or in any other Loan Document to the - -------- ------- contrary notwithstanding, the Agent and the Borrower may from time to time, without the consent of the Lenders or any of them, consent to assignments by a Lender in amounts other than those set forth above. The Borrower and the Agent shall be entitled to continue to deal solely and directly with such Lender in connection with the interests so assigned and delegated to an Assignee Lender until (a) written notice of such assignment and delegation, together with payment instructions, addresses and related information with respect to such Assignee Lender, shall have been given to the Borrower and the Agent by such Lender and such Assignee Lender, (b) such Assignee Lender shall have executed and delivered to the Borrower and the Agent a Lender Assignment Agreement, accepted by the Agent, and (c) the processing fees described below shall have been paid. 83 From and after the date that the Agent accepts such Lender Assignment Agreement, (x) the Assignee Lender thereunder shall be deemed automatically to have become a party hereto and to the Intercreditor Agreement and to the extent that rights and obligations hereunder have been assigned and delegated to such Assignee Lender in connection with such Lender Assignment Agreement, shall have the rights and obligations of a Lender hereunder and under the Intercreditor Agreement and the other Loan Documents, and (y) the assignor Lender, to the extent that rights and obligations hereunder have been assigned and delegated by it in connection with such Lender Assignment Agreement, shall be released from its obligations hereunder and under the Intercreditor Agreement and the other Loan Documents and (z) the Assignee Lender shall be deemed to have represented to the Borrower, the Guarantor and the Agent as of the date of becoming an Assignee Lender to the effect of the representations in the first sentence of Section 10.15. Accrued interest, accrued fees and amounts in respect of - ------------- outstanding Bankers' Acceptances shall be paid as provided in the relevant Lender Assignment Agreement. Accrued interest, accrued fees and amounts in respect of outstanding Bankers' Acceptances shall be paid at the same time or times provided in this Agreement. Such assignor Lender or such Assignee Lender must also pay a processing fee in the amount of U.S.$250 to the Agent upon delivery of any Lender Assignment Agreement for the account of the Agent as its own property. Any attempted assignment and delegation not made in accordance with this Section 10.11.1 shall be null and void. - --------------- SECTION 10.11.2 Participations. Any Lender may at any time sell to one or -------------- more commercial banks or other Persons organized under the laws of and resident of Canada for the purposes of the Income Tax Act (Canada) (each of such commercial banks and other Persons being herein called a "Participant") ----------- participating interests in any of the Borrowings, Commitments, or other rights or interests of such Lender hereunder; provided, however, that -------- ------- ---- (a) no participation contemplated in this Section 10.11 shall relieve ------------- such Lender from its Commitments or its other obligations hereunder or under any other Loan Document, (b) such Lender shall remain solely responsible for the performance of its Commitments and such other obligations, (c) the Borrower, the Guarantors and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and each of the other Loan Documents, 84 (d) no Participant, unless such Participant is an Affiliate of such Lender, or is itself a Lender, shall be entitled to require such Lender to take or refrain from taking any action hereunder or under any other Loan Document, except that such Lender may agree with any Participant that such Lender will not, without such Participant's consent, take any actions of the type described in clause (c) of Section 10.1, and ---------- ------------ (e) all amounts payable by the Borrower to any Lender pursuant to Article ------- IV shall be determined as if the Lender had not sold any participation and as if - -- such Lender were funding all of its Loans and Bankers' Acceptances in the same way that it is funding the portion of Loans and Bankers' Acceptances in which no participations have been sold. SECTION 10.11.3 Further Documentations in Event of Assignments or ------------------------------------------------- Participation. The Borrower hereby agrees to execute and deliver such further - ------------- instruments or documents as such Lender reasonably considers necessary or advisable to effect an assignment and/or participation under Section 10.11.1 and --------------- Section 10.11.2, provided such documents do not adversely modify any of the - --------------- Borrower's rights or increase its obligations hereunder or under the Loan Documents. SECTION 10.12 No Oral Agreements. THIS WRITTEN AGREEMENT TOGETHER WITH ------------------ THE OTHER LOAN DOCUMENTS REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. SECTION 10.13 Other Transactions. Nothing contained herein shall preclude ------------------ the Agent or any other Lender from engaging in any transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Affiliates in which such Borrower or such Affiliate is not restricted hereby from engaging with any other Person. SECTION 10.14 Forum Selection and Consent to Jurisdiction. THE BORROWER ------------------------------------------- HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE PROVINCE OF ALBERTA, CANADA IN CONNECTION WITH ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS, THE BORROWER OR ANY OF THEM; PROVIDED, -------- HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER - ------- 85 PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE PROVINCE OF ALBERTA, CANADA FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE PROVINCE OF ALBERTA, CANADA. BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. SECTION 10.15 Certain Matters. Each Lender and the Agent (collectively --------------- "Recipients" and individually a "Recipient") represents to the Borrower, the Guarantor and the Agent that as of the date hereof either (i) it is a corporation resident in Canada for purposes of the Income Tax Act, Canada (in this Section referred to as the "Act"), or (ii) it is entitled to complete exemption from Canadian withholding tax imposed on or with respect to any payments, including fees, to be made to it pursuant to this Agreement because any payments so made are attributable to a business carried on by it in Canada through a permanent establishment in Canada. Each Recipient that is not resident in Canada for purposes of the Act agrees to provide to the Borrower and the Guarantors written authorization of Revenue Canada pursuant to Regulation 805(2) of the Act (in this Section referred to as the "Authorization") ------------- permitting payments to be made to the Lender without deduction of withholding tax. If a Recipient determines, as a result of any Regulatory Change or other change in its circumstances, that it is unable to submit the Authorization that it is obliged to submit pursuant to this Section, or that the Borrower or the Guarantor is no longer entitled to rely on the Authorization, it shall promptly notify the Borrower, the Guarantors and the Agent of such fact. In the event that any Recipient fails to deliver any Authorization required under this Section upon its initially becoming a Recipient hereunder, the Borrower's obligation to pay to the Agent or any Recipient additional amounts under Section ------- 4.7 with respect to Taxes and each Guarantor's obligation to pay additional - --- amounts under Section 2.8 of its respective Guaranty shall be reduced to the amount that it would have been obliged to pay to the Agent or such Recipient had 86 such Authorization been provided. The agreements, representations and other benefits accruing to Guarantors' benefit under this Section are made and given in consideration of the Guarantors' execution and delivery of the Guaranties and shall be directly held and enforceable by the Guarantors, in their own name. SECTION 10.16 Time of the Essence. Time shall be of the essence of this ------------------- Agreement. [SIGNATURES BEGIN ON FOLLOWING PAGE] 87 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. BANK OF MONTREAL, as Agent By:_______________________________________ Name: Richard N. Miller Title: Director Address: BANK OF MONTREAL First Canadian Place, 22nd Floor 100 King Street West Toronto, Ontario 1A1 M S X Attention: Sid Levin, Director Telephone: (416) 867 - 6904 Fax: (416) 867 - 5938 PERCENTAGE LENDER - ---------- ------ BANK OF MONTREAL, as Lender 100% By:________________________________ Name: Richard N. Miller Title: Director Address: BANK OF MONTREAL 2400, 350-7th Avenue S.W. Calgary, Alberta T2P 3N9 Attention: Carol Blanche Telephone: (403) 234 - 3096 Fax: (403) 234 - 3644 LIBOR Office: Address: BANK OF MONTREAL 2400, 350-7th Avenue S.W. Calgary, Alberta T2P 3N9 Attention: Carol Blanche Telephone: (403) 234 - 3096 Fax: (403) 234 - 3644 BORROWER -------- TRAX PETROLEUMS LIMITED By: _______________________________ Name: Larry Kalas Title: Director By: _______________________________ Name: Randall Scroggins Title: Vice President Address: 2120 530-8 Ave. S.W. Calgary, Alberta T2P 3S8 Attention: Troy Welch Telex: N/A Telecopy: (403) 265-7822 Telephone: (403) 232-6677 with a copy to: Arch Petroleum Inc. 777 Taylor Street Fort Worth Club Tower Penthouse IIA Fort Worth, Texas 76102 Attention: Larry Kalas Telex: N/A Telecopy: (817) 332-9249 Telephone: (817) 332-9209 -----END PRIVACY-ENHANCED MESSAGE-----