-----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, OgzlMVC+Tr3coqKI29atCXVhVQz5hOo5kQSTM0Iz/VI3/rM7W2i4AMzp20Jz9TYe yNgh8h1b2V3JhJ3djo/Z3g== 0000930661-98-001227.txt : 19980521 0000930661-98-001227.hdr.sgml : 19980521 ACCESSION NUMBER: 0000930661-98-001227 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980520 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOTHIC ENERGY CORP CENTRAL INDEX KEY: 0000878482 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 222663839 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-19753 FILM NUMBER: 98629112 BUSINESS ADDRESS: STREET 1: 5727 S LEWIS AVE STE 700 STREET 2: P O BOX 186 CITY: TULSA STATE: OK ZIP: 74105 BUSINESS PHONE: 9187495666 FORMER COMPANY: FORMER CONFORMED NAME: TNC MEDIA INC DATE OF NAME CHANGE: 19930328 10QSB 1 FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period from___________________________to__________________________. Commission file number 0-19753 --------------------------------------------------------------- GOTHIC ENERGY CORPORATION (Exact name of registrant as specified in its charter) OKLAHOMA 22-2663839 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 5727 SOUTH LEWIS, #700, TULSA, OKLAHOMA 74105-7148 (Address of principal executive offices) 918-749-5666 (Registrant's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: As of May 14, 1998, 16,261,640 shares of the Registrant's Common Stock, $.01 par value, were outstanding. GOTHIC ENERGY CORPORATION TABLE OF CONTENTS PART I - FINANCIAL INFORMATION PAGE ITEM 1 - FINANCIAL STATEMENTS Consolidated Unaudited Balance Sheets December 31, 1997 and March 31, 1998......................... 3 Consolidated Unaudited Statements of Operations Three Months ended March 31, 1997 and 1998................... 4 Consolidated Unaudited Statements of Cash Flows Three Months ended March 31, 1997 and 1998................... 5 Notes to Unaudited Consolidated Financial Statements......... 6 Report of Review by Independent Accountants.................. 12 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS Management's Discussion and Analysis or Plan of Operations... 13 PART II - OTHER INFORMATION ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS........... 24 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.................... 25 Signatures................................................... 26 2 GOTHIC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE)
DECEMBER 31, MARCH 31, ASSETS 1997 1998 ------ ------------ --------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 16,722 $ 3,294 Available-for-sale investments 406 - Natural gas and oil receivables 3,200 8,187 Receivable from officers and employees 82 66 Other 78 2,140 -------- -------- TOTAL CURRENT ASSETS 20,488 13,687 PROPERTY AND EQUIPMENT: Natural gas and oil properties on full cost method: Properties being amortized 94,168 338,471 Unproved properties not subject to amortization 2,103 2,103 Deposit for natural gas and oil property acquisition 23,750 - Gas gathering and processing system 5,404 - Equipment, furniture and fixtures 558 607 Accumulated depreciation, depletion and amortization (9,456) (16,645) -------- -------- PROPERTY AND EQUIPMENT, NET 116,527 324,536 OTHER ASSETS, NET 1,360 8,497 NOTE RECEIVABLE FROM OFFICER AND DIRECTOR 167 - -------- -------- TOTAL ASSETS $138,542 $346,720 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable trade $ 2,081 $ 5,339 Revenues payable 1,553 2,423 Accrued interest and dividends 4,018 3,881 Accrued liabilities 182 1,754 -------- -------- TOTAL CURRENT LIABILITIES 7,834 13,397 LONG-TERM DEBT 123,750 311,434 Less: Unamortized discount and loan costs (5,250) - Less: Senior Notes in Treasury, at cost (796) (796) -------- -------- LONG-TERM DEBT, NET 117,704 310,638 GAS IMBALANCE LIABILITY 551 6,213 SERIES A REDEEMABLE PREFERRED STOCK, PAR VALUE $.05, ISSUED AND OUTSTANDING 0 AND 37,000 SHARES - 33,909 STOCKHOLDERS' EQUITY: Preferred stock, par value $.05, authorized 500,000 shares - - Common stock, par value $.01, authorized 100,000,000 shares; issued and outstanding 16,261,640 shares 162 162 Additional paid in capital 36,043 38,118 Accumulated deficit (23,462) (55,548) Unrealized loss on available-for-sale investments (121) - Note receivable (169) (169) -------- -------- TOTAL STOCKHOLDERS' EQUITY 12,453 (17,437) -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $138,542 $346,720 ======== ========
See accompanying notes 3 GOTHIC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, ---------------------------------- 1997 1998 -------- -------- REVENUES: Natural gas and oil sales $ 4,707 $ 16,516 Gas system revenues 1,269 - Well operations 306 586 -------- -------- TOTAL REVENUES $ 6,282 $ 17,102 COSTS AND EXPENSES: Lease operating expenses 1,700 4,664 Gas system expenses 1,103 - Depletion, depreciation and amortization 1,235 7,444 General and administrative expense 547 655 Severance for former officer - 258 -------- -------- Operating income 1,697 4,081 Interest expense and amortization of debt issuance costs (1,186) (8,033) Interest and other income 17 166 Loss on sale of investments - (265) -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM $ 528 (4,051) LOSS ON EARLY EXTINGUISHMENT OF DEBT - 27,061 -------- -------- NET INCOME (LOSS) 528 (31,112) PREFERRED DIVIDEND ($18.77 AND $26.32 PER PREFERRED SHARE) 104 974 -------- -------- NET INCOME (LOSS) AVAILABLE FOR COMMON SHARES $ 424 $(32,086) ======== ======== INCOME (LOSS) PER COMMON SHARE BEFORE EXTRAORDINARY ITEM, BASIC AND DILUTED $ .03 $ (.31) ======== ======== NET INCOME (LOSS) PER COMMON SHARE, BASIC AND DILUTED $ $.03 $ (1.97) ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,375 16,261 ======== ========
See accompanying notes 4 GOTHIC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, ---------------------------------- 1997 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 528 $ (31,112) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation, depletion and amortization 1,235 7,444 Amortization of discount and loan costs 380 920 Loss on early extinguishment of debt - 27,061 CHANGES IN ASSETS AND LIABILITIES: Increase in accounts receivable (387) (4,971) Increase in other current assets (54) (62) Increase in accounts and revenues payable 526 4,128 Decrease in gas imbalance payable (174) - Decrease in accrued liabilities (158) (1,164) -------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,896 $ 2,244 NET CASH USED BY INVESTING ACTIVITIES: Collection of note receivable from officer and director - 167 Purchase of available-for-sale investments - (462) Proceeds from sale of investment - 724 Proceeds from sale of property and equipment 220 4,000 Purchase of property and equipment (24,590) (214,511) Property development costs (411) (2,635) -------- --------- NET CASH USED BY INVESTING ACTIVITIES $(24,781) $(212,717) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings 14,500 60,000 Payment of short-term borrowings - (1,500) Proceeds from long-term borrowings 31,668 132,684 Payments of long-term borrowings (21,985) (4,500) Proceeds from sale of preferred stock, net - 36,475 Proceeds from exercise of common stock warrants 25 - Payment of loan fees (1,343) (26,114) Other 3 - -------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES $ 22,868 $ 197,045 NET CHANGE IN CASH AND CASH EQUIVALENTS (17) (13,428) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 206 16,722 -------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 189 $ 3,294 ======== ========= SUPPLEMENTAL DISCLOSURE OF INTEREST PAID $ 806 $ 7,113 ======== =========
See accompanying notes 5 GOTHIC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. GENERAL AND ACCOUNTING POLICIES ORGANIZATION AND NATURE OF OPERATIONS - The consolidated financial statements include the accounts of Gothic Energy Corporation, (the "Company"), and its subsidiaries, Gothic Energy of Texas, Inc. ("Gothic Texas"), since its inception in 1995 and Gothic Gas Corporation ("Gothic Gas"), since its inception in 1995 and through its sale in January 1998. The Company is primarily engaged in the business of acquiring, developing and exploiting oil and gas reserves in Oklahoma, Texas, New Mexico and Kansas. Substantially all of the Company's natural gas and oil production is being sold regionally in the "spot market" or under short-term contracts, not extending beyond twelve months. PREPARATION OF FINANCIAL STATEMENTS - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The December 31, 1997 consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by generally accepted accounting principles. The financial statements should be read in conjunction with the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997. In the opinion of management of the Company, the accompanying financial statements contain all adjustments, none of which were other than normal recurring accruals, necessary to present fairly the financial position of the Company as of March 31, 1998, and the results of its operations and cash flows for the periods ended March 31, 1997 and 1998. The results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the full year. IMPACT OF FINANCIAL ACCOUNTING PRONOUNCEMENTS - Income (loss) per common share before extraordinary item and net income (loss) per common share are computed in accordance with Statement of Financial Accounting Standards No. 128 ("FAS 128"), which is effective for reporting periods ending after December 15, 1997. FAS 128 requires the restatement of prior year's loss per share to conform to the new standard. Presented in the Consolidated Statements of Operations is a reconciliation of loss available to common shareholders. There is no difference between actual weighted average shares outstanding, which are used in computing basic income (loss) per share and diluted weighted average shares, which are used in computing diluted income (loss) per share because the effect of outstanding options and warrants would be antidilutive. Approximately 16,770,000 warrants and options were outstanding as of March 31, 1998 which were not included in the computation of diluted loss per share. In June 1997, the Financial Accounting Standards Board ("FASB") issued FAS 130, "Reporting Comprehensive Income", and FAS 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. The adoption of FAS 130 did not have a material effect in the Company's financial statements, as there was no difference between net income (loss) and comprehensive income (loss). FAS 131 does not effect the Company as only one segment is reported by Gothic. NOTE 2. OIL AND GAS PROPERTY ACQUISITIONS AMOCO ACQUISITION - On January 23, 1998, the Company completed the acquisition from Amoco Production Company ("Amoco"), a subsidiary of Amoco Corporation, of certain producing natural gas properties, located in the Anadarko and Arkoma Basins of Oklahoma. The purchase price was $237.5 million, including a $23.7 million deposit paid in November 1997 upon signing of the purchase agreements, subject to certain post-closing adjustments. Amoco also received warrants to purchase 1.5 6 NOTE 2. OIL AND GAS PROPERTY ACQUISITIONS (CONTINUED) million shares of the Company's common stock for $3.00 per share, with an estimated fair value at the date of acquisition of approximately $1.2 million, and certain producing properties having a value of less than $1.8 million. The acquisition and related fees and expenses were financed through an amended and restated credit facility with Bank One, Texas, NA. ("Bank One") (See Note 3) and the issuance of $37.0 million of Series A Preferred Stock (see Note 4). The Company acquired interests in 821 gross wells and assumed operations of 291 of the properties. The Company also acquired approximately 10,000 net undeveloped acres located throughout the Anadarko Basin as well as substantial mineral and overriding royalty interests. In connection with the Amoco Acquisition, the Company entered into a transition agreement which provided for a payment of $540,000 per month to be made to Amoco commencing January 1, 1998 for the operation and administration of the properties acquired. This transition payment was made by the Company for January and February 1998. On March 1, 1998, the Company took over operations of the properties. This transition agreement established effective control for Gothic over the properties, and accordingly, January 1, 1998 has been used as the effective date for the Amoco Acquisition for accounting purposes. NOTE 3. FINANCING ACTIVITIES CREDIT FACILITY On January 23, 1998, the Company entered into a Second Restated Loan Agreement with Bank One, as principal and as agent for a syndicate of lenders, which agreement amended the Company's credit facility entered into in January 1996 and revised in February and September 1997. The credit facility consisted of a revolving loan with a lending commitment of $160.0 million, subject to a monthly commitment reduction of $2.0 million commencing February 1, 1998 (the "Revolving Loan"), and a bridge loan (the "Bridge Loan") with a lending commitment of $60.0 million. The initial borrowing base under the Revolving Loan was $160.0 million. Proceeds of $156.4 million under the Revolving Loan and the $60.0 million Bridge Loan were used to finance a portion of the purchase price for the Amoco Acquisition. Interest on borrowings under the credit facility were payable monthly calculated at the Bank One Base Rate, as determined from time to time by Bank One, provided, however, so long as the Bridge Loan was outstanding interest on the Revolving Loan was at the Base Rate plus 0.5% and interest on the Bridge Loan was at the Base Rate plus 1.0% through March 31, 1998 and at the Base Rate plus 2% thereafter. The Company had the right to elect to calculate interest under a London Interbank Offered Rate ("LIBOR") plus 1.5%, if less than 50% of the borrowing base was utilized, up to plus 2% if more than 75% of the borrowing base was utilized, provided, however, so long as the Bridge Loan was outstanding the LIBOR rate was plus 3.0%. The interest rate under the credit facility was subject to increases up to 2.0% in the event the Company failed to fulfill timely certain agreements relating to obtaining additional capital. Pursuant to the foregoing, the interest rate increased 1% on each of February 28, 1998 and on March 31, 1998. The Company was required to pay a fee on the unused portion of the lending commitment equal to 1/2% per annum. Under the credit facility, the lenders held liens on substantially all of the Company's natural gas and oil properties, including the properties acquired in the Amoco Acquisition. The credit facility required, among other things, semi-annual engineering reports covering oil and natural gas reserves on the basis of which semi-annual and other redeterminations of the borrowing base and monthly commitment reduction were made. The credit facility also included various affirmative and negative covenants, including, among others, (i) prohibitions against additional indebtedness unless approved by the lenders, subject to certain exceptions, (ii) prohibitions against the creation of liens on the assets 7 NOTE 3. FINANCING ACTIVITIES (CONTINUED) of the Company, subject to certain exceptions, (iii) prohibitions against cash dividends, (iv) maintaining certain hedging positions and interest rate protection agreements satisfactory to Bank One, (v) prohibitions on asset sales, subject to certain exceptions, (vi) restrictions on mergers or consolidations, (vii) a requirement to maintain a ratio of current assets to current liabilities of 1.0 to 1.0, (viii) a requirement to maintain on a quarterly basis a minimum tangible net worth of at least (a) $45.0 million as of January 23, 1998, and (b) $75.0 million as of March 31, 1998, plus 50% of net income, if positive, before extraordinary gains but after extraordinary losses, for the period commending April 1, 1998, plus 100% of the net proceeds from the issuance of common or preferred stock, (ix) a minimum interest coverage ratio of not less than 1.5 to 1.0 as of the end of each quarter for the preceding four quarters beginning with the quarter ended September 30, 1997 and increasing to 2.0 to 1.0 as of the end of each quarter for the preceding four quarters beginning with the quarter ended September 30, 1998, (x) issuance of common stock with proceeds of $65.0 million by March 31, 1998, and (xi) the escrow of interest payments due on the Company's outstanding Senior Notes. Events of default included the non-payment of principal, interest or fees, a default under other outstanding indebtedness of the Company, a breach of the Company's representations and warranties contained in the loan agreement, material judgements, bankruptcy or insolvency, a default under certain covenants not cured within a grace period, and a change in the management or control of the Company. On March 30, 1998, the credit facility was amended to provide, among other things, that Gothic is required by April 30, 1998 to issue new equity with proceeds of $50.0 million and $225.0 million of senior notes to replace the 12 1/4% Senior Notes, to escrow on or before May 1, 1998 one-third of the next semi-annual interest payment on the 12 1/4% Senior Notes, and to have a tangible net worth of $60.0 million as of April 30, 1998. On April 27, 1998, as part of the Company's Recapitalization Plan, the credit facility and all accrued interest were paid in full. 12 1/4% SENIOR NOTES On September 9, 1997, the Company issued $100.0 million principal amount of its 12 1/4% Senior Notes Due 2004. On January 23, 1998, the Company obtained consents to the amendment of the Company's outstanding 12 1/4% Senior Notes. Of the consideration given for the consents, $15.0 million was paid by issuance of 15,000 shares of Series A Preferred Stock (see Note 4) and $5.8 million was paid in cash. These consent fees totaling $20.8 million together with unamortized discount and debt issue costs of $5.3 million and a $1.0 million early redemption premium related to the 12 1/4 % Senior Notes have been written off as an extraordinary loss during the quarter ended March 31, 1998, as the terms of the consent constitute a substantial modification of the terms of the 12 1/4% Senior Notes. In connection with obtaining the consents, the Company agreed to raise a total of at least $45.0 million of equity by February 28, 1998 and at least $100.0 million from the sale of senior subordinated notes by March 31, 1998. In the event the Company failed to comply with either of these agreements, until such conditions were met, the interest rate on the 12 1/4% Senior Notes increased by 1% until the additional equity is raised and also by 1% until the senior subordinated notes were sold, provided, if the senior subordinated notes were not sold by June 30, 1998, the interest rate on the 12 1/4% Senior Notes will increased by 2% until such senior subordinated notes were sold. Such additional equity was not sold by February 28, 1998. Pursuant to such consents, the holders of the 12 1/4% Senior Notes agreed that the Company had the right to redeem such notes through March 31, 1998 at 100% of the principal amount thereof and at 101% of the principal amount thereof through April 30, 1998 when such redemption right expired. On April 27, 1998, as part of the Company's Recapitalization, the Senior Notes and all accrued interest were paid in full. (see Note 5) 8 NOTE 4. STOCKHOLDERS' EQUITY PREFERRED STOCK OFFERINGS On January 23, 1998, the Company issued an aggregate of 37,000 shares of Series A Preferred Stock with each share having a liquidation preference of $1,000, inclusive of the shares issued as part of the consent fee described above. The shares of Series A Preferred Stock were redeemable at any time upon payment in cash of 101% of the liquidation preference, inclusive of accrued but unpaid dividends, and the shares were mandatorily redeemable on December 31, 2004. The shares of Series A Preferred Stock entitled the holders to receive cumulative dividends payable in additional shares of Series A Preferred Stock at a rate per annum initially of 14% of the liquidation preference of the Series A Preferred Stock increasing on April 1, 1998 and each 90-day period thereafter that the Series A Preferred Stock remained outstanding by 1%, but not to exceed a maximum dividend per annum of 20%, excluding any other adjustments to the dividend rate. The issuance of the shares provided a portion of the cash paid as consideration in the Amoco Acquisition and a fee in connection with an amendment obtained from the holders of certain terms of the Company's 12 1/4% Senior Notes. Concurrently with the sale of the Series A Preferred Stock, the Company issued five-year Warrants to purchase an aggregate of 1,175,778 shares of Common Stock exercisable at the lesser of $2.75 per share or the average of the daily closing bid prices commencing five days and ending one day before the date of exercise, subject to reduction to $0.01 per share under certain circumstances. The estimated fair value of such Warrants was $941,000 on the date of issuance. In March 1998, the Company obtained consents from the holders of approximately 95% of the Series A Preferred Stock and the related warrants to extend through April 30, 1998 the date on which (i) the warrant exercise price on existing warrants reduced to $0.01 and (ii) such holders would receive additional warrants. On April 27, 1998, as part of the Company's Recapitalization Plan, all 37,000 shares of the Series A Preferred Stock were redeemed and all accrued dividends paid. (See Note 5). NOTE 5. RECAPITALIZTION On April 27, 1998, the Company completed a series of transactions which recapitalized the Company through (i) the creation of Gothic Production Corporation ("GPC") and transfer all of the Company's natural gas and oil assets to GPC, (ii) the issuance by the Company of shares of Series B Preferred Stock, (iii) the sale of assets for $20.0 million, subject to closing adjustments, (iv) the execution of a participation agreement granting a 50% interest in substantially all of the Company's undeveloped acreage, (v) the issuance by the Company of its 14 1/8 % Senior Secured Discount Notes due 2006, (vi) the issuance by GPC of its 11 1/8% Senior Secured Notes due 2005 and (vii) the repayment and/or refinancing of substantially all of the Company's then existing debt and preferred securities (together the "Recapitalization"). Certain transactions undertaken in the Recapitalization are described in greater detail below. CORPORATE RESTRUCTURING GPC was organized as a wholly owned subsidiary of the Company. At the closing of the Recapitalization, the Company transferred to GPC its ownership of all its natural gas and oil properties. The natural gas and oil assets collateralize GPC's obligations under the Credit Facility and the 11 1/8% Senior Secured Notes. 9 NOTE 5. RECAPITALIZTION (CONTINUED) THE CHESAPEAKE TRANSACTION On April 27, 1998, the Company completed several agreements with Chesapeake Energy Corporation, pursuant to which the Company (i) executed a participation agreement granting a 50% interest in substantially all of the Company's undeveloped acreage, (ii) sold for $20.0 million, subject to closing adjustments, a 50% interest in the Company's natural gas and oil properties in the Arkoma basin, and (iii) sold 50,000 shares of Series B Preferred Stock, having a liquidation value of $50.0 million, and ten-year warrants to purchase, at an exercise price of $0.01 per share, 2,439,246 shares of the Company's Common Stock. FINANCING TRANSACTIONS The following financing transactions were also completed as part of the Recapitalization: 11 1/8% Senior Secured Notes.................. GPC sold $235.0 million principal amount of 11 1/8% Senior Secured Notes 14 1/8% Senior Secured Discount Notes......... The Company sold approximately $60.2 million initial principal amount ($104.0 million principal amount at maturity) of 14 1/8 % Senior Secured Discount Notes due 2006 secured by the outstanding capital stock of GPC held by the Company. Series B Preferred Stock and Warrants......... The Company sold 50,000 shares of Series B Preferred Stock, having a liquidation preference of $50.0 million, and ten-year common stock purchase warrants exercisable at $0.01 per share to purchase 2,439,246 shares of Common Stock. Arkoma Property Sales......................... The Company sold for $20.0 million, subject to closing adjustments, a 50% interest in its natural gas and oil properties in the Arkoma basin. Credit Facility............................... GPC, with the Company as guarantor, entered into the Credit Facility with Bank One which provides among other things, for an initial borrowing availability of approximately $25.0 million. 10 NOTE 5. RECAPITALIZTION (CONTINUED) REPAYMENTS AND REDEMPTIONS The net proceeds of approximately $350.5 million from the Recapitalization described above were applied to repay or redeem the following: 12 1/4% Senior Notes.......................... These notes, outstanding in the principal amount of approximately $99.3 million, were redeemed for approximately $102.3 million, inclusive of a 1% redemption premium and accrued interest. Series A Preferred Stock...................... These shares were redeemed for $38.7 million, inclusive of a 1% redemption premium and payment-in-kind dividends through the redemption date. Credit Facility............................... The Bridge Note with an outstanding principal balance of $56.5 million as of April 27, 1998 was repaid. The Revolving Loan with an outstanding principal balance of $149.9 million as of April 27, 1998 was repaid. 11 INDEPENDENT ACCOUNTANT'S REPORT To the Board of Directors and Stockholders: We have reviewed the accompanying consolidated balance sheet of Gothic Energy Corporation and Subsidiaries as of March 31, 1998 and the related consolidated statements of operations and cash flows for the three-month period ended March 31, 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated March 13, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1997 is fairly stated in all material respects in relation to the consolidated balance sheet form which it has been derived. COOPERS & LYBRAND, L.L.P. Tulsa, Oklahoma May 15, 1998 12 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - ------------------------------------------------------------------ The following is management's discussion and analysis of certain significant factors which have affected the Company's earnings, financial condition and liquidity during the periods included in the accompanying Consolidated Financial Statements. GENERAL The Company's results of operations have been significantly affected by its acquisition of producing natural gas and oil properties over the last two years. During the first quarter of 1998, the Company completed the Amoco Acquisition for a purchase price of approximately $239.9 million. This acquisition included approximately 240.0 Bcfe. During 1997, the Company completed seven acquisitions (the "1997 Acquisitions") of producing natural gas and oil properties for an aggregate purchase price of approximately $52.8 million. These acquisitions included an aggregate of approximately 102.2 Bcfe. The 1997 Acquisitions and the Amoco Acquisition were financed primarily through borrowings under the Company's Credit Facilities throughout 1997 and 1998 and the sale of the Company's 12 1/4% Senior Notes in September 1997. The following table reflects certain summary operating data for the periods presented: RESULTS OF OPERATIONS
Quarter Ended March 31, ----------------------------------- 1997 1998 -------- -------- (in thousands, unless otherwise indicated) Net Production: Oil (Mbbls) 37 86 Natural gas (Mmcf) 1,410 6,956 Natural gas equivalent (Mmcfe) 1,632 7,472 Oil and Natural Gas Sales: Oil $ 881 $ 1,299 Natural gas 3,826 15,217 -------- -------- Total $ 4,707 $ 16,516 ======== ======== Average Sales Price: Oil (Bbl) $ 23.81 $ 15.10 Natural gas (Mcf) 2.71 2.19 Natural gas equivalent (Mcfe) 2.88 2.21 Expenses ($ per Mcfe): Lease operating /(1)(2)/ $ 0.85 $ 0.55 General and administrative/(3)/ 0.34 0.09 Depreciation, depletion and 0.75 0.99 amortization/(4)/
- ------------------------------------------------- (1) Includes lease operating costs and production taxes and is net of well operator overhead reimbursement billed to working interest owners which is recorded as well operations revenue. (2) The 1998 lease operating expense amount includes $1.1 million of non- recurring costs associated with the Amoco Acquisition transition. (3) Excludes a non-recurring severance payment to a former officer in 1998. (4) Represents depreciation, depletion and amortization of oil and natural gas properties only. 13 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED) - ------------------------------------------------------------------------------ QUARTER ENDED MARCH 31, 1998 COMPARED WITH QUARTER ENDED MARCH 31, 1997 Revenues were $17.1 million for the quarter ended March 31, 1998, as compared to $6.3 million for the quarter ended March 31, 1997. This represents a 171% increase in total revenue for the period. Natural gas and oil sales for the quarter ended March 31, 1998 increased $11.8 million (251%) to $16.5 million, with $1.3 million from oil sales and $15.2 million from natural gas sales, as compared to natural gas and oil sales of $4.7 million for the quarter ended March 31, 1997, with $881,000 from oil sales and $3.8 million from natural gas sales. The increase in natural gas and oil sales was primarily the result of a 393% increase in natural gas production and a 132% increase in oil production in 1998 compared to 1997. The increase in volumes of oil and gas sold resulted primarily from the Amoco Acquisition and the 1997 Acquisitions. Oil sales in 1998 were based on the sale of 86,000 barrels at an average price of $15.10 per barrel as compared to 37,000 barrels at an average price of $23.81 per barrel in 1997. Natural gas sales in 1998 were based on the sale of 6,956,000 Mcf at an average price of $2.19 per Mcf compared to 1,410,000 Mcf at an average price of $2.71 per Mcf in 1997. Also included in the Company's revenue total for the quarter ended March 31, 1997 is $1.3 million related to the sale of natural gas and related products from the Company's interest in the Sycamore System, an Oklahoma gathering system, processing plant and storage facility acquired effective January 1, 1997. The Company's interest in the Sycamore System and gas processing and gathering systems acquired from Amoco were sold effective January 1, 1998 for $6.0 million. The Company incurred lease operating expenses for the quarter ended March 31, 1998 of $4.7 million compared with lease operating expenses of $1.7 million for the quarter ended March 31, 1997. Lease operating expenses include approximately $1.1 million and $300,000, respectively, in production taxes which the Company incurred from its share of production in 1998 and 1997. The increase in lease operating expenses is primarily due to the 358% increase in natural gas and oil production (on an Mcfe basis) resulting primarily from the Amoco Acquisition and the 1997 Acquisitions. Lease operating expenses for the quarter ended March 31, 1998 also include a one time charge of approximately $1.1 million associated with the Amoco Acquisition transition. Lease operating expenses as a percentage of natural gas and oil sales were 28% in 1998 as compared to 36% in 1997. The Company also incurred $1.1 million in operating costs associated with the Sycamore System during the quarter ended March 31, 1997, which were not incurred in 1998 due to the sale of the Sycamore System. Depreciation, depletion and amortization expense was $7.4 million for the quarter ended March 31, 1998 as compared to $1.2 million for the quarter ended March 31, 1997. The increase resulted primarily from the increased production associated with the properties acquired in the Amoco Acquisition and the 1997 Acquisitions. General and administrative costs were $655,000 for the quarter ended March 31, 1998, as compared to $547,000 for the quarter ended March 31, 1997. This increase was primarily the result of additional personnel and other costs related to the Amoco Acquisition and the 1997 Acquisitions and the administrative costs incurred in operating the wells acquired in the Amoco Acquisition and the 1997 Acquisitions. Although general and administrative costs increased $108,000 during 1998, the costs per Mcfe decreased from $0.34 in 1997 to $0.09 in 1998. The Company also recorded a $258,000 severance charge for a former officer during the 1998 period. Interest and debt issuance costs were $8.0 million for the quarter ended March 31, 1998 as compared to $1.2 million for 1997. The increase primarily relates to interest on the Company's 12 1/4% Senior Notes which were issued in September 1997, and costs incurred to amend the Company's Credit Facility with Bank One entered into in January 1998 to provide financing to complete the Amoco Acquisition. The Company incurred interest costs of $3.9 14 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED) - ------------------------------------------------------------------------------ million with Bank One, $3.1 million related to the 12 1/4% Senior Notes, $920,000 as amortization of loan costs and $104,000 with other parties. The Company earned $166,000 in interest and other income during the quarter ended March 31, 1998 compared to $17,000 in 1997. The Company also recorded a loss of $265,000 on the sale of investments during the 1998 period. The Company recorded an extraordinary loss on early extinguishment of debt in the amount of $27.0 million (reflecting the payment of $20.8 million in consent fees and the write-off of $6.2 million in unamortized discount and debt issue costs) in the quarter ending March 31, 1998. The loss was recognized as a result of the amendments to the Company's 12 1/4% Senior Notes which constituted a substantial modification to the terms of the Company's 12 1/4% Senior Notes. The Company also incurred $974,000 in preferred dividends on its Series A Preferred Stock during the quarter ended March 31, 1998, compared to $104,000 in preferred dividends on its 7 1/2% Cumulative Convertible Preferred Stock in 1997. All of the shares of 7 1/2% Cumulative Convertible Preferred Stock were converted into Common Stock prior to December 31, 1997.The 1998 preferred dividends are composed of the 14% annual dividend rate for approximately two months and amortization for two months related to a discount from warrants given in connection with the Series A Preferred Stock. The profitability and revenues of the Company are dependent, to a significant extent, upon prevailing spot market prices for natural gas and oil. In the past, natural gas and oil prices and markets have been volatile. Prices are subject to wide fluctuations in response to changes in supply of and demand for natural gas and oil, market uncertainty and a variety of additional factors that are beyond the control of the Company. Such factors include supply and demand, political conditions, weather conditions, government regulations, the price and availability of alternative fuels and overall economic conditions. Natural gas prices have fluctuated significantly over the past twelve months. The Company uses the sales method for recording natural gas sales. The Company's oil and condensate production is sold, title passed, and revenue recognized at or near its wells under short-term purchase contracts at prevailing prices in accordance with arrangements which are customary in the oil industry. Sales of gas applicable to the Company's interest in producing natural gas and oil wells are recorded as revenues when the gas is metered and title transferred pursuant to the gas sales contracts covering its interest in gas reserves. During such times as the Company's sales of gas exceed its pro rata ownership in a well, such sales are recorded as revenues unless total sales from the well have exceeded the Company's shares of estimated total gas reserves underlying the property at which time such excess is recorded as a gas balancing liability. Such imbalances are incurred from time to time in the ordinary course of business in the operation of gas wells as a consequence of operational factors. See Note 1 to Notes to Consolidated Financial Statements. At March 31, 1998, the Company had a gas balancing asset of $3.5 million and a gas balancing liability of $6.2 million. The balances that existed at March 31, 1998, except for possible immaterial amounts, were not the result of producing operations conducted by the Company, but were the results of asset acquisitions. It is not the Company's policy to operate wells in such a manner that imbalances are created. The Company expects that the imbalances that existed at March 31, 1998 will be settled upon abandonment of the wells or will be reflected in the price if the respective well interest is sold prior to then. 15 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED) - ------------------------------------------------------------------------------ LIQUIDITY AND CAPITAL RESOURCES GENERAL Since 1994, the Company's principal sources of cash have been bank borrowings, the sale of equity and debt securities and cash flow from operations. The following summary table reflects comparative cash flows for the Company for the quarters ended March 31, 1997 and 1998: QUARTER ENDED MARCH 31, ----------------------- 1997 1998 -------- -------- (IN THOUSANDS) Net cash provided by operating activities $ 1,896 $ 2,244 Net cash used in investing activities 24,781 212,717 Net cash provided by financing activities 22,868 197,045 Net cash provided by operations was $2.2 million for the quarter ended March 31, 1998 as compared to net cash provided of $1.9 million for the same period in 1997. The operating cash flows for the quarter ended March 31, 1998 relate primarily to the increased income from operations resulting from the Amoco Acquisition and the 1997 Acquisitions, partially offset by related interest costs and changes in working capital. The Company used $212.7 million of net cash in investing activities for the quarter ended March 31, 1998 compared to net cash used of $24.8 million for the same period in 1997. This increase was primarily due to cash paid of $214.5 million to complete the Amoco Acquisition and well enhancement costs of approximately $2.6 million. These uses were partially offset by proceeds of $4.0 million received from the sale of the Company's gas gathering and processing systems during 1998. Net cash provided by financing activities for the quarter ended March 31, 1998 was $197.0 million compared to $22.9 million provided in 1997. The March 31, 1998 amount includes proceeds from short and long-term debt related to the Amoco Acquisition of $ 192.7 million and proceeds from the issuance of the Company's Series A Preferred Stock of $36.5 million, partially offset by the payment of $26.1 million in 12 1/4% Senior Notes consent fees and other bank fees and payments of short and long-term debts of $6.0 million. OUTSTANDING INDEBTEDNESS AND OTHER SECURITIES Credit Facility. On January 23, 1998, the Company entered into a Second Restated Loan Agreement with Bank One which agreement replaced the Company's credit facility entered into in January 1996 and revised in February and September 1997. The credit facility, which was repaid in full on April 27, 1998, consisted of a revolving loan with a lending commitment of $160.0 million, subject to a monthly commitment reduction of $2.0 million commencing February 1, 1998 (the "Revolving Loan"), and a bridge loan (the "Bridge Loan") with a lending commitment of $60.0 million. The initial borrowing base under the Revolving Loan was $160.0 million. Proceeds of $156.4 million under the Revolving Loan and the $60.0 million Bridge Loan were used to finance a portion of the purchase price for the Amoco Acquisition. 16 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED) - ------------------------------------------------------------------------------ Interest on borrowings under the credit facility were payable monthly calculated at the Bank One Base Rate, as determined from time to time by Bank One, provided, however, so long as the Bridge Loan was outstanding interest on the Revolving Loan was at the Base Rate plus 0.5% and interest on the Bridge Loan was at the Base Rate plus 1.0% through March 31, 1998 and at the Base Rate plus 2% thereafter. The Company also had the right to calculate interest under a London Interbank Offered Rate ("LIBOR") plus 1.5%, if less than 50% of the borrowing base was utilized, up to plus 2% if more than 75% of the borrowing base was utilized, provided, however, so long as the Bridge Loan was outstanding the LIBOR rate was plus 3.0%. The interest rate under the credit facility was subject to increases up to 2.0% in the event the Company failed to fulfill timely certain agreements relating to obtaining additional capital. Pursuant to the foregoing, the interest rate increased 1% on each of February 28, 1998 and on March 31, 1998. The Company was required to pay a fee on the unused portion of the lending commitment equal to 1/2% per annum. On March 30, 1998, the credit facility was amended to provide, among other things, that the Company was required by April 30, 1998 to issue new equity with proceeds of $50.0 million and $225.0 million of senior notes to replace the 12 1/4% Senior Notes, to escrow on or before May 1, 1998 one-third of the next semi-annual interest payment on the 12 1/4% Senior Notes, and to have a tangible net worth of $60.0 million as of April 30, 1998. On April 27, 1998, in connection with the Recapitalization of the Company, including repayment of the Revolving Loan, the Bridge Loan and accrued interest. GPC, with the Company as guarantor entered into a new Credit Facility. (see Note 5) The Credit Facility consists of a revolving line of credit, with an initial Borrowing Base of $25.0 million. Borrowings initially are limited to being available for the acquisition and development of natural gas and oil properties, letters of credit and general corporate purposes. The Borrowing Base will be redetermined at lease semi-annually and the initial redetermination is scheduled for October 1, 1998. The principal is due at maturity, April 30, 2001. Interest is payable monthly calculated at the Bank One Base Rate, as determined from time to time by Bank One. Gothic may elect to calculate interest under a London Interbank Offered Rate ("LIBOR") plus 1.5% (or up to 2.0% in the event the loan balance is greater than 75% of the Borrowing Base). Gothic is required to pay a commitment fee on the unused portion of the Borrowing Base equal to 1/2 to 1% per annum. Under the Credit Facility, Bank One holds first priority liens on substantially all of the natural gas and oil properties of GPC, whether currently owned or hereafter acquired. The Credit Facility requires, among other things, semi-annual engineering reports covering oil and natural gas reserves on the basis of which semi-annual and other redeterminations of the borrowing base and monthly commitment reduction are made. The Credit Facility also included various affirmative and negative covenants, including, among others, (i) prohibitions against additional indebtedness unless approved by the lender, subject to certain exceptions, (ii) prohibitions against the creation of liens on the assets of the Company, subject to certain exceptions, (iii) prohibitions against cash dividends, (iv) maintaining certain hedging positions satisfactory to Bank One, (v) prohibitions on asset sales, subject to certain exceptions, (vi) restrictions on mergers or consolidations, (vii) a requirement to maintain a ratio of current assets to current liabilities of 1.0 to 1.0, 17 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED) - ------------------------------------------------------------------------------ and (viii) a minimum interest coverage ratio of not less than 1.5 to 1.0 as of the end of each quarter calculated quarterly beginning with the quarter ending June 30, 1998 and increasing to 2.0 to 1.0 as of the end of each quarter beginning with the quarter ended March 31, 1999. The Credit Facility includes covenants prohibiting cash dividends, distributions, loans or advances to third parties, subject to certain exceptions. If GPC is required to purchase or redeem any portion of the 11 1/8% Senior Secured Notes, or if any portion of the 11 1/8% Senior Secured Notes become due, the Borrowing Base is subject to reduction. GPC is required to escrow interest payments due on the Notes at such times as its borrowings under the Credit Facility equal or exceed 75% of the Borrowing Base. Events of default include the non-payment of principal, interest or fees, a default under other outstanding indebtedness of the Company, a breach of the Company's representations and warranties contained in the loan agreement, material judgements, bankruptcy or insolvency, a default under certain covenants not cured within a grace period, and a change in the management or control of the Company. The amount of borrowings available under the Credit Facility depend upon the determination of the Borrowing Base by Bank One. The Borrowing Base is subject to periodic redetermination, at the discretion of Bank One, based on a review of reserve and other information. A reduction in the Borrowing Base could require the repayment of outstanding indebtedness under the Credit Facility in excess of the redetermined Borrowing Base, and would limit available borrowings thereunder. 12 1/4% SENIOR NOTES DUE 2004. On January 23, 1998, the Company obtained consents to the amendment of the Company's outstanding 12 1/4% Senior Notes. Of the consideration given for the consents, $15.0 million was paid by the issuance of 15,000 shares of Series A Preferred Stock (see Note 4) and $5.8 million was paid in cash. These consent fees totaling $20.8 million together with unamortized discount and debt issue costs of $5.3 million and a $1.0 million early redemption premium related to the 12 1/4 % Senior Notes have all been written off as an extraordinary loss during the quarter ended March 31, 1998, as the terms of the consent constitute a substantial modification of the terms of the 12 1/4% Senior Notes. In connection with obtaining the consents, the Company agreed to raise a total of at least $45.0 million of equity by February 28, 1998 and at least $100.0 million from the sale of senior subordinated notes by March 31, 1998. In the event the Company failed to comply with either of these agreements, until such conditions were met, the interest rate on the 12 1/4% Senior Notes increased by 1% until the additional equity is raised and also by 1% until the senior subordinated notes were sold, provided, if the senior subordinated notes were not sold by June 30, 1998, the interest rate on the 12 1/4% Senior Notes increased by 2% until such senior subordinated notes were sold. Such additional equity was not sold by February 28, 1998. Pursuant to such consents, the holder of the 12 1/4% Senior Notes agreed that the Company had the right to redeem such notes through March 31, 1998 at 100% of the principal amount thereof and at 101% of the principal amount thereof through April 30, 1998 when such redemption right expired. On April 27, 1998, as part of the Company's Recapitalization, the Senior Notes and all accrued interest were paid in full. 18 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED) - ------------------------------------------------------------------------------ SERIES A PREFERRED STOCK AND WARRANTS. On January 23, 1998, the Company issued an aggregate of 37,000 shares of Series A Preferred Stock, inclusive of the shares issued as part of the consent fee described above with each share having a liquidation preference of $1,000. The shares of Series A Preferred Stock were redeemable at any time upon payment in cash of 101% of the liquidation preference, inclusive of accrued but unpaid dividends, and the shares were mandatorily redeemable on December 31, 2004. The shares of Series A Preferred Stock entitled the holders to receive cumulative dividends payable in additional shares of Series A Preferred Stock at a rate per annum initially of 14% of the liquidation preference of the Series A Preferred Stock increasing on April 1, 1998 and each 90-day period thereafter that the Series A Preferred Stock remained outstanding by 1%, but not to exceed a maximum dividend per annum of 20%, excluding any other adjustments to the dividend rate. The issuance of the shares provided a portion of the cash paid as consideration in the Amoco Acquisition and a fee in connection with an amendment obtained from the holders of certain terms of the Company's 12 1/4% Senior Notes. Concurrently with the sale of the Series A Preferred Stock, the Company issued five-year Warrants to purchase an aggregate of 1,175,778 shares of Common Stock exercisable at the lesser of $2.75 per share or the average of the daily closing bid prices commencing five days and ending one day before the date of exercise, subject to reduction to $0.01 per share under certain circumstances. The estimated fair value of such Warrants was $941,000 on the date of issuance. In March 1998, the Company obtained consents from the holders of approximately 95% of the Series A Preferred Stock and the related warrants to extend through April 30, 1998 the date on which (i) the warrant exercise price on existing warrants will reduce to $0.01 and (ii) such holders would receive additional warrants. On April 27, 1998, as part of the Company's Recapitalization Plan, all 37,000 shares of the Series A Preferred Stock were redeemed and all accrued dividends paid. RECAPITALIZATION On April 27, 1998, the Company completed a series of transactions which recapitalized the Company (the "Recapitalization). See Note 5 to notes to financial statements for a description of the Recapitalization. As a consequence of the Recapitalization the Company now has outstanding the following: 11-1/8% Senior Secured Notes The 11-1/8% Senior Secured Notes ("Senior Secured Notes") issued by GPC are fully and unconditionally guaranteed by the Company. The aggregate principal amount of Senior Secured Notes outstanding is $235.0 million issued under an indenture dated April 21, 1998 (the "Senior Note Indenture"). The Senior Secured Notes bear interest at 11-1/8% per annum payable semi-annually in cash in arrears on May 1 and November 1 of each year commencing November 1, 1998. . The Senior Secured Notes mature on May 1, 2005. All of the obligations of GPC under the Senior Secured Notes are secured by a second priority lien on substantially all of GPC's natural gas and oil properties, subject to certain permitted liens. GPC may, at its option, at any time on or after May 1, 2002, redeem all or any portion of the Senior Secured Notes at redemption prices decreasing from 105.563%, if redeemed in the 12-month period beginning May 1, 2002, to 100.00% if redeemed in the 12-month period beginning May 1, 2004 and thereafter plus, in each case, accrued and unpaid interest thereon. Notwithstanding the foregoing, at any time prior to May 1, 2002, GPC may, at its option, redeem all or any portion of the Senior Secured Notes at the Make-Whole Price (as defined in the Senior Note Indenture) plus accrued or unpaid interest to the date of redemption. In addition, in the event GPC consummates one or more Equity Offerings (as defined in the Senior Note Indenture) 19 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED) - ------------------------------------------------------------------------------ on or prior to May 1, 2001, GPC, at its option, may redeem up to 33-1/3% of the aggregate principal amount of the Senior Secured Notes with all or a portion of the aggregate net proceeds received by GPC from such Equity Offering or Equity Offerings at a redemption price of 111.125% of the aggregate principal amount of the Senior Secured Notes so redeemed, plus accrued and unpaid interest thereon to the redemption date; provided, however, that following such redemption, at least 66-2/3% of the original aggregate principal amount of the Senior Secured Notes remains outstanding. Following the occurrence of any Change of Control (as defined in the Senior Note Indenture), GPC will offer to repurchase all outstanding Senior Secured Notes at a purchase price equal to 101% of the aggregate principal amount of the Senior Secured Notes, plus accrued and unpaid interest to the date of repurchase. The Senior Note Indenture under which the Senior Secured Notes were issued contains certain covenants limiting GPC with respect to or imposing restrictions on the incurrence of additional indebtedness, the payment of dividends, distributions and other restricted payments, the sale of assets, creating, assuming or permitting to exist any liens (with certain exceptions) on its assets, mergers and consolidations (subject to meeting certain conditions), sale leaseback transactions, and transactions with affiliates, among other covenants. Events of default under the Senior Note Indenture include the failure to pay any payment of principal or premium when due, failure to pay for 30 days any payment of interest when due, failure to make any optional redemption payment when due, failure to perform any covenants relating to mergers or consolidations, failure to perform any other covenant or agreement (other than those described above) not remedied within 30 days of notice from the Trustee under the Senior Note Indenture or the holders of 25% in principal amount of the Senior Secured Notes then outstanding, defaults under other indebtedness of GPC or the Company causing the acceleration of the due date of such indebtedness having an outstanding principal amount of $10.0 million or more, the failure of GPC to be a wholly owned subsidiary of the Company, and certain other bankruptcy and other court proceedings, among other matters. 14-1/8% Senior Secured Discount Notes. The 14-1/8% Senior Secured Discount Notes (the "Discount Notes") were issued by the Company under an indenture (the "Discount Note Indenture") dated April 21, 1998 in such aggregate principal amount and at such rate of interest as generated gross proceeds of $60.2 million. The Discount Notes were issued at a substantial discount from their principal amount and accrete at a rate per annum of 14-1/8%, compounded semi- annually, to an aggregate principal amount of $104.0 million at May 1, 2002. Thereafter, the Discount Notes accrue interest at the rate of 14-1/8% per annum, payable in cash semi-annually in arrears on May 1 and November 1 of each year, commencing November 1, 2002. The Discount Notes mature on May 1, 2006. The Discount Notes are secured by a first priority lien against the outstanding shares of capital stock of GPC. The Company may, at its option, at any time on or after May 1, 2003, redeem all or any portion of the Discount Notes at redemption prices decreasing from 107.063% if redeemed in the 12-month period beginning May 1, 2003 to 100.00% if redeemed in the 12-month period beginning May 1, 2005 and thereafter plus, in each case, accrued and unpaid interest thereon. Notwithstanding the foregoing, at any time prior to May 1, 2003, the Company may, at its option, redeem all or any portion of the Discount Notes at the Make-Whole Price (as defined in the Discount Note Indenture) plus accrued or unpaid interest to the date of redemption. In addition, in the event the Company consummates one or more Equity Offerings (as defined in the Discount Note Indenture) on or prior to May 1, 2001, the Company, at its option, may redeem up to 33-1/3% of the Accreted Value (as defined in the Discount Note Indenture) of the Discount Notes with all or a portion of the aggregate net proceeds received by the Company from such 20 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED) - ------------------------------------------------------------------------------ Equity Offering or Equity Offerings at a redemption price of 114.125% of the Accreted Value of the Discount Notes so redeemed, plus accrued and unpaid interest thereon to the redemption date; provided, however, that following such redemption, at least 66-2/3% of the Accreted Value of the Discount Notes remains outstanding. Following the occurrence of any Change of Control (as defined in the Discount Note Indenture), the Company will offer to repurchase all outstanding Discount Notes at a purchase price equal to, prior to May 1, 2002, 101% of the Accreted Value of the Discount Notes on the date of repurchase, plus accrued and unpaid interest to the date of repurchase and thereafter, 101% of the aggregate principal amount of the Discount Notes plus accrued and unpaid interest and Liquidated Damages, if any, to the date of repurchase. The Discount Note Indenture under which the Discount Notes were issued contains certain covenants limiting the Company with respect to or imposing restrictions on the incurrence of additional indebtedness, the payment of dividends, distributions and other restricted payments, the sale of assets, creating, assuming or permitting to exist any liens (with certain exceptions) on its assets, mergers and consolidations (subject to meeting certain conditions), sale leaseback transactions, and transactions with affiliates, among other covenants. Events of default under the Discount Note Indenture include the failure to pay any payment of principal or premium when due, failure to pay for 30 days any payment of interest when due, failure to make any optional redemption payment when due, failure to perform any covenants relating to mergers or consolidations, failure to perform any other covenant or agreement (other than those described above) not remedied within 30 days of notice from the Trustee under the Discount Note Indenture or the holders of 25% in principal amount of the Discount Notes then outstanding, defaults under other indebtedness of the Company causing the acceleration of the due date of indebtedness having an outstanding principal amount of $10.0 million or more, the failure of GPC to be a wholly owned subsidiary of the Company, and certain other bankruptcy and other court proceedings, among other matters. Series B Preferred Stock. On April 27, 1998, as part of the Recapitalization, the Company issued 50,000 shares of Series B Preferred Stock with an aggregate liquidation value of $50.0 million. The Series B Preferred Stock, with respect to dividend rights and rights on liquidation, winding-up and dissolution, ranks senior to all classes of Common Stock of the Company and senior to all other classes or series of any class of preferred stock. Holders of the Series B Preferred Stock are entitled to receive dividends payable at a rate per annum of 12% of the aggregate Liquidation Preference of the Series B Preferred Stock payable in additional shares of Series B Preferred Stock; provided that after April 1, 2000, at the Company's option, it may pay the dividends in cash. Dividends are cumulative and will accrue from the date of issuance and are payable quarterly in arrears. At any time prior to April 30, 2000, the Series B Preferred Stock may be redeemed at the option of the Company in whole or in part, at 105% of the Liquidation Preference payable in cash out of the net proceeds from a public or private offering of any equity security, plus accrued and unpaid dividends (whether or not declared), which shall also be paid in cash. At any time on or after April 30, 2000, the Series B Preferred Stock may be redeemed at the option of the Company in whole or in part, in cash at a redemption price equal to the Liquidation Preference. The Company is required to redeem the Series B Preferred Stock on June 30, 2008 at a redemption price equal to the Liquidation Preference payable in cash or, at the option of the Company, in shares of Common Stock valued at the fair market value at the date of such redemption. 21 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED) - ------------------------------------------------------------------------------ Except as required by Oklahoma law, the holders of Series B Preferred Stock are not entitled to vote on any matters submitted to a vote of the stockholders of the Company. The Series B Preferred Stock is convertible at the option of the holders on or after April 30, 2000 into the number of fully paid and non-assessable shares of Common Stock determined by dividing the Liquidation Preference by the higher of (i) $2.04167 or (ii) the fair market value on the date the Series B Preferred Stock is converted. Notwithstanding the foregoing, no holder or group shall be able to convert any shares of Series B Preferred Stock to the extent that the conversion of such shares would cause such holder or group to own more than 19.9% of the outstanding Common Stock of the Company. Also on April 27, 1998, the Company closed agreements with Chesapeake Energy Corporation ("Chesapeake"), pursuant to which the Company entered into a participation agreement whereby Chesapeake has the right to participate, subject to certain limited exceptions, in up to 50% of the Company's working interest in future development drilling activities and sold for $20.0 million a 50% interest in the Company's producing natural gas and oil properties in the Arkoma basin. FUTURE CAPITAL REQUIREMENTS AND RESOURCES The Company's capital requirements relate to the acquisition, exploration, enhancement, development and operation of natural gas and oil properties. In general, because the natural gas and oil reserves the Company has acquired are depleted by production over time, the success of its business strategy is dependent upon a continuous acquisition, exploitation, enhancement, and development program. In order to achieve profitability and generate cash flow, the Company will be dependent upon acquiring or developing additional natural gas and oil properties or entering into joint natural gas and oil well development arrangements. The Company currently has $25.0 million in borrowing capacity available under its Credit Facility. CHANGES IN PRICES AND INFLATION The Company's revenues and value of its natural gas and oil properties have been and will continue to be affected by changes in natural gas and oil prices. Natural gas and oil prices are subject to seasonal and other fluctuations that are beyond the Company's ability to control or predict. 22 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED) - ------------------------------------------------------------------------------ YEAR 2000 COMPUTER ISSUES The Company has reviewed its computer systems and hardware to locate potential operational problems associated with the year 2000. Such review will continue until all potential problems are located and resolved. The Company believes that all year 2000 problems in its computer systems have been or will be resolved in a timely manner and have not caused and will not cause disruption of its operations or have a material adverse effect on its financial condition or results of operations. However, it is possible that the Company's cash flows could be disrupted by year 2000 problems experienced by outside operators of its wells, buyers of its natural gas and oil, financial institutions or other persons. The Company is unable to quantify the effect, if any, of year 2000 computer problems that may be experienced by these third parties. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. With the exception of historical matters, the matters discussed in this Report are "forward-looking statements" as defined under the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. Forward-looking statements include, but are not limited to, the matters described below, as well as "Item 2. Management's Discussion and Analysis or Plan of Operations - General," "- Liquidity and Capital Resources." Such forward-looking statements relate to the Company's ability to attain and maintain profitability and cash flow, the stability of and future prices for oil and gas, the ability of the Company to expand through acquisitions and to redeploy its equipment among regional operations, the ability of the Company to raise additional capital to meet its requirements and to obtain additional financing, its ability to successfully implement its business strategy, and its ability to maintain compliance with the covenants of its various loan documents and other agreements pursuant to which securities have been issued. The inability of the Company to meet these objectives or the consequences on the Company from adverse developments in general economic conditions, adverse developments in the oil and gas industry, and other factors could have a material adverse effect on the Company. The Company cautions readers that various risk factors described in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997 could cause the Company's operating results to differ materially from those expressed in any forward-looking statements made by the Company and could adversely affect the Company's financial condition and its ability to pursue its business strategy. 23 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Series A Preferred Stock and Warrants. On January 23, 1998, The Company issued an aggregate of 37,000 shares of Senior Redeemable Preferred Stock, Series A ("Series A Preferred Stock") with each share having a liquidation preference of $1,000. The shares were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), afforded by Section 4(2) thereof. The shares were issued to "accredited investors" and "qualified institutional buyers" as defined in Regulation D and Rule 144A, respectively, under the Securities Act. The issuance of the shares provided a portion of the cash paid as consideration in the Amoco Acquisition and were applied to payment of a fee in connection with an amendment obtained from the holders of certain terms of the Company's outstanding 12 1/4% Senior Notes. The Series A Preferred Stock was redeemed on April 27, 1998. Concurrently with the sale of the Series A Preferred Stock, the Company issued to the purchasers of the Series A Preferred Stock warrants expiring five years from the date of issuance to purchase an aggregate of 1,175,778 shares of Common Stock exercisable at the lesser of $2.75 per share or the average of the daily closing bid prices commencing five days and ending one day before the date of exercise, subject to reduction to an exercise price of $0.01 per share under certain circumstances. The exercise price and number of shares issuable is subject to adjustment under certain circumstances and the holders have certain rights to have the shares issuable on exercise of the warrants registered under the Securities Act or included in a registration statement filed by the Company under the Securities Act. As originally issued, in the event the Series A Preferred Stock remained outstanding on March 31, 1998, the exercise price of the warrants reduced to $0.01 per share and the holders of the Series A Preferred Stock were to receive additional five-year warrants, also having an exercise price of $.01 per share. In March 1998, Gothic obtained consents from the holders of approximately 95% of the Series A Preferred Stock and the related warrants to extend through April 30, 1998 the date on which; in the event the Series A Preferred Stock remained outstanding, (i) the warrant exercise price on existing warrants will reduce to $0.01 and (ii) such holders would receive additional warrants. As stated above, the Series A Preferred Stock was redeemed on April 27, 1998. Amoco Acquisition. On January 23, 1998, the Company issued to Amoco Corporation a warrant expiring November 24, 2002 to purchase 1,500,000 shares of Common Stock exercisable at $3.00 per share. The warrant was issued as partial consideration for the assets acquired in the Amoco Acquisition. The warrant was issued in reliance upon the exemption from the registration requirements of the Securities Act afforded by Section 4(2) thereof. The exercise price and number of shares issuable on exercise of the warrant are subject to adjustment under certain circumstances, including, among others, for issuances of shares of Common Stock at a price less than the exercise price, and the holder has certain rights to have the shares of Common Stock issuable on exercise of the warrant registered under the Securities Act or included in a registration statement filed by the Company under the Securities Act. 24 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibits: 10.1 - Loan Agreement among Gothic Production Corporation, Gothic Energy Corporation and Bank One, Texas, N.A., dated April 27, 1998. 15 - Letter Regarding Unaudited Interim Financial Information 27 - Financial Data Schedule (b) Reports on Form 8-K During the quarter ended March 31, 1998, the Company filed a Current Reports on Form 8-K dated January 27, 1998, in response to Items 5 and 7, Form 8-K/A filed January 30, 1998, in response to Item 7, Form 8-K/A filed February 6, 1998, in response to Items 2, 5 and 7, and Form 8-K/A filed February 25, 1998, in response to Items 2, 5 and 7. 25 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized. GOTHIC ENERGY CORPORATION Date: May 19, 1998 By: /s/ Michael Paulk -------------------------------------------------- MICHAEL PAULK, President, Chief Executive Officer Date: May 19, 1998 By: /s/ Steven Ensz -------------------------------------------------- STEVEN ENSZ, Vice President of Finance, Chief Financial Officer Date: May 19, 1998 By: /s/ Andrew McGuire -------------------------------------------------- ANDREW MCGUIRE, Controller 26 EX-10.1 2 LOAN AGREEMENT DATED APRIL 27, 1998 EXHIBIT 10.1 LOAN AGREEMENT AMONG GOTHIC PRODUCTION CORPORATION, AS BORROWER, AND GOTHIC ENERGY CORPORATION, AS GUARANTOR AND BANK ONE, TEXAS, N.A. AND THE INSTITUTIONS NAMED HEREIN AS BANKS AND BANK ONE, TEXAS, N.A., AS AGENT APRIL 27, 1998 TABLE OF CONTENTS Page No. 1. Definitions................................................ 1 2. Commitments of the Bank.................................... 11 (a) Terms of Revolving Commitment....................... 11 (b) Procedure for Borrowing............................. 11 (c) Letters of Credit................................... 12 (d) Procedure for Obtaining Letters of Credit........... 13 (e) Voluntary Reduction of Revolving Commitment......... 14 (f) Mandatory Commitment Reductions..................... 14 (g) Several Obligations................................. 14 3. Notes Evidencing Loans..................................... 14 (a) Form of Revolving Notes............................. 15 (b) Issuance of Additional Notes........................ 15 (c) Interest Rate....................................... 15 (d) Payment of Interest................................. 15 (e) Payment of Principal................................ 15 (f) Payment to Banks.................................... 15 (g) Sharing of Payments, Etc............................ 16 (h) Non-Receipt of Funds by the Agent................... 16 (i) Capital Adequacy.................................... 16 4. Interest Rates............................................. 17 (a) Options............................................. 17 (b) Interest Rate Determination......................... 18 (c) Conversion Option................................... 18 (d) Recoupment.......................................... 18 5. Special Provisions Relating to Loans....................... 19 (a) Unavailability of Funds or Inadequacy of Pricing.... 19 (b) Reserve Requirements................................ 19 (c) Taxes............................................... 19 (d) Change in Laws...................................... 20 (e) Option to Fund...................................... 20 (f) Indemnity........................................... 21 (g) Payments Not at End of Interest Period.............. 21 -i- 6. Collateral Security........................................ 21 7. Borrowing Base............................................. 22 (a) Initial Borrowing Base.............................. 22 (b) Subsequent Determinations of Borrowing Base......... 22 8. Fees....................................................... 24 (a) Unused Commitment Fee............................... 24 (b) Borrowing Base Increase Fee......................... 24 (c) The Letter of Credit Fee............................ 24 (d) Agency Fees......................................... 24 9. Prepayments................................................ 24 (a) Voluntary Prepayments............................... 24 (b) Mandatory Prepayment For Borrowing Base Deficiency.. 25 10. Representations and Warranties............................. 25 (a) Creation and Existence.............................. 25 (b) Power and Authority................................. 25 (c) Binding Obligations................................. 25 (d) No Legal Bar or Resultant Lien...................... 25 (e) No Consent.......................................... 26 (f) Financial Condition................................. 26 (g) Liabilities......................................... 26 (h) Litigation.......................................... 26 (i) Taxes; Governmental Charges......................... 26 (j) Titles, Etc......................................... 27 (k) Defaults............................................ 27 (l) Casualties; Taking of Properties.................... 27 (m) Use of Proceeds; Margin Stock....................... 27 (n) Location of Business and Offices.................... 28 (o) Compliance with the Law............................. 28 (p) No Material Misstatements........................... 28 (q) Not A Utility....................................... 28 (r) ERISA............................................... 28 (s) Public Utility Holding Company Act.................. 28 (t) Subsidiaries........................................ 29 (u) Environmental Matters............................... 29 (v) Liens............................................... 29 11. Conditions of Lending...................................... 29 -ii- 12. Affirmative Covenants...................................... 32 (a) Financial Statements and Reports.................... 32 (b) Certificates of Compliance.......................... 33 (c) Accountants' Certificate............................ 34 (d) Taxes and Other Liens............................... 34 (e) Compliance with Laws................................ 34 (f) Further Assurances.................................. 34 (g) Performance of Obligations.......................... 34 (h) Insurance........................................... 35 (i) Accounts and Records................................ 35 (j) Right of Inspection................................. 36 (k) Notice of Certain Events............................ 36 (l) ERISA Information and Compliance.................... 36 (m) Environmental Reports and Notices................... 37 (n) Compliance and Maintenance.......................... 37 (o) Operation of Properties............................. 37 (p) Compliance with Leases and Other Instruments........ 38 (q) Certain Additional Assurances Regarding Maintenance and Operations of Properties........................ 38 (r) Sale of Certain Assets/Prepayment of Proceeds....... 38 (s) Title Matters....................................... 39 (t) Curative Matters.................................... 39 (u) Change of Principal Place of Business............... 39 (v) Cash Collateral Accounts............................ 39 (w) Escrow of Interest Payments......................... 40 (x) Year 2000 Compatibility............................. 40 13. Negative Covenants......................................... 40 (a) Negative Pledge..................................... 41 (b) Current Ratio....................................... 41 (c) Minimum Interest Coverage Ratio..................... 41 (e) Debts, Guaranties and Other Obligations............. 41 (f) Dividends........................................... 42 (g) Loans and Advances.................................. 42 (h) Sale or Discount of Receivables..................... 43 (i) Nature of Business.................................. 43 (j) Transactions with Affiliates........................ 43 (k) Hedging Transactions................................ 43 (l) Investments......................................... 43 (m) Amendment to Articles of Incorporation or Bylaws.... 44 -iii- (n) Proceeds of Production.............................. 44 (o) Issuance of Preferred Stock........................ 44 (p) Amendments, etc. of Indentures...................... 44 (q) Amendments to and Redemption of Preferred Stock or Other Equity........................................ 44 (r) Payment or Pre-Payment of Other Indebtedness........ 44 14. Events of Default.......................................... 45 15. The Agent and the Banks.................................... 47 (a) Appointment and Authorization....................... 47 (b) Note Holders........................................ 48 (c) Consultation with Counsel........................... 48 (d) Documents........................................... 48 (e) Resignation or Removal of Agent..................... 48 (f) Responsibility of Agent............................. 49 (g) Independent Investigation........................... 50 (h) Indemnification..................................... 51 (i) Benefit of Section 15............................... 51 (j) Pro Rata Treatment.................................. 51 (k) Assumption as to Payments........................... 52 (l) Other Financings.................................... 52 (m) Interests of Banks.................................. 52 (n) Investments......................................... 53 16. Exercise of Rights......................................... 53 17. Notices.................................................... 53 18. Expenses................................................... 53 19. Indemnity.................................................. 54 20. Governing Law.............................................. 55 21. Invalid Provisions......................................... 55 22. Maximum Interest Rate...................................... 55 23. Amendments................................................. 56 24. Multiple Counterparts...................................... 56 -iv- 25. Conflict................................................... 56 26. Survival................................................... 56 27. Parties Bound.............................................. 56 28. Assignments and Participations............................. 56 29. Choice of Forum: Consent to Service of Process and Jurisdiction............................................... 58 30. Waiver of Jury Trial....................................... 58 31. Other Agreements........................................... 59 32. Financial Terms............................................ 59 -v- EXHIBITS - -------- Exhibit "A" - Notice of Borrowing Exhibit "B" - Revolving Note Exhibit "C" - Unconditional Guaranty Exhibit "D" - Certificate of Compliance Exhibit "E" - Form of Assignment and Acceptance Agreement SCHEDULES - --------- Schedule 1 - Liens Schedule 2 - Financial Condition Schedule 3 - Liabilities Schedule 4 - Litigation Schedule 5 - Subsidiaries Schedule 6 - Environmental Matters Schedule 7 - Title Matters Schedule 8 - Curative Matters -vi- LOAN AGREEMENT THIS LOAN AGREEMENT (hereinafter referred to as the "Agreement") executed as of the 27th day of April, 1998, by and between GOTHIC PRODUCTION CORPORATION, an Oklahoma corporation (hereinafter referred to as "Borrower") and GOTHIC ENERGY CORPORATION, an Oklahoma corporation (hereinafter referred to as "Guarantor") and BANK ONE, TEXAS, N.A., a national banking association ("Bank One"), and each of the financial institutions which is a party hereto (as evidenced by the signature pages to this Agreement) or which may from time to time become a party hereto pursuant to the provisions of Section 28 hereof or any successor or assignee thereof (hereinafter collectively referred to as "Banks", and individually, "Bank") and Bank One, as Agent. W I T N E S S E T H: WHEREAS, Borrower has requested the Banks make available to it a revolving loan facility in amounts of up to $25,000,000.00; and WHEREAS, the Banks have agreed to make such facility available to Borrower. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereby agree to restate the Loan Agreement as follows: 1. DEFINITIONS. When used herein the terms "Agent", "Agreement ", "Bank", "Banks", "Bank One", "Borrower" and "Guarantor" shall have the meanings indicated above. When used herein the following terms shall have the following meanings: (a) Advance or Advances - A loan or loans hereunder. (b) Adjusted Consolidated Net Tangible Assets - The term "Adjusted Consolidated Net Tangible Assets" is used herein as defined in the Senior Secured Notes Indenture. (c) Affiliate - Any Person which, directly or indirectly, controls, is controlled by or is under common control with the relevant Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean a member of the board of directors, a partner or an officer of such Person, or any other Person with possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership (of record, as trustee, or by proxy) of voting shares, partnership interests or voting rights, through a management contract or otherwise. Any Person owning or controlling directly or indirectly ten percent or more of the voting shares, partnership interests or voting rights, or other equity interest of another Person shall be deemed to be an Affiliate of such Person. (d) Assignment and Acceptance - A document substantially in the form of Exhibit "E" hereto. (e) Borrowing Base - The value assigned by the Banks from time to time to the Oil and Gas Properties pursuant to Section 7 hereof. Until the next determination of the Borrowing Base pursuant to Section 7(b) hereof, the Borrowing Base shall be $25,000,000. (f) Borrowing Date - The date elected by Borrower pursuant to Section 2(b) hereof for an Advance on the Revolving Loan. (g) Business Day - The normal banking hours during any day (other than Saturdays or Sundays) that banks are legally open for business in Dallas, Texas. (h) Change of Control - A Change of Control shall occur if any Person (or syndicate or group of Persons which is deemed a Person for the purposes of Sections 13(d) or 14(d)(ii) of the Securities Act of 1934, as amended) shall acquire, directly or indirectly an amount of issued and outstanding voting stock of Borrower or Guarantor (including the acquisition of newly-issued stock) sufficient to change the control of such Borrower or Guarantor by causing the election or change of a majority of the directors of such Borrower or Guarantor. (i) Change of Management - A Change of Management shall occur if Michael Paulk ever ceases to act as President of Borrower or Guarantor and a replacement for such officer, acceptable to Agent, is not appointed within thirty (30) days thereafter. (j) Chesapeake Transactions - The transactions between Guarantor and Chesapeake Energy Corporation "(Chesapeake") pursuant to which Guarantor agreed to (i) execute a participation agreement granting a 50% interest in substantially all of Guarantor's undeveloped acreage pursuant to a Sale and Participation Agreement dated as of March 31, 1998, (ii) sell for $20,000,000 (subject to closing adjustments) a 50% interest in Guarantor's oil and gas properties located in the Arkoma basin pursuant to an Oil and Gas Purchase Agreement dated as of January 1, 1998, and (iii) sell 50,000 shares of Series B Preferred Stock, having a liquidation value of $50,000,000 and a ten-year warrant to purchase, at an exercise price of $0.01 per share, 2,439,246 shares of Guarantor's common stock pursuant to as Securities Purchase Agreement dated as of March 31, 1998. (k) Commitment - The Revolving Commitment. (l) Current Assets - The total of the Guarantor's consolidated current assets determined in accordance with GAAP, plus, as of any date, the current unused availability on the Revolving Commitment. -2- (m) Current Liabilities - The total of Guarantor's consolidated current obligations as determined in accordance with GAAP, excluding therefrom current maturities due on the Revolving Loan. (n) Defaulting Bank - The term "Defaulting Bank" is used herein as defined in Section 3(g) hereof. (o) Discount Notes -The Notes issued by Guarantor pursuant to the Discount Notes Indenture. (p) Discount Notes Indenture - That certain Indenture dated as of April 27, 1998 by and among Guarantor, as Issuer, and Bank of New York, as Trustee, pursuant to which the Discount Notes were to be issued. (q) EBITDA - Earnings for any period before provision for interest expense, income taxes, depreciation, depletion and amortization for such period, as determined in accordance with GAAP. (r) Effective Date - The date of this Agreement. (s) Eligible Assignee - Any of (i) a Bank or any Affiliate of a Bank; (ii) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (iii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development, or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000.00, provided that such bank is acting through a branch or agency located in the United States; (iv) a Person that is primarily engaged in the business of commercial banking and that (A) is a subsidiary of a Bank, (B) a subsidiary of a Person of which a Bank is a subsidiary, or (C) a Person of which a Bank is a subsidiary; (v) any other entity (other than a natural person) which is an "accredited investor" (as defined in Regulation D under the Securities Act) which extends credit or buys loans as one of its businesses, including, but not limited to, insurance companies, mutual funds, investments funds and lease financing companies; and (vi) with respect to any Bank that is a fund that invests in loans, any other fund that invests in loans and is managed by the same investment advisor of such Bank or by an Affiliate of such investment advisor (and treating all such funds so managed as a single Eligible Assignee); provided, however, that no Affiliate of Borrower or Guarantor shall be an Eligible Assignee. (t) Environmental Laws - The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Super Fund Amendments and Reauthorization Act of 1986, 42 U.S.C.A. (S)9601, et seq., the Resource Conservation and -3- Recovery Act, as amended by the Hazardous Solid Waste Amendment of 1984, 42 U.S.C.A. (S)6901, et seq., the Clean Air Act, 42 U.S.C.A. (S)1251, et seq., the Toxic Substances Control Act, 15 U.S.C.A. (S)2601, et seq., The Oil Pollution Act of 1990, 33 U.S.G. (S)2701, et seq., and all other laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, order and restrictions of any federal, state, county, municipal and other governments, departments, commissions, boards, agencies, courts, authorities, officials and officers, domestic or foreign, relating to air pollution, water pollution, noise control and/or the handling, discharge, disposal or recovery of on-site or off-site asbestos or "hazardous substances" as defined by 42 U.S.C. (S)9601, et seq., as amended, as each of the foregoing may be amended from time to time. (u) Environmental Liability - Any claim, demand, obligation, cause of action, order, violation, damage, injury, judgment, penalty or fine, cost of enforcement, cost of remedial action or any other costs or expense whatsoever, including reasonable attorneys' fees and disbursements, resulting from the violation or alleged violation of any Environmental Law or the imposition of any Environmental Lien (as hereinafter defined) which could reasonably be expected to individually or in the aggregate have a Material Adverse Effect. (v) Environmental Lien - A Lien in favor of any court, governmental agency or instrumentality or any other Person (i) for any Environmental Liability or (ii) for damages arising from or cost incurred by such court or governmental agency or instrumentality or other person in response to a release or threatened release of asbestos or "hazardous substance" into the environment, the imposition of which Lien could reasonably be expected to have a Material Adverse Effect. (w) ERISA - The Employee Retirement Income Security Act of 1974, as amended. (x) Eurodollar Business Day - A Business Day on which dealings in U.S. Dollar deposits are carried on in the London interbank market. (y) Eurodollar Interest Period - With respect to any Eurodollar Loan (i) initially, the period commencing on the date such Eurodollar Loan is made and ending one (1), two (2), three (3) or six (6) months thereafter as selected by the Borrower pursuant to Section 4(a)(ii), and (ii) thereafter, each period commencing on the day following the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one (1), two (2), three (3) or six (6) months thereafter, as selected by the Borrower pursuant to Section 4(a)(ii); provided, however, that (i) if any Eurodollar Interest Period would otherwise expire on a day which is not a Eurodollar Business Day, such Interest Period shall expire on the next succeeding Eurodollar Business Day unless the result of such extension would be to -4- extend such Interest Period into the next calendar month, in which case such Interest Period shall end on the immediately preceding Eurodollar Business Day, (ii) if any Eurodollar Interest Period 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 at the end of such Interest Period) such Interest Period shall end on the last Eurodollar Business Day of a calendar month, and (iii) any Eurodollar Interest Period which would otherwise expire after the Maturity Date shall end on such Maturity Date. (z) Eurodollar Loan - Any loan during any period which bears interest at the Eurodollar Rate, or which would bear interest at such rate if the Maximum Rate ceiling was not in effect at a particular time. (aa) Eurodollar Margin - The Eurodollar Margin on the Revolving Loan in effect from day to day shall be: (i) two percent (2%) per annum whenever the Total Outstandings are greater than 75% of the Borrowing Base in effect at the time in question; (ii) one and three-quarters percent (1.75%) per annum whenever the Total Outstandings are greater than 50%, but less than or equal to 75%, of the Borrowing Base in effect at the time in question; or (iii) one and one-half percent (1.50%) per annum whenever the Total Outstandings are 50% or less of the Borrowing Base in effect at the time in question; and (bb) Eurodollar Rate - With respect to any Eurodollar Interest Period, the offered rate for U.S. Dollar deposits of not less than $1,000,000 as of 11:00 A.M. City of London, England time two (2) Eurodollar Business Days prior to the first date of each Eurodollar Interest Period as shown on the display designated as "British Bankers Assoc. Interest Settlement Rates" on the Telerate system ("Telerate"), Page 3750 or Page 3740, or such other page or pages as may replace such pages on Telerate for the purpose of displaying such rate. Provided, however, that if such rate is not available on Telerate then such offered rate shall be otherwise independently obtained by Agent from an alternate, substantially similar independent source available to Agent or shall be calculated by Agent by substantially similar methodology as that theretofore used to determine such offered rate in Telerate. (cc) Financial Statements - Balance sheets, income statements, statements of cash flow and appropriate footnotes and schedules, prepared in accordance with GAAP. (dd) GAAP - Generally accepted accounting principles, consistently applied. -5- (ee) Indentures - The Senior Secured Notes Indenture and the Discount Notes Indenture. (ff) Interest Payment Date - The earlier of (i) the last day of each Interest Period or (ii) the last day of each calendar month. (gg) Interest Period - Any Prime Rate Interest Period, or Eurodollar Interest Period. (hh) Letters of Credit - The term "Letters of Credit" is used herein as defined in Section 2(c) hereof. (ii) Lien - Any mortgage, deed of trust, pledge, security interest, assignment, encumbrance or lien (statutory or otherwise) of every kind and character. (jj) Loan - The Revolving Loan. (kk) Loan Documents - This Agreement, the Notes, the Guaranty, the Security Instruments and all other documents executed in connection with the transaction described in this Agreement. (ll) Majority Banks - Banks holding 66-2/3% or more of the Commitments or if the Commitments have been terminated, Banks holding 66-2/3% of the outstanding Loans. (mm) Material Adverse Effect - Any circumstance or event which could have a material adverse effect on (i) the assets or properties, liabilities, financial condition, business, operations, affairs or circumstances of the Borrower or Guarantor, or (ii) the ability of the Borrower or Guarantor to carry out their respective businesses as of the date of this Agreement or as proposed at the date of this Agreement to be conducted or to meet their obligations under the Notes, this Agreement or the other Loan Documents on a timely basis. (nn) Maximum Rate - At any particular time in question, the maximum non-usurious rate of interest which under applicable law may then be charged on the Note. If such Maximum Rate changes after the date hereof, the Maximum Rate shall be automatically increased or decreased, as the case may be, without notice to Borrower from time to time as the effective date of each change in such Maximum Rate. (oo) Minimum Interest Coverage Ratio - The ratio of EBITDA to the sum of Total Interest Expense plus any preferred stock dividends paid in cash during the period being measured. -6- (pp) Monthly Commitment Reduction - The term "Monthly Commitment Reduction" is used herein, as defined in Section 2(f) hereof. (qq) Net Income - Guarantor's consolidated net income after income taxes calculated in accordance with GAAP. (rr) Notes - The Revolving Notes, substantially in the form of Exhibit "B" hereto issued or to be issued hereunder to each Bank, respectively, to evidence the indebtedness to such Bank arising by reason of the Advances on the Revolving Loan, together with all modifications, renewals and extensions thereof or any part thereof. (ss) Oil and Gas Properties - All oil, gas and mineral properties and interests, related personal properties, in which Borrower grants to the Banks either a first and prior lien and security interest pursuant to Section 6 hereof. (tt) Other Financing - The term "Other Financing" is used herein as defined in Section 15(l) hereof. (uu) Payor - The term "Payor" is used herein as defined in Section 3(h)hereof. (vv) Permitted Liens - The term Permitted Lien shall mean (i) royalties, overriding royalties, reversionary interests, production payments and similar burdens; (ii) sales contracts or other arrangements for the sale of production of oil, gas or associated liquid or gaseous hydrocarbons which would not (when considered cumulatively with the matters discussed in clause (i) above) deprive Borrower or Guarantor of any material right in respect of any such Borrower's or Guarantor's assets or properties (except for rights customarily granted with respect to such contracts and arrangements); (iii) statutory Liens for taxes or other assessments that are not yet delinquent (or that, if delinquent, are being contested in good faith by appropriate proceedings, levy and execution thereon having been stayed and continue to be stayed and for which such Borrower or Guarantor has set aside on its books adequate reserves in accordance with GAAP); (iv) easements, rights of way, servitudes, permits, surface leases and other rights in respect to surface operations, pipelines, grazing, logging, canals, ditches, reservoirs or the like, conditions, covenants and other restrictions, and easements of streets, alleys, highways, pipelines, telephone lines, power lines, railways and other easements and rights of way on, over or in respect of Borrower's or Guarantor's assets or properties and that do not individually or in the aggregate, cause a Material Adverse Effect; (v) materialmen's, mechanic's, repairman's, employee's, warehousemen's, landlord's, carrier's, pipeline's, contractor's, sub-contractor's, operator's, non-operator's (arising under operating or joint operating agreements), and other Liens (including any financing statements filed in respect thereof) incidental to obligations incurred by Borrower in connection with the construction, maintenance, development, transportation, storage or operation of -7- Borrower's or Guarantor's assets or properties to the extent not delinquent (or which, if delinquent, are being contested in good faith by appropriate proceedings and for which Borrower or Guarantor has set aside on its books adequate reserves in accordance with GAAP); (vi) all contracts, agreements and instruments, and all defects and irregularities and other matters affecting Borrower's or Guarantor's assets and properties which were in existence at the time Borrower's or Guarantor's assets and properties were originally acquired by Borrower or Guarantor and all routine operational agreements entered into in the ordinary course of business, which contracts, agreements, instruments, defects, irregularities and other matters and routine operational agreements are not such as to, individually or in the aggregate, interfere materially with the operation, value or use of Borrower's or Guarantor's assets and properties, considered in the aggregate; (vii) liens in connection with workmen's compensation, unemployment insurance or other social security, old age pension or public liability obligations; (viii) legal or equitable encumbrances deemed to exist by reason of the existence of any litigation or other legal proceeding or arising out of a judgment or award with respect to which an appeal is being prosecuted in good faith and levy and execution thereon have been stayed and continue to be stayed; (ix) rights reserved to or vested in any municipality, governmental, statutory or other public authority to control or regulate Borrower's or Guarantor's assets and properties in any manner, and all applicable laws, rules and orders from any governmental authority; (x) landlord's liens; (xi) Liens incurred pursuant to the Security Instruments; and (xii) Liens existing at the date of this Agreement which have been disclosed to Banks in the Guarantor's December 31, 1997 Financial Statements or identified in Schedule "1" hereto, (xiii) Liens granted to the trustee of the Senior Secured Notes Indenture to secure obligations owed by Borrower on the Senior Secured Notes, which Liens are second and inferior to the Liens granted to the Banks and (xiv) Liens granted to the trustee of the Discount Notes Indenture to secure obligations owed by Guarantor on the Discount Notes. (ww) Person - An individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. (xx) Plan - Any plan subject to Title IV of ERISA and maintained by Borrower, or any such plan to which Borrower is required to contribute on behalf of its employees. (yy) Preferred Stock - The Series B Preferred Stock, issued by Guarantor on the date of the Recapitalization. (zz) Prime Rate - As of any date, the fluctuating rate of interest per annum established from time to time by Agent as its Prime Rate (which rate of interest may not be the lowest, best or most favorable rate of interest which Agent may charge on loans to its customers). Each change in the Prime Rate shall become effective without prior notice to -8- Borrower automatically as of the opening of business on the date of such change in the Prime Rate. (aaa) Prime Rate Interest Period - With respect to any Prime Rate Loan, the period ending on the last day of each month, provided, however, that (i) if any Prime Rate Interest Period would end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day, and (ii) if any Prime Rate Interest Period would otherwise end after the Maturity Date such Interest Period shall end on the Maturity Date. (bbb) Prime Rate Loans - Any loan during any period which bears interest based upon the Prime Rate or which would bear interest based upon the Prime Rate if the Maximum Rate ceiling was not in effect at that particular time. (ccc) Prime Rate Margin - The Prime Rate Margin in effect from day to day shall be zero percent (0%). (ddd) Pro Rata or Pro Rata Part - For each Bank, (i) for all purposes where no Loan is outstanding, such Bank's Revolving Commitment Percentage and (ii) otherwise, the proportion which the portion of the outstanding Loans owed to such Bank bears to the aggregate outstanding Loans owed to all Banks at the time in question. (eee) Recapitalization - The (i) successful sale and receipt of proceeds from the issuance of the Senior Secured Notes and the Discount Notes, (ii) the successful closing and receipt of proceeds from the Chesapeake Transaction, (iii) the redemption of the existing 12-1/4% Series A Senior Notes of Guarantor, (iv) the redemption of the Series A Preferred Stock of Guarantor, and (v) repayment in full of all obligations owed to Bank One and the financial institutions participating in the Third Restated Loan Agreement dated March 30, 1998. (fff) Reimbursement Obligations - At any time, the obligations of the Borrower in respect of all Letters of Credit then outstanding to reimburse amounts paid by any Bank in respect of any drawing or drawings under a Letter of Credit. (ggg) Required Payment - The term "Required Payment" is used herein as defined in Section 3(h) hereof. (hhh) Revolving Commitment - (A) For all Banks, the lesser of (i) $25,000,000 or (ii) the Borrowing Base, in each case as reduced from time to time pursuant to Sections 2 and 7 hereof, and (B) as to any Bank, its obligation to make Advances hereunder on the Revolving Loan and purchase participations in Letters of Credit issued hereunder by the -9- Agent in amounts not exceeding, in the aggregate, an amount equal to such Bank's Revolving Loan Commitment Percentage times the total Revolving Commitment as of any date. The Revolving Commitment of each Bank hereunder shall be adjusted from time to time to reflect assignments made by such Bank pursuant to Section 28 hereof. Each reduction in the Revolving Commitment shall result in a Pro Rata reduction in each Bank's Revolving Commitment. (iii) Revolving Commitment Percentage - For each Bank the percentage derived by dividing its Revolving Commitment at the time of the determination by the Revolving Commitments of all Banks at the time of determination. The Revolving Commitment Percentage of each Bank hereunder shall be adjusted from time to time to reflect assignments made by such Bank pursuant to Section 28 hereof. (jjj) Revolving Loan - Loan or loans made under the Revolving Commitment pursuant to Section 2 hereof. (kkk) Revolving Maturity Date - April 30, 2001. (lll) Revolving Notes - The Revolving Notes described in Section 3 hereof. (mmm) Security Instruments - The term Security Instruments is used collectively herein to mean this Agreement, all Deeds of Trust, Mortgages, Security Agreements, Assignments of Production and Financing Statements and other collateral documents covering the Oil and Gas Properties and related personal property, equipment, oil and gas inventory and proceeds of the foregoing, all such documents to be in form and substance satisfactory to Agent. (nnn) Senior Secured Notes - The Notes issued by Borrower pursuant to the Senior Secured Notes Indenture. (ooo) Senior Secured Notes Indenture - That certain Indenture dated April 27, 1998, by and among Borrower, as Issuer and Bank of New York, as Trustee, pursuant to which the Senior Secured Notes were to be issued. (ppp) Subsidiary - Any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by Borrower or another subsidiary. (qqq) Tangible Net Worth - An amount equal to the Guarantor's consolidated stockholders equity, as determined in accordance with GAAP. -10- (rrr) Total Interest Expense - Borrower's total interest expense for any period, as determined in accordance with GAAP, excluding non-cash interest items such as amortization of loan costs. (sss) Total Outstandings - As of any date, the sum of (i) the total principal balance outstanding on the Revolving Notes, plus (ii) the total face amount of all outstanding Letters of Credit, plus (iii) the total amount of all unpaid Reimbursement Obligations. (ttt) Tranche - A Eurodollar Loan or a Prime Rate Loan. (uuu) Unscheduled Redeterminations - A redetermination of the Borrowing Base made at any time other than on the dates set for the regular semi-annual redetermination of the Borrowing Base which are made (A) at the reasonable request of Borrower, (B) at any time it appears to Agent or Majority Banks, in the exercise of their reasonable discretion, that either (i) there has been a decrease in the value of the Oil and Gas Properties, or (ii) an event has occurred which is reasonably expected to have a Material Adverse Effect. 2. COMMITMENTS OF THE BANK. (a) Terms of Revolving Commitment. On the terms and conditions hereinafter set forth, each Bank agrees severally to make Advances to the Borrower from time to time during the period beginning on the Effective Date and ending on the Revolving Maturity Date in such amounts as the Borrower may request up to an amount not to exceed, in the aggregate principal amount outstanding at any time, the Revolving Commitment. The obligation of the Borrower hereunder shall be evidenced by this Agreement and the Revolving Notes issued in connection herewith, said Revolving Notes to be as described in Section 3 hereof. Notwithstanding any other provision of this Agreement, no Advance shall be required to be made hereunder if any Event of Default (as hereinafter defined) has occurred and is continuing or if any event or condition has occurred or failed to occur which with the passage of time or service of notice, or both, would constitute an Event of Default. Each Advance under the Revolving Commitment shall be an aggregate amount of at least $100,000 or a whole number multiple thereof. Irrespective of the face amount of the Revolving Note or Notes, the Banks shall never have the obligation to Advance any amount or amounts in excess of the Revolving Commitment or to increase the Revolving Commitment. The total number of Tranches under the Revolving Commitment which may be outstanding at any time hereunder shall never exceed five (5), whether such Tranches are Prime Rate Loans, Eurodollar Loans, or a combination thereof. (b) Procedure for Borrowing. Whenever the Borrower desires an Advance hereunder, they shall give Agent telegraphic, telex, facsimile or telephonic notice ("Notice of Borrowing") of such requested Advance, which in the case of telephonic notice, shall be -11- promptly confirmed in writing. Each Notice of Borrowing shall be in the form of Exhibit "A" attached hereto and shall be received by Agent not later than 11:00 a.m. Dallas, Texas time, (i) one Business Day prior to the Borrowing Date in the case of the Prime Rate Loan, or (ii) three Eurodollar Business Days prior to any proposed Borrowing Date in the case of Eurodollar Loans. Each Notice of Borrowing shall specify (i) the Borrowing Date (which, if at Prime Rate Loan, shall be a Business Day and if a Eurodollar Loan, a Eurodollar Business Day), (ii) the principal amount to be borrowed, (iii) the portion of the Advance constituting Prime Rate Loans and/or Eurodollar Loans, (iv) if any portion of the proposed Advance is to constitute Eurodollar Loans, the initial Interest Period selected by Borrower pursuant to Section 4 hereof to be applicable thereto, and (v) the date upon which such Advance is required. Upon receipt of such Notice, Agent shall advise each Bank thereof; provided, that if the Banks have received at least one (1) day's notice of such Advance prior to funding of a Prime Rate Loan, or at least three (3) days' notice of each Advance prior to funding in the case of a Eurodollar Loan, each Bank shall provide Agent at its office at 1717 Main Street, Dallas, Texas 75201, not later than 1:00 p.m., Dallas, Texas time, on the Borrowing Date, in immediately available funds, its pro rata share of the requested Advance, but the aggregate of all such fundings by each Bank shall never exceed such Bank's Revolving Commitment. Not later than 2:00 p.m., Dallas, Texas time, on the Borrowing Date, Agent shall make available to the Borrower at the same office, in like funds, the aggregate amount of such requested Advance. Neither Agent nor any Bank shall incur any liability to the Borrower in acting upon any Notice referred to above which Agent or such Bank believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Borrower or for otherwise acting in good faith under this Section 2(b). Upon funding of Advances by Banks in accordance with this Agreement, pursuant to any such Notice, the Borrower shall have effected Advances hereunder. (c) Letters of Credit. On the terms and conditions hereinafter set forth, the Agent shall from time to time during the period beginning on the Effective Date and ending on the Revolving 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, but not to exceed in the aggregate face amount at any time outstanding the sum of One Million Dollars ($1,000,000.00). The face amount of all Letters of Credit issued and outstanding hereunder shall be considered as Advances for Borrowing Base purposes and all payments made by the Agent on such Letters of Credit shall be considered as Advances under the Revolving 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 earlier of (a) one year or (b) the Revolving Maturity Date, and (iii) contain such other terms and provisions as may be required by Bank. Each Bank (other than Agent) agrees that, upon issuance of any Letter of Credit hereunder, it shall automatically acquire a participation in the Agent's liability under such Letter of Credit in an amount equal to such Bank's Revolving Commitment -12- Percentage of such liability, and each Bank (other than Agent) thereby shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and shall be unconditionally obligated to Agent to pay and discharge when due, its Revolving Commitment Percentage of Agent's liability under such Letter of Credit. The Borrower hereby unconditionally agrees to pay and reimburse the Agent 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 Agent 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 Agent shall promptly notify the Borrower of the demand and the date upon which such payment is to be made by the Agent to such beneficiary in respect of such demand. Forthwith upon receipt of such notice from the Agent, Borrower shall advise the Agent whether or not they intend to borrow hereunder to finance their obligations to reimburse the Agent, and if so, submit a Notice of Borrowing as provided in Section 2(b) hereof. If Borrower fails to so advise Agent and thereafter fail to reimburse Agent, the Agent shall notify each Bank of the demand and the failure of the Borrower to reimburse the Agent, and each Bank shall reimburse the Agent for its Revolving Commitment Percentage of each such draw paid by the Agent and unreimbursed by the Borrower. All such amounts paid by Agent and/or reimbursed by the Banks shall be treated as an Advance or Advances under the Revolving Commitment, which Advances shall be immediately due and payable and shall bear interest at the Maximum Rate. (d) 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(c) 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 an application and agreement with respect to the Letters of Credit, said application and agreement to be in the form used by the Agent. The Agent shall not be obligated to issue, renew, extend or reissue such Letters of Credit if (A) the amount thereon when added to the face amount of the outstanding Letters of Credit plus any Reimbursement Obligations exceeds One Million Dollars ($1,000,000.00) or (B) the amount thereof when added to the Total Outstandings would exceed the Revolving Commitment. Borrower agrees to pay the Agent for the benefit of the Banks commissions for issuing the Letters of Credit (calculated separately for each Letter of Credit) in an amount equal to the greater of (i) one percent (1%) per annum on the maximum face amount of the Letter of Credit or (ii) $500.00. Borrower further agrees to pay Agent an additional fronting fee equal to one-eighth of one percent (.125%) per annum on the maximum face amount of each Letter of Credit. Such commissions shall be payable prior to the issuance of each Letter of Credit and thereafter on each anniversary date of such issuance while such Letter of Credit is outstanding. -13- (e) Voluntary Reduction of Revolving Commitment. The Borrower may at any time, or from time to time, upon not less than three (3) Business Days' prior written notice to Agent, reduce or terminate the Revolving Commitment; provided, however, that (i) each reduction in the Revolving Commitment must be in the amount of $500,000 or more, in increments of $100,000 and (ii) each reduction must be accompanied by a prepayment of the Revolving Notes in the amount by which the outstanding principal balance of the Revolving Notes exceeds the Revolving Commitment as reduced pursuant to this Section 2. (f) Mandatory Commitment Reductions - (i) Monthly Commitment Reduction. The Borrowing Base and the Revolving Commitment shall be reduced as of the first day of each month by an amount determined by the Banks pursuant to Section 7(b) hereof (the "Monthly Commitment Reduction"). The Monthly Commitment Reduction shall be $0 beginning on May 1, 1998, with like reductions continuing on the first day of each month thereafter until redetermined pursuant to Section 7(b) hereof. If as a result of any such Monthly Commitment Reduction, the Total Outstandings ever exceed the Revolving Commitment then in effect, the Borrower shall make the mandatory prepayment of principal required pursuant to Section 9(b) hereof. (ii) Other Reductions. The Borrowing Base shall be reduced from time to time by the amount of any prepayment required by Section 12(r) hereof upon the sale of assets, provided, however, that such reduction shall only remain in effect until the next redetermination of the Borrowing Base is made pursuant to Section 7(b) hereof. Such temporary reduction of the Borrowing Base shall not result in a reduction of the Revolving Commitment unless the Borrower elects to permanently reduce the Revolving Commitment pursuant to the provisions of Section 2(e) hereof. If, as a result of any such reduction in the Borrowing Base, the Total Outstandings ever exceed the Borrowing Base then in effect, the Borrower shall make the mandatory prepayment of principal required pursuant to Section 9(b) hereof. (g) Several Obligations. The obligations of the Banks under the Commitments are several and not joint. The failure of any Bank to make an Advance required to be made by it shall not relieve any other Bank of its obligation to make its Advance, and no Bank shall be responsible for the failure of any other Bank to make the Advance to be made by such other Bank. No Bank shall be required to lend hereunder any amount in excess of its legal lending limit. 3. NOTES EVIDENCING LOANS. The loans described above in Section 2 shall be evidenced by promissory notes of Borrower as follows: -14- (a) Form of Revolving Notes - The Revolving Loan shall be evidenced by a Note or Notes in the aggregate face amount of $25,000,000, and shall be in the form of Exhibit "B" hereto with appropriate insertions (each a "Revolving Note"). Notwithstanding the face amount of the Revolving Notes, the actual principal amount due from the Borrower to Banks on account of the Revolving Notes, as of any date of computation, shall be the sum of Advances then and theretofore made on account thereof, less all principal payments actually received by Banks in collected funds with respect thereto. Although the Revolving Notes may be dated as of the Effective Date, interest in respect thereof shall be payable only for the period during which the loans evidenced thereby are outstanding and, although the stated amount of the Revolving Notes may be higher, the Revolving Notes shall be enforceable, with respect to Borrower's obligation to pay the principal amount thereof, only to the extent of the unpaid principal amount of the loans. Irrespective of the face amount of the Revolving Notes, no Bank shall ever be obligated to advance on the Revolving Commitment any amount in excess of its Revolving Commitment then in effect. (b) Issuance of Additional Notes - At the Effective Date there shall be outstanding one Revolving Note in the aggregate face amount of $25,000,000 payable to the order of Bank One. From time to time new Notes may issued to other Banks as such Banks become parties to this Agreement. Upon request from Agent, the Borrower shall execute and deliver to Agent any such new or additional Notes. From time to time as new Notes are issued the Agent shall require that each Bank exchange their Notes for newly issued Notes to better reflect the extent of each Bank's Commitments hereunder. (c) Interest Rates - The unpaid principal balance of the Notes shall bear interest from time to time as set forth in Section 4 hereof. (d) Payment of Interest - Interest on the Notes shall be payable on each Interest Payment Date. (e) Payment of Principal - Principal of the Revolving Note or Notes shall be due and payable to the Agent for the ratable benefit of the Banks on the Revolving Maturity Date unless earlier due in whole or in part as a result of an acceleration of the amount due or pursuant to the mandatory prepayment provisions of Section 9(b) hereof. (f) Payment to Banks - Each Bank's Pro Rata Part of payment or prepayment of the Loans shall be directed by wire transfer to such Bank by the Agent at the address provided to the Agent for such Bank for payments no later than 2:00 p.m., Dallas, Texas, time on the Business Day such payments or prepayments are deemed hereunder to have been received by Agent; provided, however, in the event that any Bank shall have failed to make an Advance as contemplated under Section 2 hereof (a "Defaulting Bank") and the Agent or -15- another Bank or Banks shall have made such Advance, payment received by Agent for the account of such Defaulting Bank or Banks shall not be distributed to such Defaulting Bank or Banks until such Advance or Advances shall have been repaid in full to the Bank or Banks who funded such Advance or Advances. Any payment or prepayment received by Agent at any time after 12:00 noon, Dallas, Texas, time on a Business Day shall be deemed to have been received on the next Business Day. Interest shall cease to accrue on any principal as of the end of the day preceding the Business Day on which any such payment or prepayment is deemed hereunder to have been received by Agent. If Agent fails to transfer any principal amount to any Bank as provided above, then Agent shall promptly direct such principal amount by wire transfer to such Bank. (g) Sharing of Payments, Etc. - If any Bank shall obtain any payment (whether voluntary, involuntary, or otherwise) on account of the Loans, (including, without limitation, any set-off) which is in excess of its Pro Rata Part of payments on either of the Loans, as the case may be, obtained by all Banks, such Bank shall purchase from the other Banks such participation as shall be necessary to cause such purchasing Bank to share the excess payment pro rata with each of them; provided that, if all or any portion of such excess payment is thereafter recovered from such purchasing Bank, the purchase shall be rescinded and the purchase price restored to the extent of the recovery. The Borrower agrees that any Bank so purchasing a participation from another Bank pursuant to this Section may, to the fullest extent permitted by law, exercise all of its rights of payment (including the right of offset) with respect to such participation as fully as if such Bank were the direct creditor of the Borrower in the amount of such participation. (h) Non-Receipt of Funds by the Agent - Unless the Agent shall have been notified by a Bank or the Borrower (the "Payor") prior to the date on which such Bank is to make payment to the Agent of the proceeds of a Loan to be made by it hereunder or the Borrower is to make a payment to the Agent for the account of one or more of the Banks, as the case may be (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on such date and, if the Payor has not in fact made the Required Payment to the Agent, the recipient of such payment shall, on demand, pay to the Agent the amount made available to it together with interest thereon in respect of the period commencing on the date such amount was made available by the Agent until the date the Agent recovers such amount at the rate applicable to such portion of the applicable Loan. (i) Capital Adequacy - If either (i) the introduction or implementation of or the compliance with or any change in or in the interpretation of any law, rule or regulation or (ii) the introduction or implementation of or the compliance with any mandatory request, -16- directive or guideline from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by any Bank or any corporation controlling any Bank as a result of maintaining its Pro Rata Part of the Commitments, then within fifteen (15) days after demand by such Bank, the Borrower will pay to such Bank, from time to time as specified by such Bank, such additional amount or amounts which such Bank shall reasonably determine to be appropriate to compensate such Bank or any corporation controlling such Bank in light of such circumstances, to the extent that such Bank reasonably determines that the amount of any such capital would be increased, or the rate of return on any such capital would be reduced in whole or in part, based on the existence of the amount of the Loans or such Bank's Commitment under this Agreement. 4. INTEREST RATES. (a) Options. (i) Prime Rate Loans. On Prime Rate Loans the Borrower agrees to pay interest on the Notes calculated on the basis of the actual days elapsed in a year consisting of 365 or, if appropriate, 366 days with respect to the unpaid principal amount of each Prime Rate Loan from the date the proceeds thereof are made available to Borrower until maturity (whether by acceleration or otherwise), at a varying rate per annum equal to the lesser of (i) the Maximum Rate (defined herein), or (ii) the sum of the Prime Rate plus the Prime Rate Margin. Subject to the provisions of this Agreement as to prepayment, the principal of the Notes representing Prime Rate Loans shall be payable as specified in Section 3(e) hereof and the interest in respect of each Prime Rate Loan shall be payable on each Interest Payment Date. Past due principal and, to the extent permitted by law, past due interest in respect to each Prime Rate Loan, shall bear interest, payable on demand, at a rate per annum equal to the Maximum Rate. (ii) Eurodollar Loans. On Eurodollar Loans the Borrower agrees to pay interest calculated on the basis of a year consisting of 360 days with respect to the unpaid principal amount of each Eurodollar Loan from the date the proceeds thereof are made available to Borrower until maturity (whether by acceleration or otherwise), at a varying rate per annum equal to the lesser of (i) the Maximum Rate, or (ii) the Eurodollar Rate plus the Eurodollar Margin. Subject to the provisions of this Agreement with respect to prepayment, the principal of the Notes shall be payable as specified in Section 3(e) hereof and the interest with respect to each Eurodollar Loan shall be payable on each Interest Payment Date. Past due principal and, to the -17- extent permitted by law, past due interest shall bear interest, payable on demand, at a rate per annum equal to the Maximum Rate. Upon three (3) Eurodollar Business Days' written notice prior to the making by the Banks of any Eurodollar Loan (in the case of the initial Interest Period therefor) or the expiration date of each succeeding Interest Period (in the case of subsequent Interest Periods therefor), Borrower shall have the option, subject to compliance by Borrower with all of the provisions of this Agreement, as long as no Event of Default exists, to specify whether the Interest Period commencing on any such date shall be a one (1), two (2), three (3) or six (6) month period. If Agent shall not have received timely notice of a designation of such Interest Period as herein provided, Borrower shall be deemed to have elected to convert all maturing Eurodollar Loans to Prime Rate Loans. (b) Interest Rate Determination. The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrower and the Banks of each rate of interest so determined and its determination thereof shall be conclusive absent error. (c) Conversion Option. Borrower may elect from time to time (i) to convert all or any part of its Eurodollar Loans to Prime Rate Loans by giving Agent irrevocable notice of such election in writing prior to 10:00 a.m. (Dallas, Texas time) on the conversion date and such conversion shall be made on the requested conversion date, provided that any such conversion of Eurodollar Loan shall only be made on the last day of the Eurodollar Interest Period with respect thereof, (ii) to convert all or any part of its Prime Rate Loans (other than the Bridge Loans) to Eurodollar Loans by giving the Agent irrevocable written notice of such election three (3) Eurodollar Business Days prior to the proposed conversion and such conversion shall be made on the requested conversion date or, if such requested conversion date is not a Eurodollar Business Day or a Business Day, as the case may be, on the next succeeding Eurodollar Business Day or Business Day, as the case may be. Any such conversion shall not be deemed to be a prepayment of any of the loans for purposes of this Agreement on the Notes. (d) Recoupment. If at any time the applicable rate of interest selected pursuant to Sections 4(a)(i) or 4(a)(ii) above shall exceed the Maximum Rate, thereby causing the interest on the Notes to be limited to the Maximum Rate, then any subsequent reduction in the interest rate so selected or subsequently selected shall not reduce the rate of interest on the Notes below the Maximum Rate until the total amount of interest accrued on the Note equals the amount of interest which would have accrued on the Notes if the rate or rates selected pursuant to Sections 4(a)(i) or (ii), as the case may be, had at all times been in effect. -18- 5. SPECIAL PROVISIONS RELATING TO LOANS. (a) Unavailability of Funds or Inadequacy of Pricing. In the event that, in connection with any proposed Eurodollar Loan, any Bank (i) shall have determined that U.S. Dollar deposits of the relevant amount and for the relevant Eurodollar Interest Period for Eurodollar Loans are not available to such Bank in the London interbank market; or (ii) in good faith determines that the Eurodollar Interest Rate will not adequately reflect the cost to such Bank of maintaining or funding the Eurodollar Loans for such Interest Period, the obligations of the Banks to make the Eurodollar Loans, as the case may be, shall be suspended until such time such Bank in its sole discretion reasonably exercised determines that the event resulting in such suspension has ceased to exist. If any Bank shall make such determination it shall promptly notify the Agent in writing, and Agent shall promptly notify Borrower in writing, and Borrower shall either repay the outstanding Eurodollar Loans, as the case may be, owed to Banks, without penalty, on the last day of the current Interest Period or convert the same to Prime Rate Loans in the case of Eurodollar Loans on the last day of the then current Interest Period for such Eurodollar Loan. (b) Reserve Requirements. In the event of any change in any applicable law, treaty or regulation or in the interpretation or administration thereof, or in the event any central bank or other fiscal monetary or other authority having jurisdiction over any Bank or the loans contemplated by this Agreement shall impose, modify or deem applicable any reserve requirement of the Board of Governors of the Federal Reserve System on any Eurodollar Loan or loans, or any other reserve, special deposit, or similar requirements against assets to, deposits with or for the account of, or credit extended by, the Banks or shall impose on any Bank or the London interbank market, as the case may be, any other condition affecting this Agreement or the Eurodollar Loans and the result of any of the foregoing is to increase the cost to any Bank in making or maintaining its Eurodollar Loans or to reduce any amount (or the effective return on any amount) received by any Bank hereunder, then Borrower shall pay to the Banks upon demand of any Bank as additional interest on the Notes evidencing the Eurodollar Loans such additional amount or amounts as will reimburse the Banks for such additional cost or such reduction. The Banks shall give notice to Borrower upon becoming aware of any such change or imposition which may result in any such increase or reduction. A certificate of any Bank setting forth the basis for the determination of such amount necessary to compensate Banks as aforesaid shall be delivered to Borrower and shall be conclusive as to such determination and such amount, absent error. (c) Taxes. Both principal and interest on the Notes evidencing the Loans are payable without withholding or deduction for or on account of any taxes. If any taxes are levied or imposed on or with respect to the Notes evidencing the Loans or on any payment on the Notes evidencing the Loans made to any Bank, then, and in any such event, Borrower shall pay to the Banks upon demand of any Bank such additional amounts as may be -19- necessary so that every net payment of principal and interest on the Notes evidencing the Loans, after withholding or deduction for or on account of any such taxes, will not be less than any amount provided for herein. In addition, if at any time when the Loans are outstanding any laws enacted or promulgated, or any court of law or governmental agency interprets or administers any law, which, in any such case, materially changes the basis of taxation of payments to any Bank of principal of or interest on the Notes evidencing the Loans by reason of subjecting such payments to double taxation or otherwise (except through an increase in the rate of tax on the overall net income of such Bank or Banks) then Borrower will pay the amount of loss to the extent that such loss is caused by such a change. The Banks shall give notice to Borrower upon becoming aware of the amount of any loss incurred by any Bank through enactment or promulgation of any such law which materially changes the basis of taxation of payments to one or more of the Banks. The Banks shall also give notice on becoming aware of any such enactment or promulgation which may result in such payments becoming subject to double taxation or otherwise. A certificate of any Bank setting forth the basis for the determination of such loss and the computation of such amounts shall be delivered to Borrower and shall be conclusive of such determination and such amount, absent error. (d) Change in Laws. If at any time any new law or any change in existing laws or in the interpretation of any new or existing laws shall make it unlawful for the Banks to maintain or fund its Eurodollar Loans hereunder, then the Banks shall promptly notify Borrower in writing and Borrower shall either repay the outstanding Eurodollar Loans owed to the Banks, without penalty, on the last day of the current Interest Periods (or, if any Bank may not lawfully continue to maintain and fund such Eurodollar Loans, immediately), or Borrower may convert such Eurodollar Loans at such appropriate time to Prime Rate Loans. (e) Option to Fund. The Banks shall each have the option if the Borrower elects a Eurodollar Loan, to purchase one or more deposits in order to fund or maintain its funding of the principal balance of its Note to which such Eurodollar Loan is applicable during the Interest Period in question; it being understood that the provisions of this Agreement relating to such funding are included only for the purpose of determining the rate of interest to be paid under such Eurodollar Loan and any amounts owing hereunder and under the Notes. Any Bank shall be entitled to fund and maintain its funding of all or any part of that portion of the principal balance of the Notes in any manner it sees fit, but all such determinations hereunder shall be made as if such Bank have actually funded and maintained that portion of the principal balance of the Notes to which a Eurodollar Loan is applicable during the applicable Interest Period through the purchase of deposits in an amount equal to the principal balance of the Notes to which such Eurodollar Loan is applicable and having a maturity corresponding to such Interest Period. Any Bank may fund the outstanding principal balance of the Notes which is to be subject to any Eurodollar Loan from any branch or office of such Bank as any Bank may designate from time to time. -20- (f) Indemnity. Borrower shall indemnify and hold harmless the Banks against all reasonable and necessary out-of-pocket costs and expenses which the Banks may sustain (i) as a consequence of any default by Borrower under this Agreement, or (ii) as a result of the making of any loan or loans as a Eurodollar Loan under this Agreement. (g) Payments Not at End of Interest Period. If the Borrower makes any payment of principal with respect to any Eurodollar Loan on any day other than the last day of the Interest Period applicable to such Eurodollar Loan or fail to make, borrow or convert a Eurodollar Loan on the date requested, then Borrower shall reimburse the Banks on demand for any loss, cost or expense incurred by the Banks as a result of the timing of such payment or in redepositing such principal amount, including the sum of (i) the cost of funds to the Banks in respect of such principal amount so paid, for the remainder of the Interest Period applicable to such sum, reduced, if any Bank is able to redeposit such principal amount so paid for the balance of the 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 the Bank in redepositing such principal amount. A certificate of any Bank setting forth the basis for the determination of the amount owed by Borrower pursuant to this Section 5(g) shall be delivered to the Borrower and shall be conclusive in the absence of manifest error. 6. COLLATERAL SECURITY. To secure the performance by Borrower of its obligations hereunder, and under the Notes and Security Instruments, whether now or hereafter incurred, matured or unmatured, direct or contingent, joint or several, or joint and several, including extensions, modifications, renewals and increases thereof, and substitutions therefore, Borrower shall grant and assign to Agent for the ratable benefit of the Banks a first and prior Lien on certain of its Oil and Gas Properties, certain related equipment, oil and gas inventory, certain bank accounts, escrow accounts and proceeds of the foregoing. The Oil and Gas Properties herewith mortgaged to the Agent shall represent not less than 90% of the Engineered Value (as hereinafter defined) of Borrower's Oil and Gas Properties as of the Effective Date. All Oil and Gas Properties and other collateral in which Borrower herewith granted or hereafter grants to Agent for the ratable benefit of the Banks a first and prior Lien (to the satisfaction of the Agent) in accordance with this Section 6, as such properties and interests are from time to time constituted, are hereinafter collectively called the "Collateral". The granting and assigning of such security interests and Liens by Borrower shall be pursuant to Security Instruments in form and substance reasonably satisfactory to the Agent. Concurrently with the delivery of each of the Security Instruments or within a reasonable time thereafter, Borrower shall furnish to the Agent mortgage and title opinions and other title information satisfactory to Agent with respect to the title and Lien status of Borrower's interests in not less than 90% of the Engineered Value of the Oil and Gas Properties covered by the Security Instruments as Agent shall have designated. "Engineered Value" for this purpose shall mean future net revenues discounted at the discount rate being used by the Agent as of the date of any such determination utilizing the -21- pricing parameters used in the engineering report furnished to the Agent for the ratable benefit of the Banks, pursuant to Sections 7 and 12 hereof. Borrower will cause to be executed and delivered to the Agent, in the future, additional Security Instruments if the Agent reasonably deems such are necessary to insure perfection or maintenance of Banks' security interests and Liens in the Oil and Gas Properties or any part thereof. 7. BORROWING BASE. (a) Initial Borrowing Base. At the Effective Date, the Borrowing Base shall be $25,000,000. (b) Subsequent Determinations of Borrowing Base. Subsequent determinations of the Borrowing Base shall and October 1 of each year beginning October 1, 1998 or as Unscheduled Redeterminations. In connection with, and as of, each determination of the Borrowing Base, the Banks shall also redetermine the Monthly Commitment Reduction. The Borrower shall furnish to the Banks as soon as possible but in any event no later than March 1 of each year, beginning March 1, 1999, with an Engineering Report in form and substance satisfactory to the Agent prepared by an independent petroleum engineering acceptable to Agent covering the Oil and Gas Properties utilizing economic and pricing parameters used by Agent as established from time to time, together with such other information concerning the value of the Oil and Gas Properties as the Agent shall deem necessary to determine the value of the Oil and Gas Properties. By September 1 of each year, or within thirty (30) days after either (i) receipt of notice from Agent that the Banks require an Unscheduled Redetermination, or (ii) the Borrower give notice to Agent of their desire to have an Unscheduled Redetermination performed, the Borrower shall furnish to the Banks an engineering report in form and substance satisfactory to Agent prepared by Borrower's in-house engineering staff valuing the Oil and Gas Properties utilizing economic and pricing parameters used by the Agent as established from time to time, together with such other information, reports and data concerning the value of the Oil and Gas Properties as Agent shall deem reasonably necessary to determine the value of such Oil and Gas Properties. Agent shall by notice to the Borrower no later than April 1 and October 1 of each year, or within a reasonable time thereafter (herein called the "Determination Date"), notify the Borrower of the designation by the Banks of the new Borrowing Base and Monthly Commitment Reduction for the period beginning on such Determination Date and continuing until, but not including, the next Determination Date. If an Unscheduled Redetermination is made by the Banks, the Agent shall notify the Borrower within a reasonable time after receipt of all requested information of the new Borrowing Base and Monthly Commitment Reduction, and such new Borrowing Base and Monthly Commitment Reduction shall continue until the next Determination Date. If the Borrower does not furnish all such information, reports and data by any date specified in this Section 7(b), unless such failure is of no fault of the Borrower, the Banks may -22- nonetheless designate the Borrowing Base and Monthly Commitment Reduction at any amounts which the Banks in their discretion determine and may redesignate the Borrowing Base and Monthly Commitment Reduction from time to time thereafter until the Banks receive all such information, reports and data, whereupon the Banks shall designate a new Borrowing Base and Monthly Commitment Reduction as described above. Each Bank shall determine the amount of the Borrowing Base and Monthly Commitment Reduction based upon the loan collateral value which such Bank in its discretion (using such methodology, assumptions and discounts rates as such Bank customarily uses in assigning collateral value to oil and gas properties, oil and gas gathering systems, gas processing and plant operations) assigns to such Oil and Gas Properties of the Borrower at the time in question and based upon such other credit factors consistently applied (including, without limitation, the assets, liabilities, cash flow, business, properties, prospects, management and ownership of the Borrower and its affiliates) as such Bank customarily considers in evaluating similar oil and gas credits, but such Bank in its discretion shall not be required to give any additional positive value to any Oil and Gas Property over the current economic and pricing parameters used by such Bank for such Determination Date which additional value is derived directly from a hedging, forward sale or swap agreement covering such Oil and Gas Property as of the date of such determination. All determinations or Unscheduled Redeterminations of the Borrowing Base and the Monthly Commitment Reduction require the approval of Majority Banks; provided, however, that notwithstanding anything to the contrary herein, the amount of the Borrowing Base may not be increased, nor may the Monthly Commitment Reduction be reduced, without the approval of all Banks. If the Banks cannot otherwise agree on the Borrowing Base or the Monthly Commitment Reduction, each Bank shall submit in writing to the Agent its proposed Borrowing Base and Monthly Commitment Reduction and the Borrowing Base and Monthly Commitment Reduction shall be set on the basis of the lowest Borrowing Base and the highest Monthly Commitment Reduction proposed by any Bank. If at any time any of the Oil and Gas Properties are sold, the Borrowing Base then in effect shall automatically be reduced by a sum equal to the amount of prepayment required to be made pursuant to Section 12(r) hereof. The Borrowing Base shall be additionally reduced from time to time pursuant to the provisions of Sections 2(e) and 2(f) hereof. It is expressly understood that the Banks have no obligation to designate the Borrowing Base or the Monthly Commitment Reduction at any particular amounts, except in the exercise of their discretion, whether in relation to the Revolving Commitment or otherwise. Provided, however, that the Banks shall not have the obligation to designate a Borrowing Base in an amount in excess of the Revolving Commitment or its legal or internal lending limits. Provided, however, that in no event shall the Borrowing Base ever exceed 10% of the Adjusted Consolidated Tangible Net Assets. -23- 8. FEES. (a) Unused Commitment Fee. The Borrower shall pay to Agent for the ratable benefit of the Banks an unused commitment fee (the "Unused Commitment Fee") equivalent to one-half of one percent (1/2%) per annum on the daily average of the unadvanced amount of the Revolving Commitment. The Unused Commitment Fee shall be payable in arrears on the last Business Day of each calendar quarter beginning June 30, 1998 with the final fee payment due on the Maturity Date for any period then ending for which the Unused Commitment Fee shall not have been theretofore paid. In the event the Revolving Commitment terminates on any date prior to the end of any such monthly period, the Borrower shall pay to the Agent for the ratable benefit of the Banks, on the date of such termination, the total Unused Commitment Fee due for the period in which such termination occurs. (b) Borrowing Base Increase Fee. From and after the Effective Date, Borrower shall pay to the Agent for the ratable benefit of the Banks a Borrowing Base increase fee (the "Borrowing Base Increase Fee") equal to one-fourth of one percent (1/4%) of the amount of any increase in the Borrowing Base from the amount of the Borrowing Base set as of the most recent determination (whether on a Determination Date or on the date of an Unscheduled Redetermination), said fee to be payable upon notice to Borrower of such increase. No Borrowing Base Increase Fee shall be due in connection with the execution of this Agreement and the closing of the transactions described herein. (c) The Letter of Credit Fee. Borrower shall pay to the Agent the Letter of Credit fees required above in Section 2(d). (d) Agency Fees. The Borrower shall pay to the Agent certain fees for acting as Agent hereunder in amounts to be negotiated between the Borrower and the Agent. (e) Facility Fee. The Borrower shall pay to the Agent a Facility Fee of $100,000, said fee to be payable on the Effective Date. 9. PREPAYMENTS. (a) Voluntary Prepayments. Subject to the provisions of Section 5(g) hereof, the Borrower may at any time and from time to time, without penalty or premium, prepay the Notes, in whole or in part. Each such prepayment shall be made on at least three (3) Eurodollar Business Days' notice to Agent in the case of Eurodollar Loan Tranches and without notice in the case of Prime Rate Loan Tranches and shall be in a minimum amount of $500,000 or any larger multiple thereof or the unpaid balance on the Notes, whichever is less, plus accrued interest thereon to the date of prepayment. -24- (b) Mandatory Prepayment For Borrowing Base Deficiency. In the event the Total Outstandings ever exceed the Borrowing Base as determined by Banks pursuant to Section 7(b) hereof, the Borrower shall, within thirty (30) days after notification from the Agent, either (A) by instruments reasonably satisfactory in form and substance to the Bank, provide the Agent with collateral with value and quality in amounts satisfactory to all of the Banks in their discretion in order to increase the Borrowing Base by an amount at least equal to such excess, or (B) prepay, without premium or penalty, the principal amount of the Revolving Notes in an amount at least equal to such excess plus accrued interest thereon to the date of prepayment. If the Total Outstandings ever exceed the Revolving Commitment as a result of a Monthly Commitment Reduction or any other required reduction in the Revolving Commitment, then in such event, Borrower shall immediately prepay the principal amount of the Revolving Notes in an amount at least equal to such excess plus accrued interest to the date of prepayment. 10. REPRESENTATIONS AND WARRANTIES. In order to induce the Banks to enter into this Agreement, the Borrower and Guarantor hereby, jointly and severally, represent and warrant to the Banks (which representations and warranties will survive the delivery of the Notes) that: (a) Creation and Existence. Borrower and Guarantor are each a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it was formed and is duly qualified in all jurisdictions wherein failure to qualify may result in a Material Adverse Effect. Borrower and Guarantor each has all power and authority to own its properties and assets and to transact the business in which it is engaged. (b) Power and Authority. Borrower and Guarantor are each duly authorized and empowered to create and issue the Notes; and Borrower is duly authorized and empowered to execute, deliver and perform their respective Loan Documents, including this Agreement; and all corporation action on Borrower's and Guarantor's part requisite for the due creation and issuance of the Notes and for the due execution, delivery and performance of the Loan Documents, including this Agreement, has been duly and effectively taken. (c) Binding Obligations. This Agreement does, and the Notes and other Loan Documents upon their creation, issuance, execution and delivery will, constitute valid and binding obligations of Borrower and Guarantor, enforceable in accordance with its respective terms (except that enforcement may be subject to any applicable bankruptcy, insolvency, or similar debtor relief laws now or hereafter in effect and relating to or affecting the enforcement of creditors' rights generally). (d) No Legal Bar or Resultant Lien. The Notes and the Loan Documents, including this Agreement, do not and will not, to the best of the Borrower's and each Guarantor's knowledge violate any provisions of any contract, agreement, law, regulation, -25- order, injunction, judgment, decree or writ to which Borrower or Guarantor is subject, or result in the creation or imposition of any lien or other encumbrance upon any assets or properties of Borrower or Guarantor, other than those contemplated by this Agreement. (e) No Consent. The execution, delivery and performance by Borrower and Guarantor of the Notes and their respective Loan Documents, including this Agreement, does not require the consent or approval of any other person or entity, including without limitation any regulatory authority or governmental body of the United States or any state thereof or any political subdivision of the United States or any state thereof except for (i) consents required for federal, state and, in some instances, private leases, right of ways and other conveyances or encumbrances of oil and gas leases, and (ii) consents required by the Indentures, if any, all of which consents have been obtained by the Borrower or Guarantor. (f) Financial Condition. The audited Financial Statements of Guarantor dated December 31, 1997, which have been delivered to Banks are complete and correct in all material respects, and fully and accurately reflect in all material respects the financial condition and results of the operations of the Borrower and Guarantor on a consolidated basis as of the date or dates and for the period or periods stated. No change has since occurred in the condition, financial or otherwise, of the Borrower or Guarantor which is reasonably expected to have a Material Adverse Effect, except as disclosed to the Banks in Schedule "2" attached hereto. (g) Liabilities. Neither Borrower nor the Guarantor have any material (individually or in the aggregate) liability, direct or contingent, except as disclosed to the Banks in the Financial Statements and on Schedule "3" attached hereto. No unusual or unduly burdensome restrictions, restraint, or hazard exists by contract, law or governmental regulation or otherwise relative to the business, assets or properties of Borrower or Guarantor which is reasonably expected to have a Material Adverse Effect. (h) Litigation. Except as described in the Financial Statements, or as otherwise disclosed to the Banks in Schedule "4" attached hereto, there is no litigation, legal or administrative proceeding, investigation or other action of any nature pending or, to the knowledge of the officers of Borrower or Guarantor threatened against or affecting Borrower or Guarantor which involves the possibility of any judgment or liability not fully covered by insurance, and which is reasonably expected to have a Material Adverse Effect. (i) Taxes; Governmental Charges. Borrower and Guarantor have each filed all tax returns and reports required to be filed and has paid all taxes, assessments, fees and other governmental charges levied upon them or their assets, properties or income which are due and payable, including interest and penalties, the failure of which to pay could reasonably be expected to have a Material Adverse Effect, except such as are being contested in good -26- faith by appropriate proceedings and for which adequate reserves for the payment thereof as required by GAAP has been provided and levy and execution thereon have been stayed and continue to be stayed. (j) Titles, Etc. Borrower and Guarantor each have good and defensible title to all of its respective assets, including without limitation, the Oil and Gas Properties, free and clear of all liens or other encumbrances except Permitted Liens. (k) Defaults. Neither Borrower nor the Guarantor is in default and no event or circumstance has occurred which, but for the passage of time or the giving of notice, or both, would constitute a default under any loan or credit agreement, indenture, mortgage, deed of trust, security agreement or other agreement or instrument to which Borrower or Guarantor is a party in any respect that would be reasonably expected to have a Material Adverse Effect. No Event of Default hereunder has occurred and is continuing. (l) Casualties; Taking of Properties. Since the dates of the latest Financial Statements of the Borrower and Guarantor delivered to Banks, neither the business nor the assets or properties of Borrower or Guarantor have been affected (to the extent it is reasonably likely to cause a Material Adverse Effect), as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of property or cancellation of contracts, permits or concessions by any domestic or foreign government or any agency thereof, riot, activities of armed forces or acts of God or of any public enemy. (m) Use of Proceeds; Margin Stock. The proceeds of the Revolving Commitment may be used by the Borrower for the purposes of (i) acquisition and development of oil and gas properties, (ii) Letters of Credit, and (iii) general corporate purposes. Borrower is not engaged principally or as one of their important activities in the business of extending credit for the purpose of purchasing or carrying any "margin stock " as defined in Regulation U of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221), or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry a margin stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of said Regulation G or U. Neither Borrower nor any person or entity acting on behalf of Borrower has taken or will take any action which might cause the loans hereunder or any of the Loan Documents, including this Agreement, to violate Regulation G or U or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereafter be in effect. -27- (n) Location of Business and Offices. The principal place of business and chief executive offices of the Borrower and Guarantor are located at the address stated in Section 17 hereof. (o) Compliance with the Law. To the best of Borrower's and Guarantor's knowledge, neither Borrower nor any Guarantor: (i) is in violation of any law, judgment, decree, order, ordinance, or governmental rule or regulation to which Borrower or Guarantor, or any of its assets or properties are subject; or (ii) has failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of any of its assets or properties or the conduct of its business; which violation or failure is reasonably expected to have a Material Adverse Effect. (p) No Material Misstatements. No information, exhibit or report furnished by Borrower or Guarantor to the Banks in connection with the negotiation of this Agreement or in the preparation of the offering memo contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statement contained therein not materially misleading. (q) Not A Utility. Neither Borrower nor Guarantor is an entity engaged in the State of Texas in the (i) generation, transmission, or distribution and sale of electric power; (ii) transportation, distribution and sale through a local distribution system of natural or other gas for domestic, commercial, industrial, or other use; (iii) provision of telephone or telegraph service to others; (iv) production, transmission, or distribution and sale of steam or water; (v) operation of a railroad; or (vii) provision of sewer service to others. (r) ERISA. Borrower and Guarantor are each in compliance in all material respects with the applicable provisions of ERISA, and no "reportable event", as such term is defined in Section 403 of ERISA, has occurred with respect to any Plan of Borrower or Guarantor. (s) Public Utility Holding Company Act. Neither Borrower nor Guarantor is a "holding company", or "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a"subsidiary company" of a "holding company", or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. -28- (t) Subsidiaries. All of the Borrower's Subsidiaries are listed on Schedule "5" hereto. Borrower is a wholly-owned Subsidiary of Guarantor. (u) Environmental Matters. Except as disclosed on Schedule "6", neither Borrower nor Guarantor (i) has received notice or otherwise learned of any Environmental Liability which would be reasonably likely to individually or in the aggregate have a Material Adverse Effect arising in connection with (A) any non-compliance with or violation of the requirements of any Environmental Law or (B) the release or threatened release of any toxic or hazardous waste into the environment, (ii) has received notice of any threatened or actual liability in connection with the release or notice of any threatened release of any toxic or hazardous waste into the environment which would be reasonably likely to individually or in the aggregate have a Material Adverse Effect or (iii) has received notice or otherwise learned of any federal or state investigation evaluating whether any remedial action is needed to respond to a release or threatened release of any toxic or hazardous waste into the environment for which Borrower or Guarantor is or may be liable which may reasonably be expected to result in a Material Adverse Effect. (v) Liens. Except (i) as disclosed on Schedule "1" hereto and (ii) for Permitted Liens, the assets and properties of the Borrower and Guarantor are free and clear of all liens and encumbrances. 11. CONDITIONS OF LENDING. (a) The effectiveness of this Agreement, and the obligation to make the initial Advance or issue any initial Letter of Credit under the Revolving Commitment shall be subject to satisfaction of the following conditions precedent: (i) Execution and Delivery. The Borrower and Guarantor shall each have executed and delivered the Agreement, the Notes and other required Loan Documents, including, without limitation, the Guaranty in the form of Exhibit "C" hereto and the other Security Instruments, all in form and substance satisfactory to the Agent; (ii) Legal Opinion. The Agent shall have received from Borrower's and Guarantor's legal counsel a favorable legal opinion in form and substance satisfactory to it (i) as to the matters set forth in Subsections 10(a), (b), (c), (d), (e) and (h) hereof and (ii) as to such other matters as Agent or its counsel may reasonably request; (iii) Corporate Resolutions. The Agent shall have received appropriate certified corporate resolutions of Borrower and Guarantor; -29- (iv) Good Standing. The Agent shall have received evidence of existence and good standing for Borrower and Guarantor; (v) Incumbency. The Agent shall have received a signed certificate of Borrower and Guarantor, certifying the names of the officers of Borrower and Guarantor authorized to sign loan documents on behalf of Borrower and Guarantor, together with the true signatures of each such officer. The Agent may conclusively rely on such certificate until the Agent receives a further certificate of Borrower or Guarantor canceling or amending the prior certificate and submitting signatures of the officers named in such further certificate; (vi) Articles of Incorporation and Bylaws. The Agent shall have received copies of the Articles of Incorporation of Borrower and Guarantor and all amendments thereto, certified by the Secretary of State of the State of its incorporation, and a copy of the bylaws of Borrower and Guarantor and all amendments thereto, certified by Borrower and Guarantor as being true, correct and complete; (vii) Recapitalization - The Agent shall have received satisfactory evidence of the completion of the Recapitalization. (viii) Payment of Certain Obligations. All amounts due to Bank One and the other financial institutions participating in the Third Restated Loan Agreement dated March 30, 1998 shall have been paid in full; (ix) Transfer of Oil and Gas Properties. The Agent shall have received satisfactory evidence of the assignment of all of Guarantor's Oil and Gas Properties into Borrower; (x) Priority of Liens. The Agent shall have received satisfactory evidence of the first lien status of the Liens granted by Borrower to the Banks; (xi) Execution of the Intercreditor Agreement. The Intercreditor Agreement between Borrower, the Banks and the trustee of the Senior Secured Notes Indenture shall be in form and substance satisfactory to Agent and shall have been executed by all parties thereto; (xii) Merger. The Agent shall have received satisfactory evidence of the completion of the merger of Gothic Energy of Texas, Inc. into Borrower; -30- (xiii) No Default under the Discount Notes. The Agent shall have received satisfactory evidence that Guarantor is not in default under the provisions of the Discount Notes Indenture; (xiv) No Default Under the Senior Secured Notes. The Agent shall have received satisfactory evidence that the Borrower and Guarantor is not in default under the provisions of the Indenture; (xv) Representation and Warranties. The representations and warranties of Borrower under this Agreement are true and correct in all material respects as of such date, as if then made (except to the extent that such representations and warranties related solely to an earlier date); (xvi) No Event of Default. No Event of Default shall have occurred and be continuing nor shall any event have occurred or failed to occur which, with the passage of time or service of notice, or both, would constitute an Event of Default; (xvii) Other Documents. Agent shall have received such other instruments and documents incidental and appropriate to the transaction provided for herein as Agent or its counsel may reasonably request, and all such documents shall be in form and substance reasonably satisfactory to the Agent; and (xviii) Legal Matters Satisfactory. All legal matters incident to the consummation of the transactions contemplated hereby shall be reasonably satisfactory to special counsel for Agent retained at the expense of the Borrower and Guarantor. (b) The obligation of the Banks to make any Advance or issue any Letter of Credit under the Revolving Commitment (including the initial Advance) shall be subject to the following additional conditions precedent that, at the date of making each such Advance and after giving effect thereto: (i) Representation and Warranties. The representations and warranties of Borrower and Guarantor under this Agreement are true and correct in all material respects as of such date, as if then made (except to the extent that such representations and warranties related solely to an earlier date); (ii) No Event of Default. No Event of Default shall have occurred and be continuing nor shall any event have occurred or failed to occur which, with the passage of time or service of notice, or both, would constitute an Event of Default; -31- (iii) Other Documents. Agent shall have received such other instruments and documents incidental and appropriate to the transaction provided for herein as Agent or its counsel may reasonably request, and all such documents shall be in form and substance reasonably satisfactory to the Agent; and (iv) Legal Matters Satisfactory. All legal matters incident to the consummation of the transactions contemplated hereby shall be reasonably satisfactory to special counsel for Agent retained at the expense of Borrower and Guarantor. 12. AFFIRMATIVE COVENANTS. A deviation from the provisions of this Section 12 shall not constitute an Event of Default under this Agreement if such deviation is consented to in writing by the required percentage of the Banks prior to the date of deviation. The Borrower and Guarantor will at all times comply with the covenants contained in this Section 12 from the date hereof and for so long as the Commitments are in existence or any amount is owed to the Agent or the Banks under this Agreement or the other Loan Documents. (a) Financial Statements and Reports. Borrower and Guarantor shall promptly furnish to the Agent from time to time upon request such information regarding the business and affairs and financial condition of Borrower and Guarantor, as the Agent may reasonably request, and will furnish to the Agent: (i) Annual Audited Financial Statements. As soon as available, and in any event within ninety (90) days after the close of each fiscal year beginning with the fiscal year ended December 31, 1998, the annual audited consolidated and consolidating Financial Statements of Guarantor, prepared in accordance with GAAP accompanied by an unqualified opinion rendered by an independent accounting firm reasonably acceptable to the Agent; (ii) Quarterly Financial Statements. As soon as available, and in any event within forty-five (45) days after the end of each calendar quarter of each year (except the last calendar quarter of any fiscal year), beginning with the fiscal quarter ended March 31, 1998, the quarterly unaudited consolidated and consolidating Financial Statements of Guarantor prepared in accordance with GAAP; (iii) Report on Properties. As soon as available and in any event on or before March 1 and September 1 of each calendar year, and at such other times as any Bank, in accordance with Section 7 hereof, may request, the engineering reports required to be furnished to the Agent under such Section 7 on the Oil and Gas Properties; -32- (iv) Monthly Production Reports. Within 30 days after the end of each month, a monthly report, in form and substance satisfactory to the Agent, indicating the next preceding month's sales volume, sales revenues, production taxes, operating expense and net operating income from the Oil and Gas Properties, with detailed calculations and worksheets, all in form and substance satisfactory to Agent; (v) SEC Reports. As soon as available, and in any event within five (5) days of filing, copies of all filings by Guarantor with the Securities and Exchange Commission; (vi) Report on Adjusted Consolidated Net Tangible Assets. On or before March 1 and September 1 of each calendar year, provide the Agent with a detailed calculation of Adjusted Consolidated Net Tangible Assets of Borrower, said calculation to be made as of the preceding December 31 and June 30, respectively, and shall be in form and substance satisfactory to Agent; (vii) Additional Information. Promptly upon request of the Agent from time to time any additional financial information or other information that the Agent may reasonably request. All such reports, information, balance sheets and Financial Statements referred to in Subsection 12(a) above shall be in such detail as the Agent may reasonably request and shall be prepared in a manner consistent with the Financial Statements. (b) Certificates of Compliance. Concurrently with the furnishing of the annual audited Financial Statements pursuant to Subsection 12(a)(i) hereof and the quarterly unaudited Financial Statements pursuant to Subsection 12(a)(ii) hereof for the months coinciding with the end of each calendar quarter, Borrower and Guarantor will furnish or cause to be furnished to the Agent a certificate in the form of Exhibit "D" attached hereto, signed by the President or Chief Financial Officer of Borrower and Guarantor, (i) stating that Borrower and Guarantor have fulfilled in all material respects their obligations under the Notes and the Loan Documents, including this Agreement, and that all representations and warranties made herein and therein continue (except to the extent they relate solely to an earlier date) to be true and correct in all material respects (or specifying the nature of any change), or if a Default has occurred, specifying the Default and the nature and status thereof; (ii) to the extent requested from time to time by the Agent, specifically affirming compliance of Borrower and Guarantor in all material respects with any of their representations (except to the extent they relate solely to an earlier date) or obligations under said instruments; (iii) setting forth the computation, in reasonable detail as of the end of each period covered by such certificate, of compliance with Sections 13(b), (c) and (d); and (iv) -33- containing or accompanied by such financial or other details, information and material as the Agent may reasonably request to evidence such compliance. (c) Accountants' Certificate. Concurrently with the furnishing of the annual audited Financial Statement pursuant to Section 12(a)(i) hereof, Borrower and Guarantor will furnish a statement from the firm of independent public accountants which prepared such Financial Statement to the effect that nothing has come to their attention to cause them to believe that there existed on the date of such statements any Event of Default and specifically calculating Borrower's and Guarantor's compliance with Sections 13(b), (c) and (d) of this Agreement. (d) Taxes and Other Liens. The Borrower or Guarantor will pay and discharge promptly all taxes, assessments and governmental charges or levies imposed upon the Borrower and Guarantor, or upon the income or any assets or property of Borrower or Guarantor, as well as all claims of any kind (including claims for labor, materials, supplies and rent) which, if unpaid, might become a Lien or other encumbrance upon any or all of the assets or property of Borrower or Guarantor and which could reasonably be expected to result in a Material Adverse Effect; provided, however, that neither Borrower nor Guarantor shall be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings diligently conducted, levy and execution thereon have been stayed and continue to be stayed and if Borrower or Guarantor shall have set up adequate reserves therefor, if required, under GAAP. (e) Compliance with Laws. Borrower and Guarantor will observe and comply, in all material respects, with all applicable laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, orders and restrictions relating to environmental standards or controls or to energy regulations of all federal, state, county, municipal and other governments, departments, commissions, boards, agencies, courts, authorities, officials and officers, domestic or foreign. (f) Further Assurances. The Borrower will cure promptly any defects in the creation and issuance of the Notes and the execution and delivery of the Notes and the Loan Documents, including this Agreement. The Borrower and Guarantor at their sole expense will promptly execute and deliver to Agent upon its reasonable request all such other and further documents, agreements and instruments in compliance with or accomplishment of the covenants and agreements in this Agreement, or to correct any omissions in the Notes or more fully to state the obligations set out herein. (g) Performance of Obligations. The Borrower will pay the Notes and other obligations incurred by it hereunder according to the reading, tenor and effect thereof and -34- hereof; and Borrower and Guarantor will do and perform every act and discharge all of the obligations provided to be performed and discharged by the Borrower and Guarantor under the Loan Documents, including this Agreement, at the time or times and in the manner specified. (h) Insurance. The Borrower and Guarantor now maintain and will continue to maintain insurance with financially sound and reputable insurers with respect to its assets against such liabilities, fires, casualties, risks and contingencies and in such types and amounts as is customary in the case of persons engaged in the same or similar businesses and similarly situated. Upon request of the Agent, the Borrower will furnish or cause to be furnished to the Agent from time to time a summary of the respective insurance coverage of Borrower and Guarantor in form and substance satisfactory to the Agent, and, if requested, will furnish the Agent copies of the applicable policies. Upon demand by Agent any insurance policies covering any such property shall be endorsed (i) to provide that such policies may not be canceled, reduced or affected in any manner for any reason without fifteen (15) days prior notice to Agent, (ii) to provide for insurance against fire, casualty and other hazards normally insured against, in the amount of the full value (less a reasonable deductible not to exceed amounts customary in the industry for similarly situated business and properties) of the property insured, and (iii) to provide for such other matters as the Agent may reasonably require. The Borrower and Guarantor shall at all times maintain adequate insurance with respect to all of their assets, including but not limited to, the Oil and Gas Properties or any collateral against its liability for injury to persons or property, which insurance shall be by financially sound and reputable insurers and shall without limitation provide the following coverages: comprehensive general liability (including coverage for damage to underground resources and equipment, damage caused by blowouts or cratering, damage caused by explosion, damage to underground minerals or resources caused by saline substances, broad form property damage coverage, broad form coverage for contractually assumed liabilities and broad form coverage for acts of independent contractors), worker's compensation and automobile liability. The Borrower shall at all times maintain cost of control of well insurance with respect to the Oil and Gas Properties which shall insure the Borrower against seepage and pollution expense; redrilling expense; and cost of control of well; fires, blowouts, etc., if deemed economical in the reasonable discretion of the Borrower. Additionally, the Borrower shall at all times maintain adequate insurance with respect to all of its other assets and wells in accordance with prudent business practices. (i) Accounts and Records. Borrower and Guarantor will keep books, records and accounts in which full, true and correct entries will be made of all dealings or transactions in relation to its business and activities, prepared in a manner consistent with prior years, subject to changes suggested by such Borrower's and Guarantor's auditors. -35- (j) Right of Inspection. Borrower and Guarantor will permit any officer, employee or agent of the Banks to examine Borrower's and Guarantor's books, records and accounts, and take copies and extracts therefrom, all at such reasonable times during normal business hours and as often as the Banks may reasonably request. The Banks will use best efforts to keep all Confidential Information (as herein defined) confidential and will not disclose or reveal the Confidential Information or any part thereof other than (i) as required by law, and (ii) to the Banks', and the Banks' subsidiaries', Affiliates, officers, employees, legal counsel and regulatory authorities or advisors to whom it is necessary to reveal such information for the purpose of effectuating the agreements and undertakings specified herein or as otherwise required in connection with the enforcement of the Banks' and the Agent's rights and remedies under the Notes, this Agreement and the other Loan Documents. As used herein, "Confidential Information" means information about the Borrower and Guarantor furnished by the Borrower and Guarantor to the Banks, but does not include information (i) which was publicly known, or otherwise known to the Banks, at the time of the disclosure, (ii) which subsequently becomes publicly known through no act or omission by the Banks, or (iii) which otherwise becomes known to the Banks, other than through disclosure by the Borrower and Guarantor. (k) Notice of Certain Events. The Borrower and Guarantor shall promptly notify the Agent if Borrower or Guarantor learns of the occurrence of (i) any event which constitutes an Event of Default together with a detailed statement by Borrower and Guarantor of the steps being taken to cure such Event of Default; (ii) any legal, judicial or regulatory proceedings affecting Borrower or Guarantor, or any of the assets or properties of Borrower or Guarantor which, if adversely determined, could reasonably be expected to have a Material Adverse Effect; (iii) any dispute between Borrower or Guarantor and any governmental or regulatory body or any other Person or entity which, if adversely determined, might reasonably be expected to cause a Material Adverse Effect; (iv) any event or circumstance which requires the prepayment, purchase or redemption of any of the Senior Secured Notes, the Discount Notes or any Preferred Stock, any default or event of default that occurs under the Indentures or under any subsequent indenture executed by Borrower or Guarantor in connection with the issuance of additional notes which are approved by the Banks, with a detailed statement of steps being taken to cure such default or event of default, or (v) any other matter which in Borrower's or Guarantor's reasonable opinion could have a Material Adverse Effect. (l) ERISA Information and Compliance. The Borrower and Guarantor will promptly furnish to the Agent immediately upon becoming aware of the occurrence of any "reportable event", as such term is defined in Section 4043 of ERISA, or of any "prohibited transaction", as such term is defined in Section 4975 of the Internal Revenue Code of 1954, as amended, in connection with any Plan or any trust created thereunder, a written notice signed by the chief financial officer of Borrower or Guarantor specifying the nature thereof, -36- what action Borrower or Guarantor is taking or proposes to take with respect thereto, and, when known, any action taken by the Internal Revenue Service with respect thereto. (m) Environmental Reports and Notices. The Borrower and Guarantor will deliver to the Agent (i) promptly upon its becoming available, one copy of each report sent by Borrower or Guarantor to any court, governmental agency or instrumentality pursuant to any Environmental Law, (ii) notice, in writing, promptly upon Borrower's or Guarantor's receipt of notice or otherwise learning of any claim, demand, action, event, condition, report or investigation indicating any potential or actual liability arising in connection with (x) the non-compliance with or violation of the requirements of any Environmental Law which reasonably could be expected to have a Material Adverse Effect; (y) the release or threatened release of any toxic or hazardous waste into the environment which reasonably could be expected to have a Material Adverse Effect or which release Borrower or Guarantor would have a duty to report to any court or government agency or instrumentality, or (iii) the existence of any Environmental Lien on any properties or assets of Borrower or Guarantor, and Borrower or Guarantor shall immediately deliver a copy of any such notice to Agent. (n) Compliance and Maintenance. The Borrower and Guarantor will (i) observe and comply in all material respects with all Environmental Laws; (ii) except as provided in Subsections 12(o) and 12(p) below, maintain the Oil and Gas Properties and other assets and properties in good and workable condition at all times and make all repairs, replacements, additions, betterments and improvements to the Oil and Gas Properties and other assets and properties as are needed and proper so that the business carried on in connection therewith may be conducted properly and efficiently at all times in the opinion of the Borrower or Guarantor exercised in good faith; (iii) take or cause to be taken whatever actions are necessary or desirable to prevent an event or condition of default by Borrower or Guarantor under the provisions of any gas purchase or sales contract or any other contract, agreement or lease comprising a part of the Oil and Gas Properties or other collateral security hereunder which default could reasonably be expected to result in a Material Adverse Effect; and (iv) furnish Agent upon request evidence satisfactory to Agent that there are no Liens, claims or encumbrances on the Oil and Gas Properties, except laborers', vendors', repairmen's, mechanics', worker's, or materialmen's liens arising by operation of law or incident to the construction or improvement of property if the obligations secured thereby are not yet due or are being contested in good faith by appropriate legal proceedings or Permitted Liens. (o) Operation of Properties. Except as provided in Subsection 12(p) and (q) below, the Borrower and Guarantor will operate, or use reasonable efforts to cause to be operated, all Oil and Gas Properties in a careful and efficient manner in accordance with the practice of the industry and in compliance in all material respects with all applicable laws, rules, and regulations, and in compliance in all material respects with all applicable proration and conservation laws of the jurisdiction in which the properties are situated, and all -37- applicable laws, rules, and regulations, of every other agency and authority from time to time constituted to regulate the development and operation of the properties and the production and sale of hydrocarbons and other minerals therefrom; provided, however, that the Borrower and Guarantor shall have the right to contest in good faith by appropriate proceedings, the applicability or lawfulness of any such law, rule or regulation and pending such contest may defer compliance therewith, as long as such deferment shall not subject the properties or any part thereof to foreclosure or loss. (p) Compliance with Leases and Other Instruments. The Borrower will pay or cause to be paid and discharge all rentals, delay rentals, royalties, production payment, and indebtedness required to be paid by Borrower (or required to keep unimpaired in all material respects the rights of Borrower in Oil and Gas Properties) accruing under, and perform or cause to be performed in all material respects each and every act, matter, or thing required of Borrower by each and all of the assignments, deeds, leases, subleases, contracts, and agreements in any way relating to Borrower or any of the Oil and Gas Properties and do all other things necessary of Borrower to keep unimpaired in all material respects the rights of Borrower thereunder and to prevent the forfeiture thereof or default thereunder; provided, however, that nothing in this Agreement shall be deemed to require Borrower to perpetuate or renew any oil and gas lease or other lease by payment of rental or delay rental or by commencement or continuation of operations nor to prevent Borrower from abandoning or releasing any oil and gas lease or other lease or well thereon when, in any of such events, in the opinion of Borrower exercised in good faith, it is not in the best interest of the Borrower to perpetuate the same. (q) Certain Additional Assurances Regarding Maintenance and Operations of Properties. With respect to those Oil and Gas Properties which are being operated by operators other than the Borrower, the Borrower shall not be obligated to perform any undertakings contemplated by the covenants and agreement contained in Subsections 12(o) or 12(p) hereof which are performable only by such operators and are beyond the control of the Borrower; however, the Borrower agrees to promptly take all reasonable actions available under any operating agreements or otherwise to bring about the performance of any such material undertakings required to be performed thereunder. (r) Sale of Certain Assets/Prepayment of Proceeds. The Borrower will immediately pay over to the Agent for the ratable benefit of the Banks as a prepayment of principal on the Revolving Notes, an amount equal to 100% of the Release Price received by Borrower from the sale of the Oil and Gas Properties, which sale has been approved in advance by the Majority Banks. Provided, however, that the foregoing sentence shall not apply to asset sales with proceeds valued at up to $1,000,000 between each Borrowing Base Determination Date. The term "Release Price" as used herein shall mean a price determined by the Majority Banks in their discretion based upon the loan collateral value which such -38- Banks in their discretion (using such methodology, assumptions and discounts rates as such Banks customarily use in assigning collateral value to oil and gas properties, oil and gas gathering systems, gas processing and plant operations) assign to such Oil and Gas Properties at the time in question. Any such prepayment of principal on the Revolving Notes required by this Section 12(r), shall not be in lieu of, but shall be in addition to, any Monthly Commitment Reduction or any mandatory prepayment of principal required to be paid pursuant to Section 9(b) hereof. (s) Title Matters. Within ninety (90) days after the Effective Date with respect to the Oil and Gas Properties listed on Schedule "7" hereto, furnish Agent with title opinions and/or title information reasonably satisfactory to Agent showing good and defensible title of Borrower to such Oil and Gas Properties subject only to the Permitted Liens. As to any Oil and Gas Properties hereafter mortgaged to Agent, Borrower will promptly (but in no event more than thirty (30) days following such mortgaging), furnish Agent with title opinions and/or title information reasonably satisfactory to Agent showing good and defensible title of Borrower to such Oil and Gas Properties subject only to Permitted Liens. (t) Curative Matters. Within sixty (60) days after the Effective Date with respect to matters listed on Schedule "8" and, thereafter, within sixty (60) days after receipt by Borrower from Agent or its counsel of written notice of title defects the Agent reasonably requires to be cured, Borrower shall either (i) provide such curative information, in form and substance satisfactory to Agent, or (ii) substitute Oil and Gas Properties of value and quality satisfactory to the Agent for all of Oil and Gas Properties for which such title curative was requested but upon which Borrower elected not to provide such title curative information, and, within sixty (60) days of such substitution, provide title opinions or title information satisfactory to the Agent covering the Oil and Gas Properties so substituted. (u) Change of Principal Place of Business. Borrower and Guarantor shall give Agent at least thirty (30) days prior written notice of its intention to move its principal place of business from the address set forth in Section 17 hereof. (v) Cash Collateral Accounts. Borrower and Guarantor shall establish and maintain with Agent one or more operating accounts for Borrower and Guarantor (the "Operating Accounts") and lockbox accounts for Borrower ("Lockbox Accounts"), the maintenance of each of which shall be subject to such rules and regulations as the Agent shall from time to time specify. Such accounts shall be maintained with the Agent until all amounts due hereunder and under the Notes have been paid in full. To the extent not already so instructed, Borrower and Guarantor shall within ten (10) days of the Effective Date instruct and cause all monetary proceeds of production from the Oil and Gas Properties to be remitted to their respective Lockbox Accounts. Such proceeds of production shall not be redirected without the prior written consent of the Agent until such time as all indebtedness -39- due Banks by Borrower has been paid in full and the Commitments have been terminated. If no Event of Default (and no event which, with notice or lapse of time or both, would become an Event of Default) has occurred and is continuing, the full balance of the Lockbox Accounts each day will be deposited into the Operating Accounts. The Borrower and Guarantor hereby grant a security interest to Banks in and to the Lockbox Accounts and the Operating Accounts (collectively, the "Cash Collateral Accounts") and all checks, drafts and other items ever received by any Bank for deposit therein. If any Event of Default shall occur and be continuing, Agent shall have the immediate right, without prior notice or demand, to take and apply against the Borrower's and Guarantor's obligations hereunder any and all funds legally and beneficially owned by the Borrower or Guarantor then or thereafter on deposit in the Cash Collateral Accounts for the ratable benefit of the Banks. (w) Escrow of Interest Payments. At any time that the Total Outstandings are equal to or greater than 75% of the Revolving Commitment, Borrower shall, on or before the tenth (10th) day of each succeeding month, escrow with Agent an amount equal to one-sixth (1/6th) of the next semi- annual interest payment due on any senior notes, including, without limitation, the Senior Secured Notes. Provided, however, that Borrower shall make any such required escrow payment to the Agent on or before the first (1st) day of any month in which an interest payment is due on such Senior Secured Notes. The Borrower hereby grants a security interest to Banks in such escrow account and all checks, drafts and other items ever received by any Bank for deposit therein. If any Event of Default shall occur and be continuing, Agent shall have the immediate right, without prior notice or demand, to take and apply against the Borrower's obligations hereunder any and all funds then or thereafter on deposit in such escrow accounts for the ratable benefit of the Banks. Assuming (i) compliance with the provisions hereof and (ii) that no Event of Default (and no event which, with notice or lapse of time, or both, would become an Event of Default) has occurred and is continuing or would occur as a result of taking the action described in this sentence,, the amount so escrowed may be released for payment of the accrued semi-annual interest payments on the Senior Secured Notes on their due dates. Notwithstanding any other provision hereof, any amendment, modification or waiver of compliance with this covenant shall require the consent of Majority Banks. (x) Year 2000 Compatibility. Borrower and Guarantor shall take all actions reasonably necessary to assure that Borrower's and Guarantor's computer-based systems are able to operate and effectively process data which include dates on or after January 1, 2000. 13. NEGATIVE COVENANTS. A deviation from the provisions of this Section 13 shall not constitute an Event of Default under this Agreement if such deviation is consented to in writing by the required percentage of the Banks prior to the date of deviation. The Borrower and Guarantor will at all times comply with the covenants contained in this Section 13 from the date hereof and for so -40- long as the Revolving Commitment is in existence or any amount is owed to the Agent or the Banks under this Agreement or the other Loan Documents. (a) Negative Pledge. Neither Borrower nor Guarantor shall without the prior written consent of the Banks: (i) create, incur, assume or permit to exist any Lien, security interest or other encumbrance on any of its assets or properties except Permitted Liens; or (ii) sell, lease, transfer or otherwise dispose of, in any fiscal year, any of its assets except for (A) sales, leases, transfers or other dispositions made in the ordinary course of Borrower's and Guarantor's oil and gas businesses, (B) sales made with the consent of Majority Banks which are made pursuant to, and in full compliance with, Section 12(r) hereof; and (C) sales, leases or transfers or other dispositions made by Borrower between Borrowing Base Determination Dates which do not exceed $1,000,000 in the aggregate; (b) Current Ratio. Guarantor shall not allow its ratio of consolidated Current Assets to consolidated Current Liabilities to be less than 1.0 to 1.0 as of the end of any fiscal quarter. (c) Minimum Interest Coverage Ratio. The Borrower will not allow its consolidated Minimum Interest Coverage Ratio to be less than (i) 1.5 to 1.0 as of the end of each calendar quarter beginning with the quarter ending June 30, 1998 and (ii) 2.0 to 1.0 as of the end of each calendar quarter beginning with the quarter ending March 31, 1999. (d) Consolidations and Mergers. Neither Borrower nor the Guarantor will consolidate or merge with or into any other Person, except that Borrower or Guarantor may merge with another Person if Borrower or Guarantor is the surviving entity in such merger and if, after giving effect thereto, no Default or Event of Default shall have occurred and be continuing. (e) Debts, Guaranties and Other Obligations. Without the consent of Majority Banks, neither Borrower nor Guarantor will incur, create, assume or in any manner become or be liable in respect of any indebtedness, nor will Borrower or Guarantor guarantee or otherwise in any manner become or be liable in respect of any indebtedness, liabilities or other obligations of any other person or entity, whether by agreement to purchase the indebtedness of any other person or entity or agreement for the furnishing of funds to any other person or entity through the purchase or lease of goods, supplies or services (or by way of stock purchase, capital contribution, advance or loan) for the purpose of paying or -41- discharging the indebtedness of any other person or entity, or otherwise, except that the foregoing restrictions shall not apply to: (i) the Notes and any renewal or increase thereof, or other indebtedness of the Borrower heretofore disclosed to Banks in the Borrower's Financial Statements or on Schedule "4" hereto; or (ii) taxes, assessments or other government charges which are not yet due or are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as shall be required by GAAP shall have been made therefor and levy and execution thereon have been stayed and continue to be stayed; or (iii) indebtedness (other than in connection with a loan or lending transaction) incurred in the ordinary course of business, including, but not limited to indebtedness for drilling, completing, leasing and reworking oil and gas wells; or (iv) indebtedness owed by Borrower to Guarantor by Guarantor to Borrower as a result of intercompany loans or advances; or (v) indebtedness evidenced by the Senior Unsecured Notes; or (vi) indebtedness evidenced by the Discount Notes; or (vii) letter of credit issued to Koch Production Services in the amount of $275,000 to expire October 31, 1998; or (viii) any renewals or extensions of (but not increases in) any of the foregoing. (f) Dividends. Neither Borrower nor Guarantor will declare or pay any cash dividend, purchase, redeem or otherwise acquire for value any of its stock now or hereafter outstanding, return any capital to its stockholders, or make any distribution of its assets to its stockholders as such, except the foregoing shall not apply to cash dividends paid by Borrower to Guarantor; provided, however, that immediately before and after giving effect thereto no (i) Default or Event of Default or (ii) Borrowing Base deficiency or requirement to make any mandatory prepayment of principal pursuant to Section 9(b) hereof, shall exist. (g) Loans and Advances. Neither Borrower nor the Guarantor shall make or permit to remain outstanding any loans or advances to or in any person or entity, except that the foregoing restriction shall not apply to: -42- (i) loans or advances to any person, the material details of which have been set forth in the Financial Statements of the Borrower and Guarantor heretofore furnished to Banks; or (ii) advances made in the ordinary course of Borrower's and the Guarantor's oil and gas business; or (iii) loans or advances among Borrower and Guarantor. (h) Sale or Discount of Receivables. Neither Borrower nor Guarantor will discount or sell with recourse, or sell for less than the greater of the face or market value thereof, any of its notes receivable or accounts receivable. (i) Nature of Business. Neither Borrower nor Guarantor will permit any material change to be made in the character of its business as carried on at the date hereof. (j) Transactions with Affiliates. Neither Borrower nor Guarantor will enter into any transaction with any Affiliate (other than Borrower or Guarantor), except transactions upon terms that are no less favorable to it than would be obtained in a transaction negotiated at arm's length with an unrelated third party. (k) Hedging Transactions. Neither Borrower nor Guarantor will enter into any transaction providing (i) for the hedging, forward sale, swap or any deviation thereof of crude oil or natural gas or other commodities, or (ii) for a swap, collar, floor, cap, option, corridor, or other contract which is intended to reduce or eliminate the risk of fluctuation in interest rates, as such terms are referred to in the capital markets, except the foregoing prohibitions shall not apply to (x) transactions consented to in writing by the Banks which are on terms acceptable to the Banks, or (y) Pre-Approved Contracts. The term "Pre-Approved Contracts" as used herein shall mean any contract or agreement (i) to hedge, forward, sell or swap crude oil or natural gas or otherwise sell up to 75% of the Borrower's monthly production forecast for all of Borrower's or Guarantor's, as the case may be, proved and producing oil and gas properties for the period covered by the proposed hedging transaction, (ii) with a maturity of twelve (12) months or less, (iii) with "strike prices" per barrel greater than the Agent's forecasted price in the most recent engineering evaluation of the Borrower's and Guarantor's, as the case may be, oil and gas properties, adjusted for the difference between the forecasted price and the Borrower's and Guarantor's, as the case may be, actual product price as determined by Agent, and (iv) with counter-parties to the hedging agreement which are approved by Agent. (l) Investments. Neither Borrower nor the Guarantor shall make any investments in any person or entity, except such restriction shall not apply to: -43- (i) investments and direct obligations of the United States of America or any agency thereof; (ii) investments in certificates of deposit issued by the Banks or certificates of deposit with maturities of less than one year, issued by other commercial banks in the United States having capital and surplus in excess of $500,000,000 and which have a rating of (A) 50 or above by Sheshunoff and (B) "B" or above by Keef-Bruett; or (iii) investments in insured money market funds, Eurodollar investment accounts and other similar accounts at Agent or such investment with maturities of less than ninety (90) days at other commercial banks having capital and surplus in excess of $500,000,000 and which have a rating of (A) 50 or above by Sheshunoff and (B) "B" or above by Keef-Bruett. (m) Amendment to Articles of Incorporation or Bylaws. Neither Borrower nor Guarantor will permit any amendment to, or any alteration of, its Articles of Incorporation or Bylaws. (n) Proceeds of Production. Neither Borrower nor Guarantor shall redirect the payment of the proceeds of production from the Oil and Gas Properties to anyone or any place other than to the Lockbox Account at the Agent. (o) Issuance of Preferred Stock. Neither Borrower nor Guarantor shall not issue any preferred stock after the Effective Date without the consent of Majority Banks. (p) Amendments, etc. of Indentures. Except as specifically permitted hereby, neither Borrower nor Guarantor shall make or allow to be made (a) any amendments or modifications to the Indentures or any indenture executed in connection with the issuance of any Senior Secured Notes or the Discount Notes, or (ii) any prepayments or redemptions of the Senior Secured Notes or the Discount Notes, unless any such action is approved by Majority Banks. (q) Amendments to and Redemption of Preferred Stock or Other Equity. Neither Borrower nor Guarantor shall (i) amend any outstanding equity issue after the Effective Date without the consent of Majority Banks, or (ii) redeem any preferred stock without the consent of all Banks. (r) Payment or Pre-Payment of Other Indebtedness. Except as otherwise provided for in this Agreement is outstanding, neither Borrower nor Guarantor shall make any unscheduled principal payments on or redeem any of their indebtedness, including, -44- without limitation, the Senior Secured Notes and the Discount Notes (other than indebtedness owed the Banks hereunder) or purchase or redeem any of their equity unless such payment, pre-payment or redemption is approved by Majority Banks. 14. EVENTS OF DEFAULT. Any one or more of the following events shall be considered an "Event of Default" as that term is used herein: (a) The Borrower shall fail to pay when due or declared due the principal of, and the interest on, the Notes, or any fee or any other indebtedness of the Borrower incurred pursuant to this Agreement or any other Loan Document; or (b) Any representation or warranty made by Borrower or Guarantor under this Agreement, or in any certificate or statement furnished or made to the Banks pursuant hereto, or in connection herewith, or in connection with any document furnished hereunder, shall prove to be untrue in any material respect as of the date on which such representation or warranty is made (or deemed made), or any representation, statement (including financial statements), certificate, report or other data furnished or to be furnished or made by Borrower or Guarantor under any Loan Document, including this Agreement, proves to have been untrue in any material respect, as of the date as of which the facts therein set forth were stated or certified; or (c) Default shall be made in the due observance or performance of any of the covenants or agreements of the Borrower and Guarantor contained in the Loan Documents, including this Agreement (excluding covenants contained in Section 12(w) and Section 13 of the Agreement for which there is no cure period), and such default shall continue for more than thirty (30) days; or (d) Default shall be made in the due observance or performance of the covenants of Borrower and Guarantor contained in Section 12(w) or Section 13 of this Agreement; or (e) Default shall be made in respect of any obligation for borrowed money, other than the Notes, for which Borrower or Guarantor is liable (directly, by assumption, as guarantor or otherwise), or any obligations secured by any mortgage, pledge or other security interest, lien, charge or encumbrance with respect thereto, on any asset or property of Borrower or Guarantor or in respect of any agreement relating to any such obligations unless such Borrower or Guarantor is not liable for same (i.e., unless remedies or recourse for failure to pay such obligations is limited to foreclosure of the collateral security therefor), and if such default shall continue beyond the applicable grace period, if any; or (f) Borrower or Guarantor shall commence a voluntary case or other proceedings seeking liquidation, reorganization or other relief with respect to itself or its debts under any -45- bankruptcy, insolvency or other similar law now or hereafter in effect or seeking an appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action authorizing the foregoing; or (g) An involuntary case or other proceeding, shall be commenced against Borrower or Guarantor seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of sixty (60) days; or an order for relief shall be entered against Borrower or Guarantor under the federal bankruptcy laws as now or hereinafter in effect; or (h) A final judgment or order for the payment of money in excess of $100,000 (or judgments or orders aggregating in excess of $100,000) shall be rendered against Borrower or Guarantor and such judgments or orders shall continue unsatisfied and unstayed for a period of thirty (30) days; or (i) In the event the Total Outstandings shall at any time exceed the Borrowing Base established for the Revolving Notes, and the Borrower shall fail to comply with the provisions of Section 9(b) hereof; or (j) A Change of Control shall occur; or (k) A Change of Management shall occur; or (l) A default or event of default shall occur under the Indentures or any other indenture or similar agreement executed by Borrower or Guarantor, or any of them, in connection with the issuance of additional debt as permitted by Sections 13(f)(v) and (vi) hereof. Upon occurrence of any Event of Default specified in Subsections 14(f) and (g) hereof, the entire principal amount due under the Notes and all interest then accrued thereon, and any other liabilities of the Borrower or Guarantor hereunder, shall become immediately due and payable all without notice and without presentment, demand, protest, notice of protest or dishonor or any other notice of default of any kind, all of which are hereby expressly waived by the Borrower. In any other Event of Default, the Agent, upon request of Majority Banks, shall by notice to the Borrower -46- 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 intent to accelerate, notice of acceleration or other notice of any kind, all of which the Borrower and Guarantor hereby expressly waive, anything contained herein or in the Note to the contrary notwithstanding. Nothing contained in this Section 14 shall be construed to limit or amend in any way the Events of Default enumerated in the Note, or any other document executed in connection with the transaction contemplated herein. Upon the occurrence and during the continuance of any Event of Default, the Banks are hereby authorized at any time and from time to time, without notice to the Borrower or Guarantor (any such notice being expressly waived by the Borrower and Guarantor), to set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by any of the Banks to or for the credit or the account of the Borrower or Guarantor against any and all of the indebtedness of the Borrower under the Notes and the Loan Documents, including this Agreement, irrespective of whether or not the Banks shall have made any demand under the Loan Documents, including this Agreement or the Notes and although such indebtedness may be unmatured. Any amount set-off by any of the Banks shall be applied against the indebtedness owed the Banks by the Borrower pursuant to this Agreement and the Notes. The Banks agree promptly to notify the Borrower or, if applicable, Guarantor, after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Bank under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Banks may have. 15. THE AGENT AND THE BANKS. (a) 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 the 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 the Loan Documents); (iv) to receive all documents and items to be furnished to 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 the Borrower under the Loan Documents; (vii) to promptly distribute to each Bank such Bank's Pro Rata Part 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. Each Bank hereby authorizes Agent to take all actions and to exercise such powers under the Loan Documents as are specifically delegated to Agent by the terms hereof or thereof, together with all other -47- powers reasonably incidental thereto. 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 the Borrower or the Guarantor, and any person which may do business with the Borrower or the Guarantor, all as if Agent and any successor Agent was 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 the Borrower or the Guarantor 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 the Borrower arising under the Loan Documents, then each Bank shall be entitled to share in such application according to its pro rata part thereof. Each Bank, upon request of any other Bank, shall disclose to all other Banks all indebtedness and liabilities, direct and contingent, of the Borrower to such Bank as of the time of such request. (b) Note Holders. From time to time as other Banks become a party to this Agreement, Agent shall obtain execution by the Borrower of additional Notes in amounts representing the Commitment of each such new Bank, up to an aggregate face amount of all Revolving Notes not exceeding $25,000,000. 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 hereof. From time to time, 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. (c) 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. (d) 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. (e) 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 -48- notice thereof to Banks and the Borrower, and Agent may be removed at any time with or without cause by all Banks. If no successor Agent has been so appointed by all Banks (and approved by the 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. Any successor Agent must be approved by Borrower, which approval will not be unreasonably withheld. 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 Section 15 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. To be eligible to be an Agent hereunder the party serving, or to serve, in such capacity must own a Pro Rata Part of the Commitments equal to the level of Commitment required to be held by any Bank pursuant to Section 28 hereof. (f) 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 as to each 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 the Borrower that such Bank or the 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 not incur 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 Borrower's 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 the 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. -49- The relationship between Agent and each Bank is only that of agent and principal and has 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 does not assume 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 the 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) except as provided in Section 7(b) hereof, without the consent of Majority Banks designate the amount of the Borrowing Base or the Monthly Commitment Reduction or (ii) without the consent of all 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 all Banks. Provided further, however, that no amendment, waiver, or other action shall be effected pursuant to the preceding clause (ii) without the consent of all Banks which: (i) would increase the Borrowing Base or decrease the Monthly Commitment Reduction, (ii) would reduce any fees hereunder, or the principal of, or the interest on, any Bank's Note or Notes, (iii) would postpone any date fixed for any payment of any fees hereunder, or any principal or interest of any Bank's Note or Notes, (iv) would materially increase any Bank's obligations hereunder or would materially alter Agent's obligations to any Bank hereunder, (v) would release Borrower from its obligation to pay any Bank's Note or Notes, (vi) release any of the Collateral, (vii) would change the definition of all Banks, (viii) would amend, modify or change any provision of this Agreement requiring the consent of all the Banks, (ix) would waive any of the conditions precedent to the Effective Date or the making of any Loan or issuance of any Letter of Credit or (x) would extend the Revolving Maturity Date or (xi) would amend this sentence or the previous sentence. Agent shall not have 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 the Agent, in which case only the Agent responsible for such gross negligence shall have liability therefor to the Banks. (g) Independent Investigation. Each Bank severally represents and warrants to Agent that it has made its own independent investigation and assessment of the financial -50- condition and affairs of the 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 the 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 the Borrower of this Agreement or any other document referred to or provided for herein or to inspect the properties or books of the Borrower. Other than as provided in this 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 the Borrower which may come into the possession of Agent. (h) Indemnification. Banks agree to indemnify Agent, ratably according to their respective Commitments on a Pro Rata basis, 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 the Agent for any amount such Bank paid to Agent under this Section 15(h) to the extent the Agent has been reimbursed for such payments by the Borrower or any other Person. THE PARTIES INTEND FOR THE PROVISIONS OF THIS SECTION TO APPLY TO AND PROTECT THE AGENT FROM THE CONSEQUENCES OF ANY LIABILITY INCLUDING STRICT LIABILITY IMPOSED OR THREATENED TO BE IMPOSED ON AGENT AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE, WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING OR CONCURRING CAUSE OF ANY SUCH LIABILITY. (i) Benefit of Section 15. The agreements contained in this Section 15 are solely for the benefit of Agent and the Banks and are not for the benefit of, or to be relied upon by, the Borrower, any affiliate of the Borrower or any other person. (j) Pro Rata Treatment. Subject to the provisions of this Agreement, each payment (including each prepayment) by the Borrower and collection by Banks (including offsets) on account of the principal of and interest on the Notes and fees provided for in this Agreement, payable by the Borrower shall be made Pro Rata; provided, however, in the event that any Defaulting Bank shall have failed to make an Advance as contemplated under Section 3 hereof and Agent or another Bank or Banks shall have made such Advance, payment received by Agent for the account of such Defaulting Bank or Banks shall not be -51- distributed to such Defaulting Bank or Banks until such Advance or Advances shall have been repaid in full to the Bank or Banks who funded such Advance or Advances. (k) Assumption as to Payments. Except as specifically provided herein, unless Agent shall have received notice from the Borrower prior to the date on which any payment is due to Banks hereunder that the Borrower will not make such payment in full, Agent may, but shall not be required to, assume that the Borrower has made such payment in full to Agent on such date and Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Borrower shall not have so made such payment in full to Agent, each Bank shall repay to Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to Agent, at the interest rate applicable to such portion of the Revolving Loan. (l) Other Financings. Without limiting the rights to which any Bank otherwise is or may become entitled, such Bank shall have no interest, by virtue of this Agreement or the Loan Documents, in (a) any present or future loans from, letters of credit issued by, or leasing or other financial transactions by, any other Bank to, on behalf of, or with the Borrower or the Guarantor (collectively referred to herein as "Other Financings") other than the obligations hereunder; (b) any present or future guarantees by or for the account of the Borrower or the Guarantor which are not contemplated by the Loan Documents; (c) any present or future property taken as security for any such Other Financings; or (d) any property now or hereafter in the possession or control of any other Bank which may be or become security for the obligations of the Borrower or the Guarantor arising under any loan document by reason of the general description of indebtedness secured or property contained in any other agreements, documents or instruments relating to any such Other Financings. (m) Interests of Banks. Nothing in this Agreement shall be construed to create a partnership or joint venture between Banks for any purpose. Agent, Banks and the Borrower recognize that the respective obligations of Banks under the Commitments shall be several and not joint and that neither Agent nor any of Banks shall be responsible or liable to perform any of the obligations of the other under this 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 the Security Instruments, including, without limitation, liens and security interests in any collateral, fees and payments of principal and interest by the Borrower under the Commitments on a Pro Rata basis. Each Bank shall perform all duties and obligations of Banks under this Agreement in the same proportion as its ownership interest in the Loans outstanding at the date of determination thereof. -52- (n) 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 is otherwise required to invest funds pending distribution to the Banks, Agent may invest such funds pending distribution (at the risk of the 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 the Banks (other than to the Person who is 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. 16. EXERCISE OF RIGHTS. No failure to exercise, and no delay in exercising, on the part of the Agent or the 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 the Agent and the Banks hereunder shall be in addition to all other rights provided by law. No modification or waiver of any provision of the Loan Documents, including this Agreement, or the Note 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 circumstances without such notice or demand. 17. NOTICES. Any notices or other communications required or permitted to be given by this Agreement or any other documents and instruments referred to herein must be given in writing (which may be by facsimile transmission) and must be personally delivered or mailed by prepaid certified or registered mail to the party to whom such notice or communication is directed at the address of such party as follows: (a) BORROWER and GUARANTOR: c/o GOTHIC ENERGY CORPORATION, 5727 South Lewis, Suite 700, Tulsa, Oklahoma 74105-7148, Attention: Michael Paulk, President; (b) AGENT: BANK ONE, TEXAS, N.A., 1717 Main Street, Dallas, Texas 75201, Facsimile No. 214-290-2627, Attention: Mynan C. Feldman, Vice President. 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 or delivered by facsimile as aforesaid or, if mailed, on the third day after it is mailed as aforesaid. Any party may change its address for purposes of this Agreement by giving notice of such change to the other party pursuant to this Section 17. Any notice required to be given to the Banks shall be given to the Agent and distributed to all Banks by the Agent. 18. EXPENSES. The Borrower shall pay (i) all reasonable and necessary out-of-pocket expenses of the Banks, including reasonable fees and disbursements of special counsel for the Agent, in connection with the preparation of this Agreement, any waiver or consent hereunder or any -53- amendment hereof or any default or Event of Default or alleged default or Event of Default hereunder, (ii) all reasonable and necessary out-of-pocket expenses of the Agent, including reasonable fees and disbursements of special counsel for the Agent in connection with the preparation of any participation agreement for a participant or participants requested by the Borrower or any amendment thereof and (iii) if a default or an Event of Default occurs, all reasonable and necessary out-of-pocket expenses incurred by the Banks, including fees and disbursements of counsel, in connection with such default and Event of Default and collection and other enforcement proceedings resulting therefrom. The Borrower shall indemnify the Banks against any transfer taxes, document taxes, assessments or charges made by any governmental authority by reason of the execution, delivery and filing of the Loan Documents. The obligations of this Section 18 shall survive any termination of this Agreement, the expiration of the Loans and the payment of all indebtedness of the Borrower to the Banks hereunder and under the Notes. 19. INDEMNITY. The Borrower and Guarantor agree to indemnify and hold harmless the Banks and their respective officers, employees, agents, attorneys and representatives (singularly, an "Indemnified Party", and collectively, the "Indemnified Parties") from and against any loss, cost, liability, damage or expense (including the reasonable fees and out-of-pocket expenses of counsel to the Banks, including all local counsel hired by such counsel) ("Claim") incurred by the Banks in investigating or preparing for, defending against, or providing evidence, producing documents or taking any other action in respect of any commenced or threatened litigation, administrative proceeding or investigation under any federal securities law, federal or state environmental law, or any other statute of any jurisdiction, or any regulation, or at common law or otherwise, which is alleged to arise out of or is based upon any acts, practices or omissions or alleged acts, practices or omissions of the Borrower or Guarantor or their agents or arises in connection with the duties, obligations or performance of the Indemnified Parties in negotiating, preparing, executing, accepting, keeping, completing, countersigning, issuing, selling, delivering, releasing, assigning, handling, certifying, processing or receiving or taking any other action with respect to the Loan Documents and all documents, items and materials contemplated thereby even if any of the foregoing arises out of an Indemnified Party's ordinary negligence. The indemnity set forth herein shall be in addition to any other obligations or liabilities of the Borrower and Guarantor to the Banks hereunder or at common law or otherwise, and shall survive any termination of this Agreement, the expiration of the Loans and the payment of all indebtedness of the Borrower and Guarantor to the Banks hereunder and under the Notes, provided that the Borrower and Guarantor shall have no obligation under this Section to the Bank with respect to any of the foregoing arising out of the gross negligence or willful misconduct of the Bank. If any Claim is asserted against any Indemnified Party, the Indemnified Party shall endeavor to notify the Borrower and Guarantor of such Claim (but failure to do so shall not affect the indemnification herein made except to the extent of the actual harm caused by such failure). The Indemnified Party shall have the right to employ, at the Borrower's and Guarantor's expense, counsel of the Indemnified Parties' choosing and to control the defense of the Claim. The Borrower and Guarantor may at their own expense also participate in the defense of any Claim. Each Indemnified Party may employ separate counsel in connection with any -54- Claim to the extent such Indemnified Party believes it reasonably prudent to protect such Indemnified Party. THE PARTIES INTEND FOR THE PROVISIONS OF THIS SECTION TO APPLY TO AND PROTECT EACH INDEMNIFIED PARTY FROM THE CONSEQUENCES OF ANY LIABILITY INCLUDING STRICT LIABILITY IMPOSED OR THREATENED TO BE IMPOSED ON AGENT AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE, WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING, OR CONCURRING CAUSE OF ANY CLAIM. 20. GOVERNING LAW. THIS AGREEMENT IS BEING EXECUTED AND DELIVERED, AND IS INTENDED TO BE PERFORMED, IN DALLAS, DALLAS COUNTY, TEXAS, AND THE SUBSTANTIVE LAWS OF TEXAS SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND ALL OTHER DOCUMENTS AND INSTRUMENTS REFERRED TO HEREIN, UNLESS OTHERWISE SPECIFIED THEREIN. 21. INVALID PROVISIONS. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Agreement, such provisions shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of the 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 Agreement. 22. MAXIMUM INTEREST RATE. Regardless of any provisions contained in this Agreement or in any other documents and instruments referred to herein, the 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 Maximum Rate, and in the event any Bank ever receives, collects or applies as interest any such excess, or if an acceleration of the maturities of any Notes or if any prepayment by the Borrower results in the Borrower having paid any interest in excess of the Maximum Rate, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of the Notes for which such excess was received, collected or applied, and, if the principal balance of such Note is paid in full, any remaining excess shall forthwith be paid to the Borrower. All sums paid or agreed to be paid to the Banks for the use, forbearance or detention of the indebtedness evidenced by the Notes and/or this Agreement shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the Maximum Rate. In determining whether or not the interest paid or payable under any specific contingency exceeds the Maximum Rate of interest permitted by law, the Borrower and the Banks shall, to the maximum extent permitted under applicable law, (i) characterize any non- principal payment as an expense, fee or premium, rather than as interest; and (ii) exclude voluntary prepayments and the effect thereof; and (iii) compare the total amount of interest contracted for, charged or received with the total amount of interest which could be contracted for, charged or received throughout the entire contemplated term of the Note at the Maximum Rate. -55- 23. AMENDMENTS. This Agreement may be amended only by an instrument in writing executed by an authorized officer of the party against whom such amendment is sought to be enforced. 24. MULTIPLE COUNTERPARTS. This Agreement may be executed in a number of identical separate counterparts, each of which for all purposes is to be deemed an original, but all of which shall constitute, collectively, one agreement. No party to this Agreement shall be bound hereby until a counterpart of this Agreement has been executed by all parties hereto. 25. CONFLICT. In the event any term or provision hereof is inconsistent with or conflicts with any provision of the Loan Documents, the terms or provisions contained in this Agreement shall be controlling. 26. SURVIVAL. All covenants, agreements, undertakings, representations and warranties made in the Loan Documents, including this Agreement, the Notes or other documents and instruments referred to herein shall survive all closings hereunder and shall not be affected by any investigation made by any party. 27. PARTIES BOUND. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, heirs, legal representatives and estates, provided, however, that the Borrower may not, without the prior written consent of all of the Banks, assign any rights, powers, duties or obligations hereunder. 28. ASSIGNMENTS AND PARTICIPATIONS. (a) Each Bank shall have the right to sell, assign or transfer all or any part of its Note or Notes, its Commitments and its rights and obligations hereunder to one or more Affiliates, Banks, financial institutions, pension plans, insurance companies, investment funds, or similar Persons who are Eligible Assignees or to a Federal Reserve Bank; provided, that in connection with each sale, assignment or transfer (other than to an Affiliate, a Bank or a Federal Reserve Bank), the applicable Bank will consider the opinion and recommendation of Borrower, which opinion and recommendation shall in no way be binding upon such Bank, and each such sale, assignment, or transfer (other than to an Affiliate, a Bank or a Federal Reserve Bank), shall require the consent of Agent, which consent will not be unreasonably withheld, and the assignee, transferee or recipient shall have, to the extent of such sale, assignment, or transfer, the same rights, benefits and obligations as it would if it were such Bank and a holder of such Note, Commitments and rights and obligations, including, without limitation, the right to vote on decisions requiring consent or approval of all Banks or Majority Banks and the obligation to fund its Commitments; provided, further, that (1) each such sale, assignment, or transfer (other than to an Affiliate, a Bank or a Federal Reserve Bank) shall be in an aggregate principal amount -56- not less than $5,000,000, (2) each remaining Bank shall at all times maintain Commitments then outstanding in an aggregate principal amount at least equal to $5,000,000; (3) each such sale, assignment or transfer shall be of a Pro Rata portion of such Bank's Revolving Commitment and its Bridge Loan Commitment, (4) no Bank may offer to sell its Note or Notes, Commitments, rights and obligations or interests therein in violation of any securities laws; and (5) no such assignments (other than to a Federal Reserve Bank) shall become effective until the assigning Bank and its assignee delivers to Agent and Borrower an Assignment and Acceptance and the Note or Notes subject to such assignment and other documents evidencing any such assignment. An assignment fee in the amount of $3,500 for each such assignment (other than to an Affiliate, a Bank or the Federal Reserve Bank) will be payable to Agent by assignor or assignee. Within five (5) Business Days after its receipt of copies of the Assignment and Acceptance and the other documents relating thereto and the Note or Notes, the Borrower shall execute and deliver to Agent (for delivery to the relevant assignee) a new Note or Notes evidencing such assignee's assigned Commitments and if the assignor Bank has retained a portion of its Commitments, a replacement Note in the principal amount of the Commitments retained by the assignor (except as provided in the last sentence of this paragraph (a) such Note or Notes to be in exchange for, but not in payment of, the Note or Notes held by such Bank). On and after the effective date of an assignment hereunder, the assignee shall for all purposes be a Bank, party to this Agreement and any other Loan Document executed by the Banks and shall have all the rights and obligations of a Bank under the Loan Documents, to the same extent as if it were an original party thereto, and no further consent or action by Borrower, Banks or the Agent shall be required to release the transferor Bank with respect to its Commitments assigned to such assignee and the transferor Bank shall henceforth be so released. (b) Each Bank shall have the right to grant participations in all or any part of such Bank's Notes and Commitments hereunder to one or more pension plans, investment funds, insurance companies, financial institutions or other Persons, provided, that: (i) each Bank granting a participation shall retain the right to vote hereunder, and no participant shall be entitled to vote hereunder on decisions requiring consent or approval of Bank or Majority Banks (except as set forth in (iii) below); (ii) in the event any Bank grants a participation hereunder, such Bank's obligations under the Loan Documents shall remain unchanged, such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, such Bank shall remain the holder of any such Note or Notes for all purposes under the Loan Documents, and Agent, each Bank and Borrower shall be entitled to deal with the Bank granting a participation in the same manner as if no participation had been granted; and -57- (iii) no participant shall ever have any right by reason of its participation to exercise any of the rights of Banks hereunder, except that any Bank may agree with any participant that such Bank will not, without the consent of such participant (which consent may not be unreasonably withheld) consent to any amendment or waiver requiring approval of all Banks. (c) It is understood and agreed that any Bank may provide to assignees and participants and prospective assignees and participants financial information and reports and data concerning Borrower's properties and operations which was provided to such Bank pursuant to this Agreement. (d) Upon the reasonable request of either Agent or Borrower, each Bank will identify those to whom it has assigned or participated any part of its Notes and Commitment, and provide the amounts so assigned or participated. 29. CHOICE OF FORUM: CONSENT TO SERVICE OF PROCESS AND JURISDICTION. THE OBLIGATIONS OF BORROWER UNDER THE LOAN DOCUMENTS ARE PERFORMABLE IN DALLAS COUNTY, TEXAS. ANY SUIT, ACTION OR PROCEEDING AGAINST THE BORROWER WITH RESPECT TO THE LOAN DOCUMENTS OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT THEREOF, MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS, COUNTY OF DALLAS, OR IN THE UNITED STATES COURTS LOCATED IN DALLAS COUNTY, TEXAS AND THE BORROWER HEREBY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS FOR THE PURPOSE OF ANY SUCH SUIT, ACTION OR PROCEEDING. THE BORROWER HEREBY IRREVOCABLY CONSENT TO SERVICE OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING IN SAID COURT BY THE MAILING THEREOF BY BANK BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER, AS APPLICABLE, AT THE ADDRESS FOR NOTICES AS PROVIDED IN SECTION 17. THE BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT BROUGHT IN THE COURTS LOCATED IN THE STATE OF TEXAS, COUNTY OF DALLAS, AND HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 30. WAIVER OF JURY TRIAL. THE BORROWER HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. -58- 31. OTHER AGREEMENTS. THIS WRITTEN LOAN AGREEMENT 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. 32. FINANCIAL TERMS. All accounting terms used in this Agreement which are not specifically defined herein shall be construed in accordance with GAAP. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. BORROWER: GOTHIC PRODUCTION CORPORATION an Oklahoma corporation By: ------------------------------------ Michael Paulk, President GUARANTOR: GOTHIC ENERGY CORPORATION an Oklahoma corporation By: ------------------------------------ Michael Paulk, President BANKS: BANK ONE, TEXAS, N.A., a national banking association By: ------------------------------------ Mynan C. Feldman, Vice President -59- AGENT: BANK ONE, TEXAS, N.A., a national banking association By: ------------------------------------ Mynan C. Feldman, Vice President -60- EX-15 3 LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFO. EXHIBIT 15 Gothic Energy Corporation and Subsidiaries Letter Regarding Unaudited Interim Financial Information Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Gothic Energy Corporation and Subsidiaries Registration on Form S-3 We are aware that our report dated May 15, 1998 on our review of the interim financial information of Gothic Energy Corporation for the period ended March 31, 1998 and included in this Form 10-QSB is incorporated by reference in the Company's registration statement on Form S-3 (File No. 333-23239). Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered a part of the registration statement prepared or certified by us within the meaning of Sections 7 and 11 of that Act. COOPERS & LYBRAND, L.L.P. Tulsa, Oklahoma May 19, 1998 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 3,294 0 8,316 (63) 0 13,687 341,181 (16,645) 346,720 13,397 101,000 33,909 0 162 (17,599) 346,720 16,516 17,102 13,021 13,021 99 0 8,033 (4,051) 0 (4,051) 0 (27,061) 0 (32,086) (1.97) (1.97)
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