-----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, KPtbKuknnTBFqJN2ae7t8kgBWVe3cSn/ojq6RKSy5vzvVkj06zEF+0vmRablXqgJ 6A4UIe+ES2YnkNszTL+dkA== 0000912057-99-009804.txt : 19991220 0000912057-99-009804.hdr.sgml : 19991220 ACCESSION NUMBER: 0000912057-99-009804 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991123 ITEM INFORMATION: FILED AS OF DATE: 19991217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3TEC ENERGY CORP CENTRAL INDEX KEY: 0000903267 STANDARD INDUSTRIAL CLASSIFICATION: OIL AND GAS FIELD EXPLORATION SERVICES [1382] IRS NUMBER: 631081013 STATE OF INCORPORATION: AL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-14745 FILM NUMBER: 99776615 BUSINESS ADDRESS: STREET 1: 1221 LAMAR ST STREET 2: SUITE 1020 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7137596808 MAIL ADDRESS: STREET 1: PO BOX 390 CITY: MOBILE STATE: AL ZIP: 36602 FORMER COMPANY: FORMER CONFORMED NAME: MIDDLE BAY OIL CO INC DATE OF NAME CHANGE: 19930504 8-K/A 1 FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (date of earliest event reported): NOVEMBER 23, 1999 3TEC ENERGY CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 0-21702 76-0624573 (State or other jurisdiction (Commission File (IRS Employer of incorporation) Number) Identification No.) Two Shell Plaza, 777 Walker, Suite 2400, Houston, Texas 77002 (Address of principal executive offices and zip code) (713) 222-6275 Registrant's telephone number, including area code MIDDLE BAY OIL COMPANY, INC. 1221 Lamar, Suite 1020, Houston, Texas 77010 Former Name and Address ITEM 7 FINANCIAL STATEMENTS AND EXHIBIT As discussed in Item 2 of Form 8-K filed with the commission on December 6, 1999, on November 23, 1999 Middle Bay Oil Company, Inc., now known as 3TEC Energy Corporation (the "Company") closed the previously announced transaction to purchase properties and interests owned by a group of private sellers which is managed by Floyd Oil Company (the "Floyd Oil Properties"). The Company wishes to amend the Form 8-K filed on December 6, 1999 by filing the Real Estate Exchange Agreement by and between Middle Bay Oil Company, Inc. and Floyd Oil Company as an exhibit. In addition, as discussed in Item 5 of Form 8-K filed with the commission on December 6, 1999, concurrent with the closing of the purchase of the Floyd Oil Properties, Middle Bay entered into a new $250 million credit facility with Bank One, Texas, N.A., as agent and Union Bank of California, Wells Fargo Bank, CIBC, Inc. and Bank of Nova Scotia as participating lenders. The Company wishes to amend the Form 8-K filed on December 6, 1999 by filing the Restated Credit Agreement by and among Middle Bay Oil Company, Inc., Enex Resources Corporation and Middle Bay Production Company, Inc. as borrowers, and Bank One, Texas, N.A. and other institutions as lenders as an exhibit. (c) Exhibits. The following exhibits are filed herewith: 2.1 Real Estate Exchange Agreement by and between Middle Bay Oil Company, Inc. and Floyd Oil Company. 10.1 Restated Credit Agreement by and among Middle Bay Oil Company, Inc., Enex Resources Corporation and Middle Bay Production Company, Inc. as borrowers, and Bank One, Texas, N.A. and other institutions as lenders. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. 3TEC Energy Corporation (Registrant) Date: December 17, 1999 By: /s/ Floyd C. Wilson Floyd C. Wilson President, Chief Executive Officer and Chairman of the Board EXHIBIT INDEX: The following exhibits are filed herewith and are incorporated herein by reference: 2.1 Real Estate Exchange Agreement by and between Middle Bay Oil Company, Inc. and Floyd Oil Company. 10.1 Restated Credit Agreement by and among Middle Bay Oil Company, Inc., Enex Resources Corporation and Middle Bay Production Company, Inc. as borrowers, and Bank One, Texas, N.A. and other institutions as lenders. EX-2.1 2 EXHIBIT 2.1 Exhibit 2.1 REAL ESTATE EXCHANGE AGREEMENT This Real Estate Exchange Agreement ("Floyd Exchange Agreement" or "Agreement") is made and entered into as of the 23rd day of November, 1999, by and between Middle Bay Oil Company, Inc., an Alabama Corporation ("Middle Bay"), and Floyd Oil Company, a Texas Corporation ("FOC"), (Middle Bay and FOC are sometimes collectively referred to as "Parties") with respect to the following: WHEREAS, FOC has been in the business of acquiring oil and gas properties on its own behalf and on behalf of various investors ("Investors") since 1986 and since that time FOC has formed five real estate acquisition programs and certain incremental programs which have acquired oil and gas real estate interests ("Floyd Programs"); and WHEREAS, the Floyd Programs contain perpetual real estate mineral interests which are held in a variety of forms including working interests in oil and gas properties, mineral interests held through partnerships, real estate interests held through perpetual overriding royalty interests which burden working interests held by FOC, and royalty and overriding royalty interests; and WHEREAS, Middle Bay has approached FOC as to the possibility of acquiring all of the mineral properties managed by FOC under the Floyd Programs and FOC has provided Middle Bay with the names of the Investors; and WHEREAS, FOC has advised Middle Bay that the Floyd Programs own interests in three properties which have been managed by FOC known as the Anadarko Royalty, the Quinoco Royalty and the Sacatosa Royalty ("Royalty Properties"); and WHEREAS, FOC has advised Middle Bay that if Middle Bay were able to acquire all of the beneficial mineral interests owned by the Investors in the Floyd Programs (other than those mineral interests owned by FOC), FOC would be willing to exchange the Minerals it owns in the Floyd Programs (but not including the interest FOC owns in the Royalty Properties) for the interest in the Royalty Properties acquired by Middle Bay from the Investors so that after the exchange FOC will own all of the interests in the Royalty Properties; and WHEREAS, Middle Bay is obtaining commitments to purchase all of the Minerals and beneficial interests in Minerals held by Investors and is willing to exchange the interests it acquires in the Royalty Properties and related land records (herein the interests acquired by Middle Bay in the Royalty Properties will be sometimes referred to as the "Royalty Interests") with FOC for the Minerals owned by FOC in the Floyd Programs (other than the interests owned by FOC in the Royalty Properties) in transactions qualifying for nonrecognition of gain or loss under Internal Revenue Code 1986 (as amended "Code") Section 1031 and the Regulations published thereunder; NOW, THEREFORE, in consideration of the foregoing, the parties agree as follows: DEFINITIONS: "ACQUIRED FLOYD PROGRAM ASSETS" means all right, title, and interest in and to all of the Minerals (except for the interest owned in the Royalty Properties) owned by FOC as of the Closing Date, consisting of all of its (a) real property mineral interests, leaseholds and subleaseholds therein, improvements, fixtures, and fittings thereon, and easements, rights-of-way, and other appurtenants thereto, land records and data (except for the land records and other records pertaining to the Royalty Properties), (b) leases, subleases, and rights thereunder; and (c) all oil and gas properties and hydrocarbons (except for the interest in the Royalty Properties) owned by FOC and connected with the Floyd Programs. "AFFILIATE" means with respect to FOC, Floyd Operating Company, Floyd Equity IV Corporation, Floyd IV Corporation and Alexander G. Floyd. With respect to Middle Bay, Affiliate has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act. "ASSUMED LIABILITIES" means all Liabilities and obligations of FOC or its Affiliates connected with or incurred in connection with the Acquired Floyd Program Assets or Other Assets including obligations incurred under contracts, leases, licenses, and other arrangements connected with the Acquired Floyd Program Assets or Other Assets either (i) to furnish goods, services, and other non-cash benefits to another party either before or after the Closing or (ii) to pay for goods, services, and other non-cash benefits that another party furnishes either before or after the Closing. "CLOSING DATE" has the meaning set forth in Section 2.1 below. "EFFECTIVE DATE" means January 1, 1999. "GOOD TITLE" means the title to the property shall be acceptable to a prudent and careful purchaser of oil and gas properties, giving consideration to the nature of the properties being purchased in the particular transaction and the nature of the transaction. "INTELLECTUAL PROPERTY" means those items related to the Acquired Floyd Program Assets consisting of: (a) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (b) all geophysical data, seismic data, trade secrets and confidential business information, (c) computer software (including data and related documentation), (d) copies and tangible embodiments thereof (in whatever form or medium) other than any Intellectual Property associated with or connected with the name Floyd Oil Company or Alexander G. Floyd. "KNOWLEDGE" with respect to any party means actual knowledge of the officer making such representation which presumes reasonable investigation by such officer prior to making such representation. "LIABILITY" means any liability whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due, including any liability for Taxes. "MINERALS" means an interest in oil and gas leases, permits, contracts, licenses, other agreements and interests derived therefrom including without limitation working, overriding royalty, net profits interests or other interest or right in and to oil, gas and other minerals including those derived from pooling or unitization of property, fee minerals, royalty or any other interests in oil, gas and other minerals whether similar or dissimilar. "OTHER ASSETS" means those assets owned by FOC (other than the Acquired Floyd Program Assets and Royalty Properties) including: (a) tangible personal property and fixtures used or obtained in connection with such assets and easements and rights of way connected with the production, treatment, sale or disposal of hydrocarbons or water produced therefrom including but not limited to wells, tanks, lease equipment, salt water dispersal systems, water flood facilities, gathering systems, compressor facilities, electric service systems and other equipment; (b) the rights and obligations existing under the contracts and agreements that benefit or burden the Acquired Floyd Program Assets including but not limited to operating agreements, tax partnership agreements, unitization agreements, pooling agreements, declarations of pooling or unification, farmout agreements, assignments, gas sale contracts and gas processing agreements; (c) the oil, gas, casinghead gas, condensate, distillate and other liquid hydrocarbons produced from the Acquired Floyd Program Assets, products manufactured and refined therefrom and the accounts and proceeds from the sale thereof and claims for the payment thereby to the extent accrued after the Closing; and (d) Intellectual Property, goodwill associated therewith, licenses and sublicenses granted and obtained with respect thereto, and rights thereunder, remedies against infringements thereof, and rights to protection of interests therein under the laws of all jurisdictions; (e) agreements, contracts, office leases in Texas, indentures, mortgages, instruments, Security Interests, guaranties, other similar arrangements, oil and gas purchase agreements and rights thereunder, (f) accounts, notes, and other receivables relating to the Acquired Floyd Program Assets, (g) claims, including claims for nonpayment of royalties, deposits, prepayments, refunds, causes of action, choses in action, rights of recovery, rights of set off, and rights of recoupment (including any such item relating to the payment of Taxes), (h) franchises, approvals, permits, licenses, orders, registrations, certificates, variances, and similar rights obtained from governments and governmental agencies, (i) the stock of Floyd Operating Company (j) limited partnership interest in Llaves Gavilan, Ltd., and (k) books, records, ledgers, files, documents, correspondence, lists, plats, architectural plans, drawings, and specifications, studies, reports, and other printed or written materials; PROVIDED, HOWEVER, that the Other Assets shall not include (i) the Floyd Oil Company name, the corporate charter, qualifications to conduct business as a foreign corporation, arrangements with registered agents relating to foreign qualifications, taxpayer and other identification numbers, seals, minute books, stock transfer books, blank stock certificates, and other documents relating to the organization, maintenance, and existence of FOC as a corporation; (ii) the assets listed on Exhibit "A" hereto; and (iii) any of the rights of FOC under this Agreement (or under any side agreement between FOC on the one hand and Middle Bay on the other hand entered into on or after the date of this Agreement). "SECURITY INTEREST" means any mortgage, pledge, lien, encumbrance, charge, or other security interest, OTHER THAN (a) mechanic's, materialmen's, and similar liens, (b) liens for Taxes not yet due and payable or for Taxes that the taxpayer is contesting in good faith through appropriate proceedings, (c) purchase money liens and liens securing rental payments under capital lease arrangements, and (d) other liens arising in the ordinary course of business and not incurred in connection with the borrowing of money. "TAX" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code Section 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. ARTICLE I EXCHANGE & OTHER CONSIDERATION 1.1 PRELIMINARY TRANSACTIONS. After acquisition of the interests held by Investors, Middle Bay and FOC agree to liquidate the partnerships shown in Exhibit "B" so that Middle Bay will obtain title to all of the Royalty Interests and as of the Closing Date Middle Bay will own the Royalty Interests outright as real estate Minerals. 1.2 EXCHANGE. At the Closing, FOC will exchange the Minerals it owns in the Floyd Programs (described in the conveyance attached as Exhibit "C"), and any other interests it may own in the Floyd Programs (except for its interest in the Royalty Properties), with Middle Bay in exchange for the Royalty Interests (described in the conveyance attached as Exhibit "D"). It is the intent of the Parties hereto that, such exchange will be structured so the exchange of the Acquired Floyd Program Assets for the Royalty Interests will qualify for nonrecognition treatment under the provisions of Section 1031 of the Code and the parties hereto will reasonably cooperate in executing such documents and consistent with the provisions of this Agreement take such actions as are necessary or appropriate to qualify such exchange under Section 1031 of the Code. 1.3 CONSIDERATION FOR OTHER ASSETS AND ADDITIONAL CONSIDERATION. (a) At the Closing Middle Bay will assume the Assumed Liabilities and pay FOC $85,000 for the Other Assets. (b) Middle Bay shall also pay, as Additional Consideration for the Acquired Floyd Program Assets an amount equal to the income or revenue from the Royalty Properties from the Effective Date through the Closing, less the amounts previously distributed to FOC from the income or revenues earned from the interests owned by FOC in the Floyd Programs from the Effective Date through the Closing less the amount paid for the Other Assets. Such amount shall be computed and paid as of the Closing Date and adjusted as provided in Paragraph VI(b). A draft of the Closing Statement which has been estimated as of the date of this Agreement is attached as Exhibit "E". (c) Middle Bay will pay FOC $90,000 at Closing to compensate FOC for expenditures it will incur in connection with the Closing in excess of those assumed by Middle Bay hereunder. ARTICLE II CLOSING 2.1 CLOSING. The Closing of the exchange contemplated herein shall be held in the offices of the Escrow Agent, Porter & Hedges, L.L.P., 700 Louisiana, Suite 3500, Houston, Texas 77002-2764 on or before November 30, 1999 ("Closing Date") or at such other time and at such other location as the parties hereto shall agree in writing. 2.2 DELIVERIES AT CLOSING. At the Closing, (i) FOC will deliver to Middle Bay the various certificates, instruments, and documents referred to in Paragraph VI(a) below; (ii) Middle Bay will deliver to FOC the various certificates, instruments, and documents referred to in Paragraph VI (b) below; (iii) Middle Bay and FOC will execute, acknowledge (if appropriate), and deliver to the other: assignments (including real property and lease transfer documents, division orders, letters in lieu and any other instruments reasonably requested by the other). 2.3 DELIVERIES FOLLOWING CLOSING. Middle Bay agrees to promptly remit and deliver to FOC any payments Middle Bay receives which are derived from the Royalty Properties whether such payment is derived from production which occurred before or after the Effective Date. FOC agrees to promptly remit and deliver to Middle Bay any payments FOC receives which are derived from the Minerals (other than Royalty Properties) whether such payment is derived from production which occurred before or after the Effective Date. ARTICLE III REPRESENTATIONS AND WARRANTIES OF MIDDLE BAY 3.1 REPRESENTATIONS AND WARRANTIES OF MIDDLE BAY. Middle Bay represents and warrants to FOC that the statements contained in this Article III are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Article III), except as set forth in Middle Bay's disclosure schedule accompanying this Agreement (which may be amended up to the date of Closing) and initialed by the Parties. (a) ORGANIZATION OF MIDDLE BAY. Middle Bay is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation and is qualified to do business in each state where the operation of its business or the ownership of its assets requires such qualification. (b) AUTHORIZATION OF TRANSACTION. Middle Bay has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder. Without limiting the generality of the foregoing, the board of directors of Middle Bay has duly authorized the execution, delivery, and performance of this Agreement by Middle Bay. This Agreement constitutes the valid and legally binding obligation of Middle Bay, enforceable in accordance with its terms and conditions. (c) NONCONTRAVENTION. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby (including the assignments and assumptions referred to in Article II above), will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Middle Bay or any of its Affiliates is subject or any provision of the charter or bylaws of Middle Bay or its Affiliates or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which Middle Bay or its Affiliates is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Security Interest upon any of its assets). Neither Middle Bay nor any of its Affiliates needs to give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order for the Parties to consummate the transactions contemplated by this Agreement (including the assignments and assumptions referred to in Article II above). (d) BROKERS' FEES. Middle Bay has no Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement for which FOC could become liable or obligated. Any obligation Middle Bay has to pay any amounts to Premier Capital, Limited shall be assumed by and paid by Middle Bay. (e) TITLE TO ASSETS. On the Closing Date Middle Bay will own Good Title to the Royalty Interests, free and clear of all Security Interests. Middle Bay has the power to convey Good Title to the Royalty Interests to FOC, free and clear of any Security Interest, encumbrance or restriction on transfer. (f) REAL PROPERTY. With respect to the Royalty Interests, to the best Knowledge of Middle Bay: (A) Middle Bay has acquired and has Good Title to the Royalty Interests, free and clear of any Security Interest, easement, covenant, production sales commitments (other than has been disclosed to FOC) or other restriction, except for Taxes or charges not yet delinquent and recorded easements, covenants, and other restrictions which do not impair the current use of the property; (B) there are no pending or threatened condemnation proceedings, lawsuits, or administrative actions relating to the Royalty Interests or other matters affecting the current use, or value thereof; (C) the legal description for the Royalty Interests contained in Exhibit "C" and the deed conveying such Royalty Interests to FOC describes such parcel fully and adequately; and (D) all operations on the Royalty Interests have received all approvals of governmental authorities (including licenses and permits) required in connection with the ownership or operation thereof and have been operated and maintained in accordance with applicable laws, rules, and regulations. (g) ENVIRONMENT, HEALTH, AND SAFETY. With respect to the Royalty Interests being conveyed hereunder, to the best Knowledge of Middle Bay, Middle Bay and its Affiliates have complied with all Environmental, Health, and Safety Laws, and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or notice has been filed or commenced against any of them alleging any failure so to comply. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF FOC 4.1 REPRESENTATIONS AND WARRANTIES OF FOC. FOC represents and warrants to Middle Bay that the statements contained in this Article IV are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Article IV) except as set forth in FOC's disclosure schedule accompanying this Agreement (which may be amended up to the date of Closing) and initialed by the Parties. (a) ORGANIZATION OF FOC. FOC is a corporation duly organized, validly existing, and in good standing under the laws of the State of Texas and is qualified to do business in each state where the operation of its business or the ownership of its assets requires such qualification. (b) AUTHORIZATION OF TRANSACTION. FOC has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder. The board of directors of FOC has duly authorized the execution, delivery and performance of this Agreement by FOC. This Agreement constitutes the valid and legally binding obligation of FOC, enforceable in accordance with its terms and conditions. (c) NONCONTRAVENTION. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby (including the assignments and assumptions referred to in Article II above), will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which FOC is subject or any provision of its charter or bylaws or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which FOC is a party or by which it is bound or to which any of its assets is subject. FOC does not need to give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order for the Parties to consummate the transactions contemplated by this Agreement (including the assignments and assumptions referred to in Article II above). (d) BROKERS' FEES. FOC has no Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement for which Middle Bay could become liable or obligated. (e) TITLE TO ASSETS. FOC acquired Good Title to the Minerals being conveyed to Middle Bay hereunder which are described in Exhibit "C" attached hereto. (f) REAL PROPERTY. With respect to such Minerals, to the best Knowledge of FOC: (A) On the Closing Date FOC will own Good Title to such Minerals free and clear of any Security Interest, easement, covenant, production sales commitment or other restriction, except for Taxes or charges not yet delinquent and recorded easements, covenants, and other restrictions which do not impair the current use of the property; (B) there are no pending or threatened condemnation proceedings, lawsuits, or administrative actions relating to such Minerals or other matters materially affecting the current use, or value thereof; (C) the legal description for such Minerals contained in Exhibit "D" and the Conveyance transferring such Minerals to Middle Bay describes such Minerals fully and adequately; and (D) all material operations on such Minerals have received all approvals of governmental authorities (including licenses and permits) required in connection with the ownership or operation thereof and have been operated and maintained in accordance with applicable laws, rules, and regulations. (g) ENVIRONMENTAL HEALTH AND SAFETY. To the best Knowledge of FOC and its Affiliates with respect to the Minerals being conveyed by FOC hereunder, FOC and its Affiliates have complied with all Environmental, Health, and Safety Laws, and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or notice has been filed or commenced against any of them alleging any failure so to comply. Without limiting the generality of the preceding sentence, each of FOC and its Affiliates has obtained and been in compliance with all of the terms and conditions of all permits, licenses, and other authorizations which are required under, and has complied with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules, and timetables which are contained in, all Environmental, Health, and Safety Laws. (h) DISCLAIMER OF IMPLIED WARRANTIES OF FITNESS OF OTHER ASSETS. FOC MAKES NO WARRANTY AS TO THE FITNESS FOR A PARTICULAR PURPOSE OF ANY OF THE PERSONAL PROPERTY OR FIXTURES BEING CONVEYED HEREUNDER. SUCH PROPERTY IS BEING CONVEYED "AS IS" AND "WHERE IS" WITH NO EXPRESS OR IMPLIED WARRANTIES FOR FITNESS OR MERCHANTABILITY. (i) DISCLAIMER OF WARRANTIES AS TO RESERVES OR PRODUCTION RATES. FOC makes no representation or warranty as to the reserves contained in the Floyd Programs or rates of production from such Acquired Floyd Program Assets. ARTICLE V COVENANTS 5.1 PRE-CLOSING COVENANTS. The Parties agree as follows with respect to the period between the execution of this Agreement and the Closing and, if applicable, following Closing: (a) GENERAL. Each of the Parties will use its best efforts to take all action and to do all things necessary in order to consummate and make effective the transactions contemplated by this Agreement including satisfaction, but not waiver, of the closing conditions set forth in Article VII below. (b) NOTICES, CONSENTS AND FILINGS. Each of the Parties will give any notices to, make any filings with, and use its reasonable best efforts to obtain any authorizations, consents, and approvals of governments and governmental agencies in connection with the matters referred to in Paragraph III(c) and Paragraph IV(c) above. Middle Bay will file any Notification and Report Forms and related material that it may be required to file with the Federal Trade Commission and the Antitrust Division of the United States Department of Justice under the Hart-Scott-Rodino Act, will use its reasonable best efforts to obtain an early termination of any applicable waiting period, and will make any further filings pursuant thereto and any filings of conveyance documents that may be necessary in connection therewith. Middle Bay, at its own expense, will record all conveyancing documents referenced herein and deliver copies of the recorded conveyancing documents transferring the Royalty Interests. (c) OPERATION OF BUSINESS. FOC will not (and will not cause or permit any of its Affiliates to) engage in any practice, take any action, or enter into any transaction outside the ordinary course of business. FOC will not declare, set aside or make any distributions to its shareholders of the Acquired Floyd Program Assets or Other Assets. (d) PRESERVATION OF BUSINESS. FOC will keep (and will cause each of its Affiliates to keep) its business and properties substantially intact, including its present operations, physical facilities, working conditions, and relationships with lessors, licensors, suppliers, customers, and employees. (e) FULL ACCESS. FOC will permit (and will cause each of its Affiliates to permit) representatives of Middle Bay to have access during normal business hours, and in a manner so as not to interfere with the normal business operations of FOC and its Affiliates to all premises, properties, personnel, books, records (including Tax records), contracts, and documents of or pertaining to FOC and its Affiliates. (f) NOTICE OF DEVELOPMENTS. Each Party will give prompt written notice to the other Party of any material adverse development causing a breach of any of its own representations and warranties in Article III and Article IV above. (g) EXCLUSIVITY. FOC will not (and FOC will not cause or permit any of its Affiliates to) (i) solicit, initiate, or encourage the submission of any proposal or offer from any Person relating to the acquisition of the stock of FOC, the Acquired Floyd Program Assets or the Other Assets (including any acquisition structured as a merger, consolidation, or share exchange) or (ii) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in, or facilitate in any other manner any effort or attempt by any Person to do or seek any of the foregoing. FOC will notify Middle Bay if any Person makes any proposal, offer, inquiry, or contact with respect to any of the foregoing. (h) EMPLOYMENT AND SEVERANCE AGREEMENTS. Middle Bay shall have offered employment in Houston to all current Houston based employees of FOC (other than Alex Floyd) on terms relating to base salary no less favorable than their current employment terms. In the event any FOC employee (who has been employed by FOC for at least five years as of the Closing Date) is terminated by Middle Bay without cause during the first twelve months of employment by Middle Bay, such employee shall be paid for the balance of the twelve month period. Any FOC employee (who had not been employed by FOC for at least five years as of the Closing Date) who is terminated by Middle Bay without cause during the first six months shall be paid for the balance of the six month period. (i) TRANSITION ITEMS. Middle Bay shall provide assistance and employ such consultants as necessary to assist FOC with filing required tax returns for 1999 (federal and state income and franchise tax returns) for the Floyd Programs, FOC, Floyd Employees Trust and Alexander G. Floyd and to assist FOC and its affiliates and Middle Bay in insuring that payments for Minerals comprising the Acquired Floyd Program Assets and the Royalty Interests are made to the proper owners following Closing. ARTICLE VI CONDITIONS TO CLOSING (a) CONDITIONS TO OBLIGATION OF MIDDLE BAY. The obligation of Middle Bay to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (i) the representations and warranties of FOC set forth in Article IV above shall be true and correct in all material respects at and as of the Closing Date; (ii) FOC shall have performed and complied with all of its covenants hereunder in all material respects through the Closing; (iii) no action, suit, or proceeding shall be pending before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction wherein an unfavorable injunction, judgment, order, decree, ruling, or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement, (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation or (C) affect adversely the right of Middle Bay to own the Acquired Floyd Program Assets or Other Assets; (iv) FOC shall have delivered to Middle Bay a certificate to the effect that each of the conditions specified above in Paragraph VI(a)(i)-(iii) is satisfied in all respects; (v) all applicable waiting periods, if any, under the Hart-Scott-Rodino Act shall have expired or otherwise been terminated and FOC and Middle Bay shall have received all other authorizations, consents, and approvals of governments and governmental agencies referred to in Articles III and IV; (vi) Middle Bay shall have received from counsel to FOC, dated as of the Closing Date, an opinion in form and substance as to the existence and good standing of FOC and as to the enforceability of this Agreement on FOC; (vii) all actions to be taken by FOC in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to Middle Bay; (viii) Middle Bay shall have completed its due diligence, the results of which will be satisfactory to Middle Bay in its sole discretion; and (ix) Alex Floyd shall have executed a stock power to Middle Bay transferring all issued and outstanding shares of Floyd Operating Company to Middle Bay. The Buyer may waive any condition specified in this Paragraph VI(a) if it executes a writing so stating at or prior to the Closing. (b) CONDITIONS TO OBLIGATION OF FOC. The obligation of FOC to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (i) the representations and warranties of Middle Bay set forth in Article III above shall be true and correct in all material respects at and as of the Closing Date; (ii) Middle Bay shall have performed and complied with all of its covenants hereunder in all material respects through the Closing; (iii) Middle Bay shall have acquired 100% of the beneficial interests in the Floyd Programs from the Investors (other than FOC) and shall have obtained 100% of the Royalty Interests. Middle Bay shall have completed the liquidation of any entity holding the Royalty Interests and shall own Good Title in such Royalty Interest; (iv) no action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling, or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement, (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation or (C) affect adversely the right of FOC to own the Royalty Properties; (v) Middle Bay shall have delivered a release and indemnity agreement, in form and substance satisfactory to FOC and its counsel, holding FOC, its officers, directors and shareholders harmless from any liability or cause of action relating to the Assumed Liabilities or which occurred in connection with, or because of the ownership of the Acquired Floyd Program Assets, the Other Assets or the Floyd Programs prior to the Closing ("Released Claims"). The agreement will indemnify the released parties for any expense, charge or cost incurred by any of them for Released Claims; (vi) Middle Bay shall have provided FOC with evidence of its compliance with the provisions of Paragraph V(h); (vii) Middle Bay and FOC will have approved a method to provide that the amounts due to Middle Bay from the receipts of production from the Acquired Floyd Program Assets which have occurred since the September 1999 distribution to the Investors plus any suspended revenues or unexpended amounts withheld by FOC from the September 1999 distribution, except for agreed upon amounts for future contingencies, are computed and paid to Middle Bay at Closing in accordance with the statement prepared as of the date of Closing attached as Exhibit "E"; (viii) Middle Bay and FOC shall have approved a method to provide that any adjustments to the amounts due FOC as Additional Consideration are paid to FOC within sixty (60) days of Closing; (ix) Middle Bay shall have delivered to FOC a certificate to the effect that each of the conditions specified above in paragraph VI(b)(i)-(viii) is satisfied in all respects; (x) FOC shall have received from counsel to Middle Bay an opinion in form and substance as to the existence, good standing and enforceability of this Agreement upon Middle Bay dated as of the Closing Date; (xi) FOC shall have received from its counsel a tax opinion as to the applicability of Section 1031 of the Internal Revenue Code to this transaction in form and substance satisfactory to FOC; and (xii) all actions to be taken by Middle Bay in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, conveyances, and other documents required to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to FOC. FOC may waive any condition specified in this Paragraph VI(b) if it executes a writing so stating at or prior to the Closing. VII TERMINATION (a) TERMINATION OF AGREEMENT. The Parties may terminate this Agreement as provided below: (i) Middle Bay and FOC may terminate this Agreement by mutual written consent at any time prior to the Closing; (ii) Middle Bay may terminate this Agreement by giving written notice to FOC on or before Closing, if Middle Bay is not reasonably satisfied with the results of its continuing business, legal, and accounting due diligence regarding FOC, the Floyd Programs or its Affiliates; (iii) Middle Bay may terminate this Agreement by giving written notice to FOC at any time prior to the Closing (A) in the event FOC has breached any material representation, warranty, or covenant contained in this Agreement in any material respect, Middle Bay has notified FOC of the breach, and the breach has continued without cure for a period of 15 days after the notice of breach or (B) if the Closing shall not have occurred on or before November 30, 1999, by reason of the failure of any condition precedent under Paragraph VI(a) hereof (unless the failure results primarily from Middle Bay itself breaching any representation, warranty, or covenant contained in this Agreement); and (iv) FOC may terminate this Agreement by giving written notice to Middle Bay at any time prior to the Closing (A) in the event Middle Bay has breached any material representation, warranty, or covenant contained in this Agreement in any material respect, FOC has notified Middle Bay of the breach, and the breach has continued without cure for a period of 15 days after the notice of breach or (B) if the Closing shall not have occurred on or before November 30, 1999, by reason of the failure of any condition precedent under Paragraph VI(b) hereof (unless the failure results primarily from FOC itself breaching any representation, warranty, or covenant contained in this Agreement). (b) EFFECT OF TERMINATION. If any Party terminates this Agreement pursuant to Paragraph VII(a) above, all rights and obligations of the Parties hereunder shall terminate without any Liability of any Party to any other Party (except for any Liability of any Party then in breach) provided, however, upon termination of this Agreement Middle Bay shall pay the expenses stated in Paragraph VIII (l). ARTICLE VIII MISCELLANEOUS (a) TERMINATION OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Parties contained in this Agreement shall not survive the Closing hereunder. (b) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue any press release or make any public announcement relating to the subject matter of this Agreement prior to the Closing without the prior written approval of the other Party; PROVIDED, HOWEVER, that any Party may make any public disclosure it believes in good faith is required by applicable law or any listing or trading agreement concerning its publicly-traded securities (in which case the disclosing Party will use its reasonable best efforts to advise the other Party prior to making the disclosure). (c) NO THIRD PARTY BENEFICIARIES. This Agreement shall not confer any rights or remedies upon any person other than the Parties and their respective successors and permitted assigns. (d) ENTIRE AGREEMENT. This Agreement (including the documents referred to herein) constitutes the entire agreement between the Parties and supersedes any prior understandings, agreements, or representations by or between the Parties, written or oral, to the extent they related in any way to the subject matter hereof. (e) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other Party; PROVIDED, HOWEVER, that Middle Bay may (i) assign any or all of its rights and interests hereunder to one or more of its Affiliates and (ii) designate one or more of its Affiliates to perform its obligations hereunder (in any or all of which cases Middle Bay nonetheless shall remain responsible for the performance of all of its obligations hereunder). (f) COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. (g) HEADINGS. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. (h) NOTICES. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given two business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO FOC: COPY TO: Floyd Oil Company Edward E. Hartline Attn: Alexander G. Floyd Brown McCarroll & Oaks Hartline St. Mary's Place 1300 Wortham Tower 879-B Washington Street 2727 Allen Parkway Raleigh, North Carolina 27605 Houston, Texas 77019-2100 IF TO MIDDLE BAY: COPY TO: Middle Bay Oil Company, Inc. David S. Elkouri Attn: Floyd C. Wilson Hinkel Elkouri Law Firm, L.L.C. 5910 North Central Expressway 2000 Epic Center Suite 1150 301 North Main Street Dallas, Texas 75206 Wichita, Kansas 67202-4820 Any Party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Party notice in the manner herein set forth. (i) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Texas without giving effect to any choice or conflict of law provision or rule that would cause the application of the laws of any jurisdiction other than the State of Texas. (j) AMENDMENTS AND WAIVERS. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by Middle Bay and FOC. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. (k) SEVERABILITY. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. (l) EXPENSES. All of the reasonable expenses of FOC related to this Agreement and the transactions contemplated hereby will be paid by Middle Bay at Closing or in the event the Closing does not occur such expenses shall be paid by December 1, 1999. In addition, if Closing does occur, Middle Bay will assist FOC in preparing the 1999 tax returns of FOC, Floyd Employees Trust, Floyd IV Corporation, Floyd Equity IV Corporation, Floyd Canyon, Inc. and Alexander G. Floyd, the final tax returns for the partnerships in the Floyd Programs and final reports to the investors in the Floyd Programs and either pay for or reimburse FOC for the reasonable costs incurred in preparing such tax returns and reports. Middle Bay shall be responsible for its own costs and expenses. (m) CONSTRUCTION. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean including without limitation. The Parties intend that each representation, warranty, and covenant contained herein shall have independent significance. If any Party has breached any representation, warranty, or covenant contained herein in any respect, the fact that there exists another representation, warranty, or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the Party has not breached shall not detract from or mitigate the fact that the Party is in breach of the first representation, warranty, or covenant. (n) INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. (o) SUBMISSION TO JURISDICTION. Each of the Parties submits to the jurisdiction of any state or federal court sitting in Houston, Texas, in any action or proceeding arising out of or relating to this Agreement and agrees that all claims in respect of the action or proceeding may be heard and determined in any such court. Each party also agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court. (p) USAGE OF NAME. Middle Bay agrees not to use the names "Floyd Oil Company" or "Floyd" in its business activities and to expeditiously remove the names "Floyd Oil Company" or "Floyd" from any Acquired Floyd Program Assets or Other Assets. THE BALANCE OF THIS PAGE WAS INTENTIONALLY LEFT BLANK. EXECUTED EFFECTIVE, the date herein first above written. Middle Bay Oil Company, Inc. By /s/ Floyd C. Wilson Floyd C. Wilson, President Floyd Oil Company By /s/ Alexander G. Floyd Alexander G. Floyd, President EXHIBIT A ASSETS RETAINED BY FOC All real estate owned by FOC in North Carolina. All personal property located in the FOC office at St. Mary's Place, 879-B Washington Street, Raleigh, North Carolina. All land and other records pertaining to the Royalty Properties.* All financial and income tax records (federal and state) pertaining to FOC.* All Interest in Royalty Properties owned by FOC. All cash on hand of FOC not conveyed in accordance with the terms of this Agreement. *Any records which are the property of FOC which remain in Middle Bay offices following the Closing will be maintained by Middle Bay for four years following Closing. Prior to destroying any of FOC's records, Middle Bay will give FOC notice of such intention and at least sixty (60) days to claim such records. EXHIBIT B PARTNERSHIPS TO BE LIQUIDATED Cheyenne Partners, Ltd. Cheyenne Partners II, Ltd. Cheyenne Partners III - TNE, Ltd. Cheyenne Partners III - MM, Ltd. Cheyenne Partners IV, Ltd. Cheyenne Partners V, Ltd. Floyd Equity Partners Program, Ltd. Floyd Equity Partners Program II, Ltd. Floyd Equity Partners Program III, Ltd. Floyd Equity Partners III-TNE, Ltd. Floyd Equity Partners Program IV, Ltd. Floyd Equity Partners V, Ltd. CCHub Partnership, Ltd. Floyd Canada Ojitos Partners EXHIBIT C CONVEYANCE AND DESCRIPTION OF MINERALS OWNED BY FOC BEING CONVEYED TO MIDDLE BAY EXHIBIT D CONVEYANCE AND DESCRIPTION OF ROYALTY INTERESTS BEING CONVEYED TO FOC BY MIDDLE BAY EXHIBIT "E" FLOYD OIL COMPANY / MIDDLE BAY OIL COMPANY, INC. DRAFT OF CLOSING STATEMENT EFFECTIVE DATE: JANUARY 1, 1999 CLOSING DATE: NOVEMBER 23, 1999 AMOUNTS DUE TO FLOYD OIL COMPANY Consideration For Other Assets (Paragraph 1.3(a)) $ 85,000 Additional Consideration For Acquired Floyd Program Assets (Paragraph 1.3(b)) 1999 Net Operating Income From Royalty Properties Through August 1999 Cash Receipts 1,179,585 FOC's Share of NOI from Interests Under Cheyenne Programs (424,829) Net Operating Income Due To Floyd Oil Company 754,756 Development Costs Incurred By FOC Through August 1999 79,664 G & A costs Incurred By FOC Through August 1999 26,020 Less Amount Per Exchange Agreement (85,000) --------- 775,440 Consideration For Expenditures To Be Incurred (Paragraph 1.3(c)) 90,000 ----------- 950,440 ----------- AMOUNTS DUE FROM FLOYD OIL COMPANY Net Cash Flow From Non-Royalty Properties For Sept & Oct 1999 New Operating Income ($2,206,893 and $2,641,288) 4,848,181 Development Costs ($589,878 and $564,647) (1,154,525) Tax Adjustments (218,126) --------- 3,475,530 G & A Expense Estimates Withheld From Sept 1999 Distribution 555,816 ----------- 4,031,346 ----------- NET DUE TO (FROM) FLOYD OIL COMPANY AT CLOSING $(3,080,905) ----------- -----------
DISCLOSURE SCHEDULE BY MIDDLE BAY NONE DISCLOSURE SCHEDULE FLOYD OIL COMPANY LITIGATION AND POTENTIAL LEGAL CLAIMS EAST ROANOKE FIELD, JEFFERSON DAVIS PARISH, LOUISIANA Floyd Oil Company, et al vs. James M. Wessel, et al, Docket No. C-731-95, District Court of Jefferson Davis Parish,Louisiana. Floyd, et al is the Plaintiff in a quiet title action to the drillsite tract for the Brieske #1 well (HBY RA SUB). We also filed damage claims against Wessel for breach of faith, tortuous interference and bad faith dealings. We have entered into an agreement with Wessel to settle this litigation which would result in a $10,000 payment to him. RACELAND FIELD, LAFOURCHE PARISH, LOUISIANA 4C's Inc., et al vs. Floyd Oil Company, et al, Docket No. 84623, 17th Judicial Court, Lafourche Parish, Louisiana. The surface owner has claimed we do not have ingress and egress to the Sabine #2 & 4 wells and Floyd, as well as the prior owner Torch, and the pumpers have been trespassing on and damaging the land. SLEEPING HOLLOW FIELD, RED WILLOW COUNTY, NEBRASKA We are seeking the removal of the Operator, Central Operating Inc., of the Reagan and Lansing Units. We have retained Mr. Brian Tooley of Welborn Sullivan Meck & Tooley to represent us. FULLERTON FIELD, ANDREWS COUNTY, TEXAS Floyd, et al owns 100% working interest in the University 10 & 11 leases in Sections 10 & 11, Block 13, University Lands Survey, Andrews County, Texas. These leases are subject to a 10.9375% overriding royalty on "primary production" which escalates to a 21.875% overriding royalty if "secondary recovery" operations are initiated. Gulf originally reserved said ORRI which vested in Chevron and was sold to ICA Energy, Inc., effective June 1, 1999. ICA has claimed that secondary recovery operations have occurred on the offsetting Exxon Clearfork Unit which have caused escalation of the ORRI burdening our lease. We deny this allegation but have been negotiating with ICA for them to exchange their ORRI for a working interest so we can work towards jointly developing this property. We have verbally agreed to terms with ICA to settle the ownership issue and jointly develop the property. However, we have now received a letter from Chevron also claiming escalation of the ORRI and requesting an accounting be made of royalty owed Chevron as a result of secondary operations by Exxon on the adjacent lease. Chevron estimates that it is owed approximately $284,238.41 plus interest. Our deal with ICA is contingent on them obtaining a waiver of this issue from Chevron. The minerals are subject in some cases to rights of first refusal and to a requirement to give notice of any transfer to a prior owner or lessor. ENVIRONMENTAL ISSUES TOBORG FIELD, PECOS COUNTY, TEXAS The property has significant volumes of oil and saltwater impacted surface soil located around tank batteries, water injuection pumps, lease roads and flow line rights-of-way; three unlined "emergency" pits in service on the Toborg, Tippett "E" and Tippett "C" tank batteries, and many of the injection wells have annulus open to the atmosphere. This property was sold effective December 1, 1999. RACELAND FIELD, LAFOURCHE PARISH, LOUISIANA Reserve pits with elevated levels of barium remain open in the wetlands at the three well locations. Wells are registered with the state for the elevated levels of NORM scale they produce. SOUTHEAST VELMA SIMS / HUMPHREY UNITS, CARTER COUNTY, OKLAHOMA The Velma Camp Deese Unit injection wells cause casing collapse problems with the adjacent Southeast Velma Sims and Humphrey's producing wells. The Velma Camp Deese Unit operated by Phoenix Petro Corp. overlies our Sims and Humphrey units. This could cause an adverse impact on the ground water resources. SLEEPY HOLLOW FIELD, RED WILLOW COUNTY, NEBRASKA The two waterflood units have approximately 100 temporarily abandoned wellbores which need to be plugged and abandoned. In addition, 60 well sites require some measure of surface restoration and two large unlined pits registered with the state remain open for emergency overflows. STUART CITY FIELD, LASALLE COUNTY, TEXAS Reportedly, while drilling through the Olmos formation, hydrogen sulfide was noted. The condition could have occurred from causing leaks in the Edwards producing wells in the area. APACHE FEDERAL LEASE, RIO ARRIBA COUNTY, NEW MEXICO Unlined produced water evaporated / percolation pits located adjacent to the production units at each well location remain in service and are void of protective bird netting. Some pits are located within the Expended Vulnerable Area which the BLM has informed us to close. Reference is also hereby made to the environmental study by Hinds and Associates a copy of which is attached hereto. EX-10.1 3 EXHIBIT 10.1 Exhibit 10.1 RESTATED CREDIT AGREEMENT AMONG MIDDLE BAY OIL COMPANY, INC., ENEX RESOURCES CORPORATION AND MIDDLE BAY PRODUCTION COMPANY, INC. AS BORROWERS, AND BANK ONE, TEXAS, N.A. AND THE INSTITUTIONS NAMED HEREIN AS LENDERS, BANK ONE, TEXAS, N.A., AS ADMINISTRATIVE AGENT AND UNION BANK OF CALIFORNIA, N.A., AS SYNDICATION AGENT AND BANC ONE CAPITAL MARKETS, INC. AS ARRANGER NOVEMBER 23, 1999 $250,000,000 REVOLVING CREDIT TABLE OF CONTENTS
Page No. 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 2. Commitments of the Lender . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (a) Terms of Commitment. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (b) Procedure for Borrowing. . . . . . . . . . . . . . . . . . . . . . . . . 13 (c) Letters of Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (d) Procedure for Obtaining Letters of Credit. . . . . . . . . . . . . . . . 15 (e) Voluntary Reduction of Commitment. . . . . . . . . . . . . . . . . . . . 15 (f) Mandatory Commitment Reductions. . . . . . . . . . . . . . . . . . . . . 16 (g) Several Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 (h) Type and Number of Advances. . . . . . . . . . . . . . . . . . . . . . . 16 (i) Limited Liability of Enex and Production . . . . . . . . . . . . . . . . 16 3. Notes Evidencing Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (b) Issuance of Additional Notes . . . . . . . . . . . . . . . . . . . . . . 17 (c) Interest Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (d) Payment of Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (e) Payment of Principal . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (f) Payment to Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (g) Sharing of Payments, Etc.. . . . . . . . . . . . . . . . . . . . . . . . 18 (h) Non-Receipt of Funds by the Agent. . . . . . . . . . . . . . . . . . . . 18 4. Interest Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 (a) Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 (b) Interest Rate Determination. . . . . . . . . . . . . . . . . . . . . . . 20 (c) Conversion Option. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (d) Recoupment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5. Special Provisions Relating to Loans. . . . . . . . . . . . . . . . . . . . . 20 (a) Unavailability of Funds or Inadequacy of Pricing . . . . . . . . . . . . 20 (b) Change in Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (c) Increased Cost or Reduced Return . . . . . . . . . . . . . . . . . . . . 21 (d) Discretion of Lender as to Manner of Funding . . . . . . . . . . . . . . 23 (e) Breakage Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6. Collateral Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 7. Borrowing Base. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 (a) Initial Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . . 25 (b) Subsequent Determinations of Borrowing Base. . . . . . . . . . . . . . . 25 8. Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (a) Unused Commitment Fee. . . . . . . . . . . . . . . . . . . . . . . . . . 26 (b) The Letter of Credit Fee . . . . . . . . . . . . . . . . . . . . . . . . 27 (c) Agency Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 9. Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (a) Voluntary Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . 27 (b) Mandatory Prepayment For Borrowing Base Deficiency . . . . . . . . . . . 27 10. Representations and Warranties. . . . . . . . . . . . . . . . . . . . . . . . 28 (a) Creation and Existence.. . . . . . . . . . . . . . . . . . . . . . . . . 28 (b) Power and Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (c) Binding Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (d) No Legal Bar or Resultant Lien . . . . . . . . . . . . . . . . . . . . . 28 (e) No Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (f) Financial Condition. . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (g) Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (h) Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (i) Taxes; Governmental Charges. . . . . . . . . . . . . . . . . . . . . . . 29 (j) Titles, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (k) Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (l) Casualties; Taking of Properties . . . . . . . . . . . . . . . . . . . . 30 (m) Use of Proceeds; Margin Stock. . . . . . . . . . . . . . . . . . . . . . 30 (n) Location of Business and Offices . . . . . . . . . . . . . . . . . . . . 30 (o) Compliance with the Law. . . . . . . . . . . . . . . . . . . . . . . . . 30 (p) No Material Misstatements. . . . . . . . . . . . . . . . . . . . . . . . 31 (q) Not A Utility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 (r) ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 (s) Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . 31 (t) Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 (u) Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 31 (v) Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (w) Year 2000 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . 32 11. Conditions of Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 12. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 (a) Financial Statements and Reports . . . . . . . . . . . . . . . . . . . . 35 (b) Certificates of Compliance . . . . . . . . . . . . . . . . . . . . . . . 36 (c) Accountants' Certificate . . . . . . . . . . . . . . . . . . . . . . . . 36 (d) Taxes and Other Liens. . . . . . . . . . . . . . . . . . . . . . . . . . 36 (e) Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 37 (f) Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 (g) Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . 37 (h) Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 (i) Accounts and Records . . . . . . . . . . . . . . . . . . . . . . . . . . 38 (j) Right of Inspection. . . . . . . . . . . . . . . . . . . . . . . . . . . 38 (k) Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . 39 (l) ERISA Information and Compliance . . . . . . . . . . . . . . . . . . . . 39 (m) Environmental Reports and Notices. . . . . . . . . . . . . . . . . . . . 39 (n) Compliance and Maintenance . . . . . . . . . . . . . . . . . . . . . . . 39 (o) Operation of Properties. . . . . . . . . . . . . . . . . . . . . . . . . 40 (p) Compliance with Leases and Other Instruments . . . . . . . . . . . . . . 40 (q) Certain Additional Assurances Regarding Maintenance and Operations of Properties . . . . . . . . . . . . . . . . 41 (r) Sale of Certain Assets/Prepayment of Proceeds. . . . . . . . . . . . . . 41 (s) Title Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 (t) Curative Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 (u) Change of Principal Place of Business. . . . . . . . . . . . . . . . . . 42 (v) Cash Collateral Accounts . . . . . . . . . . . . . . . . . . . . . . . . 42 (w) Year 2000 Compatibility. . . . . . . . . . . . . . . . . . . . . . . . . 42 13. Negative Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 (a) Negative Pledge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 (b) Current Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 (c) Minimum Interest Coverage Ratio. . . . . . . . . . . . . . . . . . . . . 43 (d) Consolidations and Mergers . . . . . . . . . . . . . . . . . . . . . . . 44 (e) Debts, Guaranties and Other Obligations. . . . . . . . . . . . . . . . . 44 (f) Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 (g) Loans and Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 (h) Sale or Discount of Receivables. . . . . . . . . . . . . . . . . . . . . 45 (i) Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 (j) Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . 45 (k) Hedging Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 45 (l) Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 (m) Amendment to Articles of Incorporation or Bylaws . . . . . . . . . . . . 46 (n) Proceeds of Production . . . . . . . . . . . . . . . . . . . . . . . . . 46 (o) Issuance of Preferred Stock . . . . . . . . . . . . . . . . . . . . . . 46 (p) Amendments to and Redemption of Preferred Stock or Other Equity. . . . . 46 (q) Payment or Pre-Payment of Other Indebtedness . . . . . . . . . . . . . . 46 (r) Subordinated Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . 47 14. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 15. The Agent and the Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . 49 (a) Appointment and Authorization. . . . . . . . . . . . . . . . . . . . . . 49 (b) Note Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 (c) Consultation with Counsel. . . . . . . . . . . . . . . . . . . . . . . . 50 (d) Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 (e) Resignation or Removal of Agent. . . . . . . . . . . . . . . . . . . . . 51 (f) Responsibility of Agent. . . . . . . . . . . . . . . . . . . . . . . . . 51 (g) Independent Investigation. . . . . . . . . . . . . . . . . . . . . . . . 53 (h) Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 (i) Benefit of Section 15. . . . . . . . . . . . . . . . . . . . . . . . . . 53 (j) Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 (k) Assumption as to Payments. . . . . . . . . . . . . . . . . . . . . . . . 54 (l) Other Financings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 (m) Interests of Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . 54 (n) Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 16. Exercise of Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 17. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 18. Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 19. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 20. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 21. Invalid Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 22. Maximum Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 23. Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 24. Multiple Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 25. Conflict. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 26. Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 27. Parties Bound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 28. Assignments and Participations. . . . . . . . . . . . . . . . . . . . . . . . 58 29. Choice of Forum: Consent to Service of Process and Jurisdiction . . . . . . . 60 30. Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 31. Other Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 32. Financial Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
EXHIBITS Exhibit "A" - Notice of Borrowing Exhibit "B" - Note Exhibit "C" - Certificate of Compliance Exhibit "D" - 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 RESTATED CREDIT AGREEMENT THIS RESTATED CREDIT AGREEMENT (hereinafter referred to as the "Agreement") executed as of the 23rd day of November, 1999, by and between MIDDLE BAY OIL COMPANY, INC., an Alabama corporation ("Middle Bay"), ENEX RESOURCES CORPORATION, a Delaware corporation ("Enex") and MIDDLE BAY PRODUCTION COMPANY, INC., a Kansas corporation ("Production") (Middle Bay, Enex and Production are hereinafter collectively referred to as "Borrowers", and individually as a "Borrower") 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 "Lenders", and individually, "Lender") and Bank One, as Administrative Agent (the "Agent") and Union Bank of California, N.A., as Syndication Agent. W I T N E S S E T H: WHEREAS, as of March 27, 1998, Middle Bay entered into a Credit Agreement with Compass Bank, as Agent for itself and Bank of Oklahoma, N.A., pursuant to which the Lenders made available to Middle Bay a credit facility of up to $100,000,000 (the "Credit Agreement"); and' WHEREAS, the Lenders have acquired all of the interest of Compass Bank and Bank of Oklahoma in the Credit Agreement and the liens securing the same; and WHEREAS, Borrowers have requested that the Lenders restate the Credit Agreement to make available to them a loan facility in amounts of up to $250,000,000; and WHEREAS, the Lenders have agreed to restate the Credit Agreement and to make the requested facility available to Borrowers. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereby agree to restate the Credit Agreement as follows: 1. DEFINITIONS. When used herein the terms "Agent", "Agreement", "Bank One", "Borrower", "Borrowers", "Enex", "Lender", "Lenders", "Middle Bay" and "Production" shall have the meanings indicated above. When used herein the following terms shall have the following meanings: ADVANCE OR ADVANCES means a loan or loans hereunder. AFFILIATE means 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. ALTERNATE BASE RATE shall mean, as of any date, a rate of interest per annum equal to the higher of (i) the Corporate Base Rate for such date, and (ii) the sum of the Federal Funds Effective Rate for such date plus one-half of one percent (.50%) per annum. ASSIGNMENT AND ACCEPTANCE means a document substantially in the form of Exhibit "D" hereto. BASE RATE shall mean, as of any date, the sum of the Alternate Base Rate plus the Base Rate Margin. BASE RATE LOANS shall mean any loan during any period which bears interest based upon the Alternate Base Rate or which would bear interest based upon the Alternate Base Rate if the Maximum Rate ceiling was not in effect at that particular time. BASE RATE MARGIN shall be: (i) one-quarter of one percent (.25%) per annum whenever the Borrowing Base Usage is equal to or greater than 75%; or (ii) zero percent (0%) per annum whenever the Borrowing Base Usage is less than 75%. BORROWING BASE shall mean the value assigned by the Lenders 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 $95,000,000. BORROWING BASE USAGE shall mean, as of any date, all amounts outstanding on the Loan plus all outstanding Letters of Credit, divided by the Borrowing Base. BORROWING DATE means the date elected by Borrowers pursuant to Section 2(b) hereof for an Advance on the Loan. -2- BUSINESS DAY shall mean (i) with respect to any borrowing, payment or note selection of Eurodollar Loans, a day (other than Saturdays or Sundays) on which banks are legally open for business in Dallas, Texas and New York, New York and on which dealings in United States dollars are carried on in the London interbank market, and (ii) for all other purposes a day (other than Saturdays and Sundays) on which banks are legally open for business in Dallas, Texas. CASH COLLATERAL ACCOUNTS is used herein as defined in Section 12(v). 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 Borrowers (including the acquisition of newly-issued stock) sufficient to change the control of Borrowers by causing the election or change of a majority of the directors of Borrowers. CHANGE OF MANAGEMENT means a Change of Management shall occur if Floyd C. Wilson ever ceases to act as President and Chief Executive Officer of Middle Bay and a replacement for such officer, acceptable to Agent, is not appointed within sixty (60) days thereafter. COMMITMENT means (A) For all Lenders, the LESSER of (i) $250,000,000 or (ii) the Borrowing Base, as reduced or increased from time to time pursuant to Sections 2 and 7 hereof, and (B) as to any Lender, its obligation to make Advances hereunder on the Loan and purchase participations in Letters of Credit issued hereunder by the Agent in amounts not exceeding, in the aggregate, an amount equal to such Lender's Commitment Percentage times the total Commitment as of any date. The Commitment of each Lender hereunder shall be adjusted from time to time to reflect assignments made by such Lender pursuant to Section 28 hereof. Each reduction in the Commitment shall result in a Pro Rata reduction in each Lender's Commitment. COMMITMENT PERCENTAGE means for each Lender the percentage derived by dividing its Commitment at the time of the determination by the Commitments of all Lenders at the time of determination. The Commitment Percentage of each Lender hereunder shall be adjusted from time to time to reflect assignments made by such Lender pursuant to Section 28 hereof. CONSOLIDATED CURRENT ASSETS means the total of the consolidated current assets determined in accordance with GAAP, plus, as of any date, the unused availability on the Commitment. -3- CONSOLIDATED CURRENT LIABILITIES means the total of consolidated current obligations as determined in accordance with GAAP, excluding therefrom, as of any date, current maturities due on the Loans. CONSOLIDATED EBITDA shall mean Consolidated Net Income (excluding gains and losses from asset sales, extraordinary and non-recurring gains and losses and non-recurring formation costs) plus the sum of (i) income tax expense (but excluding income tax expense relating to the sales or other disposition of assets, including capital stock, the gains and losses from which are excluded in the determination of Consolidated Net Income), plus (ii) Consolidated Interest Expense, plus (iii) depreciation, depletion and amortization expense, plus (iv) other non-cash expenses. CONSOLIDATED INTEREST EXPENSE shall mean the aggregate amount of cash and non-cash interest expense (including capitalized interest) of Borrowers as determined on a consolidated basis in accordance with GAAP in respect of all indebtedness. CONSOLIDATED NET INCOME shall mean Borrowers' consolidated net income after income taxes calculated in accordance with GAAP. CORPORATE BASE RATE means the rate per annum equal to the Corporate Base Rate announced by the Agent from time to time, changing when and as said Corporate Base Rate changes. CURRENT RATIO means the ratio of Consolidated Current Assets for the period being measured to the Consolidated Current Liabilities for such period. DEFAULT means all the events specified in Section 14 hereof, regardless of whether there shall have occurred any passage of time or giving of notice, or both, that would be necessary in order to constitute such event as an Event of Default. DEFAULTING LENDER is used herein as defined in Section 3(f) hereof. EFFECTIVE DATE means the date of this Agreement. ELIGIBLE ASSIGNEE means any of (i) a Lender or any Affiliate of a Lender; (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 -4- primarily engaged in the business of commercial lending and that (A) is a subsidiary of a Lender, (B) a subsidiary of a Person of which a Lender is a subsidiary, or (C) a Person of which a Lender 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 Lender 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 Lender 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 Borrowers shall be an Eligible Assignee. ENGINEERED VALUE is used herein as defined in Section 6 hereof. ENVIRONMENTAL LAWS means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.A. Section 9601, ET SEQ., the Resource Conservation and Recovery Act, as amended by the Hazardous Solid Waste Amendment of 1984, 42 U.S.C.A. Section 6901, ET SEQ., the Clean Water Act, 33 U.S.C.A. Section 1251, et seq., the Clean Air Act, 42 U.S.C.A. Section 1251, ET SEQ., the Toxic Substances Control Act, 15 U.S.C.A. Section 2601, ET SEQ., The Oil Pollution Act of 1990, 33 U.S.G. Section 2701, ET SEQ., and all other laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, orders, permits 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 oil pollution, air pollution, water pollution, noise control and/or the handling, discharge, disposal or recovery of on-site or off-site asbestos, radioactive materials, spilled or leaked petroleum products, distillates or fractions and industrial solid waste or "hazardous substances" as defined by 42 U.S.C. Section 9601, ET SEQ., as amended, as each of the foregoing may be amended from time to time. ENVIRONMENTAL LIABILITY means 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 release of any substance into the environment which is required to be remediated by a regulatory agency or governmental authority 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. ENVIRONMENTAL LIEN means 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 -5- 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. ERISA means the Employee Retirement Income Security Act of 1974, as amended. EURODOLLAR BASE RATE shall mean, with respect to any Eurodollar Loan for the relevant Interest Period, the rate determined by the Agent to be the rate at which the Agent offers to place deposits in U.S. dollars with first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two (2) Business Days prior to the first date of such Interest Period, in the approximate amount of the Agent's relevant Eurodollar Loan and having a maturity equal to such Interest Period. EURODOLLAR LOANS means any loans during any period which bear 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. EURODOLLAR MARGIN shall be: (i) one and seven-eights percent (1.875%) per annum whenever the Borrowing Base Usage is equal to or greater than 90%; (ii) one and three-quarters percent (1.75%) per annum whenever the Borrowing Base Usage is equal to or greater than 75%, but less than 90%; (iii) one and one-half percent (1.50%) per annum whenever the Borrowing Base Usage is equal to or greater than 50%, but less than 75%; or (iv) one and one-quarter percent (1.25%) per annum whenever the Borrowing Base Usage is less than 50%. EURODOLLAR RATE means, with respect to a Eurodollar Loan for the relevant Interest Period, the sum of (i) the quotient of (A) the Eurodollar Base Rate applicable to such Interest Period, divided by (B) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus the (iii) Eurodollar Margin. The Eurodollar Rate shall be rounded to the next higher multiple of 1/16th of one percent if the rate is not such a multiple. FEDERAL FUNDS EFFECTIVE RATE shall mean, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with -6- members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (Dallas, Texas time) on such day on such transactions received by the Agent from three (3) Federal funds brokers of recognized standing selected by the Agent in its sole discretion. FINANCIAL STATEMENTS means balance sheets, income statements, statements of cash flow and appropriate footnotes and schedules, prepared in accordance with GAAP. FLOYD ACQUISITION means the acquisition by Borrowers of oil and gas properties and partnership interests from Floyd Oil Company and the Floyd Participants pursuant to several Purchase Agreements between Middle Bay, Floyd Oil Company and the Floyd Participants, all of which have been executed. FLOYD EQUITY TRANSACTION means the transaction whereby a portion of the amount paid for the oil and gas properties being acquired in the Floyd Acquisition will be paid for with common stock of Middle Bay. FLOYD PARTICIPANTS means those parties to the Floyd Acquisition who were participants in oil and gas programs sponsored by Floyd Oil from 1986 through 1993. GAAP means generally accepted accounting principles, consistently applied. INTERCREDITOR AGREEMENTS means the Intercreditor Agreements among (i) Middle Bay, the Agent and 3TEC Energy Company L.L.C., (ii) Middle Bay, the Agent and Shoemaker Family Partnership, LP and (iii) Middle Bay, the Agent and Shoeinvest II, LP, each dated November 23, 1999. INTEREST PAYMENT DATE shall mean the last day of each calendar month in the case of Base Rate Loans and, in the case of Eurodollar Loans, the last day of the applicable Interest Period. INTEREST PERIOD shall mean 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 Borrowers 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 Borrowers pursuant to Section 4(a)(ii); provided, however, that (i) if any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding -7- Business Day unless the result of such extension would be to extend such Interest Period into the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day, (ii) if any Interest Period begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) such Interest Period shall end on the last Business Day of a calendar month, and (iii) any Interest Period which would otherwise expire after the Maturity Date shall end on such Maturity Date. LETTERS OF CREDIT is used herein as defined in Section 2(c) hereof. LIEN means any mortgage, deed of trust, pledge, security interest, assignment, encumbrance or lien (statutory or otherwise) of every kind and character. LOAN OR LOANS means an Advance or Advances made under the Commitment. LOAN DOCUMENTS means this Agreement, the Notes, the Intercreditor Agreements, the Security Instruments and all other documents executed in connection with the transaction described in this Agreement. LOCKBOX ACCOUNTS is used herein as defined in Section 12(v). MAJORITY LENDERS means Lenders holding 66-2/3% or more of the Commitments or if the Commitments have been terminated, Lenders holding 66-2/3% of the outstanding Loans. MATERIAL ADVERSE EFFECT shall mean a material adverse effect on (i) the assets or properties, liabilities, financial condition, business, operations, affairs or circumstances of the Borrowers, (ii) the ability of the Borrowers 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, (iii) the ability of Borrowers to perform fully and on a timely basis its obligations under any of the Loan Documents, or (iv) the validity or enforceability of any of the Loan Documents or the rights and remedies of the Agent or the Lenders thereunder. MATURITY DATE shall mean November 30, 2002. MAXIMUM RATE means 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 Borrowers from time to time as the effective date of each change in such Maximum Rate. -8- MINIMUM INTEREST COVERAGE RATIO means the ratio of Consolidated EBITDA for the period being measured to the sum of Consolidated Interest Expense for the period being measured. MONTHLY COMMITMENT REDUCTION is used herein, as defined in Section 2(f) hereof. NOTES means the Notes, substantially in the form of Exhibit "B" hereto issued or to be issued hereunder to each Lender, respectively, to evidence the indebtedness to such Lender arising by reason of the Advances on the Loan, together with all modifications, renewals and extensions thereof or any part thereof. OIL AND GAS PROPERTIES means all oil, gas and mineral properties and interests, related personal properties, in which Borrowers grant to the Lenders either a first and prior lien and security interest pursuant to Section 6 hereof or a negative pledge pursuant to Section 13(a) hereof. OPERATING ACCOUNTS is used herein as defined in Section 12(v). OTHER FINANCING is used herein as defined in Section 15(l) hereof. PAYOR is used herein as defined in Section 3(h)hereof. PERMITTED LIENS 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 Borrowers of any material right in respect of any such Borrowers' 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 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 Borrowers' 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 -9- incurred by Borrowers in connection with the construction, maintenance, development, transportation, storage or operation of Borrowers' assets or properties to the extent not delinquent (or which, if delinquent, are being contested in good faith by appropriate proceedings and for which such Borrower 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 Borrowers' assets and properties which were in existence at the time Borrowers' assets and properties were originally acquired by Borrowers 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 Borrowers' 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 Borrowers' 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 are identified in Schedule "1" hereto. PERSON means 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. PLAN means any plan subject to Title IV of ERISA and maintained by Borrowers, or any such plan to which any Borrower is required to contribute on behalf of its employees. PRE-APPROVED CONTRACTS as used herein shall mean any contracts or agreements entered into in connection with any Rate Management Transaction designed (i) to hedge, forward sell or swap crude oil or natural gas or otherwise sell up to 75% of the Borrowers' anticipated production from proved, developed producing reserves of crude oil, and/or 75% of the Borrowers' anticipated production from proved, developed producing reserves of natural gas, during the period from the immediately preceding settlement date (or the commencement of the term of such hedge transactions if there is no prior settlement date) to such settlement date, (ii) with a maturity of eighteen (18) months or less, (iii) with "strike prices" per barrel greater than Agent's forecasted price in the most recent engineering evaluation of Borrowers' Oil and Gas Properties, adjusted for the difference between the forecasted price and the Borrowers' actual product price as reasonably determined by the Agent, and (iv) with counterparties to the hedging agreement which are reasonably -10- approved by Agent. PRO RATA OR PRO RATA PART means for each Lender, (i) for all purposes where no Loan is outstanding, such Lender's Commitment Percentage and (ii) otherwise, the proportion which the portion of the outstanding Loans owed to such Lender bears to the aggregate outstanding Loans owed to all Lenders at the time in question. RATE MANAGEMENT TRANSACTION means any transaction (including an agreement with respect thereto) now existing or hereafter entered into between Borrowers and Agent or the Lenders which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, forward exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures. REGULATION D shall mean Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto and other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. REIMBURSEMENT OBLIGATIONS means, at any time, the obligations of the Borrowers in respect of all Letters of Credit then outstanding to reimburse amounts paid by any Lender in respect of any drawing or drawings under a Letter of Credit. RELEASE PRICE is used herein as defined in Section 12(r) hereof. REQUIRED PAYMENT is used herein as defined in Section 3(h) hereof. RESERVE REQUIREMENT means, with respect to any Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D or Eurocurrency liabilities. 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. -11- SECURITY PURCHASE AGREEMENTS mean (i) a Securities Purchase Agreement dated August 27, 1999 between Middle Bay and Shoemaker Family Partnership, LP, (ii) a Securities Purchase Agreement dated August 27, 1999 between Middle Bay and Shoeinvest II, LP, (iii) a Securities Purchase Agreement dated July 1, 1999 between Middle Bay and 3TEC Energy Company, L.L.C. and (iv) a Securities Purchase Agreement dated October 19, 1999 between Middle Bay and The Prudential Insurance Company of America, as amended by that certain Letter Amendment No. 1 to Middle Bay Oil Company, Inc. Security Purchase Agreement dated November 23, 1999. SERIES B PREFERRED STOCK means 266,667 shares of Middle Bay preferred stock which has been designated as Series B and has a stated value of $7.50 per share, all of which is issued and outstanding. SERIES C PREFERRED STOCK means 2,300,000 shares of Middle Bay preferred stock which has been designated as Series C and has a stated value of $5.00 per share, 2,177,814 shares of which is issued and outstanding. SUBORDINATED LENDERS 3TEC Energy Company L.L.C., Shoemaker Family Partnership, LP, Shoeinvest II, LP and The Prudential Insurance Company of America. SUBORDINATED NOTES means promissory notes issued by Middle Bay pursuant to the Security Purchase Agreements. SUBSIDIARY means 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 Borrowers or another subsidiary. TOTAL OUTSTANDINGS means, as of any date, the sum of (i) the total principal balance outstanding on the Notes, plus (ii) the total face amount of all outstanding Letters of Credit, plus (iii) the total amount of all unpaid Reimbursement Obligations. TRANCHE means a set of Eurodollar Loans made by the Lenders at the same time and for the same Interest Period. UNSCHEDULED REDETERMINATIONS means 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 request of Borrowers (but only once between Borrowing Base redeterminations), (B) at the request of Majority Lenders. -12- UNUSED COMMITMENT FEE RATE shall be: (i) one-half of one percent (.50%) per annum whenever the Borrowing Base Usage is equal to or greater than 90%; (ii) three-eighths of one percent (.375%) per annum whenever the Borrowing Base Usage is equal to or greater than 50% but less than 90%; or (iii) one-fourth of one percent (.25%) per annum whenever the Borrowing Base Usage is less than 50%. 2. COMMITMENTS OF THE LENDER. (a) TERMS OF COMMITMENT. On the terms and conditions hereinafter set forth, each Lender agrees severally to make Advances to the Borrowers from time to time during the period beginning on the Effective Date and ending on the Maturity Date in such amounts as the Borrowers may request up to an amount not to exceed, in the aggregate principal amount outstanding at any time, the Commitment less Total Outstandings. The obligation of the Borrowers hereunder shall be evidenced by this Agreement and the Notes issued in connection herewith, said 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 Commitment shall be an aggregate amount of at least $1,000,000 or any whole multiples of $100,000 in excess thereof. Irrespective of the face amount of the Note or Notes, the Lenders shall never have the obligation to Advance any amount or amounts in excess of the Commitment or to increase the Commitment. (b) PROCEDURE FOR BORROWING. Whenever the Borrowers desire 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 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 Base Rate Loan, or (ii) three 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 Base Rate Loan, shall be a Business Day and if a Eurodollar Loan, a Business Day), (ii) the principal amount to be borrowed, (iii) the portion of the Advance constituting Base 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 Borrowers pursuant to Section 4 -13- hereof to be applicable thereto, and (v) the date upon which such Advance is required. Upon receipt of such Notice, Agent shall advise each Lender thereof; provided, that if the Lenders have received at least one (1) day's notice of such Advance prior to funding of a Base Rate Loan, or at least three (3) days' notice of each Advance prior to funding in the case of a Eurodollar Loan, each Lender 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 Lender shall never exceed such Lender's Commitment. Not later than 2:00 p.m., Dallas, Texas time, on the Borrowing Date, Agent shall make available to the Borrowers at the same office, in like funds, the aggregate amount of such requested Advance. Neither Agent nor any Lender shall incur any liability to the Borrowers in acting upon any Notice referred to above which Agent or such Lender believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Borrowers or for otherwise acting in good faith under this Section 2(b). Upon funding of Advances by Lenders in accordance with this Agreement, pursuant to any such Notice, the Borrowers 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 Maturity Date upon request of Borrowers issue standby Letters of Credit for the account of Borrowers (the "Letters of Credit") in such face amounts as Borrowers may request, but not to exceed in the aggregate face amount at any time outstanding the sum of Five Million Dollars ($5,000,000). The face amount of all Letters of Credit issued and outstanding hereunder shall be considered as Advances on the Commitment for Borrowing Base purposes and all payments made by the Agent on such Letters of Credit shall be considered as Advances under the Notes. Each Letter of Credit issued for the account of Borrowers hereunder shall (i) be in favor of such beneficiaries as specifically requested by Borrowers, (ii) have an expiration date not exceeding the earlier of (a) one year or (b) the Maturity Date, and (iii) contain such other terms and provisions as may be required by issuing Lender. Each Lender (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 Lender's Commitment Percentage of such liability, and each Lender (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 Commitment Percentage of Agent's liability under such Letter of Credit. The Borrowers hereby unconditionally agree 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 -14- Credit, the Agent shall promptly notify the Borrowers 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, Borrowers 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 Borrowers fail to so advise Agent and thereafter fail to reimburse Agent, the Agent shall notify each Lender of the demand and the failure of the Borrowers to reimburse the Agent, and each Lender shall reimburse the Agent for its Commitment Percentage of each such draw paid by the Agent and unreimbursed by the Borrowers. All such amounts paid by Agent and/or reimbursed by the Lenders shall be treated as an Advance or Advances under the 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 Lenders' commitments above in Section 2(c) shall be designated by Borrowers' 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, Borrowers 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 Five Million Dollars ($5,000,000) or (B) the amount thereof when added to the Total Outstandings would exceed the Commitment. Borrowers agree to pay the Agent for the benefit of the Lenders commissions for issuing the Letters of Credit (calculated separately for each Letter of Credit) in an amount equal to the greater of (i) the Eurodollar Margin then in effect times the maximum face amount of the Letter of Credit or (ii) $500.00. Borrowers further agree to pay Agent an additional fronting fee equal to one-eighth of one percent (0.125%) 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. (e) VOLUNTARY REDUCTION OF COMMITMENT. The Borrowers 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 Commitment; provided, however, that (i) each reduction in the Commitment must be in the amount of $1,000,000 or more, in increments of $1,000,000 and (ii) each reduction must be accompanied by a prepayment of the Notes in the amount by which the outstanding principal balance of the Notes exceeds the Commitment as reduced pursuant to this Section 2. -15- (f) MANDATORY COMMITMENT REDUCTIONS - (i) MONTHLY COMMITMENT REDUCTION. The Borrowing Base and the Commitment shall be reduced as of the first day of each month by an amount determined by the Lenders pursuant to Section 7(b) hereof (the "Monthly Commitment Reduction"). The Monthly Commitment Reduction shall be $0 per month until redetermined pursuant to Section 7(b) hereof. If as a result of any such Monthly Commitment Reduction, the Total Outstandings ever exceed the Commitment then in effect, the Borrowers 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 Commitment unless the Borrowers elect to permanently reduce the 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 Borrowers shall make the mandatory prepayment of principal required pursuant to Section 9(b) hereof. (g) SEVERAL OBLIGATIONS. The obligations of the Lenders under the Commitments are several and not joint. The failure of any Lender to make an Advance required to be made by it shall not relieve any other Lender of its obligation to make its Advance, and no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender. No Lender shall be required to lend hereunder any amount in excess of its legal lending limit. (h) TYPE AND NUMBER OF ADVANCES. Any Advance of the Commitment may be a Base Rate Loan or a Eurodollar Loan, or a combination thereof, as selected by the Borrowers pursuant to Section 4 hereof. The total number of Tranches which may be outstanding at any time shall never exceed four (4). (i) LIMITED LIABILITY OF ENEX AND PRODUCTION. While the obligations of the Borrowers under the Agreement and the Notes shall be joint and several obligations of Middle Bay, Enex and Production, the liability of Enex and Production thereunder shall be limited to the maximum amount of liability that can be incurred without rendering the obligations of Enex and Production under the Loan Documents voidable under applicable law relating to fraudulent conveyance or fraudulent transfer, and not for any greater amount. -16- 3. NOTES EVIDENCING LOANS. The loans described above in Section 2 shall be evidenced by promissory notes of Borrowers as follows: (a) FORM OF NOTES. The Loan shall be evidenced by a Note or Notes in the aggregate face amount of $250,000,000, and shall be in the form of Exhibit "B" hereto with appropriate insertions (each a "Note"). Notwithstanding the face amount of the Notes, the actual principal amount due from the Borrowers to Lenders on account of the 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 Lenders in collected funds with respect thereto. Although the 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 Notes may be higher, the Notes shall be enforceable, with respect to Borrowers' 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 Notes, no Lender shall ever be obligated to advance on the Commitment any amount in excess of its Commitment then in effect. (b) ISSUANCE OF ADDITIONAL NOTES. At the Effective Date there shall be outstanding Notes in the aggregate face amount of $250,000,000 payable to the order of Lenders. From time to time new Notes may issued to other Lenders as such Lenders become parties to this Agreement. Upon request from Agent, the Borrowers 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 Lender exchange its Note(s) for newly issued Note(s) to better reflect the extent of each Lender'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 Note or Notes shall be due and payable to the Agent for the ratable benefit of the Lenders on the 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 LENDERS. Each Lender's Pro Rata Part of payment or prepayment of the Loans shall be directed by wire transfer to such Lender by the Agent at the address provided to the Agent for such Lender 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 Lender -17- shall have failed to make an Advance as contemplated under Section 2 hereof (a "Defaulting Lender") and the Agent or another Lender or Lenders shall have made such Advance, payment received by Agent for the account of such Defaulting Lender or Lenders shall not be distributed to such Defaulting Lender or Lenders until such Advance or Advances shall have been repaid in full to the Lender or Lenders 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 Lender as provided above, then Agent shall promptly direct such principal amount by wire transfer to such Lender. (g) SHARING OF PAYMENTS, ETC. If any Lender 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 Lenders, such Lender shall purchase from the other Lenders such participation as shall be necessary to cause such purchasing Lender 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 Lender, the purchase shall be rescinded and the purchase price restored to the extent of the recovery. The Borrowers agree that any Lender so purchasing a participation from another Lender 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 Lender were the direct creditor of the Borrowers in the amount of such participation. (h) NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Agent shall have been notified by a Lender or the Borrowers (the "Payor") prior to the date on which such Lender is to make payment to the Agent of the proceeds of a Loan to be made by it hereunder or the Borrowers are to make a payment to the Agent for the account of one or more of the Lenders, 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. -18- 4. INTEREST RATES. (a) OPTIONS. (i) BASE RATE LOANS. On all Base Rate Loans the Borrowers agree to pay interest on the Notes calculated on the basis of the actual days elapsed in a year consisting of 360 days with respect to the unpaid principal amount of each Base Rate Loan from the date the proceeds thereof are made available to Borrowers 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 Base Rate. Subject to the provisions of this Agreement as to prepayment, the principal of the Notes representing Base Rate Loans shall be payable as specified in Section 3(e) hereof and the interest in respect of each Base 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 Base Rate Loan, shall bear interest, payable on demand, at a rate per annum equal to the Maximum Rate. (ii) EURODOLLAR LOANS. On all Eurodollar Loans the Borrowers agree 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 Borrowers 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. 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 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) Business Days' written notice prior to the making by the Lenders 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), Borrowers shall have the option, subject to compliance by Borrowers 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), -19- 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, Borrowers shall be deemed to have elected to convert all maturing Eurodollar Loans to Base 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 Borrowers and the Lenders of each rate of interest so determined and its determination thereof shall be conclusive absent error. (c) CONVERSION OPTION. Borrowers may elect from time to time (i) to convert all or any part of its Eurodollar Loans to Base 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 Interest Period with respect thereof, (ii) to convert all or any part of its Base Rate Loans to Eurodollar Loans by giving the Agent irrevocable written notice of such election three (3) 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 Business Day, on the next succeeding Business Day. 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. 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, the Agent reasonably determines, which determination shall, absent manifest error, be final, conclusive and binding upon all parties, due to changes in circumstances since the date hereof, adequate and fair means do not exist for determining the Eurodollar Rate or such rate will not accurately reflect the costs to the Lenders of funding Eurodollar Loan for such Interest Period, the Agent shall give notice of such determination to the Borrowers and the Lenders, whereupon, until the Agent notifies the Borrowers and the Lenders that the circumstances giving rise to such suspension no -20- longer exist, the obligations of the Lenders to make, continue or convert Loan into Eurodollar Loan shall be suspended, and all loans to Borrowers shall be Base Rate Loan during the period of suspension. (b) 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 any Lender to make or continue to maintain or fund Eurodollar Loan hereunder, then such Lender shall promptly notify Borrowers in writing and such Lender's obligation to make, continue or convert Loan into Eurodollar Loan under this Agreement shall be suspended until it is no longer unlawful for such Lender to make or maintain Eurodollar Loan. Upon receipt of such notice, Borrowers shall either repay the outstanding Eurodollar Loan owed to the Lenders, without penalty, on the last day of the current Interest Periods (or, if any Lender may not lawfully continue to maintain and fund such Eurodollar Loan, immediately), or Borrowers may convert such Eurodollar Loan at such appropriate time to Base Rate Loan. (c) INCREASED COST OR REDUCED RETURN. (i) If, after the date hereof, the adoption of any applicable law, rule, or regulation, or any change in any applicable law, rule, or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender with any request or directive (whether or not having the force of law) of any such governmental authority, central bank, or comparable agency: (A) shall subject such Lender to any tax, duty, or other charge with respect to any Eurodollar Loan, its Notes, or its obligation to make Eurodollar Loan, or change the basis of taxation of any amounts payable to such Lender under this Agreement or its Notes in respect of any Eurodollar Loan (other than franchise taxes and taxes imposed on the overall net income of such Lender); (B) shall impose, modify, or deem applicable any reserve, special deposit, assessment, or similar requirement (other than reserve requirements, if any, taken into account in the determination of the Eurodollar Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Lender, including the Commitment of such Lender hereunder; or (C) shall impose on such Lender or on the London interbank market any other condition affecting this Agreement or its Notes or any -21- of such extensions of credit or liabilities or commitments; and the result of any of the foregoing is to increase the cost to such Lender of making, converting into, continuing, or maintaining any Eurodollar Loan or to reduce any sum received or receivable by such Lender under this Agreement or its Notes with respect to any Eurodollar Loan, then Borrowers shall pay to such Lender on demand such amount or amounts as will reasonably compensate such Lender for such increased cost or reduction. If any Lender requests compensation by Borrowers under this Section 5(c), Borrowers may, by notice to such Lender (with a copy to Agent), suspend the obligation of such Lender to make or continue Eurodollar Loan, or to convert all or part of the Base Rate Loan owing to such Lender to Eurodollar Loan, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 5(c) shall be applicable); PROVIDED that such suspension shall not affect the right of such Lender to receive the compensation so requested. (ii) If, after the date hereof, any Lender shall have determined that the adoption of any applicable law, rule, or regulation regarding capital adequacy or any change therein or in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank, or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of such Lender's obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change, request, or directive (taking into consideration its policies with respect to capital adequacy), then from time to time upon demand Borrowers shall pay to such Lender such additional amount or amounts as will reasonably compensate such Lender for such reduction. (iii) Each Lender shall promptly notify Borrowers and Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section 5(c) and will designate a separate lending office, if applicable, if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Lender, be otherwise disadvantageous to it. Any Lender claiming compensation under this Section 5(c) shall furnish to Borrowers and Agent a statement setting forth the additional amount or amounts to be paid to it hereunder which shall be conclusive in the absence of manifest error. In -22- determining such amount, such Lender may use any reasonable averaging and attribution methods. (iv) Any Lender giving notice to the Borrowers through the Agent, pursuant to Sections 3(k) or 5(c) shall give to the Borrowers a statement signed by an officer of such Lender setting forth in reasonable detail the basis for, and the calculation of such additional cost, reduced payments or capital requirements, as the case may be, and the additional amounts required to compensate such Lender therefor. (v) Within five (5) Business Days after receipt by the Borrowers of any notice referred to in Sections 3(k) or 5(c), the Borrowers shall pay to the Agent for the account of the Lender issuing such notice such additional amounts as are required to compensate such Lender for the increased cost, reduce payments or increase capital requirements identified therein, as the case may be. (d) DISCRETION OF LENDER AS TO MANNER OF FUNDING. Notwithstanding any provisions of this Agreement to the contrary, each Lender shall be entitled to fund and maintain its funding of all or any part of its Loan in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if each Lender had actually funded and maintained each Eurodollar Loan through the purchase of deposits having a maturity corresponding to the last day of the Interest Period applicable to such Eurodollar Loan and bearing an interest rate to the applicable interest rate for such Eurodollar Period. (e) BREAKAGE FEES. Without duplication under any other provision hereof, if any Lender incurs any loss, cost or expense including, without limitation, any loss of profit and loss, cost, expense or premium reasonably incurred by reason of the liquidation or re-employment of deposits or other funds acquired by such Lender to fund or maintain any Eurodollar Loan or the relending or reinvesting of such deposits or amounts paid or prepaid to the Lenders as a result of any of the following events other than any such occurrence as a result in the change of circumstances described in Sections 5(a) and (b): (i) any payment, prepayment or conversion of a Eurodollar Loan on a date other than the last day of its Interest Period (whether by acceleration, prepayment or otherwise); (ii) any failure to make a principal payment of a Eurodollar Loan on the due date thereof; or (iii) any failure by the Borrowers to borrow, continue, prepay or -23- convert to a Eurodollar Loan on the dates specified in a notice given pursuant to Section 2(c) or 4(c) hereof; then the Borrowers shall pay to such Lender such amount as will reimburse such Lender for such loss, cost or expense. If any Lender makes such a claim for compensation, it shall furnish to Borrowers and Agent a statement setting forth the amount of such loss, cost or expense in reasonable detail (including an explanation of the basis for and the computation of such loss, cost or expense) and the amounts shown on such statement shall be conclusive and binding absent manifest error. 6. COLLATERAL SECURITY. To secure the performance by Borrowers of their 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, Borrowers shall grant and assign to Agent for the ratable benefit of the Lenders a first and prior Lien on certain of its Oil and Gas Properties, certain related equipment, oil and gas inventory and proceeds of the foregoing. The Oil and Gas Properties herewith mortgaged to the Agent shall represent not less than 85% of the Engineered Value (as hereinafter defined) of Borrowers' Oil and Gas Properties as of the Effective Date. Obligations arising from agreements arising from Rate Management Transactions between Borrowers and one or more of the Lenders or an Affiliate of any of the Lenders providing for the hedging, forward sale or swap of crude oil or natural gas or interest rate protection shall be secured by the Collateral (as hereinafter defined) on a pari passu basis with the indebtedness and obligations of the Borrowers under the Loan Documents. In addition to the foregoing, the Agent, on behalf of the Lenders, shall require that all notes and liens currently held by Compass Bank to secure obligations under the Credit Agreement be assigned to the Agent for the ratable benefit of the Lenders under this Agreement. All Oil and Gas Properties and other collateral in which Borrowers herewith grant or hereafter grant to Agent for the ratable benefit of the Lenders a first and prior Lien (to the satisfaction of the Agent) in accordance with this Section 6 or the Oil and Gas Properties and other collateral in which the Agent has acquired an interest for the ratable benefit of the Lenders from Compass Bank, 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 Borrowers 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, Borrowers 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 Borrowers' 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 -24- of any such determination utilizing the pricing parameters used in the engineering report furnished to the Agent for the ratable benefit of the Lenders, pursuant to Sections 7 and 12 hereof. Borrowers 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 Lenders' 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 $95,000,000. (b) SUBSEQUENT DETERMINATIONS OF BORROWING BASE. Subsequent determinations of the Borrowing Base shall be made by the Lenders at least semi-annually on May 1 and November 1 of each year beginning May 1, 2000 or as Unscheduled Redeterminations. In connection with, and as of, each determination of the Borrowing Base, the Lenders shall also redetermine the Monthly Commitment Reduction. The Borrowers shall furnish to the Lenders as soon as possible but in any event no later than April 1 of each year, beginning April 1, 2000, with an Engineering Report in form and substance satisfactory to the Agent prepared by an independent petroleum engineering firm or firms 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 October 1 of each year, or within thirty (30) days after either (i) receipt of notice from Agent that the Lenders require an Unscheduled Redetermination, or (ii) the Borrowers give notice to Agent of its desire to have an Unscheduled Redetermination performed, the Borrowers shall furnish to the Lenders an engineering report in form and substance satisfactory to Agent prepared by Borrowers' 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 written notice to the Borrowers no later than May 1 and November 1 of each year, or within a reasonable time thereafter (herein called the "Determination Date"), notify the Borrowers of the designation by the Lenders 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 Lenders, the Agent shall notify the Borrowers 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 Borrowers do not furnish all such -25- information, reports and data by any date specified in this Section 7(b), unless such failure is of no fault of the Borrowers, the Lenders may nonetheless designate the Borrowing Base and Monthly Commitment Reduction at any amounts which the Lenders in their reasonable discretion determine and may redesignate the Borrowing Base and Monthly Commitment Reduction from time to time thereafter until the Lenders receive all such information, reports and data, whereupon the Lenders shall designate a new Borrowing Base and Monthly Commitment Reduction as described above. Each Lender shall determine the amount of the Borrowing Base and Monthly Commitment Reduction based upon the loan collateral value which such Lender in its reasonable discretion (using such methodology, assumptions and discounts rates as such Lender 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 Borrowers 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 Borrowers and their affiliates) as such Lender customarily considers in evaluating similar oil and gas credits, but such Lender 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 Lender 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 Lenders; 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 Lenders. If the Lenders cannot otherwise agree on the Borrowing Base or the Monthly Commitment Reduction, the Agent shall notify each of the Lenders of such fact or facts and each Lender will submit within five (5) days thereafter its proposed Borrowing Base and Monthly Commitment Reduction. The redetermined Borrowing Base and Monthly Commitment Reduction shall be then determined based upon the weighted arithmetic average of the proposed amounts submitted by each Lender, said proposals to be weighted according to each Lender's Commitment. 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 Lenders 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 Commitment or otherwise. Provided, however, that the Lenders shall not have the obligation to designate a Borrowing Base in an amount in excess of the Commitment. -26- 8. FEES. (a) UNUSED COMMITMENT FEE. The Borrowers shall pay to Agent for the ratable benefit of the Lenders an unused commitment fee (the "Unused Commitment Fee") equivalent to the Unused Commitment Fee Rate times the daily average of the unadvanced amount of the Commitment. Such Unused Commitment Fee shall be calculated on the basis of a year consisting of 360 days. The Unused Commitment Fee shall be payable in arrears on the last Business Day of each calendar quarter beginning December 31, 1999 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 Commitment terminates on any date prior to the end of any such monthly period, the Borrowers shall pay to the Agent for the ratable benefit of the Lenders, on the date of such termination, the total Unused Commitment Fee due for the period in which such termination occurs. (b) THE LETTER OF CREDIT FEE. Borrowers shall pay to the Agent the Letter of Credit fees required above in Section 2(d). (c) AGENCY FEES. The Borrowers shall pay to the Agent certain fees for acting as Agent hereunder in amounts to be negotiated between the Borrowers and the Agent. 9. PREPAYMENTS. (a) VOLUNTARY PREPAYMENTS. Subject to the provisions of Section 5(g) hereof, the Borrowers 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) Business Days' notice to Agent in the case of Eurodollar Loan Tranches and without notice in the case of Base Rate Loans and shall be in a minimum amount of (i) $500,000 or any whole multiple of $100,000 in excess thereof (or the unpaid balance of the Notes, whichever is less), for Base Rate Loans, plus accrued interest thereon and (ii) $1,000,000 or any whole multiple of $100,000 in excess thereof (or the unpaid balance on the Notes, whichever is less) for Eurodollar Loans, plus accrued interest thereon to the date of prepayment. (b) MANDATORY PREPAYMENT FOR BORROWING BASE DEFICIENCY. In the event the Total Outstandings ever exceed the Borrowing Base as determined by Lenders pursuant to Section 7(b) hereof, the Borrowers shall, within thirty (30) days after written notification from the Agent, either (A) by instruments reasonably satisfactory in form and substance to the Lender, provide the Agent with collateral with value and quality in amounts satisfactory to all of the Lenders 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 Notes in an amount at least equal to such excess plus accrued interest thereon to the date of prepayment, or (C) prepay, without premium or penalty, the principal amount -27- of such excess in five (5) equal monthly installments to be applied to principal plus accrued interest thereon with the first such monthly payment being due upon the 30th day after receipt of notice of such deficiency. If the Total Outstandings ever exceed the Commitment as a result of a Monthly Commitment Reduction or any other required reduction in the Commitment, then in such event, Borrowers shall, upon written notice, immediately prepay the principal amount of the 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 Lenders to enter into this Agreement, the Borrowers represent and warrant to the Lenders (which representations and warranties will survive the delivery of the Notes) that: (a) CREATION AND EXISTENCE. Each Borrower is 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. Each Borrower 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. Each Borrower is duly authorized and empowered to create and issue the Notes; and is duly authorized and empowered to execute, deliver and perform the Loan Documents, including this Agreement; and all corporate action on each Borrower'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 each Borrower, 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 each Borrower's knowledge violate any provisions of any contract, agreement, law, regulation, order, injunction, judgment, decree or writ to which any Borrower is subject, or result in the creation or imposition of any lien or other encumbrance upon any assets or properties of any Borrower, other than those contemplated by this Agreement. (e) NO CONSENT. The execution, delivery and performance by each Borrower of the Notes and the Loan Documents, including this Agreement, does not require the -28- 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 consents required for federal, state and, in some instances, private leases, right of ways and other conveyances or encumbrances of oil and gas leases. (f) FINANCIAL CONDITION. The unaudited consolidated Financial Statements of Middle Bay dated June 30, 1999, which have been delivered to Lenders 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 Borrowers on a consolidated basis as of the date or dates and for the period or periods stated subject to normal year-end adjustments and provided that such Financial Statements do not contain footnotes. No change has since occurred in the condition, financial or otherwise, of any Borrower which is reasonably expected to have a Material Adverse Effect, except as disclosed to the Lenders in Schedule "2" attached hereto. (g) LIABILITIES. No Borrower has any material liability, direct or contingent, except as disclosed to the Lenders 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 any Borrower 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 Lenders 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 any of the Borrowers threatened against or affecting any of the Borrowers 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. Each Borrower has filed all tax returns and reports required to be filed and has paid all taxes, assessments, fees and other governmental charges levied upon it or its 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 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. Each Borrower has good and defensible title to all of its assets, including without limitation, the Oil and Gas Properties, free and clear of all liens or other encumbrances except Permitted Liens. -29- (k) DEFAULTS. No Borrower 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 any Borrower 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 Borrowers delivered to Lenders, neither the business nor the assets or properties of any Borrower has 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 Commitment may be used by the Borrowers for the purposes of (i) refinance existing indebtedness, (ii) acquisition and development of oil and gas properties, (iii) Letters of Credit, (iv) working capital and (v) general corporate purposes including redemption of the Series C Stock made in compliance with the requirements of Section 13(f) hereof. None of the Borrowers are 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 U. No Borrower nor any person or entity acting on behalf of the Borrowers 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 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. (n) LOCATION OF BUSINESS AND OFFICES. The principal place of business and chief executive offices of the each Borrower is located at the address stated in Section 17 hereof. (o) COMPLIANCE WITH THE LAW. To the best of each Borrower's knowledge, no Borrower: -30- (i) is in violation of any law, judgment, decree, order, ordinance, or governmental rule or regulation to which Borrower, 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 any Borrower to the Lenders 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. No Borrower 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. Each Borrower is 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 any Borrower. (s) PUBLIC UTILITY HOLDING COMPANY ACT. No Borrower 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. (t) SUBSIDIARIES. Each of the Borrowers' Subsidiaries are listed on Schedule "5" hereto. (u) ENVIRONMENTAL MATTERS. Except as disclosed on Schedule "6", no Borrower (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 -31- 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 any Borrower 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 each Borrower are free and clear of all liens and encumbrances. (w) YEAR 2000 COMPLIANCE. Each Borrower represents and warrants to Lenders that: (i) It will use its best efforts to cause all devices, systems, machinery, information technology, computer software and hardware, and other date sensitive technology (jointly and severally the "Systems") necessary for each Borrower carry on its business as presently conducted and as contemplated to be conducted in the future to be Year 2000 Compliant within a period of time calculated to result in no material disruption of any of any Borrower's business operations. For purposes of these provisions, "Year 2000 Compliant" means that such Systems are designed to be used prior to, during and after the Gregorian calendar year 2000 A.D. and will operate during each such time period without error relating to date data, specifically including any error relating to, or the product of, date data which represents or references different centuries or more than one century. (ii) Each Borrower has: (A) undertaken, or will undertake, an inventory, review, and assessment of all areas within its business and operations that could be adversely affected by the failure of any Borrower to be Year 2000 Compliant on a timely basis; (B) developed, or will develop, a plan and time line for becoming Year 2000 Compliant on a timely basis; (C) to date, implemented, or will implement, that plan in accordance with that timetable in all material respects on a best-efforts basis. (iii) Each Borrower has either made, or will make, written inquiry of each of its vendors, and have obtained, or will obtain, in writing confirmations from all such persons, as to whether such persons have initiated programs to become Year 2000 Compliant and on the basis of such confirmations. Each Borrower reasonably believes that all such persons will be or become so -32- compliant. For purposes hereof, "vendors" refers to those vendors of Borrowers whose business failure would, with reasonable probability, result in a Material Adverse Effect on the business, properties, condition (financial or otherwise), or prospects of any Borrower. (iv) The fair market value of all Collateral pledged to Lenders to secure the Loan and the Notes and all of Borrowers' obligations hereunder are not and shall not be less than currently anticipated or subject to deterioration in value because of the failure of such Collateral to be Year 2000 Compliant. 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 Commitment shall be subject to satisfaction of the following conditions precedent: (i) EXECUTION AND DELIVERY. Each Borrower shall have executed and delivered the Agreement, the Notes and other required Loan Documents, all in form and substance satisfactory to the Agent; (ii) LEGAL OPINION. The Agent shall have received from Borrowers' 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; provided that the opinion as to 10(e) and 10(h) may be limited to knowledge; (iii) CORPORATE RESOLUTIONS. The Agent shall have received appropriate certified corporate resolutions of each Borrower; (iv) GOOD STANDING. The Agent shall have received evidence of existence and good standing for each Borrower; (v) INCUMBENCY. The Agent shall have received a signed certificate of each Borrower, certifying the names of the officers of each Borrower authorized to sign loan documents on behalf of each Borrower, 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 any Borrower 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 -33- received copies of the Articles of Incorporation of each Borrower and all amendments thereto, certified by the Secretary of State of the State of its incorporation, and a copy of the bylaws of each Borrower and all amendments thereto, certified by each Borrower as being true, correct and complete; (vii) CLOSING OF FLOYD ACQUISITION. The Agent shall have received satisfactory evidence that the Floyd Acquisition will close concurrently with the initial funding hereunder; (viii) INTERCREDITOR AGREEMENT. The Agent, the Borrowers and the Subordinated Lenders shall have executed and delivered the Intercreditor Agreements in form and substance satisfactory to the Agent; (ix) CLOSING OF SECURITY PURCHASE AGREEMENTS. The Agent shall have received satisfactory evidence of the closing and funding of the transactions described in all of the Security Purchase Agreements; (x) 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); (xi) 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; (xii) 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 (xiii) 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. (b) The obligation of the Lenders to make any Advance or issue any Letter of Credit under the 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: -34- (i) 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); (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; (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. 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 Majority Lenders prior to the date of deviation. The Borrowers 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 Lenders under this Agreement or the other Loan Documents. (a) FINANCIAL STATEMENTS AND REPORTS. Each Borrower shall promptly furnish to the Agent from time to time upon request such information regarding the business and affairs and financial condition of each Borrower, 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, 1999, the annual audited consolidated and consolidating Financial Statements of Borrowers, 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 fiscal quarter of each year -35- beginning with the fiscal quarter ended December 31, 1999, the quarterly unaudited, consolidated and consolidating Financial Statements of the Borrowers prepared in accordance with GAAP; (iii) REPORT ON PROPERTIES. As soon as available and in any event on or before April 1 and October 1 of each calendar year, and at such other times as any Lender, 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; (iv) SEC REPORTS. As soon as available, and in any event within five (5) days of filing, copies of all filings by each Borrower with the Securities and Exchange Commission; (v) 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, each Borrower will furnish or cause to be furnished to the Agent a certificate in the form of Exhibit "C" attached hereto, signed by the President or Chief Financial Officer of each Borrower, (i) stating that each Borrower has fulfilled in all material respects its 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 each Borrower in all material respects with any of its 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) and (c); and (iv) 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 -36- audited Financial Statement pursuant to Section 12(a)(i) hereof, Borrowers 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 Borrowers' compliance with Sections 13(b), (c) and (d) of this Agreement. (d) TAXES AND OTHER LIENS. Each Borrower will pay and discharge promptly all taxes, assessments and governmental charges or levies imposed upon each Borrower, or upon the income or any assets or property of any Borrower, 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 any Borrower and which could reasonably be expected to result in a Material Adverse Effect; provided, however, that such Borrower shall not 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 such Borrower shall have set up adequate reserves therefor, if required, under GAAP. (e) COMPLIANCE WITH LAWS. Each Borrower 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. Borrowers 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. Borrowers 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. Borrowers will pay the Notes and other obligations incurred by it hereunder according to the reading, tenor and effect thereof and hereof; and Borrowers will do and perform every act and discharge all of the obligations provided to be performed and discharged by the Borrowers under the Loan Documents, including this Agreement, at the time or times and in the manner specified. (h) INSURANCE. The Borrowers now maintain and will continue to maintain insurance with financially sound and reputable insurers with respect to their respective assets -37- 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 Borrowers will furnish or cause to be furnished to the Agent from time to time a summary of the respective insurance coverage of Borrowers 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 Borrowers 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 Borrowers shall at all times maintain cost of control of well insurance with respect to the Oil and Gas Properties which shall insure the Borrowers 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 Borrowers. Additionally, the Borrowers 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. Each Borrower 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 auditors. (j) RIGHT OF INSPECTION. Each Borrower will permit any officer, employee or agent of the Lenders to examine such Borrower'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 Lenders may reasonably request. The Lenders 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 Lenders', and the Lenders' subsidiaries', Affiliates, officers, employees, legal counsel and regulatory authorities or advisors to whom it is necessary to reveal such information for the -38- purpose of effectuating the agreements and undertakings specified herein or as otherwise required in connection with the enforcement of the Lenders' 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 Borrowers furnished by the Borrowers to the Lenders, but does not include information (i) which was publicly known, or otherwise known to the Lenders, at the time of the disclosure, (ii) which subsequently becomes publicly known through no act or omission by the Lenders, or (iii) which otherwise becomes known to the Lenders, other than through disclosure by the Borrowers. (k) NOTICE OF CERTAIN EVENTS. The Borrowers shall promptly notify the Agent if Borrowers learn of the occurrence of (i) any event which constitutes an Event of Default together with a detailed statement by Borrowers of the steps being taken to cure such Event of Default; (ii) any legal, judicial or regulatory proceedings affecting Borrowers or any of the assets or properties of Borrowers which, if adversely determined, could reasonably be expected to have a Material Adverse Effect; (iii) any dispute between Borrowers 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 other matter which in Borrowers' reasonable opinion could have a Material Adverse Effect. (l) ERISA INFORMATION AND COMPLIANCE. The Borrowers 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 Borrowers specifying the nature thereof, what action Borrowers are 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 Borrowers will deliver to the Agent (i) promptly upon its becoming available, one copy of each report sent by any Borrower to any court, governmental agency or instrumentality pursuant to any Environmental Law, (ii) notice, in writing, promptly upon any Borrower'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 any Borrower 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 any Borrower, and Borrowers shall immediately deliver a copy of any such notice to Agent. -39- (n) COMPLIANCE AND MAINTENANCE. The Borrowers 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 Borrowers 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 Borrowers 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 Borrowers 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 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 Borrowers 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 Borrowers will pay or cause to be paid and discharge all rentals, delay rentals, royalties, production payment, and indebtedness required to be paid by Borrowers (or required to keep unimpaired in all material respects the rights of Borrowers 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 Borrowers by each and all of the assignments, deeds, leases, subleases, contracts, and agreements in any way relating to Borrowers or any of the Oil and Gas Properties and do all other things necessary of Borrowers to keep unimpaired in all material respects the rights of Borrowers thereunder and to prevent the forfeiture thereof or default thereunder; -40- provided, however, that nothing in this Agreement shall be deemed to require Borrowers 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 Borrowers 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 Borrowers exercised in good faith, it is not in the best interest of the Borrowers 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 Borrowers, the Borrowers 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 Borrowers; however, the Borrowers agree 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 Borrowers will immediately pay over to the Agent for the ratable benefit of the Lenders as a prepayment of principal on the Notes, an amount equal to 100% of the Release Price from the proceeds of the sale of the Oil and Gas Properties, which sale has been approved in advance by the Majority Lenders. The term "Release Price" as used herein shall mean a price determined by the Majority Lenders in their discretion based upon the loan collateral value of the Oil and Gas Properties being sold by Borrowers which such Lenders in their discretion (using such methodology, assumptions and discounts rates as such Lenders 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 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, Borrowers shall furnish Agent with title opinions and/or title information reasonably satisfactory to Agent showing good and defensible title of Borrowers to such Oil and Gas Properties subject only to the Permitted Liens. As to any Oil and Gas Properties hereafter mortgaged to Agent, Borrowers 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 Borrowers to such Oil and Gas Properties subject only to Permitted Liens. (t) CURATIVE MATTERS. Within sixty (60) days after the Effective Date with -41- respect to matters listed on Schedule "8" and, thereafter, within sixty (60) days after receipt by Borrowers from Agent or its counsel of written notice of title defects the Agent reasonably requires to be cured, Borrowers 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 Borrowers 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. If the Borrowers fail to satisfy (i) or (ii) above within the time specified, the loan collateral value assigned by the Lenders to the Oil and Gas Properties for which such curative information was requested shall be deducted from the Borrowing Base resulting in a reduction thereof. (u) CHANGE OF PRINCIPAL PLACE OF BUSINESS. Borrowers 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. Each Borrower shall establish and maintain with Agent one or more operating accounts (the "Operating Accounts"), the maintenance of each of which shall be subject to such rules and regulations as Agent from time to time specify. Such Operating Accounts shall be the sole operating accounts of the Borrowers. 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, Borrowers shall within sixty (60) 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 Operating Accounts. Such proceeds of production shall not be redirected without the prior written consent of the Agent until such time as all indebtedness due Lenders by Borrowers has been paid in full and the Commitments have been terminated. Each Borrower hereby grants a security interest to Lenders in and to their respective Operating Accounts (collectively, the "Cash Collateral Accounts") and all checks, drafts and other items ever received by any Lender 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 Borrowers' obligations hereunder any and all funds legally and beneficially owned by the Borrowers then or thereafter on deposit in the Cash Collateral Accounts for the ratable benefit of the Lenders. (w) YEAR 2000 COMPATIBILITY. Borrowers covenant and agree with Lenders that it will: (i) Furnish such additional information, statements and other reports with respect to Borrowers' activities, course of action and progress -42- towards becoming Year 2000 Compliant as Lenders may reasonably request from time to time; (ii) In the event of any change in circumstances that causes or will likely cause any of Borrowers' representations and warranties with respect to its being or becoming Year 2000 Compliant to no longer be true (hereinafter, referred to as a "Change in Circumstances") then Borrowers shall promptly, and in any event within ten (10) days of receipt of information regarding a Change in Circumstances, provide Lenders with written notice (the "Notice") that describes in reasonable detail the Change in Circumstances and how such Change in Circumstances caused or will likely cause Borrowers' representations and warranties with respect to being or becoming Year 2000 Compliant no longer to be true. Borrowers shall, within ten (10) days of a request, also provide Lenders with any additional information Lenders reasonably request of Borrowers in connection with the Notice and/or a Change in Circumstances. 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 Majority Lenders prior to the date of deviation. The Borrowers will at all times comply with the covenants contained in this Section 13 from the date hereof and for so long as the Commitment is in existence or any amount is owed to the Agent or the Lenders under this Agreement or the other Loan Documents. (a) NEGATIVE PLEDGE. Borrowers shall not without the prior written consent of the Lenders: (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 Borrowers' oil and gas businesses, (B) sales, leases or transfers or other dispositions made by Borrowers between Borrowing Base Determination Dates which do not exceed $4,000,000 (based upon Borrowing Base values assigned by the Agent to such properties at the last Borrowing Base redetermination) in the aggregate between such Determination Dates, and (C) other sales, leases, transfer or other dispositions made with the consent of Majority Lenders which are made pursuant to, and in full compliance with, Section 12(r) hereof; -43- (b) CURRENT RATIO. Borrowers shall not allow their ratio Current Ratio to be less than 1.0 to 1.0 as of the end of any fiscal quarter. (c) MINIMUM INTEREST COVERAGE RATIO. The Borrowers will not allow their Minimum Interest Coverage Ratio to be less than (i) 2.5 to 1.0 for the one quarter period ending December 31, 1999, (ii) 2.5 to 1.0 for the two quarter period ending March 31, 2000, (iii) 2.5 to 1.0 for the three quarter period ending June 30, 2000, (iv) 2.5 to 1.0 for the four quarter period ending September 30, 2000 and each four quarter period thereafter. (d) CONSOLIDATIONS AND MERGERS. No Borrower will consolidate or merge with or into any other Person, except that any Borrower may merge with another Person if such Borrower 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, and except that (i) Middle Bay may merge with 3TEC Energy Corporation, a Delaware corporation in a transaction described in the Middle Bay Definitive Proxy Statement as filed with the Securities and Exchange Commission on October 25, 1999 ("Proxy Statement") and (ii) Enex and Production may merge into Middle Bay. (e) DEBTS, GUARANTIES AND OTHER OBLIGATIONS. Without the consent of Majority Lenders, no Borrower will incur, create, assume or in any manner become or be liable in respect of any indebtedness, nor will any Borrower 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 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 Borrowers heretofore disclosed to Lenders 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 -44- to indebtedness for drilling, completing, leasing and reworking oil and gas wells; or (iv) indebtedness evidenced by the Subordinated Notes; or (v) any renewals or extensions of (but not increases in) any of the foregoing. (f) DIVIDENDS. No Borrower 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 (i) dividends on the Series C Preferred Stock and (ii) the redemption of the Series C Preferred Stock but such redemption shall be allowed only if (x) such redemption is made prior to May 1, 2000, (y) the Floyd Equity Transaction has occurred and (z) at least $5,000,000 of availability exists under the Commitment immediately after such redemption; 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. Borrowers shall not 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: (i) loans or advances to any person, the material details of which have been set forth in the Financial Statements of the Borrowers heretofore furnished to Lenders; or (ii) advances made in the ordinary course of Borrowers' oil and gas business; or (iii) loans or advances to Affiliates and non-related third parties not exceeding $100,000 in the aggregate during the existence of the Commitment. (h) SALE OR DISCOUNT OF RECEIVABLES. Borrowers will not discount or sell with recourse, or sell for less than the greater of the face or market value thereof, any of their notes receivable or accounts receivable. (i) NATURE OF BUSINESS. Borrowers will not permit any material change to be made in the character of their respective businesses as carried on at the date hereof. -45- (j) TRANSACTIONS WITH AFFILIATES. Borrowers will not enter into any transaction with any Affiliate, 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. Borrowers will not enter into any Rate Management Transactions, except the foregoing prohibitions shall not apply to (x) transactions consented to in writing by the Majority Lenders which are on terms acceptable to the Majority Lenders, or (y) Pre-Approved Contracts. (l) INVESTMENTS. Borrowers shall not make any investments in any person or entity, except such restriction shall not apply to: (i) investments and direct obligations of the United States of America or any agency thereof; (ii) investments in certificates of deposit issued by the Lenders 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. Borrowers will not permit any material amendment to, or any alteration of, its Articles of Incorporation or Bylaws except such amendments or alterations as may be contemplated by the Proxy Statement. (n) PROCEEDS OF PRODUCTION. Borrowers shall not redirect the payment of the proceeds of production from the Oil and Gas Properties to anyone or any place other than to the Operating Accounts at the Agent. (o) ISSUANCE OF PREFERRED STOCK. Borrowers shall not issue any additional preferred stock after the Effective Date without the consent of Majority Lenders. (p) AMENDMENTS TO AND REDEMPTION OF PREFERRED STOCK OR OTHER EQUITY. -46- Borrowers shall not (i) amend any outstanding equity issue after the Effective Date without the consent of Majority Lenders, or (ii) redeem any preferred stock (other than the Series C Preferred Stock which may be redeemed pursuant to Section 13(f)) without the consent of Majority Lenders. (q) PAYMENT OR PRE-PAYMENT OF OTHER INDEBTEDNESS. Except as otherwise provided for in this Agreement, Borrowers shall not make any unscheduled payments on or redeem any of its indebtedness (other than indebtedness owed the Lenders hereunder) or purchase or redeem any of their equity unless such payment, pre-payment or redemption is approved by Majority Lenders. (r) SUBORDINATED INDEBTEDNESS. Borrowers shall not fail in any respect to comply with all of the provisions of the Intercreditor Agreements or the subordination provisions of the Security Purchase Agreements and shall not make any payments on the Subordinated Notes in violation of the provisions thereof. Middle Bay shall not amend in any respect the provisions of the Subordinated Notes or the Security Purchase Agreements, except as permitted by the provisions of the Intercreditor Agreements or any of the Security Purchase Agreements. 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 Borrowers 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 Borrowers incurred pursuant to this Agreement or any other Loan Document; or (b) Any representation or warranty made by Borrowers under this Agreement, or in any certificate or statement furnished or made to the Lenders 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 Borrowers 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 Borrowers contained in the Loan Documents, including this Agreement (excluding covenants contained in Section 13 of the Agreement for which there is no cure period), and such default shall continue for more than thirty (30) days after written notice is received by Borrowers; or -47- (d) Default shall be made in the due observance or performance of the covenants of Borrowers contained in 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 Borrowers are 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 any Borrower or in respect of any agreement relating to any such obligations unless such Borrower 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) Borrowers shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any 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 their 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 them, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay their 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 Borrowers seeking liquidation, reorganization or other relief with respect to them or their 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 Borrowers 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 $1,000,000 (or judgments or orders aggregating in excess of $1,000,000) shall be rendered against Borrowers 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 Notes, and the Borrowers shall fail to comply with the provisions of Section 9(b) hereof; or (j) A Change of Control shall occur; or -48- (k) A Change of Management shall occur. 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 Borrowers 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 Borrowers. In any other Event of Default, the Agent, upon request of Majority Lenders, shall by written notice to the Borrowers 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 Borrowers 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 Lenders are hereby authorized at any time and from time to time, without notice to the Borrowers (any such notice being expressly waived by the Borrowers), 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 Lenders to or for the credit or the account of the Borrowers against any and all of the indebtedness of the Borrowers under the Notes and the Loan Documents, including this Agreement, irrespective of whether or not the Lenders 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 Lenders shall be applied against the indebtedness owed the Lenders by the Borrowers pursuant to this Agreement and the Notes. The Lenders agree promptly to notify the Borrowers 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 Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Lenders may have. 15. THE AGENT AND THE LENDERS. (a) APPOINTMENT AND AUTHORIZATION. Each Lender 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 Lender in and under all Loan Documents; (ii) to arrange the means whereby the funds of Lenders are to be made available to the Borrowers under the Loan Documents; (iii) to take such action as may be requested by any Lender under the Loan Documents (when such Lender is entitled to make such request under the Loan Documents); (iv) to receive all -49- documents and items to be furnished to Lenders 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 Lenders; (vi) to promptly distribute to each Lender all material information, requests, documents and items received from the Borrowers under the Loan Documents; (vii) to promptly distribute to each Lender such Lender'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 Lenders. Each Lender 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 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 Lender and may exercise the same as though it were not the Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include Agent and any successor Agent in its capacity as a Lender. 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 Borrowers, and any person which may do business with the Borrowers, all as if Agent and any successor Agent was not Agent hereunder and without any duty to account therefor to the Lenders; 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 Borrowers 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 Borrowers arising under the Loan Documents, then each Lender shall be entitled to share in such application according to its pro rata part thereof. Each Lender, upon request of any other Lender, shall disclose to all other Lenders all indebtedness and liabilities, direct and contingent, of the Borrowers to such Lender as of the time of such request. (b) NOTE HOLDERS. From time to time as other Lenders become a party to this Agreement, Agent shall obtain execution by the Borrowers of additional Notes in amounts representing the Commitment of each such new Lender, up to an aggregate face amount of all Notes not exceeding $250,000,000. The obligation of such Lender 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 Lenders exchange their Notes for newly issued Notes to better reflect the Commitments of the Lenders. 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. Lenders agree that Agent may consult with -50- 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. LENDERS ACKNOWLEDGE THAT GARDERE & WYNNE, L.L.P. IS COUNSEL FOR BANK ONE, BOTH AS AGENT AND AS A LENDER, AND THAT SUCH FIRM DOES NOT REPRESENT ANY OF THE OTHER LENDERS IN CONNECTION WITH THIS TRANSACTION. (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 notice thereof to Lenders and the Borrowers, and Agent may be removed at any time with or without cause by all Lenders. If no successor Agent has been so appointed by all Lenders (and approved by the Borrowers) 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 Lenders, appoint a successor Agent. Any successor Agent must be approved by Borrowers, 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, as the case may be, 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 Lender 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 Lender or the Borrowers that such Lender or the Borrowers 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 -51- 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 Lenders for any of the Borrowers' recitals, statements, representations or warranties contained in any of the Loan Documents, or in any certificate or other document referred to or provided for in, or received by any Lender 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 Borrowers to perform any of its obligations hereunder or thereunder. Agent may employ agents and attorneys-in-fact and shall not be answerable, except as to money or securities received by it or its authorized agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The relationship between Agent and each Lender 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 Borrowers or any of their 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 Lenders and such instructions shall be binding upon all Lenders 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 Lenders, 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 herein and in Section 7(b) hereof, without the consent of Majority Lenders designate the amount of the Borrowing Base or the Monthly Commitment Reduction or (ii) 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. Provided further, however, that no amendment, waiver, or other action shall be effected pursuant to the preceding clause (ii) without the consent of all Lenders 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 Lender's Note or Notes, (iii) would postpone any date fixed for any payment of any fees hereunder, or any principal or interest of any Lender's Note or Notes, (iv) would materially increase any Lender's -52- obligations hereunder or would materially alter Agent's obligations to any Lender hereunder, (v) would release Borrowers from their obligation to pay any Lender's Note or Notes, (vi) release any of the Collateral except as permitted by Sections 12(r) and 13(a)(ii) hereof, (vii) would change the definition of Majority Lenders, (viii) would amend, modify or change any provision of this Agreement requiring the consent of all the Lenders, (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 Maturity Date or (xi) would amend this sentence or the previous sentence. Agent shall not have liability to Lenders 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 Lenders. (g) INDEPENDENT INVESTIGATION. Each Lender severally represents and warrants to Agent that it has made its own independent investigation and assessment of the financial condition and affairs of the Borrowers in connection with the making and continuation of its participation hereunder and has not relied exclusively on any information provided to such Lender by Agent in connection herewith, and each Lender represents, warrants and undertakes to Agent that it shall continue to make its own independent appraisal of the credit worthiness of the Borrowers 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 Borrowers of this Agreement or any other document referred to or provided for herein or to inspect the properties or books of the Borrowers. Other than as provided in this Agreement, Agent shall not have any duty, responsibility or liability to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Borrowers which may come into the possession of Agent. (h) INDEMNIFICATION. Lenders 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 Lender 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 Lender shall be entitled to be reimbursed by the Agent for any amount such Lender paid to Agent under this Section 15(h) to the extent the Agent has been reimbursed for such payments by the Borrowers 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 -53- 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 Lenders and are not for the benefit of, or to be relied upon by, the Borrowers, any affiliate of the Borrowers or any other person. (j) PRO RATA TREATMENT. Subject to the provisions of this Agreement, each payment (including each prepayment) by the Borrowers and collection by Lenders (including offsets) on account of the principal of and interest on the Notes and fees provided for in this Agreement, payable by the Borrowers shall be made Pro Rata; provided, however, in the event that any Defaulting Lender shall have failed to make an Advance as contemplated under Section 3 hereof and Agent or another Lender or Lenders shall have made such Advance, payment received by Agent for the account of such Defaulting Lender or Lenders shall not be distributed to such Defaulting Lender or Lenders until such Advance or Advances shall have been repaid in full to the Lender or Lenders who funded such Advance or Advances. (k) ASSUMPTION AS TO PAYMENTS. Except as specifically provided herein, unless Agent shall have received notice from the Borrowers prior to the date on which any payment is due to Lenders hereunder that the Borrowers will not make such payment in full, Agent may, but shall not be required to, assume that the Borrowers have made such payment in full to Agent on such date and Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Borrowers shall not have so made such payment in full to Agent, each Lender shall repay to Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to Agent, at the interest rate applicable to such portion of the Loan. (l) OTHER FINANCINGS. Without limiting the rights to which any Lender otherwise is or may become entitled, such Lender 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 Lender to, on behalf of, or with the Borrowers (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 Borrowers 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 Lender which may be or become security for the obligations of the Borrowers arising under any loan document by reason of the general description of indebtedness secured or property contained in any other agreements, -54- documents or instruments relating to any such Other Financings. (m) INTERESTS OF LENDERS. Nothing in this Agreement shall be construed to create a partnership or joint venture between Lenders for any purpose. Agent, Lenders and the Borrowers recognize that the respective obligations of Lenders under the Commitments shall be several and not joint and that neither Agent nor any of Lenders shall be responsible or liable to perform any of the obligations of the other under this Agreement. Each Lender 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 Borrowers under the Commitments on a Pro Rata basis. Each Lender shall perform all duties and obligations of Lenders under this Agreement in the same proportion as its ownership interest in the Loans outstanding at the date of determination thereof. (n) INVESTMENTS. Whenever Agent in good faith determines that it is uncertain about how to distribute to Lenders any funds which it has received, or whenever Agent in good faith determines that there is any dispute among the Lenders 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 Lenders, Agent may invest such funds pending distribution (at the risk of the Borrowers). 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 Lenders (other than to the Person who is Agent in its separate capacity as a Lender) shall be held by the Agent pending such distribution solely as Agent for such Lenders, 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 Lenders, 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 Lenders 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 -55- 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) BORROWERS: c/o MIDDLE BAY OIL COMPANY, INC., 5910 N. Central Expressway, Suite 1150, Dallas, Texas 75206, Attn: Floyd C. Wilson, President and Chief Executive Officer, Facsimile (214) 523-7965; (b) AGENT: BANK ONE, TEXAS, N.A., 1717 Main Street, Dallas, Texas 75201, Facsimile No. (214) 290-2332, Attention: Mynan C. Feldman, First 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 Lenders shall be given to the Agent and distributed to all Lenders by the Agent. 18. EXPENSES. The Borrowers shall pay (i) all reasonable and necessary out-of-pocket expenses of the Lenders, 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 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 Borrowers 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 Lenders, including fees and disbursements of counsel, in connection with such default and Event of Default and collection and other enforcement proceedings resulting therefrom. THE BORROWERS HEREBY ACKNOWLEDGE THAT GARDERE & WYNNE, L.L.P. IS SPECIAL COUNSEL TO BANK ONE, AS AGENT AND AS A LENDER, UNDER THIS AGREEMENT AND THAT IT IS NOT COUNSEL TO, NOR DOES IT REPRESENT THE BORROWERS IN CONNECTION WITH THE TRANSACTIONS DESCRIBED IN THIS AGREEMENT. The Borrowers are relying on separate counsel in the transaction described herein. The Borrowers shall indemnify the Lenders 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 Borrowers to the Lenders hereunder and under the Notes. 19. INDEMNITY. The Borrowers agree to indemnify and hold harmless the Lenders 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 Lenders, including all local counsel hired by such counsel) ("Claim") incurred by the Lenders in investigating or preparing for, defending against, or providing evidence, -56- 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 Borrowers 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 Borrowers to the Lenders 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 Borrowers to the Lenders hereunder and under the Notes, provided that the Borrowers shall have no obligation under this Section to the Lender with respect to any of the foregoing arising out of the gross negligence or willful misconduct of the Lender. If any Claim is asserted against any Indemnified Party, the Indemnified Party shall endeavor to notify the Borrowers 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 Borrowers' expense, counsel of the Indemnified Parties' choosing and to control the defense of the Claim. The Borrowers may at their own expense also participate in the defense of any Claim. Each Indemnified Party may employ separate counsel in connection with any 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 -57- 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 Lenders 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 Lender 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 Borrowers results in the Borrowers 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 Borrowers. All sums paid or agreed to be paid to the Lenders 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 Borrowers and the Lenders 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. 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 -58- 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 Borrowers may not, without the prior written consent of all of the Lenders, assign any rights, powers, duties or obligations hereunder. 28. ASSIGNMENTS AND PARTICIPATIONS. (a) Each Lender shall have the right to sell, assign or transfer all or any part of its Note or Notes, its Commitment and its rights and obligations hereunder to one or more Affiliates, Lenders, 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), shall require the consent of Agent and the Borrowers, which consents will not be unreasonably withheld; provided, however, that if an Event of Default has occurred and is continuing, the consent of the Borrowers shall not be required. Any such 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 Lender and a holder of such Note, Commitment and rights and obligations, including, without limitation, the right to vote on decisions requiring consent or approval of all Lenders or Majority Lenders and the obligation to fund its Commitment; provided, 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 not less than $5,000,000, (2) each remaining Lender shall at all times maintain Commitment 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 Lender's Commitment, (4) no Lender may offer to sell its Note or Notes, Commitment, 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 Lender and its assignee delivers to Agent and Borrowers 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 Borrowers shall execute and deliver to Agent (for delivery to the relevant assignee) a new Note or Notes evidencing such assignee's assigned Commitment and if the assignor Lender has retained a portion of its Commitment, a replacement Note in the principal amount of the Commitment 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 Lender). On and after the effective date of an assignment -59- hereunder, the assignee shall for all purposes be a Lender, party to this Agreement and any other Loan Document executed by the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party thereto, and no further consent or action by Borrowers, Lenders or the Agent shall be required to release the transferor Lender with respect to its Commitment assigned to such assignee and the transferor Lender shall henceforth be so released. (b) Each Lender shall have the right to grant participations in all or any part of such Lender's Notes and Commitment hereunder to one or more pension plans, investment funds, insurance companies, financial institutions or other Persons, provided, that: (i) each Lender 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 Lender or Majority Lenders (except as set forth in (iii) below); (ii) in the event any Lender grants a participation hereunder, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the holder of any such Note or Notes for all purposes under the Loan Documents, and Agent, each Lender and Borrowers shall be entitled to deal with the Lender granting a participation in the same manner as if no participation had been granted; and (iii) no participant shall ever have any right by reason of its participation to exercise any of the rights of Lenders hereunder, except that any Lender may agree with any participant that such Lender 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 Lenders. (c) It is understood and agreed that any Lender may provide to assignees and participants and prospective assignees and participants financial information and reports and data concerning Borrowers' properties and operations which was provided to such Lender pursuant to this Agreement. (d) Upon the reasonable request of either Agent or Borrowers, each Lender will identify those to whom it has assigned or participated any part of its Notes and -60- Commitment, and provide the amounts so assigned or participated. 29. CHOICE OF FORUM: CONSENT TO SERVICE OF PROCESS AND JURISDICTION. THE OBLIGATIONS OF BORROWERS UNDER THE LOAN DOCUMENTS ARE PERFORMABLE IN DALLAS COUNTY, TEXAS. ANY SUIT, ACTION OR PROCEEDING AGAINST THE BORROWERS 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 BORROWERS HEREBY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS FOR THE PURPOSE OF ANY SUCH SUIT, ACTION OR PROCEEDING. THE BORROWERS HEREBY IRREVOCABLY CONSENT TO SERVICE OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING IN SAID COURT BY THE MAILING THEREOF BY LENDER BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWERS, AS APPLICABLE, AT THE ADDRESS FOR NOTICES AS PROVIDED IN SECTION 17. THE BORROWERS HEREBY IRREVOCABLY WAIVE ANY OBJECTION WHICH THEY 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 BORROWERS HEREBY WAIVE, 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. 31. OTHER AGREEMENTS. THIS WRITTEN CREDIT 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. -61- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. BORROWERS: MIDDLE BAY OIL COMPANY, INC. an Alabama corporation By: /s/ Floyd C. Wilson ------------------------------------------- Name: Floyd C. Wilson ----------------------------------------- Title: President and Chief Executive Officer ---------------------------------------- ENEX RESOURCES CORPORATION a Delaware corporation By: /s/ Floyd C. Wilson ------------------------------------------- Name: Floyd C. Wilson ----------------------------------------- Title: President and Chief Executive Officer ---------------------------------------- MIDDLE BAY PRODUCTION COMPANY, INC. a Kansas corporation By: /s/ Floyd C. Wilson ------------------------------------------- Name: Floyd C. Wilson ----------------------------------------- Title: President and Chief Executive Officer ---------------------------------------- LENDERS: BANK ONE, TEXAS, N.A., a national banking association By: /s/ Mynan C. Feldman ------------------------------------------- Mynan C. Feldman, First Vice President -62- THE BANK OF NOVA SCOTIA By: /s/ F.C.H. Ashby ------------------------------------------- Name: F.C.H. Ashby ----------------------------------------- Title: Senior Manager Loan Operations ---------------------------------------- UNION BANK OF CALIFORNIA, N.A. By: /s/ Randy Osterberg ------------------------------------------- Randy Osterberg, Vice President By: /s/ Ali Ahmed ------------------------------------------- Ali Ahmed, Investment Banking Officer WELLS FARGO BANK By: /s/ Brian K. Otis ------------------------------------------- Brian K. Otis, Assistant Vice President CIBC, INC. By: /s/ Roger Colden ------------------------------------------- Name: Roger Colden ----------------------------------------- Title: Authorized Signatory ---------------------------------------- -63- ADMINISTRATIVE AGENT: BANK ONE, TEXAS, N.A., a national banking association By: /s/ Mynan C. Feldman ------------------------------------------- Mynan C. Feldman, First Vice President SYNDICATION AGENT: UNION BANK OF CALIFORNIA, N.A. By: /s/ Randy Osterberg ------------------------------------------- Randy Osterberg, Vice President By: /s/ Ali Ahmed ------------------------------------------- Ali Ahmed, Investment Banking Officer -64- -----END PRIVACY-ENHANCED MESSAGE-----