-----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, L/BoJfklSfWhz4YD4hHKv22hVHYBUxscVbww0hTLnmk9mJr1zUO5dBL0LbQfFf/T /w+inKIUWjH7olRsZ1+LLQ== 0000950129-98-001375.txt : 19980401 0000950129-98-001375.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950129-98-001375 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3DX TECHNOLOGIES INC CENTRAL INDEX KEY: 0000915518 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760386601 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21841 FILM NUMBER: 98582283 BUSINESS ADDRESS: STREET 1: 12012 WICKCHESTER STREET 2: SUITE 250 CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 2815793390 MAIL ADDRESS: STREET 1: 12012 WICKCHESTER STREET 2: SUITE 250 CITY: HOUSTON STATE: TX ZIP: 77079 10-K 1 3DX TECHNOLOGIES INC. - 12/31/97 1 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K For Annual and Transition Reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 0-21841 3DX TECHNOLOGIES INC. (Exact name of registrant as specified in its charter) DELAWARE 76-0386601 (State of Incorporation) (IRS Employer Identification Number) 12012 WICKCHESTER, SUITE 250, HOUSTON, TEXAS 77079\ (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (281) 579-3398 Securities registered pursuant to Section 12(b) of the Exchange Act: (None) Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.01 par value (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $7.6 million on March 13, 1998 based upon the closing sale price of common stock on such date of $1.625 per share on the NASDAQ National Market. As of March 13, 1998, the registrant had 7,260,993 shares of common stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III is incorporated by reference to the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or before April 30, 1998. =============================================================================== 2 TABLE OF CONTENTS
PART I ITEM 1. BUSINESS..........................................................................1 ITEM 2. PROPERTIES........................................................................8 ITEM 3. LEGAL PROCEEDINGS................................................................14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................................14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ....................................................14 ITEM 6. SELECTED FINANCIAL DATA..........................................................14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................16 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............................20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............................21 ITEM 11. EXECUTIVE COMPENSATION...........................................................21 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................21 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K................ 21 SIGNATURES................................................................................................23
i 3 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. Because such statements include risks and uncertainties, actual results, events and circumstances could differ materially from those expressed in or implied by such statements due to various factors. Such factors include the possibility that the drilling of wells in projects in which the Company has a working interest may be delayed or abandoned, actual rates of production may not reach anticipated levels and opportunities for the Company to acquire future working interests in additional projects may be limited or unavailable, changing economic, regulatory and competitive conditions, other technological developments and other risks and uncertainties, including those set forth herein. The Company's future financial results will depend primarily on: (i) the Company's ability to continue to source and screen potential projects; (ii) the Company's ability to discover commercial quantities of hydrocarbons; (iii) the market price for oil and gas; and (iv) the Company's ability to obtain additional sources of funding to fully implement its exploration and development program. There can be no assurance that the Company will be successful in any of these respects or that the prices of oil and gas prevailing at the time of production will be at a level allowing for profitable production. PART I ITEM 1. BUSINESS. OVERVIEW 3DX Technologies Inc. ("the Company") is a knowledge-based oil and gas exploration company whose core competence and strategic focus is the utilization of 3-D seismic imaging and other advanced technologies in the search for commercial quantities of hydrocarbons. The Company enters into arrangements that enable it to combine its expertise and exploration capabilities with the operating skills of other oil and gas companies. The Company participates in selected exploration projects as a non-operating working interest owner, sharing both risks and rewards with its partners. The Company commenced operations in January 1993 to take advantage of perceived opportunities emerging from changes in the domestic oil and gas industry, including the divestiture of domestic oil and gas properties, advances in technology and the outsourcing of specialized technical capabilities. By reducing drilling risk through 3-D imaging and analysis, the Company seeks to improve the expected return on investment in its oil and gas projects. The Company has developed a screening process that it applies to all projects that it considers. The screening process, adapted continually to incorporate the Company's ongoing experience, is designed to produce a balanced portfolio of projects that have reliable and experienced operating partners, are conducive to the application of advanced 3-D technology, have significant upside potential and may be extended into exploration trends. STRATEGY The Company's goal is to increase its proved reserves, production and cash flow by quickly, accurately and economically locating commercial quantities of hydrocarbons for itself and its partners. To reach its goal, the Company is pursuing a business strategy that includes the following principal elements: Focusing Operational Efforts Exclusively on the Company's Expertise in 3-D Imaging and Analysis. The Company focuses all of its technical resources on obtaining the best possible subsurface image and on identifying the most effective location and target depth for each prospective well. To allow it to focus its efforts exclusively on 3-D imaging and analysis, the Company relies on its project partners to undertake the -1- 4 project's other operating functions, including land acquisition, drilling and marketing. Although 3-D seismic technology is now routinely used in oil and gas exploration projects, the Company believes that its focus, experience and innovative methods of applying the technology provide it with advantages in extracting useful information from seismic and other data. Developing and Supporting a Team of Technologically Sophisticated Explorationists. The quality of information obtained from the application of 3-D imaging is dependent to a large extent on the Company's ability to capitalize on the intelligence, acquired knowledge and creativity of the experienced geoscientists and engineers it employs. To allow the Company to capitalize fully on the intellectual resources offered by such experts, the Company's administrative operations and infrastructure are directed toward providing tools and support to the Company's technical specialists. To continue its ability to recruit, retain and motivate such experts, the Company is committed to providing its oil and gas geoscientists and engineers with the most advanced imaging and analytical technology commercially available and awards options to purchase common stock to each of its experts and other employees. Maintaining a Research Program to Develop Innovative Application Techniques Involving Advanced Exploration Technology. The Company relies upon its ongoing applied research effort to continually develop and adapt technology that will enable it to retain its position as a leading high technology exploration company. For example, through its research efforts, the Company has developed the 3DXpress process. The Company's 3DXpress process is an innovative technique used in exploration that improves the quality of seismic data and significantly compresses the time frame traditionally required for acquisition, processing, imaging and analysis. This process allows analysis of 3-D data while the survey is being conducted, giving the Company's explorationists the ability to ensure data quality and steer data collection toward areas where prospects are more likely to exist. Utilizing this technology, the Company believes it has been able to image and analyze a larger number of projects concurrently and identify potential drilling sites more rapidly and accurately than with traditional methods. The Company also believes that the application of emerging technologies, such as migration velocity analysis and depth migration technology, provides the Company with a competitive advantage in its efforts to effectively and efficiently locate commercial quantities of hydrocarbons. Pursuing a Disciplined Approach to Selective Project Participation, Partnering and Drilling Efforts. The Company adheres to a disciplined screening process and, based on its experience, continually adapts the criteria to select projects which are likely to maximize the return on its capital investment. The Company's selection criteria favor projects which (i) are managed by reliable and successful operating partners; (ii) are located on properties to which 3-D imaging can be effectively applied to evaluate the primary geologic risk; (iii) have high upside potential; (iv) may be extended into trend plays; and (v) have projected rates of return which make the production of hydrocarbons economically attractive. Actively Managing the Company's Portfolio of Oil and Gas Projects. The Company has developed and actively manages a portfolio of partners, projects and producing assets having a diverse range of risk/reward ratios. Active portfolio management enables the Company to reduce its exposure to non-geologic project risks such as land acquisition, operator performance and drilling operations that are not mitigated by the application of 3-D imaging and analysis technologies. In addition, the Company believes that aggressive management of its portfolio enables it to make more efficient use of available capital by limiting the Company's exposure to any individual exploration project and by allowing it to focus its resources toward trend play opportunities arising from carefully selected projects. PROJECT SELECTION AND MANAGEMENT METHODOLOGY Successful application of the Company's business plan is dependent upon the Company's participation as an active working interest partner in select high quality projects. The working interest acquired by the Company in any project is determined through negotiation among the Company and its prospective partners prior to the Company's commitment to participate. The percentage working interest which the Company seeks to acquire varies with each project and is dependent upon the project's anticipated costs, risk and potential return. During the course of the project, the Company's working interest is subject to -2- 5 change as a result of negotiated cost and working interest sharing arrangements, the terms of which are negotiated by the Company prior to its commitment to participate. To identify these projects, the Company undertakes a rigorous evaluation of the numerous projects proposed to it by its existing partners and other project generators. The Company engages in the following steps to evaluate, identify and manage high quality projects in which the Company participates. o Initial Screening. Prior to committing technical resources to the evaluation of a potential project, the Company's business development team reviews both the potential project and its partners to determine if they satisfy certain initial business criteria. To evaluate a potential project, the Company considers geographic location, scale, geological model, anticipated drilling prospects, number of pay zones, trend potential and expected project economics. To evaluate a potential partner, the Company considers that partner's financial stability, reputation and record of success in exploration and production activities. o Technical Evaluation. If the potential project and partner satisfies the Company's initial business screening criteria, the project is then evaluated by a multidisciplinary team of the Company's technical experts. Such technical evaluation allows the Company to analyze and evaluate further the basic geological model, determine the seismic character of reservoirs within the project site, determine if the application of 3-D imaging technology will adequately address the primary geologic risk, investigate local and regional production trends for target reservoirs, refine its evaluation of project economics and determine if the capital required conforms to the Company's investment guidelines. If the project meets these criteria, the Company will participate in the project, committing its capital, technological resources and 3-D imaging and analytical expertise. o Earth Imaging. Once a project is approved for investment, the project team, led by one of the Company's geoscientists or engineers and including representatives of all or substantially all of the project's partners, commences its efforts to create the most accurate subsurface image possible. By integrating 3-D seismic data with other geologic and engineering data, the project team uses the derived subsurface image to model the potential reservoirs within the project's area. The seismic data collection, processing and analysis are usually managed by the Company to assure its integrity and consistency. o Drilling Decision. After the project team completes the earth imaging and analysis of a selected project, the project team determines if the applicable data identify economically attractive drilling opportunities. The economic return expected from drilling must satisfy certain criteria and must be commensurate with the perceived risk. Thereafter, the project team makes recommendations to the partnership regarding drill sites and target depths. o Post-Drilling Appraisal. Subsequent to the drilling of each well in a project, the Company integrates the information it has acquired in the drilling phase with its earth model, enabling it to enhance the model based on the best available data and knowledge. As a result, the Company builds an increasing base of knowledge upon which to make future drilling decisions with respect to each project. As a working interest partner, the Company shares all project costs in proportion to its working interest percentage. In instances in which exploration and development activities are unsuccessful, the Company incurs an economic loss equal to its proportionate share of project costs prior to the time the project is abandoned. Similarly, the Company incurs an economic loss if the Company's proportionate share of revenue generated from production is insufficient to cover the Company's share of project costs. PROJECT GENERATION AND SIGNIFICANT BUSINESS RELATIONSHIPS By its participation in multiple projects, many with multiple partners, the Company seeks to demonstrate its ability to improve project economics. Its current partners are its best resource for future high -3- 6 quality projects. The Company believes that its existing partners, which have benefited from the Company's ability to improve project economics by reducing primary geologic risk, will seek such benefits with respect to future projects and will therefore solicit the Company's involvement in such new projects. By participating in projects with partners who possess experience and knowledge in exploration operations that are complementary to the Company's imaging and analytical focus area, the Company believes that it and each project partner receive the benefit of the other's knowledge and expertise while achieving results that are greater than any particular partner might be able to achieve independently. The Company further believes that establishing long-term partner relationships will enhance the flow of prospective opportunities and the quality and stability of the business relationship, as well as reduce significant risks, such as the partner's operating capabilities and financial stability. As of December 31, 1997, the Company's active exploration portfolio consisted of 25 projects and included 12 operator partners, as reflected in the table below:
OPERATOR PARTNER OFFICE LOCATION AREA OF ACTIVITY - ---------------- --------------- ---------------- Alta Mesa Resources, Inc. Houston, TX Louisiana Gulf Coast Onshore Aspect Resources LLC Denver, CO Texas Gulf Coast Onshore Esenjay Petroleum Corporation Corpus Christi, TX Gulf Coast Onshore (TX,MS,AL) Genesis Producing Company Corpus Christi, TX Texas Gulf Coast Onshore Louisiana Land & Exploration New Orleans, LA Louisiana Gulf Coast Onshore Phillips Petroleum Company Houston, TX Texas Onshore and Offshore Plains Resources, Inc. Houston, TX Florida Sunniland Trend PrimeEnergy Corporation Stamford, CT Texas Gulf Coast Onshore Rutherford Oil Corporation Houston, TX Texas Gulf Coast Onshore Santa Fe Energy Resources, Inc. Houston, TX West Africa and Deep Water Sue Ann Production Company Houston, TX Texas Gulf Coast Onshore Union Gas Corporation Houston, TX Texas Gulf Coast Onshore
The Company's strategy is to enter into long-term joint ventures and alliances with high quality operator partners to enhance the flow of opportunities presented to the Company and to assure consistent quality of operations. As part of this strategy, the Company attempts to convert successful relationships on individual projects with quality partners into long-term strategic alliances. 3-D IMAGING TECHNOLOGY The Company's oil and gas exploration capabilities are dependent upon the effective application of 3-D imaging technologies. Although the initial application of 3-D imaging technology began in the late 1960's, its cost through the 1970s justified use only in deep offshore applications and other environments with substantial drilling costs and risk. During the latter half of the 1980's, 3-D imaging was a principal tool used in exploration activities in both the North Sea and the Gulf of Mexico. Advances in technology during the 1980's made the use of 3-D imaging more cost-effective and more readily available for use onshore. In general, 3-D imaging technology provides an "image" of the subsurface geology by collecting seismic data along multiple parallel lines and creating a cube of information which is spatially sampled throughout. The data acquired by use of 3-D imaging technology is of significantly higher quality and provides significantly better information than the data acquired by 2-D seismic technology. The higher fidelity and resolution of 3-D data results in more accurate images than are possible using 2-D seismic and other conventional methods. The productive application of 3-D imaging technology requires the skills of highly trained experts. -4- 7 The Company maintains an extensive computer facility to support its oil-finding activities. A Silicon Graphics Power Challenge provides the large-scale computing capacity to support real-time data processing and depth migration. A network of eight Sun Sparc and Ultra Sparc workstations, functioning in a client-server environment, provides the framework for synthesis of the geological, geophysical and engineering data into an integrated image of the subsurface. The principal supplier of the software used by the Company for both processing and data interpretation is Landmark Graphics Corporation and its subsidiaries. In addition, the Company maintains licenses for certain complex geological and geophysical applications from Hampson-Russell Software Inc., Paradigm Geophysical, Inc., and Petrosoft Inc. GEOLOGIC, GEOPHYSICAL AND ENGINEERING EXPERTISE The Company has assembled a group of talented and experienced geologists, geophysicists and engineers that work in multidisciplinary teams to enable the Company to exploit fully the advantages afforded by 3-D imaging technologies. As of December 31, 1997, the Company employed 17 full-time experts who design and manage the process of seismic data acquisition, processing, imaging and analysis and drill site selection using computer systems and software owned or licensed by the Company. The majority of these geoscientists and engineers have between five to 20 years of experience involving the utilization of seismic data imaging and analysis, and they have extensive experience with 3-D seismic projects in diverse geologic trends throughout the world. If a project requires technical expertise not available from the Company's or project partners' personnel, the Company's project manager will identify and recruit an industry expert to join the project team. By assembling in-house technical expertise, the Company is able to manage fully and effectively the imaging and analytical phase of the projects in which it participates. The Company provides its technical expertise exclusively to those projects in which it participates as a working interest partner. RESEARCH AND DEVELOPMENT The Company believes that it possesses a competitive advantage over other oil and gas companies by utilizing the experience of its in-house scientific experts to continually develop innovative techniques and tools to optimize the Company's utilization of 3-D imaging technologies. The Company's ongoing research and development and its continuous accumulation of knowledge have resulted in technical improvements and innovations that the Company believes provide it with significant competitive advantages. The Company enhances its ongoing research program by forging strategic alliances with select suppliers of hardware and software which have demonstrated foresight in the science of earth imaging. The Company believes that its strategy of applied research and development will allow it to remain at the forefront of oil and gas exploration technology. The Company has been able to adapt and refine concurrent imaging methods to create the Company's 3DXpress process through the effective application of its applied research and development strategy. In its first commercial application of the 3DXpress process, the Company commenced and completed a project's imaging and analysis phase in a four week period. Thereafter, the project operator successfully drilled and completed seven of the eight resulting wells in a complex geologic setting relying upon the Company's drill site and target depth recommendations. Other innovations and improvements to the imaging process resulting from the Company's ongoing research include the use of digital orthomaps for survey planning and control, the use of GPS locators on seismic vibrators for positioning control, application of AVO, inversion and geostatistics to the process of reservoir characterization and the application of interactive migration velocity analysis and depth migration to achieve superior image reconstruction. Many of these innovations and improvements are the result of strategic alignments with pioneering technology suppliers such as GPS Technologies, Inc., Hampson-Russell Software, Inc., Landmark Graphics Corporation and Paradigm Geophysical, Inc. -5- 8 REGULATION The Company's operations are subject to numerous federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Public interest in the protection of the environment has increased dramatically in recent years. Offshore drilling in certain areas has been opposed by environmental groups and, in certain areas, has been restricted. The Company believes that the trend of more expansive and stricter environmental legislation and regulations will continue. To the extent laws are enacted or other governmental action is taken which prohibit or restrict onshore and offshore drilling or impose environmental protection requirements that result in increased costs to the oil and gas industry in general, the business and prospects of the Company could be adversely affected. The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder impose a variety of requirements on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills in United States waters. A "responsible party" includes the owner or operator of a facility or vessel, or the lessee or permittee of the area in which an offshore facility is located. The OPA assigns liability to each responsible party for oil removal costs and a variety of public and private damages including natural resource damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulation. If the party fails to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply. Few defenses exist to the liability imposed by the OPA. Under the OPA and regulations promulgated thereunder, owners and operators of "offshore facilities" must satisfy certain financial assurance requirements to evidence their ability to cover potential environmental cleanup and restoration costs. In projects in which the Company has a participating working interest, the operator partner is responsible for all demonstrations of financial responsibility including the posting of any indemnity bonds which are required by applicable governmental regulations. The expenses incurred in the operator partner's demonstration of financial responsibility are expenses which are allocated to each project partner based on the respective partner's working interest. The OPA also imposes other requirements, such as the preparation of an oil spill contingency plan. The Company has such a plan in place. Failure to comply with ongoing requirements or inadequate cooperation during a spill event may subject a responsible party to civil or criminal enforcement actions. To complement the OPA, the State of Texas enacted the Oil Spill Prevention and Response Act (OSPRA). The Texas General Land Office (GLO) is the lead agency for carrying out OSPRA, and to that end the GLO has promulgated regulations affecting anyone who owns or operates a vessel or facility that stores or transfers oil in areas where a spill could reach Texas coastal waters. In addition, the Outer Continental Shelf Lands Act ("OCSLA") authorizes regulations relating to safety and environmental protection applicable to lessees and permittees operating on the Outer Continental Shelf (the "OCS"). Specific design and operational standards may apply to OCS vessels, rigs, platforms, vehicles and structures. Violations of lease conditions or regulations issued pursuant to the OCSLA can result in substantial civil and criminal penalties, as well as potential court injunctions curtailing operations and the cancellation of leases. Such enforcement liabilities can result from either governmental or private prosecution. -6- 9 The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to have contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources. Additionally, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. Further, certain oilfield wastes are subject to the Resource Conservation & Reservation Act ("RCRA") with respect to the regulation of hazardous wastes. The RCRA regulates the generation, transportation and disposal of hazardous wastes. The Texas Railroad Commission has issued rules for management of certain types of hazardous waste generated in the oilfield. However, until delegation of the RCRA program to the Railroad Commission, hazardous wastes generated in the oilfield are regulated by the Texas Natural Resources Conservation Commission. The Texas Railroad Commission regulates pollution of groundwater and surface water resulting from exploration, production and development of oil and natural gas resources. The Clean Water Act (CWA) and regulations promulgated thereunder prohibit the discharge of pollutants into waters of the United States without a permit pursuant to the National Pollutant Discharge Elimination System (NPDES) provisions. The CWA also requires reporting of oil spills to the National Response Center. The United States Environmental Protection Agency (EPA) has issued general NPDES permits for oil and gas platforms in the Gulf of Mexico, which permits impose limits on discharges of such things as oil, grease, produced water and drilling fluids. Onshore platforms may also be subject to the requirement for NPDES permits for both production discharges and for discharges of stormwater. In Louisiana, the NPDES permit program has recently been delegated to the State of Louisiana. In Texas, the NPDES permit program is administered by the EPA. Failure to obtain the proper permit may result in both civil and criminal penalties as well as an order to cease discharges, which in effect is an order to shut down production. Management believes that the Company is in substantial compliance with current applicable environmental laws and regulations. Compliance with such laws and regulations has not historically represented a significant expense for the Company and management does not foresee the need for material expenditures to ensure continued compliance with currently existing laws and regulations. Laws and regulations in these areas are, however, subject to change and there can be no assurance that future laws or regulations will not have a material adverse effect on the Company. OPERATING HAZARDS AND INSURANCE The oil and gas business involves a variety of operating risks, including the risk of fire, explosions, blow-out, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases, the occurrence of any of which could result in substantial losses to the Company due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. In addition to the foregoing, offshore operations are subject to the additional hazards of marine operations, such as capsizing, collision and adverse weather and sea conditions. The Company maintains insurance coverage, both directly for its own account and indirectly through its operator partners, against some, but not all, operating risks. The insurance maintained by project operator partners generally does not cover claims relating to failure of title to oil and gas leases, trespass during 3-D survey acquisition or surface damage attributable to seismic operations, business interruption nor does it protect against loss of revenues due to well failure. There can be no assurance that any insurance obtained -7- 10 by the Company or its project operator partners covering claims related to worker's compensation, comprehensive general liability for bodily injury and property damage, comprehensive automobile liability and pollution, cleanup, underground blowout and evacuation will be adequate to cover any losses or liabilities which may be incurred within projects in which the Company participates. The Company is an additional named insured on the insurance policies procured and maintained by operator partners. The Company cannot predict the continued availability of insurance coverage or the availability of insurance at premium levels that justify its purchase. If the Company or any project operator partner were unable to procure insurance at an acceptable cost with respect to each of the projects in which the Company participates, the occurrence of significant adverse events not fully insured or indemnified against could materially and adversely affect the Company's financial condition and operations. COMPETITION Competition in the oil and gas industry is intense, particularly with respect to the acquisition of acreage and capital. The Company's competitors in the provision of seismic imaging, analytical and other related services and in the exploration for oil and gas include numerous major and independent oil and gas companies, smaller, technology-driven service companies, individual proprietors, drilling and income programs and partnerships. Many of the Company's competitors possess and employ financial and personnel resources substantially in excess of those available to the Company and may, therefore, be able to define, evaluate, bid for and participate in a greater number of oil and gas properties than the Company. The Company believes that technology, experience and reliability are the primary elements upon which the Company competes in the industry, as oil and gas exploration companies demand higher quality seismic data delivered and analyzed in increasingly shorter time frames and greater assurances that the interests of such company are respected and advanced. Although the Company believes that it competes effectively in each of these areas, there can be no assurance that the Company's ability to attract and invest in high quality projects will not be adversely affected if its current competitors or new market entrants introduce new services with better quality technology than those offered by the Company. EMPLOYEES AND INDEPENDENT CONSULTANTS As of December 31, 1997, the Company had 23 full-time employees including 17 explorationists. The Company believes that its relationship with its employees is good. None of the Company's employees is covered by a collective bargaining agreement. The Company expects to continue a program, which it commenced in August 1996, to hire recent college graduates and advanced degree holders. ITEM 2. PROPERTIES SIGNIFICANT PROJECTS AND PROPERTIES The Company's exploration activities are primarily focused in the onshore Gulf Coast region of the United States, principally in Texas, but also include projects in Louisiana, Mississippi, Alabama and Florida. Additionally, the Company has active exploration projects offshore in the Gulf of Mexico and internationally in West Africa, offshore both The Republic of Cote d'Ivoire and Ghana. 3-D seismic imaging is an effective tool to identify the structural and stratigraphic features in the Gulf Coast region and provides the Company with an ability to identify hydrocarbon potential in and around existing fields that could not be detected with 2-D seismic and earlier exploration techniques. Due to geologic complexities within this region, it may be possible to identify multiple prospects within a single project. These prospects typically offer multiple drilling opportunities with individual wells capable of penetrating multiple reservoirs. The extensive drilling history within Gulf Coast trends provides a powerful subsurface and production database to which seismic data can be calibrated. This data provides the foundation required to design a -8- 11 seismic program that optimizes resolution at targeted reservoirs. This subsurface information, when combined with 3-D seismic data, provides a more accurate assessment of reservoir quality, productivity, reserve potential and, in some instances, fluid type. As demonstrated by its election to participate in projects located in The Republic of Cote d'Ivoire and Ghana, the Company believes it can extend its trend strategy into other select geographic areas where the application of 3-D imaging technology can be utilized to reduce the primary geological risks prior to drilling. The major producing areas in which the Company holds an interest are reflected in the table below as of and for the year ended December 31, 1997:
Proved Reserves 1997 Production --------------- ---------------- Gas Oil Gas Oil Area/Trend Mmcf Mbo Mmcf Mbo - ---------- --------------- ---------------- Miocene Trend 1,498 -- 777 -- Ramrod Deep Frio 1,047 24 -- -- Offshore Gulf of Mexico 639 1 242 -- Geronimo Area 449 12 36 2 Other Properties 299 52 77 12 ------ ------ ------ ----- 3,932 89 1,132 14 ====== ====== ====== =====
GULF COAST AREA Of the 23 wells which were evaluated in 1997 and in which the Company held an interest, 21 were in the Gulf Coast area, including 16 in Texas, 3 in Mississippi and Alabama, and 2 in Louisiana. All of the Company's 11 successful wells in 1997 were in the Gulf Coast area. TEXAS GULF COAST. This trend area includes both onshore and near-shore properties and generally extends along the Texas coast for a distance of approximately 100 miles inland from the coastline. Prospective geology in the trend is characterized by numerous stacked sand formations that were deposited continuously by river channels and deltas. The trend's primary oil and gas producing formations include the Miocene, Frio, Vicksburg, Yegua, and Wilcox. The Company has active exploration projects targeting each of these oil and gas formations from depths of 3,000' to 15,000'. Of the Company's 25 active exploration projects, 15 are in the Texas Gulf Coast area. The Company completed eight major 3-D seismic shoots in the Texas Gulf Coast region during 1997, covering over 350 square miles. Below is a discussion of certain of the active exploration projects in this area: Miocene Trend. The Company currently has nine producing gas wells in the Miocene Trend area in Calhoun and Matagorda Counties, Texas, at depths between 3,000' and 6,000'. The Company owns working interests ranging from 20% to 40% in these wells, which are operated by Prime Operating Company, a subsidiary of PrimeEnergy Corporation. The Miocene Trend projects in which the Company currently owns an interest are considered to be substantially developed and the Company does not plan to drill any additional wells on these projects in 1998. However, the Company may continue to pursue additional opportunities in this trend area. Geronimo and Geronimo Extension. The Company completed acquisition of a total of 115 square miles of 3-D seismic data in 1996 and 1997 utilizing the 3DXPRESS process on these projects which are located in San Patricio County, Texas. Primary target formations include the Frio and Vicksburg sands. The Company spudded four wells on these projects in 1997, two of which were successful, one of which was lost due to mechanical failure, and the fourth of which was drilling at December 31, 1997. The well which was lost did not fully evaluate the target formation and is expected to be -9- 12 redrilled in 1998. The Company owns working interests ranging from 11% to 22% in these projects, which are operated by Esenjay Petroleum Corporation. Ramrod. The Company completed acquisition of 34 square miles of 3-D seismic data in early 1997 on this project, which targeted both Miocene and Frio potential. The Company owns a 40% working interest and together with its partner, PrimeEnergy Corporation, drilled 5 wells on this project in 1997, all of which were successful. Four of the wells were Miocene wells. The fifth well drilled was the St. George #1, which made a potentially significant discovery in the deeper section of the Frio. This well was tested subsequent to December 31, 1997 at rates exceeding 10 Mmcf of gas and 200 barrels of condensate per day with a flowing tubing pressure of almost 9,000 psi. The Company plans to produce this first well for a period of at least three months before continuing with development plans for the field. Because this well is a new field wildcat without nearby analogs, the estimate of proved reserves assigned to it by the Company's independent reservoir engineers was very conservative. Hall Ranch. The Company has a 25% working interest in the Hall Ranch prospect, which is located in Karnes County, Texas. Esenjay Petroleum is the operator of the project. The partnership completed a 42 square mile 3-D seismic survey on this project in the second quarter of 1997. The primary objective in the area is the lower Wilcox formation at depths of 10,000' to 13,000'. The Company drilled one well on this prospect in 1997 which experienced mechanical difficulties and had to be plugged and abandoned prior to evaluating the objective formation. The redrill of this well and an additional well in a separate fault block are planned for drilling in the first half of 1998. Galveston Bay Area. The Company has two major projects in the Galveston Bay area. This area targets potential production in the upper and lower sections of the Frio formation and the Vicksburg formation. There has been extensive recent exploration activity in this area and several significant discoveries have been announced by other companies within the industry. The first Company project at Smith Point, onshore in Chambers County, Texas, contains 40,000 acres under lease or option. The Company, which owns a 15% working interest in this project, completed an 80 square mile 3-D survey during 1997 and has developed four drilling locations for 1998, with further evaluation continuing. The operator of this project is Rutherford Oil Corporation. The second project, Gillock, which is located in Galveston County, Texas, was generated by Aspect Resources LLC. The Company owns a 15% working interest in this project. A 60 square mile 3-D seismic survey is planned for the second quarter of 1998 on this project. Wilcox Trend. The Company has two projects in the counties of Lavaca and Dewitt, Texas. This area contains production primarily from the Upper and Middle Wilcox formations. The first project, Matthews, is operated by Union Gas Corporation. 3DX has a 20% working interest in this project. A 19 square mile 3-D seismic survey was completed in the third quarter of 1997 and the Company plans to drill its first well in the second quarter of 1998. The other project, Thomaston, is operated by Phillips Petroleum Company and represents one of the first projects in what the Company seeks to be a continuing strategic alliance with Phillips. A 65 square mile 3-D seismic survey was completed on this project in the fourth quarter of 1997 and was acquired and processed using the Company's 3DXpress process for real-time seismic acquisition and processing. LOUISIANA. The Company has two active exploration projects in Louisiana. The Four Isle Dome prospect in Terrebonne Parish, operated by Louisiana Land and Exploration, targets Miocene-age sands at depths up to 15,000'. The Company has a 5% working interest in Four Isle Dome. The Hayes prospect, in Calcasieu and Jefferson Davis Parishes, targets Miocene age sands at depths up to 14,000'. The Company has a 10% working interest in this project. The Company intends to drill wells on both of these projects in 1998. -10- 13 MISSISSIPPI/ALABAMA. This area includes onshore properties and generally extends across a seven-county area from Newton County in Southern Mississippi eastward through Southern Alabama to the Florida border. Prospective geology in the trend is characterized by discrete occurrences of basement and salt-related features that deform shallower sand formations to create potential structural traps for oil and gas. The primary historical oil and gas producing formations in the trend have been the Cotton Valley, Lower Haynesville, Smackover and Norphlet. The Company drilled three wells during 1997 on its Lipsmacker project in this area, each of which was unsuccessful. The Company has identified two additional drilling locations on the Lipsmacker project which it intends to drill in 1998. FLORIDA. The Company has an active exploration effort in the Sunniland trend area in Florida, which is operated by Plains Resources, Inc. ("Plains"). Prospective geology in the trend is characterized by carbonate reefs and shoals. The primary oil and gas producing formation is the Cretaceous-age Sunniland formation, which extends from south of Ft. Myers, Florida to northwest of Miami, Florida. In 1998, the Company plans to drill a well on a prospect that may confirm an extension of the Raccoon Point Field. Cumulative production from this field, located in Collier County, Florida, has exceeded 9.5 MMBOE. The Company and Plains are exploring other project opportunities within the Sunniland trend by acquiring, reprocessing and analyzing 2-D seismic data along with other exploration techniques. The Company holds an 8% working interest in this exploration project. OTHER PROJECTS OFFSHORE GULF OF MEXICO. The Company has two producing properties and three active exploratory projects offshore in the Gulf of Mexico. The two producing properties, the Cove project at Matagorda Island Block 487-L and the Hollywood project at East Cameron Block 42, are at this time considered to be fully developed. The Company owns a 7% and 5% working interest in these projects, respectively. One of the exploratory projects is part of the Company's initial joint venture with Phillips Petroleum which commenced in July 1997. On this project, the Company committed to conduct a field study on an existing producing block in the Gulf of Mexico with the objective of identifying additional exploratory or exploitation opportunities. The Company has the right to participate as a 5% working interest partner in future drilling on this block. The other exploratory projects consist of two deep water projects in the flex trend of the Gulf of Mexico. These projects have eight-year lease terms which expire in March 2005. The Company does not currently plan to drill wells on either of these projects during 1998. A third deep water block was also acquired in 1997. The Company participated in the drilling of an exploration well on this block in 1997 which was unsuccessful. WEST AFRICA. The Company joined its partner, Santa Fe Energy Resources (Cote d'Ivoire) Ltd., in January 1997 to evaluate Block CI-24 which consists of 190,000 acres located in the offshore waters of The Republic of Cote d'Ivoire. Pursuant to a production sharing contract, the Company and its partner purchased and reprocessed existing seismic data, which includes an 81 square mile 3-D seismic survey, and completed an engineering and economic study. The partnership plans to drill the first exploratory well on this project in 1998. The Company owns a 10% working interest in the project. During 1997, the Company and Santa Fe acquired an additional project offshore Cote d'Ivoire, Block CI-202. Late in 1997, the partnership began work on a 400 square kilometer 3-D seismic survey, which was completed during the first quarter of 1998. The Company holds a 10% working interest in Block CI-202. Also during 1997, the Company and Santa Fe acquired a concession offshore Ghana covering a total area of almost 3 million acres. The Company's working interest in the project, which is in the early stage of exploration, ranges from 5% to 10%. OIL AND GAS RESERVES All of the Company's proved reserves described below are located onshore and offshore Texas and in the Federal waters offshore Louisiana. All of the Company's proved reserves reflected in the table are proved developed reserves. The reserve estimates as of December 31, 1995 were based on estimates prepared by the Company, while the reserve estimates subsequent to that date were prepared by the independent engineering consulting firm Ryder Scott Company Petroleum Engineers. In accordance with -11- 14 applicable requirements of the Securities and Exchange Commission, the estimated discounted future net revenues from estimated proved reserves are based on prices and costs as of the date of the estimate unless such prices or costs are contractually determined at such date. The Company has not provided any estimates of total proved reserves, comparable to those disclosed herein, in any reports filed with federal authorities or agencies other than the Securities and Exchange Commission.
DECEMBER 31, -------------------------------- 1997 1996 1995 ----------- ---------- --------- Estimated Net Proved Reserves Data: Gas (Mmcf) 3,932 2,464 443 Oil and condensate (Mbbl) 89 32 41 Total equivalent, converted at 6:1 (Mmcfe) 4,466 2,656 689 Pre-tax present value of proved reserves discounted at 10% (in thousands) $7,048 $6,623 $771 Standardized Measure of Discounted Future Net Cash Flows (in thousands) (1) $7,048 $6,623 $771 - --------------
(1) In accordance with statutory requirements of the Securities and Exchange Commission, these amounts represent the present value of estimated future net revenues after income taxes discounted at 10%. The present value amounts are the same before taxes and after projected income taxes as a result of the Company's substantial net operating loss carryforwards. The process of estimating proved developed and proved undeveloped oil and gas reserves is very complex, requiring significant subjective decisions in the evaluation of available geologic, engineering and economic data for each reservoir. The data for a given reservoir may change over time as a result of additional development activity, production history and viability of production under varying economic conditions. The actual production, revenues, severance taxes, development and operating expenditures with respect to the Company's reserves will likely vary from such estimates, and such variances could be material. PRODUCTIVE WELLS At December 31, 1997, 1996 and 1995, the Company held interests in the following productive wells:
AT DECEMBER 31, ------------------------------------------------------------------------- 1997 1996 1995 ----------------------- ---------------------- ----------------------- GROSS NET GROSS NET GROSS NET ----- ---- ----- ---- ----- ---- Oil Wells 9 0.54 8 0.31 7 0.16 Gas Wells 21 4.49 11 1.71 5 0.74 ----- ---- ----- ---- ----- ---- Total Wells 30 5.03 19 2.02 12 0.90 ===== ==== ===== ==== ===== ====
The number of gross wells equals the total number of wells in which the Company owns a working interest. The number of net wells equals the sum of the Company's fractional working interests owned in gross wells. OIL AND GAS DRILLING ACTIVITIES The following table sets forth the gross and net number of productive, dry and total exploratory and development wells that the Company drilled in each of 1997, 1996 and 1995: -12- 15
GROSS WELLS NET WELLS --------------------------- ----------------------------- PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL ---------- --- ----- ---------- --- ----- EXPLORATORY WELLS Year ended December 31, 1997 11 9 20 2.98 1.83 4.81 Year ended December 31, 1996 7 7 14 0.74 0.84 1.58 Year ended December 31, 1995 2 - 2 0.28 - 0.28 DEVELOPMENT WELLS Year ended December 31, 1997 - 3 3 - 0.48 0.48 Year ended December 31, 1996 3 - 3 0.60 - 0.60 Year ended December 31, 1995 - - - - - -
As of December 31, 1997, the Company was participating in 2 gross (0.32 net) exploratory wells. PRODUCTION The following table summarizes the net volumes of oil and gas produced and sold and the average prices received with respect to such sales from all properties in which the Company held an interest during 1997, 1996 and 1995, respectively.
GAS OIL ----------------------- ------------------------ NET AVERAGE NET AVERAGE PRODUCTION SALES PRODUCTION SALES (MMCF) PRICE/MCF (MMCF) PRICE/BBL ---------- --------- ---------- --------- Year ended December 31, 1997 1,131.8 2.46 14.1 18.54 Year ended December 31, 1996 271.2 2.50 8.5 20.43 Year ended December 31, 1995 97.1 1.59 6.7 17.89
Average oil and gas operating expenses per Mcfe including severance and ad valorem taxes, were $0.36, $0.33, and $0.57 for 1997, 1996 and 1995, respectively. ACREAGE The following table sets forth the developed and undeveloped oil and gas acreage in which the Company held an interest as of December 31, 1997. Undeveloped acreage consists of those lease acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether or not such acreage contains proved reserves.
DEVELOPED UNDEVELOPED ----------------------- ----------------------- GROSS NET GROSS NET --------- --------- --------- --------- Texas ........................... 6,627 1,822 69,769 14,542 Louisiana ....................... 267 13 23,733 1,387 Mississippi ..................... -- -- 3,922 981 Offshore Federal ................ 1,440 72 32,054 2,917 Cote d'Ivoire ................... -- -- 359,537 35,954 Ghana ........................... -- -- 2,594,345 172,952 --------- --------- --------- --------- Total ....................... 8,334 1,907 3,083,360 228,733 ========= ========= ========= =========
In addition to the above acreage, as of December 31, 1997, the Company had agreements, options or farm-ins to acquire leases on 149,319 gross (31,493 net) acres of undeveloped land located in Florida, Mississippi and Texas. -13- 16 ITEM 3. LEGAL PROCEEDINGS The Company has not been the subject of any legal proceedings since its organization. There can be no assurance, however, that the Company will not in the future be involved in litigation incidental to the conduct of its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded over the counter on the NASDAQ National Market under the symbol "TDXT". The following table sets forth, on a per share basis for the periods indicated, the high and low prices as quoted by the NASDAQ National Market since the shares became publicly traded on December 26, 1996. As of January 23, 1998 there were approximately 580 record holders of the common stock.
HIGH LOW ---- ---- 1997 Fourth Quarter ended December 31, 1997 $ 9.25 $ 2.25 Third Quarter ended September 30, 1997 12.50 8.00 Second Quarter ended June 30, 1997 10.50 7.75 First Quarter ended March 31, 1997 13.13 10.00 1996 Fourth Quarter ended December 31, 1996 $ 11.25 $ 10.88
DIVIDEND POLICY The Company has not declared or paid any cash dividends on its common stock since its formation. The Company's current credit agreement prohibits the payment of cash dividends. The Company does not anticipate paying cash dividends on its common stock in the foreseeable future. The Company currently intends to retain any future earnings to finance the expansion and continued development of its business. ITEM 6. SELECTED FINANCIAL DATA The financial information set forth below for the years ended December 31, 1997, 1996, 1995 and 1994 and for the period from inception of operations on January 6, 1993 through December 31, 1993 is derived from the financial statements of the Company, which were audited by Arthur Andersen LLP. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements of the Company, the notes related thereto and other financial data included elsewhere in this Form 10-K. -14- 17
STATEMENT OF OPERATIONS DATA: YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1997 1996 1995 1994 1993(A) -------- -------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues (b): Oil and gas .............................. $ 3,046 $ 852 $ 275 $ 304 $ -- Interest and other ....................... 585 248 236 53 8 -------- -------- -------- -------- -------- Total revenues ........................ 3,631 1,100 511 357 8 -------- -------- -------- -------- -------- Costs and expenses: Total lease operating .................... 437 107 79 34 -- Impairment of oil and gas properties ..... 9,061 1,477 1,627 -- -- Depletion, depreciation & amortization ... 2,636 423 158 91 -- General and administrative (b) ........... 2,533 1,828 1,135 617 623 -------- -------- -------- -------- -------- Total costs and expenses ................ 14,667 3,835 2,999 742 623 -------- -------- -------- -------- -------- Net loss from operations ................... (11,036) (2,735) (2,488) (385) (615) Dividends and accretion on preferred stock . - (941) (1,108) (452) (67) -------- -------- -------- -------- -------- Net loss from operations applicable to common stockholders ..................... $(11,036) $ (3,676) $ (3,596) $ (837) $ (682) ======== ======== ======== ======== ======== Basic and diluted net loss per common share as previously reported .................. $ (1.53) $ (1.16) $ (1.14) $ (0.33) $ (0.59) Retroactive effect of change in accounting principle (c) ........................... -- (0.05) (0.06) (0.02) (0.10) -------- -------- -------- -------- -------- Basic and diluted net loss per common share $ (1.53) $ (1.21) $ (1.20) $ (0.35) $ (0.69) ======== ======== ======== ======== ======== Weighted average number of common shares outstanding ............................. 7,194 3,042 2,988 2,373 993 ======== ======== ======== ======== ======== STATEMENT OF CASH FLOW DATA: Net cash provided by (used in) operating activities .............................. $ 1,430 $ 615 $ (503) $ 16 $ 619 Net cash used by investing activities ...... 21,187 5,022 4,113 2,018 401 Net cash provided by financing activities .. 3,803 16,225 7,876 2,515 2,950 BALANCE SHEET DATA: AS OF DECEMBER 31, ------------------------------------------------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (IN THOUSANDS) Working capital.............................. $ (632) $15,987 $ 7,265 $2,103 $2,003 Property and equipment, net.................. 18,372 8,576 2,935 2,669 636 Total assets................................. 21,310 26,827 10,451 5,197 2,792 Series B preferred stock..................... -- -- 6,278 5,452 2,631 Series C preferred stock..................... -- -- 7,904 -- -- Stockholders' equity (deficit)............... $17,818 $24,574 $(4,240) $ (674) $ 16
(a) Period from inception of operations, January 6, 1993, through December 31, 1993. (b) As discussed in Note 2 to the financial statements, rental income has been reflected as a reduction of general and administrative expenses in all periods presented. (c) As discussed in Note 2 to the financial statements, earnings per share for periods prior to the Company's initial public offering have been restated to retroactively reflect the effect of SAB No. 98. -15- 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company for the three years ended December 31, 1997, 1996 and 1995. This discussion should be read in conjunction with the financial statements of the Company, the notes thereto and the other financial data included elsewhere in this Annual Report on Form 10-K. Overview The Company is a knowledge-based oil and gas exploration company whose core competence and strategic focus is the utilization of 3-D imaging and other advanced technologies in the search for commercial quantities of hydrocarbons. The Company enters into arrangements that enable it to combine its expertise and exploration capabilities with the operating skills of other oil and gas companies. The Company participates in selected exploration projects as a non-operating working interest owner, sharing both risks and rewards with its partners. The Company commenced operations in January 1993 to take advantage of perceived opportunities emerging from changes in the domestic oil and gas industry, including the divestiture of domestic oil and gas properties, advances in technology and the outsourcing of specialized technical capabilities. By reducing drilling risk through 3-D imaging and analysis, the Company seeks to improve the expected return on investment in its oil and gas projects. As a working interest partner, the Company shares all project costs in proportion to its working interest percentage. In instances in which exploration and development activities are unsuccessful, the Company incurs an economic loss equal to its proportionate share of project costs prior to the time the project is abandoned. Similarly, the Company incurs economic loss if the Company's proportionate share of revenue generated from production is insufficient to cover the Company's share of project costs. The Company's future financial results will depend primarily on: (i) the Company's ability to continue to source and screen potential projects; (ii) the Company's ability to discover commercial quantities of hydrocarbons; (iii) the market price for oil and gas; and (iv) the Company's ability to fully implement its exploration and development program, which is dependent on the availability of capital resources. There can be no assurance that the Company will be successful in any of these respects, that the prices of oil and gas prevailing at the time of production will be at a level allowing for profitable production, or that the Company will be able to obtain additional funding to increase its currently limited capital resources. The Company recorded a valuation allowance against the estimated amount of deferred tax assets for which realization is uncertain. The Company reviews the valuation allowance at the end of each quarter and makes adjustments, as necessary, if it is determined that it is more likely than not that the deferred tax assets will be realized. As of December 31, 1997, the Company had tax net operating loss carryforwards ("NOL's") of approximately $11.2 million which begin to expire in 2008. As a result of the recent stock transactions, including the initial public offering, there is a yearly limitation placed on the Company's utilization of its NOL's under Section 382 of the Internal Revenue Code of 1986, as amended. See Note 3 to the financial statements of the Company included elsewhere herein. -16- 19 RESULTS OF OPERATIONS The following table sets forth certain operating information of the Company during the periods indicated:
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 ---- ---- ---- PRODUCTION: Gas (MMcf) 1,131.8 271.2 97.1 Oil and condensate (Mbbls) 14.1 8.5 6.7 Total equivalent, converted at 6:1 (Mmcfe) 1,216.2 322.2 137.3 AVERAGE SALES PRICE: Gas (per Mcf) $ 2.46 $ 2.50 $ 1.59 Oil and condensate (per Bbl) 18.54 20.43 17.89 AVERAGE EXPENSES (per Mcfe): Lease operating (1) $ 0.36 $ 0.33 $ 0.57 Depletion of oil and gas properties 2.17 1.31 1.15
- ------------- (1) Includes all lease operating expenses and taxes attributable to the Company's properties, including production and ad valorem taxes. Oil and Gas Revenues. Oil and gas revenues increased to $3,045,447 for the year ended December 31, 1997 (the "1997 period") from $851,827 for the year ended December 31, 1996 (the "1996 period"). This increase was primarily attributable to higher oil and gas production levels. Production increased by over 277% to 1,216.2 Mmcfe for the 1997 period, from 322.2 Mmcfe for the 1996 period. The increased production resulted from successful wells drilled during the last three months of 1996 and throughout the year in 1997. The number of productive wells in which the Company owned an interest increased to 30 (5.03 net) at the end for the 1997 period from 19 (2.02 net) at the end of the 1996 period. The average sales price for natural gas, which accounted for 93% of equivalent production during the 1997 period, decreased by 2% to $2.46 per Mcf from $2.50 per Mcf for the 1996 period. The average sales price for oil decreased to $18.54 during the 1997 period versus $20.43 per barrel for the 1996 period. Oil and gas revenues increased to $851,827 for the 1996 period from $274,511 for the 1995 period. This increase was attributable to both higher oil and gas production levels and a significant increase in the average price for both natural gas and oil. Production increased by over 135% to 322.2 Mmcfe for the 1996 period, from 137.3 Mmcfe for the 1995 period. The increased production resulted from successful wells drilled during the last six months of 1995 and throughout the year in 1996. The average sales price for natural gas, which accounted for 84% of equivalent production during the 1996 period, increased by 57% to $2.50 per Mcf for the 1996 period from $1.59 per Mcf for the 1995 period. The average sales price for oil increased to $20.43 during the 1996 period versus $17.89 for the 1995 period. Lease Operating Expenses. Total lease operating expenses, including production taxes, increased to $436,243 for the 1997 period from $107,676 for the 1996 period. This increase was primarily attributable to the additional costs of operating new producing wells drilled during the last three months of 1996 and throughout the year in 1997 and is comparable to the increase in production during the corresponding periods. Lease operating expenses per Mcfe of production increased slightly to $0.36 per Mcfe for the 1997 period from $0.33 per Mcfe for the 1996 period. Total lease operating expenses, including production taxes, increased to $107,676 for the 1996 period from $78,533 for the 1995 period. Lease operating expenses per Mcfe decreased to $0.33 for the 1996 period from $0.57 per Mcfe for the 1995 period. Substantially all of this decrease in lease operating expenses per Mcfe was the result of lower lease operating expenses per Mcfe for certain wells completed during the 1996 period. These wells were producing at relatively high rates from onshore, shallow, highly permeable gas -17- 20 sands and produce relatively small amounts of water, so there are negligible treating or disposal costs associated with such wells. These wells require no artificial lift or compression so the power and maintenance costs associated with such wells are minimal. Additionally, the highly permeable nature of the producing zones resulted in relatively high production rates, which lowered the operating expenses associated with production from these wells on a per Mcfe basis. Depletion, Depreciation and Amortization Expense. Depletion of oil and gas properties for the 1997 period increased to $2,636,305 from $422,839 for the 1996 period. The increase in depletion of oil and gas properties resulted from both the increase in oil and gas production during the 1997 period, as discussed above, and an increase in the depletion rate for this period. Depletion of oil and gas properties per Mcfe for the 1997 period increased to $2.17 per Mcfe, or 66%, from the rate of $1.31 per Mcfe in the corresponding period in 1996. The increase in the rate resulted from greater additions to evaluated oil and gas property costs than the additions to oil and gas reserves relative to the existing depletion rate per Mcfe. This was principally the result of the costs of unsuccessful wells drilled in 1997. Depletion of oil and gas properties for the 1996 period increased to $422,839 from $158,336 for the 1995 period. The increase in depletion of oil and gas properties resulted from both the increase in oil and gas production during the 1996 period and a 14% increase in the depletion rate. Depletion of oil and gas properties per Mcfe for the 1996 period increased to $1.31 per Mcfe over the rate of $1.15 per Mcfe in the corresponding period in 1995. The increase in the rate resulted from greater additions to evaluated oil and gas property costs than the additions to oil and gas reserves relative to the existing depletion rate per Mcfe. Impairment of Oil and Gas Properties. Under the rules of the full-cost accounting method as prescribed by the Securities and Exchange Commission, the Company is required to compare the net costs of its evaluated properties to the net present value of its proved reserves, using prices and costs in effect at the end of each quarterly period. If such evaluated costs, net of accumulated depreciation, depletion and amortization exceed the present value of proved reserves, an impairment charge is required to writedown those excess costs. Oil and gas impairment charges recorded during 1997 were $9,061,240, all of which were attributable to the fourth quarter ended December 31, 1997. This writedown results principally from three factors: (1) the significant decline in oil and gas prices being received by the Company on December 31, 1997 as compared to September 30, 1997, (2) a relatively large investment in three unsuccessful exploratory wells all of which were evaluated in fourth quarter of 1997, and (3) a conservative estimate of proved reserves on a potentially significant discovery on the Ramrod prospect, as discussed in Item 2, "Properties." Impairments recorded during 1996 and 1995 totaled $1,476,690, and $1,627,321, respectively, primarily as a result of the evaluated costs of prospects which had poor drilling results during those periods. General and Administrative Expense. General and administrative expense, net of costs capitalized to exploration and development projects, increased 39% to $2,532,957 for the 1997 period from $1,827,946 for the 1996 period. The increase is primarily a result of personnel costs associated with hiring which occurred during 1997 and increased professional fees and other costs associated with being a public company offset by a decrease in the amount of $390,616 relating to the amortization of deferred compensation expense. The 1996 amount represented a 61% increase from $1,134,882 incurred during the year ended December 31, 1995. This increase was primarily attributable to the amortization of deferred compensation expense recognized in connection with stock options granted within one year of the filing of the registration statement for the initial public offering, which expense is based on the difference between the option price and the initial $11.00 per share initial public offering price of the common stock. Interest and Other Income. Interest and other income increased 136% to approximately $585,154 for the 1997 period from approximately $247,960 for the comparable period during 1996. This increase reflects interest income on the higher level of short-term investments during 1997 as a result of investment of the proceeds of the Company's initial public offering. The 1996 amount represents a 5% increase from $236,186 earned during the comparable 1995 period, as a result of interest income attributable to short-term investment of the proceeds of the Series C preferred stock. -18- 21 Net Loss. As a result of the foregoing, the Company's net loss increased to approximately $11.0 million for the 1997 period from approximately $2.7 million for the 1996 period. The most significant factor which caused the increase in net loss was the impairment of oil and gas properties recorded under full-cost accounting rules. The net loss for 1996 increased slightly from the net loss of $2.5 million in 1995, as a result of all of the foregoing. LIQUIDITY AND CAPITAL RESOURCES To date, net cash provided by operating activities has been limited and the Company has funded its oil and gas exploration activities principally through cash provided by the sale of equity securities. On December 26, 1996, the Company consummated an initial public offering of common stock which provided approximately $23.6 million in proceeds, net of offering expenses. In January 1997, the Company's underwriters exercised their over-allotment option to purchase 375,000 additional shares of common stock, resulting in additional net proceeds to the Company of approximately $3.8 million. Approximately $7.5 million of the proceeds of the initial public offering was used to redeem all the issued and outstanding shares of the Series B preferred stock and to pay accrued dividends on the issued and outstanding Series C preferred stock. The balance of the net proceeds were designated to fund the Company's exploration and development capital expenditures and for general corporate purposes, including expenses associated with hiring additional personnel. The Company's business requires substantial oil and gas capital expenditures. To achieve its near-term goals, the Company has been and will be required to make oil and gas capital expenditures substantially in excess of its net cash flow from operations in order to acquire, explore and develop oil and gas properties. Capital expenditures for oil and gas exploration and development activities during the years ended December 31, 1997, 1996, and 1995, were $19.9 million, $6.2 million and $2.2 million, respectively. The Company has not set a final capital expenditure budget for 1998, but has opportunities to invest in excess of $10 million in exploration and development projects in which the Company currently owns an interest. The Company continues to define new opportunities on both its active exploration projects and new projects. However, the level of capital spending in 1998 is dependent upon the Company's ability to obtain additional sources of funding. As of December 31, 1997, the Company had a deficit in working capital of approximately $632,000. On December 18, 1997, the Company executed a credit agreement with a commercial bank. The credit agreement provided borrowing capacity of $3.0 million at December 31, 1997. Such borrowing capacity is a function of the value of the Company's proved oil and gas reserves, and is redetermined on a quarterly basis. The bank is currently conducting a schedule redetermination. Based of preliminary indications from the bank, the Company expects the revised borrowing base to be between $2.0 and $3.0 million. The credit agreement is secured by substantially all of the Company's oil and gas properties and contains restrictions on dividends and additional liens and indebtedness and requires the maintenance of a minimum current ratio and net worth, each as defined in the credit agreement. There were no borrowings under the credit agreement during 1997. The Company prefers to use debt only to fund development drilling and not to finance exploration costs. However, the Company expects to use funds available under the credit agreement as a source of financing to fund both exploration and development activities until additional equity or other sources of permanent funding are obtained. As a result of the Company's periodic review of each of its oil and gas exploration and development properties and its available capital, the Company has on two occasions sold partial interests in specific oil and gas projects to other investors to reduce its total investment commitment to such projects. No gain or loss was recognized on either transaction. The Company is currently reviewing its portfolio and has identified one property in which it intends to sell the majority of its interests to provide additional capital for its exploration program. Such interests consist of both producing wells and future drilling locations. The Company may identify additional properties for sale in the course of its continuing review. There can be no assurance, however, that the Company will be able to sell any such interests, or that the terms of such sale will be acceptable to the Company. The Company expects that its projected cash flows from currently producing properties will be sufficient to fund its cash general and administrative costs for the next twelve months, including technical employee and related costs which are capitalized under full-cost accounting, and will also provide limited funding for its capital program. The Company's projections of cash flows from currently producing properties are dependent on the following assumptions: (i) there are no significant declines in oil and gas prices below -19- 22 current levels or anticipated seasonal lows, and (ii) there are no significant declines in oil and gas production from existing properties other than declines in production currently anticipated based on engineering estimates of the decline curves associated with such properties. To enable it to continue to take advantage of oil and gas exploration and development opportunities, the Company intends to seek additional financing in 1998 to satisfy its capital requirements. The Company is currently evaluating alternatives to obtain additional equity financing, which include sales of common or preferred stock. The Company anticipates funding its short-term capital spending from a combination of expected cash flow generated from operations, borrowings under the credit agreement and proceeds from the sale of oil and gas properties. In the absence of additional financing, the Company could be required to modify the implementation and timing of its oil and gas exploration and development capital spending for 1998, which modification could have a material adverse effect on the Company. No assurance can be given that the Company will be able to obtain additional financing on terms which would be acceptable to the Company, if at all. EFFECTS OF INFLATION AND CHANGES IN PRICE The Company's results of operations and cash flows are affected by changing oil and gas prices. If the price of oil and gas increases (decreases), there could be a corresponding increase (decrease) in the operating cost that the Company is required to bear for operations, as well as an increase (decrease) in revenues. Historically, general price inflation has had a minimal effect on the Company. OTHER In connection with stock options granted within one year prior to the initial filing of the registration statement relating to the initial public offering, the Company recorded deferred compensation expense based on the difference between the option exercise price and the fair value of the Company's common stock at the date of grant, using the $11.00 per share initial public offering price as an estimate of the fair value. Such deferred compensation is being amortized as additional compensation expense over the vesting period for the options. As of December 31, 1997, the Company had unamortized deferred compensation of $512,132 which will be charged to expense during the next three years. The Company has elected not to adopt the fair value accounting of SFAS No. 123 for employees and continues to account for these plans under APB Opinion No. 25. The Company has assessed the expected impact of the date change in the Year 2000 on the software programs used in its operations. The majority of the Company's technical applications are not date sensitive. The applications that do have date sensitive aspects, including the Company's accounting software, have either been updated to compensate for the date change in the Year 2000 or are currently being updated by the software vendors. Based on this assessment, the Company does not expect to have any significant operational issues or material costs related to the Year 2000 software issue. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this item are incorporated under Item 14 in Part IV of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -20- 23 PART III ITEMS 10 TO 13 INCLUSIVE. These items have been omitted in accordance with the general instructions to Form 10-K Annual Report. The Registrant will file with the Securities and Exchange Commission in April 1998, pursuant to Regulation 14A, a definitive proxy statement that will involve the election of directors. The information required by these items will be included in such proxy statement and are incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS: INDEX TO FINANCIAL STATEMENTS PAGE Report Of Independent Public Accountants.................................................... F-1 Balance Sheets as of December 31, 1997 and 1996................................... F-2 Statements of Operations for the three years ended December 31, 1997.............. F-3 Statements of Changes in Common Stockholders' Equity for the three years ended December 31, 1997................................................ F-4 Statements of Cash Flows for the three years ended December 31, 1997.............. F-5 Notes to Financial Statements..................................................... F-6 Supplementary Information - Unaudited............................................. F-16 (A)(2) FINANCIAL STATEMENT SCHEDULES: Not applicable
-21- 24 (a)(3)EXHIBITS: INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ----------------------- 3.1(i) Sixth Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1(i)(d) to the Company's Amendment No. 2 to the Registration Statement on Form S-1 (No. 333-14473), filed December 16, 1996). 3.1(ii) Second Amended and Restated Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Form 10-Q for the period ended June 30, 1997). 4.1 Form of Specimen Stock Certificate, incorporated by reference to Exhibit 4.1 to the Company's Amendment No. 1 to Registration Statement on Form S-1 (No. 333-14473), filed November 27, 1996. 10.1 Technical Services Agreement between Landmark Graphics Corporation and Novera Energy Inc. dated January 1993 (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (No. 333-14473), filed October 18, 1996 10.2 * Credit Agreement with NationsBank of Texas dated December 18, 1997 10.3 1994 Stock Option Plan (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (No. 333-14473), filed October 18, 1996 + 10.4 Stock Purchase Agreement among the Company, C. Eugene Ennis, Douglas C. Nester, Peter M. Duncan and the Investors named therein dated November 9, 1993 (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (No. 333-14473), filed October 18, 1996). 10.5 Series C Preferred Stock Purchase Agreement among the Company, C. Eugene Ennis, Douglas C. Nester, Peter M. Duncan and the Investors named therein dated July 26, 1995 (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (No. 333-14473), filed October 18, 1996). 10.6 Lease Contract dated January 22, 1995 between the Company and The Penn Mutual Life Insurance Company and Letter dated March 1, 1995 from Trammell Crow Houston, Inc. (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement of Form S-1 (No. 333-14473), filed October 18, 1996). 11.1 * Computation of Earnings per Share 23.1 * Consent of Arthur Andersen LLP 23.2 * Consent of Ryder Scott Company 24.1 * Power of Attorney (included on signature page) 27.1 * Financial Data Schedule for December 31, 1997 27.2 * Financial Data Schedule for December 31, 1996 (restated) 27.3 * Financial Data Schedule for December 31, 1995 (restated)
--------------- * filed herewith + management contract or compensating plan (b) REPORTS ON FORM 8-K: There were no Current Reports on Form 8-K filed during the quarter ended December 31, 1997 and through the date hereof. -22- 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. 3DX TECHNOLOGIES INC. By: /s/ Randall D. Keys -------------------------------- Vice President, Finance, Chief Financial Officer and Secretary Know All Men By These Presents, that each individual whose signature appears below hereby constitutes and appoints C. Eugene Ennis, Randall D. Keys and Peter M. Duncan and each of them individually, his true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities, to (i) act on, sign and file with the Securities and Exchange Commission any and all amendments to this report together with all schedules and exhibits thereto, (ii) act on, sign and file with the Securities and Exchange Commission any exhibits to this report, (iii) act on, sign and file such certificates, instruments, agreements and other documents as may be necessary or appropriate in connection therewith and (iv) take any and all actions which may be necessary or appropriate in connection therewith, granting unto such agents, proxies and attorneys-in-fact and each of them individually, full power and authority to do and perform each and every act and thing necessary or appropriate to be done, as fully for all intents and purposes as he might or could do in person, hereby approving, ratifying and confirming all that such agents, proxies and attorneys-in-fact, any of them or any of his or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
DATE SIGNATURE TITLE(S) ---- --------- -------- March 27, 1998 /s/ C. Eugene Ennis President, Chief Executive Officer; Director --------------------------------------- (Principal Executive Officer) C. Eugene Ennis March 27, 1998 /s/ Randall D. Keys Vice President, Finance, Chief Financial --------------------------------------- Officer and Secretary (Principal Financial Randall D. Keys and Accounting Officer) March 27, 1998 /s/ Peter M. Duncan Vice President, Chief Geophysicist and --------------------------------------- Treasurer Peter M. Duncan
-23- 26 March 27, 1998 /s/ Douglas C. Nester Vice President and Chief Geologist --------------------------------------- Douglas C. Nester March 27, 1998 /s/ Ronald P. Nowak Vice President, Exploration --------------------------------------- Ronald P. Nowak March 27, 1998 /s/ Robert J. Bacon, Jr. Vice President, Joint Ventures --------------------------------------- Robert J. Bacon, Jr. March 27, 1998 /s/ Joseph Schuchardt, III Vice President, Business Development --------------------------------------- Joseph Schuchardt, III March 27, 1998 /s/ Jon W. Bayless Director --------------------------------------- Jon W. Bayless March 27, 1998 /s/ Charles E. Edwards Director --------------------------------------- Charles E. Edwards March 27, 1998 /s/ C.D. Gray Director --------------------------------------- C.D. Gray March 27, 1998 /s/ Douglas C. Williamson Director --------------------------------------- Douglas C. Williamson
-24- 27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of 3DX Technologies Inc.: We have audited the accompanying balance sheets of 3DX Technologies Inc. (a Delaware corporation) as of December 31, 1997 and 1996, and the related statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 3DX Technologies Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Houston, Texas February 25, 1998 ARTHUR ANDERSEN LLP F-1 28 3DX TECHNOLOGIES INC. BALANCE SHEETS
DECEMBER 31, ------------------------------ 1997 1996 ---- ---- ASSETS Current assets: Cash and cash equivalents............................................ $ 1,568,091 $ 17,521,745 Accounts receivable ................................................. 1,181,083 554,210 Prepaid expenses..................................................... 110,681 165,095 ------------ ------------ Total current assets............................................... 2,859,855 18,241,050 ------------ ------------ Propery and equipment: Oil and gas properties, full-cost method: Evaluated.......................................................... 22,521,673 7,164,397 Unevaluated........................................................ 10,098,698 4,403,165 Technical interpretation equipment................................... 2,605,439 1,505,534 Other property and equipment......................................... 273,780 205,531 ------------ ------------ 35,499,590 13,278,627 Less accumulated depletion, depreciation and amortization.......... (17,127,846) (4,702,296) ------------ ------------ 18,371,744 8,576,331 Other assets............................................................ 78,041 9,808 ------------ ------------ $ 21,309,640 $ 26,827,189 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................................... $ 1,713,209 $ 1,960,984 Accrued liabilities ................................................. 1,778,543 292,581 ------------ ------------ Total current liabilities ......................................... 3,491,752 2,253,565 ------------ ------------ Stockholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued ..................................................... -- -- Common stock, $.01 par value, 20,000,000 shares authorized, 7,225,462 and 6,841,177 shares issued and outstanding, respectively 72,255 68,412 Paid-in capital ..................................................... 38,085,357 34,189,700 Deferred compensation ............................................... (512,132) (893,040) Accumulated deficit ................................................. (19,827,592) (8,791,448) ------------ ------------ Total stockholders' equity ........................................ 17,817,888 24,573,624 ------------ ------------ $ 21,309,640 $ 26,827,189 ============ ============
The accompanying notes are an integral part of these financial statements. F-2 29 3DX TECHNOLOGIES INC. STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1997 1996 1995 ---- ---- ---- Revenues: Oil and gas ........................................ $ 3,045,447 $ 851,827 $ 274,511 Interest and other ................................. 585,154 247,960 236,186 ------------ ------------ ------------ Total revenues ................................... 3,630,601 1,099,787 510,697 ------------ ------------ ------------ Costs and expenses: Lease operating .................................... 257,291 49,016 60,877 Production taxes ................................... 178,952 58,660 17,656 Impairment of oil and gas properties ............... 9,061,240 1,476,690 1,627,321 Depletion, depreciation, and amortization .......... 2,636,305 422,839 158,336 General and administrative ......................... 2,532,957 1,827,946 1,134,882 ------------ ------------ ------------ Total costs and expenses ......................... 14,666,745 3,835,151 2,999,072 ------------ ------------ ------------ Net loss .............................................. (11,036,144) (2,735,364) (2,488,375) Dividends on preferred stock .......................... -- (520,393) (1,058,956) Redemption premium on Series B preferred stock ........ -- (365,810) -- Accretion on preferred stock .......................... -- (54,844) (48,408) ------------ ------------ ------------ Net loss applicable to common stockholders ............ $(11,036,144) $ (3,676,411) $ (3,595,739) ============ ============ ============ Basic and diluted net loss per common share ........... $ (1.53) $ (1.21) $ (1.20) ============ ============ ============ Weighted average number of common shares outstanding... 7,193,837 3,042,466 2,987,908 ============ ============ ============
The accompanying notes are an integral part of these financial statements. F-3 30 3DX TECHNOLOGIES INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK STOCK ----------------- PAID-IN DEFERRED ACCUMULATED SUBSCRIPTIONS SHARES AMOUNT CAPITAL COMPENSATION DEFICIT RECEIVABLE TOTAL ------ ------ ------- ------------ ------- ---------- ----- Balance at December 31, 1994. 2,987,908 $29,879 $ 841,604 $ - $ (1,519,298) $(26,157) $ (673,972) Principal collections........ - - - - - 36,156 36,156 Shares issued during 1995.... - - - - - (57,755) (57,755) Accrual of dividends......... - - - - (1,058,956) - (1,058,956) Accretion on preferred stock. - - - - (48,408) - (48,408) Deferred compensation related to certain stock options................... - - 888,855 (888,855) - - - Compensation expense related to certain stock options.. - - - 50,991 - - 50,991 Net loss..................... - - - - (2,488,375) - (2,488,375) ---------- -------- ------------ ----------- ------------ ---------- ----------- Balance at December 31, 1995. 2,987,908 29,879 1,730,459 (837,864) (5,115,037) (47,756) (4,240,319) Principal collections........ - - - - - 47,756 47,756 Shares issued upon exercise of stock options.......... 3,124 31 573 - - - 604 Accrual of dividends......... - - - - (520,393) - (520,393) Accretion on preferred stock. - - - - (54,844) - (54,844) Deferred compensation related to certain stock options................... - - 922,806 (922,806) - - - Compensation expense related to certain stock options.. - - - 867,630 - - 867,630 Shares issued in Initial Public Offering (net of offering costs)........... 2,400,000 24,000 23,539,064 - - - 23,563,064 Conversion of Series C preferred to common stock. 1,450,145 14,502 7,996,798 - - - 8,011,300 Redemption of Series B preferred stock........... - - - - (365,810) - (365,810) Net loss..................... - - - - (2,735,364) - (2,735,364) ---------- -------- ------------ ----------- ------------ ---------- ----------- Balance at December 31, 1996. 6,841,177 68,412 34,189,700 (893,040) (8,791,448) - 24,573,624 Shares issued for over-allotment............ 375,000 3,750 3,796,396 - - - 3,800,146 Shares issued for exercise of stock options.......... 9,285 93 3,155 - - 3,248 Deferred compensation related to certain stock options................... - - 96,106 (96,106) - - - Compensation expense related to certain stock options.. - - - 477,014 - - 477,014 Net loss..................... - - - - (11,036,144) - (11,036,144) ---------- -------- ------------ ----------- ------------- -------------- ------------ Balance at December 31, 1997. 7,225,462 $ 72,255 $ 38,085,357 $ (512,132) $ (19,827,592) $ - $ 17,817,888 ========== ======== ============ =========== ============= ============== ============
The accompanying notes are an integral part of these financial statements. F-4 31 3DX TECHNOLOGIES INC. STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ............................................. $(11,036,144) $ (2,735,364) $ (2,488,375) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depletion, depreciation and amortization ........ 3,366,242 883,962 446,350 Compensation expense related to certain stock options ...................................... 477,014 867,630 50,991 Impairment of oil and gas properties ............ 9,061,240 1,476,690 1,627,321 Increase in accounts receivable ................. (626,873) (440,506) (45,485) (Increase) decrease in prepaid expenses ......... 54,414 (79,309) (76,188) Increase (decrease) in accounts payable ......... (107,291) 388,767 (3,005) Increase (decrease) in accrued liabilities ...... 240,963 253,415 (14,540) ------------ ------------ ------------ Net cash provided by (used in) operating activities .. 1,429,565 615,285 (502,931) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to oil and gas properties .................. (19,948,293) (6,166,219) (2,185,804) Sales of oil and gas properties ...................... -- -- 480,931 Purchases of technical and other equipment ........... (1,168,154) (456,264) (800,573) Proceeds from (purchases of) securities held to maturity .......................................... -- 1,595,167 (1,595,167) Other ................................................ (70,166) 5,000 (12,886) ------------ ------------ ------------ Net cash used in investing activities ................ (21,186,613) (5,022,316) (4,113,499) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Common stock proceeds, net of issuance costs ......... 3,803,394 23,563,668 -- Series B preferred stock proceeds, net of issuance costs............................................... -- -- 25,297 Series C preferred stock proceeds, net of issuance costs .............................................. -- 143,843 7,851,133 Redemption of Series B preferred stock ............... -- (6,687,100) -- Payment of Series C preferred stock dividends ........ -- (795,649) -- ------------ ------------ ------------ Net cash provided by financing activities ............ 3,803,394 16,224,762 7,876,430 ------------ ------------ ------------ Net change in cash and cash equivalents ................. (15,953,654) 11,817,731 3,260,000 Cash and cash equivalents at beginning of year .......... 17,521,745 5,704,014 2,444,014 ------------ ------------ ------------ Cash and cash equivalents at end of the year ............ $ 1,568,091 $ 17,521,745 $ 5,704,014 ============ ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION NON-CASH TRANSACTIONS: Dividends declared but not paid .................... $ -- $ -- $ 275,256 Accretion on preferred stock ....................... -- 54,844 48,408 Redemption premium on Series B preferred stock ..... -- 365,810 -- Stock dividend on Series B preferred stock ......... -- -- 783,700 Sale of Series C preferred stock in exchange for promissory notes ............................... -- -- 57,755
The accompanying notes are an integral part of these financial statements. F-5 32 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION 3DX Technologies Inc. ("3DX" or the "Company") began operations in January 1993 to offer 3-D seismic imaging and computer-aided exploration capabilities as a partner to experienced oil and gas operators. The Company combines its 3-D imaging capabilities with the operator's local knowledge and infrastructure to evaluate and exploit drilling opportunities. The Company primarily invests in prospects in the Gulf Coast region of the U.S., where 3-D seismic evaluation and interpretation is expected to reduce drilling risk. Working interests in major prospects have ranged from 5% to 40% in property investments to date. The Company was initially funded by its three founding stockholders and by Landmark Graphics Corporation (Landmark), a Houston company which is a leading supplier of interactive computer-aided exploration systems used by geoscientists to analyze subsurface data in the process of exploring for and producing petroleum reserves. The three founding stockholders of 3DX were formerly employed by Landmark. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Oil and Gas Properties 3DX accounts for its oil and gas properties using the full-cost method. All costs associated with the acquisition, exploration and development of oil and gas properties, including such costs as leasehold acquisition costs, geological and geophysical expenditures, dry hole costs and tangible and intangible development costs, are capitalized as incurred. Included in capitalized costs for 1997, 1996 and 1995 are general and administrative costs of $1,962,691, $1,146,722, and $618,614, respectively. Such capitalized costs include payroll and related costs of exploration department personnel which are directly attributable to the Company's current exploration and development activities. Other costs, such as office and facilities costs, technical equipment maintenance, depreciation and support and communication costs are also capitalized to the extent they are attributed to the Company's oil and gas property acquisition and exploration activities and would not otherwise be incurred if such activities were not being undertaken. Dispositions of proved oil and gas properties are reported as adjustments to capitalized costs, with gains and losses not recognized unless such adjustments would significantly alter the relationship between capitalized costs and estimated proved oil and gas reserves. The evaluated costs of oil and gas properties plus estimated future development and dismantlement costs (including plugging, abandonment and site-restoration costs) are charged to operations as depreciation, depletion, and amortization using the unit-of-production method based on the ratio of current production to estimated proved recoverable oil and gas reserves. The Company excludes unevaluated property costs from the depreciation, depletion and amortization calculations until proved reserves have been discovered or a determination of impairment has been made. Unevaluated properties are evaluated for impairment on a property-by-property basis. Impairment of capitalized costs of oil and gas properties is determined for each cost center on a country-by-country basis. For each cost center, to the extent that capitalized costs of oil and gas properties, net of related accumulated depreciation, depletion and amortization and any related deferred income taxes, exceed the future net revenues of estimated proved oil and gas reserves, discounted at 10% and net of any income tax effects, plus the lower of cost or fair value of unevaluated properties, such excess costs are charged to operations as an impairment of oil and gas properties. Writedowns of $9,061,240, $1,476,690 and $1,627,321 were recorded during 1997, 1996 and 1995, respectively. F-6 33 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Other property and equipment, consisting of technical interpretation equipment and related software and office furniture, equipment and leasehold improvements are recorded at cost. Depreciation is determined on a straight-line basis over the estimated useful lives of the assets, which range from three to five years. Depreciation of other property and equipment totaled $728,005, $459,189 and $288,014 for 1997, 1996 and 1995, respectively, and is included in general and administrative expenses. Accounting for Income Taxes The Company provides deferred income taxes at the balance sheet date for the estimated tax effects of differences in the tax basis of assets and liabilities and their financial statement carrying amounts. Natural Gas Revenues Natural gas revenues are recorded using the sales method, whereby the Company recognizes natural gas revenues based on the amount of gas sold to product purchasers on its behalf. The Company has no material gas imbalances. Rental Income The Company has an informal income-sharing arrangement with a seismic processing company whereby the Company receives a percentage of the seismic processing company's gross billings in exchange for office space and the use of technical equipment provided by the Company. The Company's share of billings under this arrangement amounted to $264,651, $229,556, and $58,195 in 1997, 1996 and 1995, respectively, and is reflected as a reduction of the Company's general and administrative expenses. Net Loss per Common Share In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which establishes new computation, presentation, and disclosure requirements for earnings per share for public companies. The statement is effective for financial statements issued for periods ending after December 15, 1997. In connection with this new statement, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 98, which prescribes a new accounting treatment for the impact on earnings per share of "nominal issuances" of common stock and common stock options issued within one year prior to the filing of a registration statement for an initial public offering of common stock. Under the prior rules, common stock options having a nominal exercise price issued within one year of an initial public offering were required to be reflected retroactively in the computation of earnings per share for all periods even if the effect was antidilutive. Under SAB No. 98, these common stock options are only required to be reflected in earnings per share if the effect is dilutive. The Company has restated all prior periods to reflect this change in accounting principle. The effect of this change is presented in the following table: F-7 34
Years ended December 31, ---------------------------- 1997 1996 1995 ---- ---- ----- Basic and diluted net loss per common share, as previously reported .............................. $ (1.53) $ (1.16) $ (1.14) Retroactive effect of change in accounting principle ........................................ -- (0.05) (0.06) ----- ----- ----- Basic and diluted net loss per common share ........ $ (1.53) $ (1.21) $ (1.20) ===== ===== =====
The computation of basic and diluted net loss per common share was based entirely on the weighted average common shares outstanding. Stock options which are potentially dilutive were excluded from the net loss per common share calculation in each of the years presented as the effect would have been antidilutive. See Note 7 for the number of stock options outstanding. Statements of Cash Flows For the purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Concentration of Credit Risk All of the Company's receivables are due from oil and gas producing companies located in the United States. The Company has not experienced any significant credit losses related to its receivables. Major Customers Operators for producing oil and gas wells in which the Company holds working interests sold the Company's share of oil and gas production to three major customers during the years ended December 31, 1997, 1996 and 1995. Sales to one customer represented 63% and 58% of oil and gas revenues in 1997 and 1996, respectively. During 1995, sales to two customers represented 79% of oil and gas revenues. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, account payable and accrued liabilities are short-term in nature and approximate fair value. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Oil and gas reserve estimates, which are the basis for units-of-production depletion and impairment of oil and gas properties, are inherently imprecise and are expected to change as future information becomes available. F-8 35 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Prior Year Reclassifications Certain prior year amounts have been reclassified to conform with the current presentation. Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS 130 establishes standards for reporting and displaying of comprehensive income and its components. SFAS No. 131 establishes standards for the way that public enterprises report information about operating segments and related information in interim and annual financial statements. SFAS 130 and 131 are effective for periods beginning after December 15, 1997. These two statements will not have any effect on the Company's 1997 financial position or results of operations. Management is presently evaluating what, if any, additional disclosures may be required when these two statements are implemented. 3. INCOME TAXES Significant components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31, ----------------------------- 1997 1996 ---- ---- Deferred tax liability: Exploration and development expenditures deducted for tax and capitalized for books ................................ $ 981,479 $ (325,812) Other items, net .......................... (70,968) (54,872) ----------- ----------- Total deferred tax liability ........ 910,511 (380,684) ----------- ----------- Deferred tax assets: Net operating loss carryforwards .......... 3,803,419 2,039,546 Other items, net .......................... 836,151 126,517 ----------- ----------- Total deferred tax assets ........... 4,639,570 2,166,063 Less: Valuation allowance ................. (5,550,081) (1,785,379) ----------- ----------- Net deferred tax assets ..................... (910,511) 380,684 ----------- ----------- Net deferred tax liability .................. $ -- $ -- =========== ===========
The Company did not record any current or deferred income tax provision or benefit in any of the periods presented. The Company's provision for income taxes differs from the amount computed by applying the statutory rate due principally to the valuation allowance recorded against its deferred tax asset account relating to net operating tax loss carryforwards. Management believes that such allowance is necessary until there is greater assurance that the net operating tax loss carryforwards can be utilized. The Company has recorded a valuation allowance against its deferred tax assets in each year to reflect the estimated portion for which realization is uncertain. As of December 31, 1997, the Company had tax net operating loss carryforwards of approximately $11.2 million which begin to expire in 2008. As a result of recent stock transactions, including the initial public offering, the Company's utilization of its net operating losses under Section 382 of the Internal Revenue Code is limited. F-9 36 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 4. CREDIT AGREEMENT On December 18, 1997, the Company executed a credit agreement with a commercial bank. The credit agreement expires on June 30, 2002 and provides for total borrowings of $25 million, subject to availability under a borrowing base calculation which is redetermined on a quarterly basis. The credit agreement, which is secured by substantially all of the Company's producing oil and gas properties, had a current availability of $3.0 million under Tranche A of the agreement as of December 31, 1997. There was no availability under Tranche B. Tranche A advances carry an interest rate, at the Company's option, of either the London Interbank Offered Rate ("LIBOR") plus 2% or the lender's prime rate. Tranche B advances carry an interest rate of either LIBOR plus 4% or the lender's prime rate plus 2%. The credit agreement contains restrictions on dividends and additional liens and indebtedness and requires the maintenance of a minimum current ratio and net worth, each as defined in the credit agreement. There were no borrowings under the credit agreement during the year ended December 31, 1997. 5. MANDATORILY REDEEMABLE PREFERRED STOCK Series B In November 1993, the Company issued 29,000 Series B equity units at $100 per unit, for total proceeds before offering costs of $2,900,000. In October 1994, the Company issued 25,000 additional Series B equity units at $100 per unit, for total proceeds before offering costs of $2,500,000. Each equity unit consisted of one share of redeemable Series B preferred stock, par value $.01 per share ("Series B Preferred Stock"), at $94.1558 per share and 30.215 shares of common stock, par value $.01 per share, at $0.19 per share. The Series B Preferred Stock carried a redemption value of $100 per share. The difference between the sales price and the redemption value was subject to pro-rata accretion which was charged to retained earnings, such that the book value of each share of Series B Preferred Stock would equal $100 at the required mandatory redemption in two installments commencing in November 2002. The Series B Preferred Stock also carried a cumulative annual dividend, payable on December 31 of each year, of $12.50 per share if paid in cash or .13276 shares of Series B Preferred Stock if paid in stock. All dividends were paid in additional shares of Series B Preferred Stock. Series B equity units totaling $1,025,000, or 19% of the total proceeds of the offering, were sold to related parties, consisting of officers of the Company, consultants and Landmark. Additionally, units totaling $3,032,000, or 56%, were sold to two investors and their affiliates, each of which required the right to designate one member of the Board of Directors of the Company. In connection with the initial public offering which was completed on December 26, 1996 (see Note 6), all of the issued and outstanding shares of Series B Preferred Stock were redeemed. The unamortized redemption premium of $365,810 was charged to the Company's accumulated deficit. Series C During the period from July 26, 1995 through September 25, 1995, the Company sold a total of 2,662,241 shares of senior redeemable convertible Series C preferred stock, par value $.01 per share ("Series C Preferred Stock"), at $3.00 per share, for total proceeds before offering costs of $7,986,723. The Series C Preferred Stock carried a cumulative dividend at an annual rate of $.24 per share if paid in cash or .08 shares of Series C Preferred Stock if paid in stock, payable or accruing quarterly, commencing on December 31, 1995. Unpaid dividends earned interest at an annual interest rate of 8%. During the year ended December 31, 1996, the Company paid accrued dividends on Series C Preferred Stock of $795,649. Shares totaling $925,515, or 12% of the total proceeds, were sold to related parties, including consultants to and officers of the Company, as well as two directors and their affiliates. Additionally, one investor purchased F-10 37 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) shares totaling $3,999,999, or 50% of the offering, on the condition that it be given the right to designate one member of the Company's Board of Directors. Each share of Series C Preferred Stock was convertible into one share of common stock. Subsequent to the reverse stock split in October 1996, each share was convertible into .517 shares of common stock. The Series C Preferred Stock could be automatically converted to common stock upon the occurrence of certain conversion events, including the successful completion of an initial public offering of the Company's common stock if certain pricing and other criteria were met. The Series C preferred stock also contained a mandatory-redemption feature under which the stock could be redeemed, at the option of at least 67% of the holders, at the $3.00 per share liquidation value in two installments commencing in November 2002. In October 1995, the Board of Directors granted the holder of each share of Series C Preferred Stock a warrant to purchase additional shares equal to 10% of the shares owned by such holder, at an exercise price of $3.00 per share. Such shares were exercisable at any time until the earlier of (a) five years from the date of issuance and (b) the effective date of an initial public offering of the Company's securities. No value was assigned to these warrants as the computed value of the warrants using the Black-Scholes model was zero. In connection with the Initial Public Offering which was completed on December 26, 1996, all of the issued and outstanding shares of Series C Preferred Stock, and all outstanding Series C Preferred Stock warrants were converted into common stock. Stock Subscriptions Receivable Certain officers and directors of the Company purchased Series B equity units and Series C Preferred Stock for promissory notes, which are reflected as an offset to equity in the accompanying financial statements. The promissory notes were full recourse and carried interest at a fixed rate of 6% per annum. The notes from the Company's officers were collateralized by certain vested stock options the individuals held from their former employer. The principal and accrued interest on all notes for the purchase of equity securities of the Company were paid off as of December 31, 1996. F-11 38 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) The following table summarizes the 1996 and 1995 activity of Series B and Series C Preferred Stock:
REDEEMABLE PREFERRED STOCK -------------------------- SERIES B SERIES C ----------------------- ------------------------- SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------- Balance at December 31, 1994 ...... 59,034 $ 5,451,522 -- $ -- Shares issued during 1995 ......... -- -- 2,662,241 7,986,723 Offering costs .................... -- (860) -- (87,834) Accrual of dividends .............. 7,837 783,700 -- -- Accretion to redemption value ..... -- 43,464 -- 4,944 --------- ----------- ----------- ----------- Balance at December 31, 1995 ....... 66,871 6,277,826 2,662,241 7,903,833 Accretion to redemption value ...... -- 43,464 -- 11,380 Redemption premium ................. -- 365,810 Redemption of Series B preferred ... (66,871) (6,687,100) -- -- Exercise of outstanding warrants For cash ....................... -- -- 32,029 96,087 Under cashless tender .......... -- -- 110,653 -- Conversion to common stock ......... -- -- (2,804,923) (8,011,300) --------- ----------- ----------- ----------- Balance at December 31, 1996 ....... -- $ -- $ -- $ -- ========= =========== =========== ===========
6. STOCKHOLDERS' EQUITY In May 1995, the stockholders approved a 10-for-1 stock split of the Company's common stock. In October 1996, the stockholders approved a reverse stock split whereby holders of common stock received .517 shares of common stock for every share previously owned. All references in this report to number of common shares outstanding reflect stock splits retroactively to inception of the Company. On December 26, 1996, the Company completed an initial public offering for the sale of 2,400,000 shares of common stock at $11.00 per share, less offering costs. In January 1997, the Company's underwriters exercised their 30-day over-allotment option to purchase 375,000 additional shares of common stock at the offering price of $11.00 per share, less underwriting discounts and commissions. Total proceeds to the Company from the initial public offering, net of offering costs, were approximately $27.4 million. F-12 39 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 7. STOCK OPTIONS In June 1994, the Board of Directors approved the 1994 Stock Option Plan (the "Plan") for employees, officers, directors and certain consultants of the Company. The ten year options vest over four years for employees (25% at the end of each of the first two years and monthly over the last 24 months. For directors and consultants, the options vest 50% at the end of the first year and 25% at the end of the second and third years. Certain of these options are eligible for accelerated vesting upon a change of control of the Company. The Company has reserved a total of 2,004,937 shares of common stock for issuance under this Plan, of which 611,778 shares were available for grant as of December 31, 1997. The following table summarizes option balances and activity for the Plan:
WEIGHTED NUMBER AVERAGE OF EXERCISE SHARES PRICE --------------------------------------------------- -------------- ------------- Options outstanding, December 31, 1994........... 438,783 $ 0.22 Granted.......................................... 248,160 0.56 Exercised........................................ -- -- Canceled......................................... -- -- --------------------------------------------------- -------------- ------------- Options outstanding, December 31, 1995........... 686,943 0.34 Granted.......................................... 267,806 1.52 Exercised........................................ (3,124) 0.19 Canceled......................................... (157,146) 0.57 --------------------------------------------------- -------------- ------------- Options outstanding, December 31, 1996........... 794,479 0.70 Granted.......................................... 628,656 10.33 Exercised........................................ (9,285) 0.35 Canceled......................................... (33,100) 5.03 --------------------------------------------------- -------------- ------------- Options outstanding, December 31, 1997.......... 1,380,750 $ 4.98 --------------------------------------------------- -------------- ------------- Exercisable options - December 31, 1995............................ 109,696 $0.22 December 31, 1996............................ 344,396 0.28 December 31, 1997............................ 554,183 0.56 --------------------------------------------------- -------------- -------------
WEIGHTED WEIGHTED WEIGHTED RANGE OF OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE PRICES AT 12/31/97 LIFE (YRS) PRICE AT 12/31/97 PRICE -------------------- ----------------- -------------- ------------- --------------- -------------- $0.19 to $0.58 734,693 7.02 $ 0.37 537,897 $ 0.32 $7.79 to $11.88 646,057 9.40 $ 10.23 16,286 $ 8.30 Total 1,380,750 8.14 $ 4.98 554,183 $ 0.56
F-13 40 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) In connection with stock options granted within one year of the initial public offering, the Company recorded deferred compensation as additional paid in capital with a corresponding offset to stockholders' equity. The amount of deferred compensation is based on the difference between the option exercise price and the $11.00 per share initial public offering common stock price for those options. Deferred compensation is being amortized as compensation expense over the option vesting period, and totaled $477,014, $867,630 and $50,991 during the years ended December 31, 1997, 1996 and 1995, respectively. Unamortized deferred compensation as of December 31, 1997 amounted to $512,132. In October 1995, the FASB issued SFAS No. 123. SFAS No. 123 is a new standard of accounting for stock-based compensation and establishes a fair value method of accounting for awards granted after December 31, 1995 under stock compensation plans. The Company has elected to continue accounting for employee stock options under Accounting Principles Board Opinion No. 25. Had the Company elected to apply SFAS No. 123, the estimated effects on net income and earnings per share resulting from grants made after December 31, 1994 would have been as follows:
1997 1996 1995 ---- ---- ---- Net loss attributable to common stockholders: As reported................................. $(11,036,144) $(3,676,411) $(3,595,739) Pro forma................................... (11,587,856) (3,391,345) (3,588,257) Basic and diluted earnings per share: As reported................................. $ (1.53) $ (1.21) $ (1.20) Pro forma................................... (1.61) (1.11) (1.20) --------------------------------------------------------------------------------------------------- Pro forma assumptions: Risk free interest rate: Maximum.................................. 6.72% 6.68% 5.98% Minimum.................................. 5.91% 5.35% 5.59% Expected option life: Maximum.................................. 4.5 years 4.5 years 5.0 years Minimum.................................. 3.7 years 3.7 years 4.6 years --------------------------------------------------------------------------------------------------- Weighted average fair value of options granted during the year............................. $6.39 $8.95 $3.72 --------------------------------------------------------------------------------------------------- Volatility factor................................ .703 - - ---------------------------------------------------------------------------------------------------
Volatility was not considered in the calculation of option values prior to December 26, 1996, as the Company was not publicly traded. 8. SAVINGS PLAN The Company's employees participated, prior to January 1, 1998, in Landmark's 401-K employee savings plan (the Plan), which became effective upon inception of the Company. The Plan covers substantially all employees and entitles them to contribute up to 16% of their annual compensation, subject to limitations imposed by the Internal Revenue Code. The Company did not make any contributions to the Plan on behalf of employees during any of the years presented. Effective January 1, 1998, the Company established a separate employee savings plan exclusively for its employees with substantially the same terms and provisions as the previous Plan. F-14 41 3DX TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 9. RELATED PARTIES Prior to the Company's initial public offering of common stock in December 1996, Landmark was the beneficial owner of greater than 5% of the issued and outstanding Common Stock and was considered a related party. In connection with its initial capitalization, the Company entered into a Technical Services Agreement with Landmark pursuant to which Landmark agreed to grant to the Company ongoing licenses to use Landmark software as Landmark first made such software available to its customers. In addition, the agreement provides for a strategic alliance between Landmark and the Company, which enables the Company to request, and requires Landmark to deliver, enhancements and modifications to existing Landmark software and, in certain instances, to develop new software for use in the Company's oil and gas exploration efforts. In exchange for such rights, the Company has agreed to serve as an alpha test site for software developed by Landmark. During 1997, 1996 and 1995, the Company purchased technical equipment and software, supplies and hardware maintenance from Landmark in the amounts of $645,109, $267,007 and $521,128, respectively. In addition, the Company and Landmark were also parties to an informal arrangement pursuant to which the Company's employees participated in Landmark's medical insurance plan, life insurance plans and 401(k) employee savings plan. The Company reimburses Landmark for the costs of providing these benefits, together with an administrative fee. Effective January 1, 1998, the Company ceased to participate in this informal arrangement and established separate benefit plans exclusively for its employees. In April 1995, the Company sold 66.67% of its working interest in the Double Diamond Jones Ranch prospect to a group of individual investors who are stockholders in the Company through a limited partnership. Proceeds from the sale, which represented both the estimated fair market value of the interest sold as well as 3DX's proportionate cost to date on the prospect, amounted to $480,931. No gain or loss was recorded on this transaction. 10. COMMITMENTS In March 1995, the Company entered into a 5-year office lease agreement. Future minimum payments under this non-cancelable office lease are as follows at December 31, 1997: 1998..................................... $ 94,633 1999..................................... 94,633 2000..................................... 15,772 -------- Total minimum lease payments............. $205,038 ========
Rental expense under this office lease amounted to $94,633, $94,633 and $83,919 during the years ended December 31, 1997, 1996 and 1995, respectively. F-15 42 3DX TECHNOLOGIES INC. SUPPLEMENTARY INFORMATION - UNAUDITED QUARTERLY FINANCIAL DATA (UNAUDITED) The table below sets forth selected unaudited quarterly financial information for 1997 and 1996:
-------------------------------------------------------------------------------------------------------- QUARTER ENDED: -------------------------------------------------------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- 1997: Revenues (a)...................... $ 839,273 $ 890,846 $ 840,705 $ 1,059,777 Net loss (b)...................... (40,458) (460,474) (590,225) (9,944,987) Net loss applicable to common stockholders.................. (40,458) (460,474) (590,225) (9,944,987) Basic and diluted net loss per common share (c).............. (0.01) (0.06) (0.08) (1.38) 1996: Revenues (a)...................... $ 183,310 $ 169,041 $ 273,786 $ 473,650 Net loss (b)...................... (453,139) (1,372,840) (445,590) (463,795) Net loss applicable to common stockholders.................... (638,434) (1,554,939) (624,496) (858,542) Basic and diluted net loss per common share as reported........ (0.20) (0.49) (0.20) (0.26) Retroactive effect of change in accounting principle (d)........ (0.01) (0.03) (0.01) (0.01) ------ ------ ------ ------ Basic and diluted net loss per common share (c)................ (0.21) (0.52) (0.21) (0.27) ====== ====== ====== ======
(a) As discussed in Note 2, rental income has been reflected as a reduction of general and administrative expense in all periods presented. (b) As discussed in Note 2, the Company recorded a writedown of oil and gas properties of $19,061,240 in the fourth quarter of 1997, and writedowns totaling $1,476,690 in 1996, including $1,090,718 in the second quarter of 1996. (c) Net loss per common share are computed independently for each of the quarters presented and therefore may not sum to the totals for the year. (d) As discussed in Note 2, earnings per share amounts for periods prior to the Company's initial public offering have been restated to retroactively reflect the effect of SAB No. 98. F-16 43 3DX TECHNOLOGIES INC. SUPPLEMENTARY INFORMATION - UNAUDITED (Continued) RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) The following table sets forth the Company's results of operations for oil and gas producing activities for the years ended December 31, 1997, 1996 and 1995.
1997 1996 1995 ---- ---- ---- Oil and gas revenues ........................ $ 3,045,447 $ 851,827 $ 274,511 Lease operating costs ....................... 257,291 49,016 60,877 Production taxes ............................ 178,952 58,660 17,656 Impairment of oil and gas properties ........ 9,061,240 1,476,690 1,627,321 Depletion, depreciation and amortization .... 2,636,305 422,839 158,336 ----------- ----------- ----------- Loss before income taxes .................... (9,088,341) (1,155,378) (1,589,679) Income tax expense (credit) ................. -- -- -- ----------- ----------- ----------- Net loss .................................... $(9,088,341) $(1,155,378) $(1,589,679) =========== =========== =========== Amortization per physical unit of production (equivalent Mcf of gas, converted at 6 to 1) .................................... $ 2.17 $ 1.31 $ 1.15 =========== =========== ===========
The results of operations from oil and gas producing activities were determined in accordance with Statement of Financial Accounting Standards No. 69, "Disclosures About Oil and Gas Producing Activities" ("SFAS No. 69") and, therefore, do not include corporate overhead, interest and other general income and expense items. COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) The aggregate amounts of capitalized costs relating to the Company's oil and gas producing activities and the related accumulated depletion, depreciation, and amortization and impairment at December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995 ---- ---- ---- Evaluated oil and gas properties................. $ 22,521,673 $ 7,164,397 $ 2,648,724 Unevaluated oil and gas properties............... 10,098,698 4,403,165 1,375,145 ------------ ----------- ----------- Total capitalized costs.......................... 32,620,371 11,567,562 4,023,869 Less-accumulated depletion, depreciation and amortization and impairments................. (15,473,403) (3,775,858) (1,876,329) ------------ ----------- ----------- $ 17,146,968 $ 7,791,704 $ 2,147,540 ============ =========== ===========
The costs of unevaluated oil and gas properties consists of projects which at each date were undergoing exploration or development activities or were projects on which the Company planned to commence such exploration activities in the future. The Company will begin to amortize these costs when proved reserves are established or impairment is determined. The Company believes that substantially all of the unevaluated properties at December 31, 1997 will be fully evaluated within the succeeding two-year period. F-17 44 3DX TECHNOLOGIES INC. SUPPLEMENTARY INFORMATION - UNAUDITED (Continued) The following table represents an analysis of remaining unevaluated oil and gas property costs at December 31, 1997 according to the years in which they were incurred:
YEARS ENDED DECEMBER 31, ------------------------ 1997 1996 1995 ---- ---- ---- Acquisition costs............... $3,145,580 $ 219,748 $ 21,525 Exploration costs............... 5,459,965 1,251,881 -- ---------- ---------- ---------- Total...................... $8,605,545 $1,471,629 $ 21,525 ========== ========== ==========
The following table sets forth the costs incurred in the Company's oil and gas property acquisition, exploration and development activities for the years presented:
YEARS ENDED DECEMBER 31, ------------------------ 1997 1996 1995 ---- ---- ---- Property acquisition costs- Proved .................... $ 70,000 $ -- $ -- Unproved .................. 4,794,238 1,171,217 490,141 Exploration costs ............. 15,654,152 6,269,266 1,611,192 Development costs ............. 534,419 103,210 -- ----------- ----------- ----------- $21,052,809 $ 7,543,693 $ 2,101,333 =========== =========== ===========
OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) RESERVES The process of estimating proved developed and proved undeveloped oil and gas reserves is very complex, requiring significant subjective decisions in the evaluation of available geologic, engineering and economic data for each reservoir. The data for a given reservoir may change over time as a result of, among other things, additional development activity, production history and viability of production under varying economic conditions. Consequently, material revisions to existing reserve estimates may occur in the future. Although every reasonable effort is made to ensure that reserve estimates are based on the most accurate and complete information possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures. The following information regarding estimates of the Company's proved oil and gas reserves, all located in the United States, is based on reports prepared on behalf of the Company by the Company's independent petroleum engineers. The following table sets forth the changes in the Company's total proved reserves for the years ended December 31, 1997, 1996 and 1995. All of the reserve quantities reflected in the table below are proved developed reserves. F-18 45 3DX TECHNOLOGIES INC. SUPPLEMENTARY INFORMATION - UNAUDITED (Continued)
YEAR ENDED DECEMBER 31, ------------------------------------------- 1997 1996 1995 ---- ---- ---- OIL (BBLS) ---------- Proved reserves at the beginning of the year ................................... 32,428 41,193 39,886 Extensions, discoveries, and other additions .............................. 43,497 9,797 26,000 Revisions of previous estimates ............ 5,489 (10,079) (18,000) Purchases of reserves in place ............. 21,405 -- -- Production ................................. (14,068) (8,483) (6,693) ---------- ---------- ---------- Proved reserves at the end of the year ..... 88,751 32,428 41,193 ========== ========== ========== GAS (MCF) --------- Proved reserves at the beginning of the year ................................... 2,463,736 442,795 1,236,915 Extensions, discoveries, and other additions .............................. 2,546,337 2,284,482 104,000 Revisions of previous estimates ............ 53,855 7,661 (801,000) Purchases of reserves in place ............. -- -- -- Production ................................. (1,131,819) (271,202) (97,120) ---------- ---------- ---------- Proved reserves at the end of the year ..... 3,932,109 2,463,736 442,795 ========== ========== ==========
Standardized Measures of Discounted Future Net Cash Flows The Company's standardized measure of discounted future net cash flows, and changes therein, related to proved oil and gas reserves are as follows (in thousands):
DECEMBER 31, ------------------------------------ 1997 1996 1995 ---- ---- ---- Future cash inflow .................................... $ 10,427 $ 9,354 $ 1,405 Future production, development and abandonment costs .. (2,195) (1,430) (329) -------- -------- -------- Future cash flows before income taxes ................. 8,232 7,924 1,076 Future income taxes ................................... -- -- -- -------- -------- -------- Future net cash flows ................................. 8,232 7,924 1,076 10% Discount factor ................................... (1,184) (1,301) (305) -------- -------- -------- Standardized measure of discounted future net cash flow .............................................. $ 7,048 $ 6,623 $ 771 ======== ======== ========
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS: Sales of oil, gas and natural gas liquids, net of production costs .................................................. $(2,609) $ (744) $ (196) Extensions, discoveries and other additions ................ 4,737 6,594 349 Revisions of previous quantity estimates ................... 124 (200) (1,280) Net changes in prices and production costs ................. (2,468) 173 (71) Accretion of discount ...................................... 662 77 161 Changes in future development costs ........................ 60 (82) 103 Purchases of reserves in place ............................. 109 -- -- Changes in production rates (timing) and other ............. (190) 34 99 ------- ------- ------- Net change ................................................. $ 425 $ 5,852 $ (835) ======= ======= =======
F-19 46 3DX TECHNOLOGIES INC. SUPPLEMENTARY INFORMATION - UNAUDITED (Continued) Estimated future cash inflows are computed by applying year-end prices of oil and gas to year-end quantities of proved reserves. Future price changes are considered only to the extent provided by contractual arrangements. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions. Estimated future income tax expense is calculated by applying year-end statutory tax rates to estimated future pretax net cash flows related to proved oil and gas reserves, less the tax basis (including net operating loss carryforwards projected to be usable) of the properties involved. These estimates were determined in accordance with SFAS No. 69. Because of unpredictable variances in expenses and capital forecasts, crude oil and gas prices and oil and gas reserve volume estimates, as well as the statutory pricing and discounting assumptions used in these cash flow estimates, management believes the usefulness of this data is limited. These estimates of future net cash flows do not necessarily represent management's assessment of estimated fair market value, future profitability or future cash flow to the Company. Management's investment and operating decisions are based upon reserve estimates that include proved as well as probable reserves and upon different price and cost assumptions from those used herein. The future cash flows presented in the "Standardized Measures of Discounted Future Net Cash Flows" are based on year-end oil and gas prices for oil and gas reserves which as of December 31, 1997 were approximately $16.17 per barrel of oil and approximately $2.29 per Mcf of gas. The Company does not have oil and gas reserves which are committed under long-term oil and gas sales or hedging contracts. F-20 47 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ----------------------- 3.1(i) Sixth Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1(i)(d) to the Company's Amendment No. 2 to the Registration Statement on Form S-1 (No. 333-14473), filed December 16, 1996). 3.1(ii) Second Amended and Restated Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Form 10-Q for the period ended June 30, 1997). 4.1 Form of Specimen Stock Certificate, incorporated by reference to Exhibit 4.1 to the Company's Amendment No. 1 to Registration Statement on Form S-1 (No. 333-14473), filed November 27, 1996. 10.1 Technical Services Agreement between Landmark Graphics Corporation and Novera Energy Inc. dated January 1993 (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (No. 333-14473), filed October 18, 1996 10.2 * Credit Agreement with NationsBank of Texas dated December 18, 1997 10.3 1994 Stock Option Plan (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (No. 333-14473), filed October 18, 1996 + 10.4 Stock Purchase Agreement among the Company, C. Eugene Ennis, Douglas C. Nester, Peter M. Duncan and the Investors named therein dated November 9, 1993 (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (No. 333-14473), filed October 18, 1996). 10.5 Series C Preferred Stock Purchase Agreement among the Company, C. Eugene Ennis, Douglas C. Nester, Peter M. Duncan and the Investors named therein dated July 26, 1995 (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (No. 333-14473), filed October 18, 1996). 10.6 Lease Contract dated January 22, 1995 between the Company and The Penn Mutual Life Insurance Company and Letter dated March 1, 1995 from Trammell Crow Houston, Inc. (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement of Form S-1 (No. 333-14473), filed October 18, 1996). 11.1 * Computation of Earnings per Share 23.1 * Consent of Arthur Andersen LLP 23.2 * Consent of Ryder Scott Company 24.1 * Power of Attorney (included on signature page) 27.1 * Financial Data Schedule for December 31, 1997 27.2 * Financial Data Schedule for December 31, 1996 (restated) 27.3 * Financial Data Schedule for December 31, 1995 (restated)
--------------- * filed herewith + management contract or compensating plan EX-10.2 2 CREDIT AGREEMENT WITH NATIONSBANK OF TEXAS 1 EXHIBIT 10.2 ================================================================================ $25,000,000.00 CREDIT AGREEMENT Among 3DX TECHNOLOGIES INC. as Borrower, THE FINANCIAL INSTITUTIONS NAMED IN THIS CREDIT AGREEMENT as Banks, and NATIONSBANK OF TEXAS, N.A. as Agent December 18, 1997 ================================================================================ 2 TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms . . . . . . . . . . . . . . . . . . . 1 Section 1.02. Computation of Time Periods . . . . . . . . . . . . . . . . 15 Section 1.03. Accounting Terms; Changes in GAAP . . . . . . . . . . . . . 15 Section 1.04. Types of Advances . . . . . . . . . . . . . . . . . . . . . 15 Section 1.05. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE II CREDIT FACILITIES Section 2.01. Commitment for Advances . . . . . . . . . . . . . . . . . . 16 Section 2.02. Borrowing Bases . . . . . . . . . . . . . . . . . . . . . . 17 Section 2.03. Method of Borrowing . . . . . . . . . . . . . . . . . . . . 19 Section 2.04. Prepayment of Advances . . . . . . . . . . . . . . . . . . 21 Section 2.05. Repayment of Advances . . . . . . . . . . . . . . . . . . . 24 Section 2.06. Letters of Credit . . . . . . . . . . . . . . . . . . . . . 24 Section 2.07. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 2.08. Interest . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 2.09. Payments and Computations . . . . . . . . . . . . . . . . . 32 Section 2.10. Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . 33 Section 2.11. Breakage Costs . . . . . . . . . . . . . . . . . . . . . . 33 Section 2.12. Increased Costs . . . . . . . . . . . . . . . . . . . . . . 34 Section 2.13. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE III CONDITIONS OF LENDING Section 3.01. Conditions Precedent to Credit Agreement . . . . . . . . . 39 Section 3.02. Conditions Precedent to All Borrowings . . . . . . . . . . 40 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01. Corporate Existence; Subsidiaries . . . . . . . . . . . . . 40 Section 4.02. Corporate Power . . . . . . . . . . . . . . . . . . . . . . 41 Section 4.03. Authorization and Approvals . . . . . . . . . . . . . . . . 41 Section 4.04. Enforceable Obligations . . . . . . . . . . . . . . . . . . 41 Section 4.05. Financial Statements . . . . . . . . . . . . . . . . . . . 42 Section 4.06. True and Complete Disclosure . . . . . . . . . . . . . . . 42 Section 4.07. Litigation . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 4.08. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . 43
-i- 3 Section 4.09. Investment Company Act . . . . . . . . . . . . . . . . . . 43 Section 4.10. Public Utility Holding Company Act . . . . . . . . . . . . 43 Section 4.11. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 4.12. Pension Plans . . . . . . . . . . . . . . . . . . . . . . . 43 Section 4.13. Condition of Property; Casualties . . . . . . . . . . . . . 44 Section 4.14. No Burdensome Restrictions; No Defaults . . . . . . . . . . 44 Section 4.15. Environmental Condition . . . . . . . . . . . . . . . . . . 44 Section 4.16. Permits, Licenses, Etc. . . . . . . . . . . . . . . . . . . 45 Section 4.17. Gas Contracts . . . . . . . . . . . . . . . . . . . . . . . 45 ARTICLE V AFFIRMATIVE COVENANTS Section 5.01. Compliance with Laws, Etc. . . . . . . . . . . . . . . . . 46 Section 5.02. Maintenance of Insurance . . . . . . . . . . . . . . . . . 46 Section 5.03. Preservation of Corporate Existence, Etc. . . . . . . . . . 46 Section 5.04. Payment of Taxes, Etc. . . . . . . . . . . . . . . . . . . 47 Section 5.05. Visitation Rights . . . . . . . . . . . . . . . . . . . . . 47 Section 5.06. Reporting Requirements . . . . . . . . . . . . . . . . . . 47 Section 5.07. Maintenance of Property . . . . . . . . . . . . . . . . . . 51 Section 5.08. New Subsidiaries . . . . . . . . . . . . . . . . . . . . . 51 ARTICLE VI NEGATIVE COVENANTS Section 6.01. Liens, Etc. . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 6.02. Debts, Guaranties, and Other Obligations . . . . . . . . . 54 Section 6.03. Agreements Restricting Liens and Distributions . . . . . . 54 Section 6.04. Merger or Consolidation; Asset Sales . . . . . . . . . . . 55 Section 6.05. Restricted Payments . . . . . . . . . . . . . . . . . . . . 56 Section 6.06. Investments . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 6.07. Limitation on Speculative Hedging . . . . . . . . . . . . . 56 Section 6.08. Affiliate Transactions . . . . . . . . . . . . . . . . . . 56 Section 6.09. Compliance with ERISA . . . . . . . . . . . . . . . . . . . 57 Section 6.10. Maintenance of Ownership of Subsidiaries . . . . . . . . . 57 Section 6.11 Sale-and-Leaseback . . . . . . . . . . . . . . . . . . . . 57 Section 6.12. Change of Business . . . . . . . . . . . . . . . . . . . . 57 Section 6.13. Current Ratio . . . . . . . . . . . . . . . . . . . . . . . 58 Section 6.14. Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . 58 ARTICLE VII REMEDIES Section 7.01. Events of Default . . . . . . . . . . . . . . . . . . . . . 58 Section 7.02. Optional Acceleration of Maturity . . . . . . . . . . . . . 61
-ii- 4 Section 7.03. Automatic Acceleration of Maturity . . . . . . . . . . . . 62 Section 7.04. Right of Set-off . . . . . . . . . . . . . . . . . . . . . 62 Section 7.05. Actions Under Credit Documents . . . . . . . . . . . . . . 62 Section 7.06. Non-exclusivity of Remedies . . . . . . . . . . . . . . . . 63 ARTICLE VIII THE AGENT AND THE ISSUING BANK Section 8.01. Authorization and Action . . . . . . . . . . . . . . . . . 63 Section 8.02. Agent's Reliance, Etc. . . . . . . . . . . . . . . . . . . 63 Section 8.03. The Agent and Its Affiliates . . . . . . . . . . . . . . . 64 Section 8.04. Bank Credit Decision . . . . . . . . . . . . . . . . . . . 64 Section 8.05. Indemnification . . . . . . . . . . . . . . . . . . . . . . 64 Section 8.06. Successor Agent and Issuing Bank . . . . . . . . . . . . . 65 ARTICLE IX MISCELLANEOUS Section 9.01. Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . 66 Section 9.02. Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . 66 Section 9.03. No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . 66 Section 9.04. Costs and Expenses . . . . . . . . . . . . . . . . . . . . 67 Section 9.05. Binding Effect . . . . . . . . . . . . . . . . . . . . . . 67 Section 9.06. Bank Assignments and Participations . . . . . . . . . . . . 67 Section 9.07. Indemnification . . . . . . . . . . . . . . . . . . . . . . 70 Section 9.08. Execution in Counterparts . . . . . . . . . . . . . . . . . 70 Section 9.09. Survival of Representations, Etc . . . . . . . . . . . . . 70 Section 9.10. Severability . . . . . . . . . . . . . . . . . . . . . . . 71 Section 9.11. Business Loans . . . . . . . . . . . . . . . . . . . . . . 71 Section 9.12. Governing Law . . . . . . . . . . . . . . . . . . . . . . . 71 Section 9.13. Confidentiality . . . . . . . . . . . . . . . . . . . . . . 71
-iii- 5
EXHIBITS: Exhibit A - Form of Assignment and Acceptance Exhibit B - Form of Compliance Certificate Exhibit C - Form of Guaranty Exhibit D-1 - Form of Revolving A Note Exhibit D-2 - Form of Revolving B Note Exhibit E - Form of Notice of Borrowing Exhibit F - Form of Notice of Conversion or Continuation Exhibit G - Form of Letter of Credit Application Exhibit H - Form of Borrower's Counsel Opinion SCHEDULES: Schedule 1 - Borrower, Agent, and Bank Information Schedule 4.07 - Existing Litigation Schedule 4.15(a) - Existing Environmental Concerns Schedule 4.15(b) - Designated Environmental Sites Schedule 6.01 - Permitted Existing Liens Schedule 6.02 - Permitted Existing Debt Schedule 6.08 - Affiliated Transactions
-iv- 6 CREDIT AGREEMENT This Credit Agreement dated as of December 18, 1997 is among 3DX Technologies Inc., a Delaware corporation, the Banks (as defined below), and NationsBank of Texas, N.A., as Agent for the Banks. The Borrower, the Banks, and the Agent agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (unless otherwise indicated, such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Acceptable Security Interest" means a Lien which (a) exists in favor of the Agent for the benefit of the Agent and the Banks and (b) is superior to all Liens or rights of any other Person in the Property encumbered thereby, except to the extent that the rights of another Person are permitted hereunder. "Adjusted Base Rate" means, for any day, the fluctuating rate per annum of interest equal to the greater of (a) the Base Rate in effect on such day and (b) the Federal Funds Rate in effect on such day plus 1.00%. "Adjusted Net Income" means, for any Person and for any period of its determination, the Adjusted Net Income of such Person determined in accordance with GAAP consistently applied, but excluding any gains and losses on sales and retirements of assets and any noncash write-down of assets. "Advances" means any Revolving A Advance or Revolving B Advance. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person or any Subsidiary of such Person. The term "control" (including the terms "controlled by" or "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of Voting Securities, by contract, or otherwise. 7 "Agent" means NationsBank of Texas, N.A., in its capacity as an agent pursuant to Article VIII and any successor agent pursuant to Section 8.06. "Agent's Fee Letter" has the meaning specified in Section 2.07(b). "Agreement" means this Credit Agreement, as the same may be amended, supplemented, and otherwise modified from time to time. "Applicable Lending Office" means, with respect to each Bank, such Bank's Domestic Lending Office in the case of a Base Rate Advance and such Bank's Eurodollar Lending Office in the case of a Eurodollar Rate Advance. "Applicable Margin" means the following percentages for the following Classes and Types of Advances:
Applicable Margin Applicable Margin Base Rate Advances Eurodollar Rate Advances ------------------ ------------------------ Revolving A Advances 0.00% 2.00% Revolving B Advances 2.00% 4.00%
"Assignment and Acceptance" means an assignment and acceptance entered into by a Bank and an Eligible Assignee, and accepted by the Agent, in substantially the form of the attached Exhibit A. "Banks" means the lenders listed on the signature pages of this Agreement and each Eligible Assignee that shall become a party to this Agreement pursuant to Section 9.06. "Base Rate" means a fluctuating interest rate per annum as shall be in effect from time to time equal to the rate of interest publicly announced by NationsBank of Texas, N.A., as its base rate, whether or not the Borrower has notice thereof. "Base Rate Advance" means an Advance which bears interest as provided in Section 2.08(a). "Borrower" means 3DX Technologies Inc., a Delaware corporation. "Borrowing" means any Revolving A Borrowing or Revolving B Borrowing. -2- 8 "Borrowing Bases" means the Revolving A Borrowing Base and the Revolving B Borrowing Base. "Business Day" means a day of the year on which banks are not required or authorized to close in Dallas, Texas and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on by banks in the London interbank market. "Capital Leases" means, as applied to any Person, any lease of any Property by such Person as lessee which would, in accordance with GAAP, be required to be classified and accounted for as a capital lease on the balance sheet of such Person. "Cash Collateral Account" means a special interest bearing cash collateral account pledged to the Agent for the ratable benefit of the Banks containing cash deposited pursuant to Section 2.04(b) or (c), 2.05(b), 7.02(b), or 7.03(b) to be maintained at the Agent's office in accordance with Section 2.06(h) and bear interest or be invested in the Agent's reasonable discretion. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, state and local analogs, and all rules and regulations and requirements thereunder in each case as now or hereafter in effect. "Class" has the meaning set forth in Section 1.04. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute. "Commitments" means, as to any Bank, its Revolving A Commitment and its Revolving B Commitment. "Compliance Certificate" means a compliance certificate in the form of the attached Exhibit B signed by a Responsible Officer of the Borrower. "Controlled Group" means all members of a controlled group of corporations and all trades (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Code. "Convert," "Conversion," and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type pursuant to Section 2.03(b). -3- 9 "Credit Documents" means this Agreement, the Notes, the Letter of Credit Documents, the Guaranties, the Security Documents, any Hedge Agreements entered into with a Bank, and each other agreement, instrument, or document executed at any time in connection with this Agreement. "Debt," for any Person, means without duplication: (a) indebtedness of such Person for borrowed money, including, without limitation, obligations under letters of credit and agreements relating to the issuance of letters of credit or acceptance financing; (b) obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (c) obligations of such Person to pay the deferred purchase price of property or services; (d) obligations of such Person as lessee under Capital Leases; (e) obligations of such Person under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) of such Person to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (a) through (d) above; (f) indebtedness or obligations of others of the kinds referred to in clauses (a) through (e) secured by any Lien on or in respect of any Property of such Person; and (g) all liabilities of such Person in respect of unfunded vested benefits under any Plan. "Default" means (a) an Event of Default or (b) any event or condition which with notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Dollar Equivalent" means for all purposes of this Agreement, the equivalent in another currency of an amount in Dollars to be determined by reference to the rate of exchange quoted by NationsBank of Texas, N.A., at 10:00 a.m. (Dallas, Texas, time) on the date of determination, for the spot purchase in the foreign exchange market of such amount of Dollars with such other currency. -4- 10 "Dollars" and "$" mean lawful money of the United States of America. "Domestic Lending Office" means, with respect to any Bank, the office of such Bank specified as its "Domestic Lending Office" opposite its name on Schedule 1 or such other office of such Bank as such Bank may from time to time specify to the Borrower and the Agent. "Effective Date" means the date on which each of the conditions precedent in Section 3.01 have been met or waived. "Eligible Assignee" means any commercial bank organized under the laws of any country which is a member of the Organization for Economic Cooperation and Development and having primary capital (or its equivalent) of not less than $250,000,000.00 (or its Dollar Equivalent) and approved by the Agent in its sole discretion and the Borrower, which approval by the Borrower will not be unreasonably withheld. "Environment" shall have the meanings set forth in 43 U.S.C. Section 9601(8). "Environmental Claim" means any third party (including governmental agencies and employees) action, lawsuit, claim, demand, regulatory action or proceeding, order, decree, consent agreement or notice of potential or actual responsibility or violation (including claims or proceedings under the Occupational Safety and Health Acts or similar laws or requirements relating to health or safety of employees) which seeks to impose liability under any Environmental Law. "Environmental Law" means all Legal Requirements arising from, relating to, or in connection with the Environment, health, or safety, including without limitation CERCLA, relating to (a) pollution, contamination, injury, destruction, loss, protection, cleanup, reclamation or restoration of the Environment or other natural resources; (b) solid, gaseous or liquid waste generation, treatment, processing, recycling, reclamation, cleanup, storage, disposal or transportation; (c) exposure to pollutants, contaminants, hazardous, or toxic substances, materials or wastes; (d) the safety or health of employees; or (e) the manufacture, processing, handling, transportation, distribution in commerce, use, storage or disposal of hazardous, or toxic substances, materials or wastes. -5- 11 "Environmental Permit" means any permit, license, order, approval or other authorization issued under an Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Federal Reserve Board (or any successor), as in effect from time to time. "Eurodollar Lending Office" means, with respect to any Bank, the office of such Bank specified as its "Eurodollar Lending Office" opposite its name on Schedule 1 (or, if no such office is specified, its Domestic Lending Office) or such other office of such Bank as such Bank may from time to time specify to the Borrower and the Agent. "Eurodollar Rate" means, for the Interest Period for each Eurodollar Rate Advance, the interest rate per annum (rounded upward to the nearest 1/100 of 1% per annum) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days before the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "Eurodollar Rate" shall mean, for the Interest Period for each Eurodollar Rate Advance, the interest rate per annum (rounded upward to the nearest 1/100 of 1% per annum) appearing on Reuters Screen LIBO page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days before the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO page, the applicable rate shall be the arithmetic mean of all such rates. "Eurodollar Rate Advance" means an Advance which bears interest as provided in Section 2.08(b). "Eurodollar Rate Reserve Percentage" of any Bank for the Interest Period for any Eurodollar Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Federal Reserve Board for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Bank with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. -6- 12 "Event of Default" has the meaning specified in Section 7.01. "Expiration Date" means, with respect to any Letter of Credit, the date on which such Letter of Credit will expire or terminate in accordance with its terms. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for any such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System or any of its successors. "Financial Statements" means the balance sheet and statements of income, retained earnings and cash flow dated December 31, 1996 referred to in Section 4.05, copies of which have been delivered to the Agent and the Banks. "GAAP" means United States generally accepted accounting principles as in effect from time to time, applied on a basis consistent with the requirements of Section 1.03. "Governmental Authority" means any foreign governmental authority, the United States of America, any state of the United States of America and any subdivision of any of the foregoing, and any agency, department, commission, board, authority or instrumentality, bureau or court having jurisdiction over any Bank, the Borrower, or the Borrower's Subsidiaries or any of their respective Properties. "Guaranties" means each Guaranty in favor of the Agent for the ratable benefit of the Banks in the form of the attached Exhibit C executed by a Guarantor as required by Section 5.08, as the same may be amended, supplemented, or otherwise modified from time to time. "Guarantors" means each of the Borrower's Subsidiaries who hereafter executes a Guaranty under Section 5.08. -7- 13 "Hazardous Substance" means the substances identified as such pursuant to CERCLA and those regulated as such under any other Environmental Law, including without limitation pollutants, contaminants, petroleum, petroleum products, radionuclides, radioactive materials, and medical and infectious waste. "Hazardous Waste" means the substances regulated as such pursuant to any Environmental Law. "Hedge Agreement" means (a) an interest hedge, rate swap, or cap, or similar arrangement between the Borrower or any of its Subsidiaries and a financial institution providing for the exchange of nominal interest obligations or the cap of the interest rate on the Advances made under this Agreement or (b) any forward sales arrangement, call, option, price swap, or other similar transaction entered into by the Borrower or any of its Subsidiaries to protect against fluctuations in prices or rates. "Interest Period" means, for each Eurodollar Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Advance or the date of the Conversion of any Base Rate Advance into such an Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below or by Section 2.03 and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below or by Section 2.03. The duration of each such Interest Period shall be one, two, three, or six months, in each case as the Borrower may, upon notice received by the Agent not later than 10:00 a.m. (Dallas, Texas, time) on, the third Business Day prior to the first day of such Interest Period select; provided, however, that: (a) the Borrower may not select any Interest Period for any Advance which ends after the Maturity Date; (b) the Borrower may not select any Interest Period after the Termination Date which ends after any principal repayment date unless, after giving effect to such selection, the aggregate unpaid principal amount of the Advances that are Base Rate Advances and that are Eurodollar Rate Advances having Interest Periods which end on or before such principal repayment date shall be at least equal to the amount of Advances due and payable on or before such date; -8- 14 (c) Interest Periods commencing on the same date for Advances comprising part of the same Borrowing shall be of the same duration; (d) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and (e) any Interest Period which 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) shall end on the last Business Day of the calendar month in which it would have ended if there were a numerically corresponding day in such calendar month. "Interim Financial Statements" means the unaudited balance sheet and statements of income and cash flow dated as of September 30, 1997, referred to in Section 4.05. "Issuing Bank" means NationsBank of Texas, N.A., and any successor issuing bank pursuant to Section 8.06. "Legal Requirement" means any law, statute, ordinance, decree, requirement, order, judgment, rule, regulation (or official interpretation of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority, including, but not limited to, Regulations G, T, U, and X. "Letter of Credit" means, individually, any letter of credit issued by the Issuing Bank which is subject to this Agreement and "Letters of Credit" means all such letters of credit collectively. "Letter of Credit Application" means the Issuing Bank's standard form letter of credit application for either a commercial or standby letter of credit, as the case may be, which has been executed by the Borrower and accepted by the Issuing Bank in connection with the issuance of a Letter of Credit, which form or forms as of the date of this Agreement are in the form of the attached Exhibit G, as the same may be amended, supplemented, and otherwise modified from time to time. -9- 15 "Letter of Credit Documents" means all Letters of Credit, Letter of Credit Applications, and agreements, documents, and instruments entered into in connection with or relating thereto. "Letter of Credit Exposure" means, at any time, the sum of (a) the aggregate undrawn maximum face amount of each Letter of Credit at such time plus (b) the aggregate unpaid amount of all Reimbursement Obligations at such time. "Letter of Credit Obligations" means any obligations of the Borrower under this Agreement in connection with the Letters of Credit, including the Reimbursement Obligations. "Lien" means any mortgage, lien, pledge, charge, deed of trust, security interest, or encumbrance to secure or provide for the payment of any obligation of any Person, whether arising by contract, operation of law, or otherwise (including, without limitation, the interest of a vendor or lessor under any conditional sale agreement, Capital Lease, or other title retention agreement). "Liquid Investments" means: (a) debt securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof, with maturities of no more than one year from the date of acquisition; (b) commercial paper of a domestic issuer rated at the date of acquisition not less than P1 by Moody's Investor Service, Inc., or A1 by Standard & Poor's Corporation; (c) certificates of deposit, demand deposits, Eurodollar time deposits, overnight bank deposits, and bankers' acceptances, with maturities of no more than 180 days from the date of acquisition, issued by any Bank or any bank or trust company organized under the laws of the United States or any state thereof whose deposits are insured by the Federal Deposit Insurance Corporation, and having capital and surplus aggregating at least $500,000,000.00; (d) repurchase agreements secured by debt securities of the type described in part (a) above, the market value of which, including accrued interest, is not less than 100% of the amount of the repurchase agreement, with maturities of no more than one year from the date of acquisition, issued by or acquired from or through any Bank or any bank or trust company organized under the laws of the United States or any state thereof and having capital and surplus aggregating at least $500,000,000.00; and -10- 16 (e) the Merrill Lynch Institutional Fund or other similar institutional money market mutual fund having total assets in excess of $1,000,000,000.00. "Majority Banks" means, at any time, Banks holding at least 66-2/3% of the then aggregate unpaid principal amount of the Notes held by the Banks and the Letter of Credit Exposure of the Banks at such time, but in no event less than two Banks at any time when there are three or more Banks; provided that if no such principal amount or Letter of Credit Exposure is then outstanding, "Majority Banks" shall mean Banks having at least 66-2/3% of the aggregate amount of the Revolving Commitments at such time, but in no event less than two Banks at any time when there are three or more Banks. "Material Adverse Change" means (a) a material adverse change in the business, financial condition, or results of operations of the Borrower and its Subsidiaries (taken as a whole), or (b) the occurrence and continuance of any event or circumstance which could reasonably be expected (i) to have a material adverse effect on the Borrower's or any Guarantor's ability to perform its obligations under this Agreement, any Note, any Guaranty, or any other Credit Document or (ii) to cause a Default. "Material Contracts" means, with respect to any Oil and Gas Property, all of the material contracts affecting the maintenance and operation of, or the Borrower or its Subsidiaries' title to such Oil and Gas Properties, including all operating agreements and all farm-out or farm-in agreements. "Maturity Date" means the earlier of (a) June 30, 2002 or (b) the earlier termination in whole of the Revolving Commitments pursuant to Section 2.01(e) or Article VII. "Maximum Rate" means the maximum nonusurious interest rate under applicable law. "Mortgages" means any mortgages, deeds of trust, or other security instruments granting or purporting to grant Acceptable Security Interests in the Oil and Gas Properties of the Borrower and its Subsidiaries, as the same may be amended, supplemented, or otherwise modified from time to time. -11- 17 "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. "Net Worth" means, for any Person that is a corporation and as of any date of its determination, the consolidated total assets of such Person less the total liabilities of such Person, determined in accordance with GAAP consistently applied. "Note" means a Revolving A Note or a Revolving B Note. "Notice of Borrowing" means a notice of borrowing in the form of the attached Exhibit E signed by a Responsible Officer of the Borrower. "Notice of Conversion or Continuation" means a notice of conversion or continuation in the form of the attached Exhibit F signed by a Responsible Officer of the Borrower. "Obligations" means all principal, interest, fees, reimbursements, indemnifications, and other amounts payable by the Borrower to the Agent or the Banks under the Credit Documents. "Oil and Gas Properties" means fee, leasehold or other interests in or under mineral estates or oil, gas, and other liquid or gaseous hydrocarbon leases with respect to Properties situated in the United States or offshore from any state of the United States, including overriding royalty and royalty interests, leasehold estate interests, net profits interests, production payment interests and mineral fee interests, together with contracts executed in connection therewith and incidental rights belonging thereto. "Oil and Gas Reserve Report" means each engineering report covering the Borrower's consolidated Oil and Gas Properties provided to the Agent pursuant to Section 5.06(c). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Liens" means the Liens permitted to exist pursuant to Section 6.01. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, limited liability corporation or company, limited liability partnership, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof or any trustee, receiver, custodian or similar official. -12- 18 "Plan" means an employee benefit plan (other than a Multiemployer Plan) maintained for employees of the Borrower or any member of the Controlled Group and covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code. "Property" of any Person means any property or assets (whether real, personal, or mixed, tangible or intangible) of such Person. "Pro Rata Share" means, with respect to any Bank, either (a) the ratio (expressed as a percentage) of such Bank's Commitments at such time to the aggregate Commitments at such time or (b) if the Commitments have been terminated, the ratio (expressed as a percentage) of such Bank's aggregate outstanding Advances and Letter of Credit Exposure at such time to the aggregate outstanding Advances and Letter of Credit Exposure of all the Banks at such time. "Register" has the meaning set forth in paragraph (c) of Section 9.06. "Regulations G, T, U, and X" mean Regulations G, T, U, and X of the Federal Reserve Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Reimbursement Obligations" means all of the obligations of the Borrower to reimburse the Issuing Bank for amounts paid by the Issuing Bank under Letters of Credit as established by the Letter of Credit Applications and Section 2.06(d). "Release" shall have the meaning set forth in CERCLA or under any other Environmental Law. "Reportable Event" shall have the meaning set forth in Title IV of ERISA. "Response" shall have the meaning set forth in CERCLA or under any other Environmental Law. "Responsible Officer" means, with respect to any Person, such Person's Chief Executive Officer, President, Chief Financial Officer, Chief Accounting Officer, and Vice Presidents. "Restricted Payment" means, with respect to any Person, any dividends or other distributions (in cash, property, or otherwise) on, or any payment for the purchase, -13- 19 redemption, or other acquisition of, any shares of any capital stock of such Person, other than dividends payable in such Person's stock. "Revolving A Advance" means any advance by a Bank to the Borrower as part of a Revolving A Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance. "Revolving B Advance" means any advance by a Bank to the Borrower as part of a Revolving B Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance. "Revolving A Borrowing" means, subject to Sections 2.03(c)(ii) and 2.04(e), a borrowing consisting of simultaneous Revolving A Advances of the same Type made by each Bank pursuant to Section 2.03(a), continued by each Bank pursuant to Section 2.03(b), or Converted by each Bank to Revolving A Advances of a different Type pursuant to Section 2.03(b). "Revolving B Borrowing" means, subject to Sections 2.03(c)(ii) and 2.04(e), a borrowing consisting of simultaneous Revolving B Advances of the same Type made by each Bank pursuant to Section 2.03(a), continued by each Bank pursuant to Section 2.03(b), or Converted by each Bank to Revolving B Advances of a different Type pursuant to Section 2.03(b). "Revolving A Borrowing Base" means, for any date of its determination by the Majority Banks or all of the Banks, as the case may be, in accordance with Section 2.02, the lending value of the Borrower's and its Subsidiaries' Oil and Gas Properties as of such date, allocated to the Revolving A Borrowing Base pursuant to Section 2.02(g). "Revolving B Borrowing Base" means, for any date of its determination by the Majority Banks or all of the Banks, as the case may be, in accordance with Section 2.02, the lending value of the Borrower's and its Subsidiaries' Oil and Gas Properties as of such date, allocated to the Revolving B Borrowing Base pursuant to Section 2.02(g). "Revolving A Commitment" means, for any Bank, the amount set opposite such Bank's name on the signature pages hereof as its Revolving A Commitment, or if such Bank has entered into any Assignment and Acceptance, as set forth for such Bank as its Revolving A Commitment in the Register maintained by the Agent pursuant to Section 9.06(c), as such amount may be reduced or terminated pursuant to Article VII. -14- 20 "Revolving B Commitment" means, for any Bank, the amount set opposite such Bank's name on the signature pages hereof as its Revolving B Commitment, or if such Bank has entered into any Assignment and Acceptance, as set forth for such Bank as its Revolving B Commitment in the Register maintained by the Agent pursuant to Section 9.06(c), as such amount may be reduced or terminated pursuant to Article VII. "Revolving A Note" means a promissory note of the Borrower payable to the order of any Bank, in substantially the form of the attached Exhibit D-1, evidencing indebtedness of the Borrower to such Bank resulting from Revolving A Advances owing to such Bank. "Revolving B Note" means a promissory note of the Borrower payable to the order of any Bank, in substantially the form of the attached Exhibit D-2, evidencing indebtedness of the Borrower to such Bank resulting from Revolving B Advances owing to such Bank. "Security Documents" means the Mortgages and any other documents creating or purporting to create Liens in favor of the Agent securing the repayment of the Obligations. "Subsidiary" of a Person means any corporation or other entity of which more than 50% of the outstanding capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or similar governing body of such corporation or other entity (irrespective of whether at such time capital stock or other ownership interests of any other class or classes of such corporation or other entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person, by such Person and one or more Subsidiaries of such Person or by one or more Subsidiaries of such Person. "Tax Group" has the meaning set forth in Section 4.11. "Termination Date" means December 31, 2000. "Termination Event" means (a) a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the PBGC under such regulations), (b) the withdrawal of the Borrower or any of its Affiliates from a Plan during a plan year in -15- 21 which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (c) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041(c) of ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC, or (e) any other event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Type" has the meaning set forth in Section 1.04. "Voting Securities" means with respect to any corporation, capital stock of the corporation having general voting power under ordinary circumstances to elect directors of such corporation (irrespective of whether at the time stock of any other class or classes shall have or might have special voting power or rights by reason of the happening of any contingency). Section 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". Section 1.03. Accounting Terms; Changes in GAAP. (a) All accounting terms not specifically defined in this Agreement shall be construed in accordance with GAAP applied on a consistent basis with those applied in the preparation of the Financial Statements. (b) Unless otherwise indicated, all financial statements of the Borrower, all calculations for compliance with covenants in this Agreement and all calculations of any amounts to be calculated under the definitions in Section 1.01 shall be based upon the consolidated accounts of the Borrower and its Subsidiaries in accordance with GAAP (or in compliance with the regulations promulgated by the United States Securities and Exchange Commission regarding financial reporting) and consistent with the principles applied in preparing the Financial Statements. Section 1.04. Types of Advances. Advances are distinguished by "Type." The "Type" of an Advance refers to the determination whether such Advance is a Eurodollar Rate Advance or Base Rate Advance. Borrowings and Advances are also distinguished by "Class." The "Class" of a Borrowing or an Advance refers to the determination whether such Borrowing or Advance is a Revolving A Borrowing or a Revolving B Borrowing or a Revolving A Advance or a Revolving B Advance, as applicable. -16- 22 Section 1.05. Miscellaneous. Article, Section, Schedule, and Exhibit references are to Articles and Sections of and Schedules and Exhibits to this Agreement, unless otherwise specified. ARTICLE II CREDIT FACILITIES Section 2.01. Commitment for Advances. (a) Revolving A Advances. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make Revolving A Advances to the Borrower from time to time on any Business Day during the period from the date of this Agreement until the Termination Date in an aggregate outstanding amount up to but not to exceed an amount equal to the lesser of (i)(A) such Bank's Revolving A Commitment minus (B) the outstanding principal amount of such Bank's Revolving B Advances minus (C) such Bank's Pro Rata Share of the Letter of Credit Exposure and (ii)(A) such Bank's Pro Rata Share of the Revolving A Borrowing Base minus (B) such Bank's Pro Rata Share of the Letter of Credit Exposure. (b) Revolving B Advances. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make Revolving B Advances to the Borrower from time to time on any Business Day during the period from the date of this Agreement until the Termination Date in an aggregate outstanding amount up to but not to exceed an amount equal to the lesser of (i)(A) such Bank's Revolving B Commitment minus (B) the outstanding principal amount of such Bank's Revolving A Advances minus (C) such Bank's Pro Rata Share of the Letter of Credit Exposure and (ii) such Bank's Pro Rata Share of the Revolving B Borrowing Base. (c) Amount of Borrowing. Each Borrowing shall, in the case of Borrowings consisting of Base Rate Advances, be in an aggregate amount not less than $200,000.00 and in integral multiples of $100,000.00 in excess thereof, and in the case of Borrowings consisting of Eurodollar Rate Advances, be in an aggregate amount not less than $200,000.00 or in integral multiples of $100,000.00 in excess thereof, and in each case shall consist of Advances of the same Type made on the same day by the Banks ratably according to their respective Commitments. -17- 23 (d) Reborrowing. Within the limits of each Bank's Commitment, and subject to the terms of this Agreement, the Borrower may from time to time borrow, prepay, and reborrow Advances. (e) Reduction of Commitment. The Borrower shall have the right, upon at least three Business Days' irrevocable notice to the Agent, to terminate in whole or reduce ratably in part the unused portion of the Revolving A Commitments or the Revolving B Commitments from time to time; provided that each partial reduction of the Revolving A Commitments or the Revolving B Commitments shall be in the aggregate amount of $2,500,000.00 or in integral multiples of $500,000.00 in excess thereof. Any reduction or termination of the Revolving A Commitments or Revolving B Commitments pursuant to this Section 2.01(e) shall be permanent, with no obligation of the Banks to reinstate such Commitments. (f) Notes. The indebtedness of the Borrower to each Bank resulting from the Revolving A Advances owing to such Bank shall be evidenced by a Revolving A Note of the Borrower in the maximum principal amount of such Bank's Revolving A Commitment. The indebtedness of the Borrower to each Bank resulting from the Revolving B Advances owing to such Bank shall be evidenced by a Revolving B Note of the Borrower in the maximum principal amount of such Bank's Revolving B Commitment. Section 2.02. Borrowing Bases. (a) The Revolving A Borrowing Base as of the date of this Agreement has been set by the Majority Banks and acknowledged by the Borrower as $3,000,000.00. (b) The Revolving B Borrowing Base as of the date of this Agreement has been set by the Majority Banks and acknowledged by the Borrower as $2,000,000.00. (c)(i) From the date hereof through the Maturity Date, so long as the Majority Banks have allocated any value to the Revolving B Borrowing Base, and subject to the further provisions of this Section 2.02, the Borrowing Bases shall be subject to a quarterly redetermination by the Majority Banks within 30 days after the receipt of each Oil and Gas Reserve Report scheduled to be provided to the Agent pursuant to Sections 5.06(c)(i) and (c)(ii)(A) on the basis of information, including such Oil and Gas Reserve Reports, supplied by Borrower -18- 24 in compliance with the provisions of this Agreement, including such additional data concerning pricing, quantities of production, purchasers of production, and other information and engineering and geological data with respect thereto as the Agent or any Bank may reasonably request, together with all other information then available to the Agent and the Banks. (ii) If the Majority Banks have not allocated any value to the Revolving B Borrowing Base, the Revolving A Borrowing Base shall be subject to a semi-annual redetermination by the Majority Banks within 30 days after the receipt of each Oil and Gas Reserve Report scheduled to be provided to the Agent pursuant to Sections 5.06(c)(i) and (c)(ii)(B) on the basis of information, including such Oil and Gas Reserve Reports, supplied by Borrower in compliance with the provisions of this Agreement, including such additional data concerning pricing, quantities of production, purchasers of production, and other information and engineering and geological data with respect thereto as the Agent or any Bank may reasonably request, together with all other information then available to the Agent and the Banks. (iii) Notwithstanding the foregoing, the Majority Banks may, in the exercise of their good faith discretion, make redeterminations of the Borrowing Bases from time to time on the basis of information then available to the Agent and the Banks regarding the Borrower's Oil and Gas Properties, but only one such redetermination may be made during any fiscal year. (d) The Borrower may request the Majority Banks to redetermine the Borrowing Bases by providing a written request to the Agent, but only one such request may be made during any fiscal year of the Borrower. In connection with any such request, the Borrower shall provide the Agent and the Banks with an interim reserve report prepared by the Borrower together with such other information, including additional data concerning pricing, quantities of production, purchasers of production, and other information and engineering and geological data, as the Agent or any Bank may reasonably request. Within 30 days following the receipt of such interim reserve report and other information, the Majority Banks shall make a redetermination of the Borrowing Bases. (e) Upon its redetermination of the Borrowing Bases, each Bank shall notify the Agent in writing of the Revolving A Borrowing Base and Revolving B Borrowing Base it has approved, and the Agent shall in turn notify the Borrower of such redetermination. Until the Borrower receives such notification from the Agent, the -19- 25 most recently established Revolving A Borrowing Base and Revolving B Borrowing Base shall remain in effect, and thereafter the new Revolving A Borrowing Base and Revolving B Borrowing Base as set forth in such notification shall be in effect. (f) The Borrowing Bases shall represent the determination by the Majority Banks in their sole discretion, of the loan value of the Borrower's and its Subsidiaries' Oil and Gas Properties subject to an Acceptable Security Interest and the allocation between the Revolving A Borrowing Base and the Revolving B Borrowing Base of such loan values, but the Majority Banks shall make their determination in accordance with the applicable definitions and provisions herein contained, each such Bank's standard policies regarding energy lending, industry lending practices, consultation with the Agent and the other Banks (but without requiring the approval thereof), and consideration for the nature of the facilities established hereunder. The Borrower acknowledges that the determination of the Borrowing Bases contains an equity cushion (market value in excess of loan value), which is acknowledged by Borrower to be essential for the adequate protection of the Agent and the Banks. (g) The Borrower shall also have the right to reduce either or both of the Borrowing Bases once during the period from October 1 to March 31 and once during the period from April 1 to September 30 during each year by providing the Agent 30 days advance written notice of such reduction. The Agent shall promptly send to each Bank a copy of such notice and such reduction shall be effective on the date of the Agent's receipt of such notice. -20- 26 Section 2.03. Method of Borrowing. (a) Notice. Each Borrowing shall be made pursuant to a Notice of Borrowing (or by telephone notice promptly confirmed in writing by a Notice of Borrowing), given not later than 10:00 a.m. (Dallas, Texas, time) (i) on the third Business Day before the date of the proposed Borrowing, in the case of a Eurodollar Rate Borrowing or (ii) on the Business Day of the proposed Borrowing, in the case of a Base Rate Borrowing, by the Borrower to the Agent, which shall in turn give to each Bank prompt notice of such proposed Borrowing by telecopier or telex. Each Notice of a Borrowing shall be given by telecopier or telex, confirmed immediately in writing specifying the information required therein. In the case of a proposed Borrowing comprised of Eurodollar Rate Advances, the Agent shall promptly notify each Bank of the applicable interest rate under Section 2.08(b). Each Bank shall, before 10:00 a.m. (Dallas, Texas, time) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Agent at its address referred to in Section 9.02, or such other location as the Agent may specify by notice to the Banks, in same day funds, such Bank's Pro Rata Share of such Borrowing. After the Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent shall make such funds available to the Borrower at its account with the Agent. (b) Conversions and Continuations. The Borrower may elect to Convert or continue any Borrowing under this Section 2.03 by delivering an irrevocable Notice of Conversion or Continuation to the Agent at the Agent's office no later than 10:00 a.m. (Dallas, Texas, time) (i) on the date which is at least three Business Days in advance of the proposed Conversion or continuation date in the case of a Conversion to or a continuation of a Borrowing of the same Class comprised of Eurodollar Rate Advances and (ii) on the Business Day of the proposed conversion date in the case of a Conversion to a Borrowing of the same Class comprised of Base Rate Advances. Each such Notice of Conversion or Continuation shall be in writing or by telex or telecopier confirmed immediately in writing specifying the information required therein. Promptly after receipt of a Notice of Conversion or Continuation under this Section, the Agent shall provide each Bank with a copy thereof and, in the case of a Conversion to or a Continuation of a Borrowing comprised of Eurodollar Rate Advances, notify each Bank of the applicable interest rate under Section 2.08(b). -21- 27 (c) Certain Limitations. Notwithstanding anything in paragraphs (a) and (b) above: (i) at no time shall there be more than five Interest Periods applicable to outstanding Eurodollar Rate Advances; (ii) if any Bank shall, at least one Business Day before the date of any requested Borrowing, Conversion, or continuation, notify the Agent that the introduction of, any change in, or any change in the interpretation of any law or regulation makes it unlawful, or that any central bank or other Governmental Authority asserts that it is unlawful, for such Bank or its Eurodollar Lending Office to perform its obligations under this Agreement to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances, the right of the Borrower to select Eurodollar Rate Advances from such Bank shall be suspended until such Bank shall notify the Agent that the circumstances causing such suspension no longer exist, and the Advance made by such Bank in respect of such Borrowing, Conversion, or continuation shall be a Base Rate Advance; (iii) if the Agent is unable to determine the Eurodollar Rate for Eurodollar Rate Advances comprising any requested Borrowing, the right of the Borrower to select Eurodollar Rate Advances for such Borrowing or for any subsequent Borrowing shall be suspended until the Agent shall notify the Borrower and the Banks that the circumstances causing such suspension no longer exist, and each Advance comprising such Borrowing shall be a Base Rate Advance; (iv) if the Majority Banks shall, at least one Business Day before the date of any requested Borrowing, notify the Agent that the Eurodollar Rate for Eurodollar Rate Advances comprising such Borrowing will not adequately reflect the cost to such Banks of making or funding their respective Eurodollar Rate Advances, as the case may be, for such Borrowing, the right of the Borrower to select Eurodollar Rate Advances for such Borrowing or for any subsequent Borrowing shall be suspended until the Agent shall notify the Borrower and the Banks that the circumstances causing such suspension no longer exist, and each Advance comprising such Borrowing shall be a Base Rate Advance; and (v) if the Borrower shall fail to select the duration or continuation of any Interest Period for any Eurodollar Rate Advances in accordance with the -22- 28 provisions contained in the definition of "Interest Period" in Section 1.01 and paragraph (b) above, the Agent shall forthwith so notify the Borrower and the Banks and such Advances shall be made available to the Borrower on the date of such Borrowing as Base Rate Advances or, if an existing Advance, Convert into Base Rate Advances. (d) Notices Irrevocable. Each Notice of Borrowing and Notice of Conversion or Continuation shall be irrevocable and binding on the Borrower. In the case of any Borrowing which the related Notice of Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Bank against any loss, out-of-pocket cost, or expense incurred by such Bank as a result of any failure by the Borrower to fulfill on or before the date specified in such Notice of Borrowing for such Borrowing the applicable conditions set forth in Article III including, without limitation, any loss (including any loss of anticipated profits), cost, or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Bank to fund the Advance to be made by such Bank as part of such Borrowing when such Advance, as a result of such failure, is not made on such date. (e) Agent Reliance. Unless the Agent shall have received notice from a Bank before the date of any Borrowing that such Bank shall not make available to the Agent such Bank's Pro Rata Share of such Borrowing, the Agent may assume that such Bank has made its Pro Rata Share of such Borrowing available to the Agent on the date of such Borrowing in accordance with paragraph (a) of this Section 2.03 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made its Pro Rata Share of such Borrowing available to the Agent, such Bank and the Borrower severally agree to immediately repay to the Agent on demand such corresponding amount, together with interest on such amount, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the interest rate applicable on such day to Advances comprising such Borrowing and (ii) in the case of such Bank, the Federal Funds Rate for such day. If such Bank shall repay to the Agent such corresponding amount and interest as provided above, such corresponding amount so repaid shall constitute such Bank's Advance as part of such Borrowing for purposes of this Agreement even though not made on the same day as the other Advances comprising such Borrowing. (f) Bank Obligations Several. The failure of any Bank to make the Advance to be made by it as part of any Borrowing shall not relieve any other Bank of its obligation, if any, to make its Advance on the date of such Borrowing. No Bank shall -23- 29 be responsible for the failure of any other Bank to make the Advance to be made by such other Bank on the date of any Borrowing. Section 2.04. Prepayment of Advances. (a) Optional. The Borrower may prepay Advances, after giving by 10:00 a.m. (Dallas, Texas, time) (i) in the case of Eurodollar Rate Advances, at least two Business Days' or (ii) in the case of Base Rate Advances, same Business Day's, irrevocable prior written notice to the Agent stating the proposed date and aggregate principal amount of such prepayment. If any such notice is given, the Borrower shall prepay Advances comprising part of the same Borrowing in whole or ratably in part in an aggregate principal amount equal to the amount specified in such notice, together with accrued interest to the date of such prepayment on the principal amount prepaid and amounts, if any, required to be paid pursuant to Section 2.11 as a result of such prepayment being made on such date; provided, however, that each partial prepayment with respect to: (A) any Borrowing comprised of Base Rate Advances shall be made in $100,000.00 multiples and in an aggregate principal amount such that after giving effect thereto such Borrowing shall have a principal amount outstanding of at least $200,000.00 and (B) any Borrowing comprised of Eurodollar Rate Advances shall be made in $100,000.00 multiples and in an aggregate principal amount such that after giving effect thereto such Borrowing shall have a principal amount outstanding of at least $200,000.00. Full prepayments of any Borrowing are permitted without restriction of amounts. Optional prepayments shall be first applied to reduce the aggregate unpaid principal amount of Revolving B Advances and, after the Revolving B Advances have been repaid in full, to reduce the aggregate unpaid principal amount of the Revolving A Advances. (b) Borrowing Base Deficiency. (i) If the aggregate outstanding amount of Revolving A Advances plus the Letter of Credit Exposure ever exceeds the Revolving A Borrowing Base or (ii) if the aggregate outstanding amount of Revolving B Advances ever exceeds the Revolving B Borrowing Base, the Borrower shall, within ten days after receipt of written notice of such condition from the Agent, elect by written notice to the Agent to take one or more of the following actions to remedy the Borrowing Base deficiency: (i) prepay the applicable Advances and, in the case of a Revolving A Borrowing Base deficiency, if the Revolving A Advances have been repaid in full, make deposits into the Cash Collateral Account to provide cash collateral for the Letter of Credit Exposure, such that the applicable Borrowing Base deficiency is cured within ten days after the Borrower's written election; -24- 30 (ii) add additional Oil and Gas Properties subject to an Acceptable Security Interest acceptable to the Majority Banks to the Borrowing Bases such that the applicable Borrowing Base deficiency is cured within 30 days after the Borrower's written election ; or (iii) pay the deficiency in six equal monthly installments in amounts sufficient for the prepayment of applicable Advances and, in the case of a Revolving A Borrowing Base deficiency, if the Advances have been repaid in full, make deposits into the Cash Collateral Account to provide cash collateral for the Letter of Credit Exposure such that the Revolving A Borrowing Base deficiency is eliminated in a period satisfactory to the Majority Banks, but in no event to exceed six months, by irrevocably dedicating an amount of the monthly cash flow from the Borrower's and its Subsidiaries' Oil and Gas Properties to the prepayment of the applicable Advances and, if applicable, cash collateralization of the Letter of Credit Exposure. Each prepayment pursuant to this Section 2.04(b) shall be accompanied by accrued interest on the amount prepaid to the date of such prepayment and amounts, if any, required to be paid pursuant to Section 2.11 as a result of such prepayment being made on such date. (c) Reduction of Commitments. On the date of each reduction of the aggregate Commitments pursuant to Section 2.01(e), the Borrower agrees to make a prepayment in respect of the outstanding amount of the Advances and the Letter of Credit Exposure to the extent, if any, that the aggregate unpaid principal amount of all Advances plus the Letter of Credit Exposure exceeds the Commitments, as so reduced. Any amount paid under the preceding sentence in respect of Letter of Credit Exposure shall be held as cash collateral under Section 2.06(g). Each prepayment pursuant to this Section 2.04(c) shall be accompanied by accrued interest on the amount prepaid to the date of such prepayment and amounts, if any, required to be paid pursuant to Section 2.11 as a result of such prepayment being made on such date. (d) Equity Issuances. The Borrower shall repay the Revolving B Advances by an amount equal to 75% of the net cash proceeds (after offering expenses) received by the Borrower from the sale of any of the Borrower's capital stock (other than any common stock sold in connection with sales to its consultants, employees or directors pursuant to any employee or director stock option plan, employee compensation -25- 31 arrangement, or other employee benefit plan), upon receipt of such proceeds, whether at closing of such sale or thereafter. Each prepayment pursuant to this Section 2.04(d) shall be accompanied by accrued interest on the amount prepaid to the date of such prepayment and amounts, if any, required to be paid pursuant to Section 2.11 as a result of such prepayment being made on such date. (e) Illegality. If any Bank shall notify the Agent and the Borrower that the introduction of, any change in, or any change in the interpretation of any law or regulation makes it unlawful, or that any central bank or other governmental authority asserts that it is unlawful for such Bank or its Eurodollar Lending Office to perform its obligations under this Agreement to maintain any Eurodollar Rate Advances of such Bank then outstanding hereunder, (i) the Borrower shall, no later than 10:00 a.m. (Dallas, Texas, time), (A) if not prohibited by law, on the last day of the Interest Period for each outstanding Eurodollar Rate Advance made by such Bank or (B) if required by such notice, on the second Business Day following its receipt of such notice, prepay all of the Eurodollar Rate Advances made by such Bank then outstanding, together with accrued interest on the principal amount prepaid to the date of such prepayment and amounts, if any, required to be paid pursuant to Section 2.11 as a result of such prepayment being made on such date, (ii) such Bank shall simultaneously make a Base Rate Advance to the Borrower on such date in an amount equal to the aggregate principal amount of the Eurodollar Rate Advances prepaid to such Bank, and (iii) the right of the Borrower to select Eurodollar Rate Advances from such Bank for any subsequent Borrowing shall be suspended until such Bank giving notice referred to above shall notify the Agent that the circumstances causing such suspension no longer exist; provided that, each Bank represents and warrants to the Borrower that as of the later of (i) the Closing Date or (ii) the date on which it shall have executed an Assignment and Acceptance pursuant to Section 9.06(a), it has no knowledge that it would be unlawful for such Bank or its Eurodollar Lending Office to make Eurodollar Rate Advances as contemplated by this Agreement. (f) No Additional Right; Ratable Prepayment. The Borrower shall have no right to prepay any principal amount of any Advance except as provided in this Section 2.04, and all notices given pursuant to this Section 2.04 shall be irrevocable and binding upon the Borrower. Each payment of any Advance pursuant to this Section 2.04 shall be made in a manner such that all Advances comprising part of the same Borrowing are paid in whole or ratably in part. (g) Application. Each prepayment of Advances after the Termination Date shall be applied to the scheduled principal installments in the inverse order of their maturity. -26- 32 Section 2.05. Repayment of Advances. (a) The Borrower shall repay to the Agent for the ratable benefit of the Banks the outstanding principal amount of each Advance on the Maturity Date. (b) After the Termination Date, the Borrower shall repay to the Agent for the ratable benefit of the Banks the outstanding principal amount of the Revolving A Advances and Revolving B Advances pro rata based on the outstanding principal amount of the Revolving A Advances and Revolving B Advances on the Termination Date or, if the Advances have been repaid in full and any Letters of Credit remain outstanding, provide cash collateral for the Letter of Credit Exposure in equal installments equal to 1/6 of the outstanding principal amount of the Advances on the Termination Date. Each of the first five of such installments shall be due on the last Business Day of each fiscal quarter beginning with the fiscal quarter ending December 31, 2000 and the last installment shall be due on the Maturity Date. Section 2.06. Letters of Credit. (a) Commitment. (i) From time to time from the date of this Agreement until the Termination Date, at the request of the Borrower, the Issuing Bank shall, on the terms and conditions hereinafter set forth, issue, increase, or extend the expiration date of Letters of Credit for the account of the Borrower on any Business Day, and (ii) from the Termination Date until three months before the Maturity Date, at the request of the Borrower, the Issuing Bank shall, on the terms and conditions hereinafter set forth, extend the expiration date of Letters of Credit for the account of the Borrower on any Business Day. (b) Certain Requirements. No Letter of Credit shall be issued, increased, or extended: (i) unless such issuance, increase, extension or conversion would not cause the Letter of Credit Exposure to exceed the lesser of (A) $1,000,000.00 or (B) the lesser of (1) the aggregate Revolving A Commitments less the aggregate outstanding principal amount of all Advances or (2) the Revolving A Borrowing Base less the aggregate outstanding principal amount of all Revolving A Advances; -27- 33 (ii) unless such Letter of Credit has an Expiration Date not later than the earlier of (A) 12 months after the date of issuance thereof (or, if extendable beyond such period, unless such Letter of Credit is cancelable upon at least 30 days' notice given by the Issuing Bank to the beneficiary of such Letter of Credit) or (B) the Maturity Date; (iii) unless such Letter of Credit Documents are in form and substance acceptable to the Issuing Bank in its sole discretion; (iv) unless such Letter of Credit is a standby letter of credit not supporting the repayment of indebtedness for borrowed money of any Person; and (v) unless the Borrower has delivered to the Issuing Bank a completed and executed Letter of Credit Application. (c) Participations. Upon the date of the issuance or increase of a Letter of Credit, the Issuing Bank shall be deemed to have sold to each other Bank and each other Bank shall have been deemed to have purchased from the Issuing Bank a participation in the related Letter of Credit Obligations equal to such Bank's Pro Rata Share at such date, and such sale and purchase shall otherwise be in accordance with the terms of this Agreement. The Issuing Bank shall promptly notify each such participant Bank by telex, telephone, or telecopy of each Letter of Credit issued, increased, or extended and the actual dollar amount of such Bank's participation in such Letter of Credit. (d) Issuing. Each Letter of Credit shall be issued, increased, or extended pursuant to a Letter of Credit Application (or by telephone notice promptly confirmed in writing by a Letter of Credit Application), given not later than 10:00 a.m. (Dallas, Texas, time) on the fifth Business Day before the date of the proposed issuance, increase, or extension of the Letter of Credit, and the Agent shall give to each Bank prompt notice of thereof by telex, telephone, or telecopy. Each Letter of Credit Application shall be given by telecopier or telex, confirmed immediately in writing, specifying the information required therein. After the Agent's receipt of such Letter of Credit Application and upon fulfillment of the applicable conditions set forth in Article III, the Agent shall issue, increase, or extend such Letter of Credit for the account of the Borrower. Each Letter of Credit Application shall be irrevocable and binding on the Borrower. -28- 34 (e) Reimbursement. The Borrower hereby agrees to pay on demand to the Issuing Bank an amount equal to any amount paid by the Issuing Bank under any Letter of Credit. In the event the Issuing Bank makes a payment pursuant to a request for draw presented under a Letter of Credit and such payment is not promptly reimbursed by the Borrower upon demand, the Issuing Bank shall give the Agent notice of the Borrower's failure to make such reimbursement and the Agent shall promptly notify each Bank of the amount necessary to reimburse the Issuing Bank. Upon such notice from the Agent, each Bank shall promptly reimburse the Issuing Bank for such Bank's Pro Rata Share of such amount. To the extent that the Revolving A Borrowing Base exceeds the sum of all outstanding Revolving A Advances, such reimbursement shall be deemed for all purposes of this Agreement to be a Revolving A Advance to the Borrower transferred at the Borrower's request to the Issuing Bank; then, the remainder of such reimbursement shall be deemed for all purposes of this Agreement to be a Revolving B Advance to the Borrower transferred at the Borrower's request to the Issuing Bank. If such reimbursement is not made by any Bank to the Issuing Bank on the same day on which the Agent notifies such Bank to make reimbursement to the Issuing Bank hereunder, such Bank shall pay interest on its Pro Rata Share thereof to the Issuing Bank at a rate per annum equal to the Federal Funds Rate. The Borrower hereby unconditionally and irrevocably authorizes, empowers, and directs the Agent and the Banks to record and otherwise treat such reimbursements to the Issuing Bank as Base Rate Advances under a Borrowing requested by the Borrower to reimburse the Issuing Bank which have been transferred to the Issuing Bank at the Borrower's request. (f) Obligations Unconditional. The obligations of the Borrower under this Agreement in respect of each Letter of Credit shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: (i) any lack of validity or enforceability of any Letter of Credit Documents; (ii) any amendment or waiver of, or any consent to, departure from any Letter of Credit Documents; (iii) the existence of any claim, set-off, defense, or other right which the Borrower may have at any time against any beneficiary or transferee of such Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), the Issuing Bank, or any other person or entity, -29- 35 whether in connection with this Agreement, the transactions contemplated in this Agreement or in any Letter of Credit Documents, or any unrelated transaction; (iv) any statement or any other document presented under such Letter of Credit proving to be forged, fraudulent, invalid, or insufficient in any respect or any statement therein being untrue or inaccurate in any respect to the extent the Issuing Bank would not be liable therefor pursuant to the following paragraph (g); or (v) payment by the Issuing Bank under such Letter of Credit against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit; provided, however, that nothing contained in this paragraph (f) shall be deemed to constitute a waiver of any remedies of the Borrower in connection with the Letters of Credit or the Borrower's rights under Section 2.06(g) below. (g) Liability of Issuing Bank. The Borrower assumes all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit. Neither the Issuing Bank nor any of its officers or directors shall be liable or responsible for: (i) the use which may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (ii) the validity, sufficiency, or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent, or forged; (iii) payment by the Issuing Bank against presentation of documents which do not comply with the terms of a Letter of Credit, including failure of any documents to bear any reference or adequate reference to the relevant Letter of Credit; or (iv) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit (INCLUDING THE ISSUING BANK'S OWN NEGLIGENCE), except that the Borrower shall have a claim against the Issuing Bank, and the Issuing -30- 36 Bank shall be liable to the Borrower, to the extent of any direct, as opposed to consequential, damages suffered by the Borrower which the Borrower proves were caused by (A) the Issuing Bank's willful misconduct or gross negligence in determining whether documents presented under a Letter of Credit comply with the terms of such Letter of Credit or (B) the Issuing Bank's willful failure to make lawful payment under any Letter of Credit after the presentation to it of a draft and certificate strictly complying with the terms and conditions of such Letter of Credit. In furtherance and not in limitation of the foregoing, the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. (h) Cash Collateral Account. (i) If the Borrower is required to deposit funds in the Cash Collateral Account pursuant to Section 2.04(b) or (c), 2.05(b), 7.02(b), or 7.03(b), then the Borrower and the Agent shall establish the Cash Collateral Account and the Borrower shall execute any documents and agreements, including the Agent's standard form assignment of deposit accounts, that the Agent requests in connection therewith to establish the Cash Collateral Account and grant the Agent a first priority security interest in such account and the funds therein. The Borrower hereby pledges to the Agent and grants the Agent a security interest in the Cash Collateral Account, whenever established, all funds held in the Cash Collateral Account from time to time, and all proceeds thereof as security for the payment of the Obligations. (ii) So long as no Event of Default exists, (A) the Agent may apply the funds held in the Cash Collateral Account only to the reimbursement of any Letter of Credit Obligations and (B) the Agent shall release to the Borrower at the Borrower's written request any funds held in the Cash Collateral Account in an amount up to but not exceeding the excess, if any (immediately prior to the release of any such funds), of the total amount of funds held in the Cash Collateral Account over the Letter of Credit Exposure. During the existence of any Event of Default, the Agent may apply any funds held in the Cash Collateral Account to the Obligations in any order determined by the Agent, regardless of any Letter of Credit Exposure which may remain outstanding. The Agent may in its sole discretion at any time release to the Borrower any funds held in the Cash Collateral Account. -31- 37 (iii) The Agent shall exercise reasonable care in the custody and preservation of any funds held in the Cash Collateral Account and shall be deemed to have exercised such care if such funds are accorded treatment substantially equivalent to that which the Agent accords its own property, it being understood that the Agent shall not have any responsibility for taking any necessary steps to preserve rights against any parties with respect to any such funds. Section 2.07. Fees. (a) Commitment Fees. (i) Subject to the following clause (ii), the Borrower agrees to pay to the Agent for the account of each Bank a commitment fee of .50% per annum on the average daily amount by which (A) (1) the lesser of (I) such Bank's Pro Rata Share of the Revolving A Borrowing Base and (II) such Bank's Commitment exceeds (2) the sum of (I) such Bank's outstanding Revolving A Advances and (II) such Bank's Pro Rata Share of the Letter of Credit Exposure and (B) (1) the lesser of (I) such Bank's Pro Rata Share of the Revolving B Borrowing Base and (II) such Bank's Revolving B Commitment exceeds (2) the outstanding Revolving B Advances, from the Effective Date until the Termination Date. (ii) The Borrower may from time to time designate by written notice to the Agent a portion of either Borrowing Base or portions of both Borrowing Bases as inactive. The commitment fee for the portion or portions declared inactive shall be .25% per annum; provided that, if the Borrower at any time requests a Borrowing that would use a portion of the Borrowing Bases designated as inactive, the Borrower shall pay on the date of such Borrowing to the Agent for the ratable benefit of the Banks, a fee equal to (A) .25% per annum times (B) (1) the lesser of (I) 90 and (II) the number of days the portion of the Borrowing Bases used as part of such Borrowing was designated as inactive times (C) an amount equal to the portion of the inactive Borrowing Bases used as part of such Borrowing. (iii) The commitment fees shall be due and payable quarterly in arrears on the last day of each March, June, September, and December during the term of this Agreement and on the Termination Date. (b) Arrangement Fees. The Borrower agrees to pay to the Agent for the benefit of the Agent the arrangement fee described in the letter dated October 24, 1997, from the Agent to the Borrower (the "Agent's Fee Letter"). -32- 38 (c) Engineering Fees. The Borrower agrees to pay to the Agent an engineering fee of $5,000.00 on the date of each delivery of information required under Section 5.06(c). (d) Letter of Credit Fees. The Borrower agrees to pay to the Agent for the pro rata benefit of the Banks a fee for each Letter of Credit issued hereunder equal to 1.00% per annum on the face amount of such Letter of Credit, but with minimum annual fee of $750.00 on each Letter of Credit. Each such fee shall be payable annually in advance on the date of the issuance, increase or extension of the Letter of Credit, but, in the case of an increase or extension only, on the amount of such increase or for the period of such extension. Section 2.08. Interest. The Borrower shall pay interest on the unpaid principal amount of each Advance made by each Bank from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances. If such Advance is a Base Rate Advance, a rate per annum equal at all times to the Adjusted Base Rate in effect from time to time plus the Applicable Margin in effect from time to time, payable in arrears on the last day of March, June, September, and December and on the date such Base Rate Advance shall be paid in full, provided that any amount of principal which is not paid when due (whether at stated maturity, by acceleration, or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the Adjusted Base Rate in effect from time to time plus the Applicable Margin plus 3.00% per annum. (b) Eurodollar Rate Advances. If such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during the Interest Period for such Advance to the Eurodollar Rate for such Interest Period plus the Applicable Margin in effect from time to time, payable on the last day of such Interest Period, and, in the case of six-month Interest Periods, on the day which occurs during such Interest Period three months from the first day of such Interest Period, provided that any amount of principal which is not paid when due (whether at stated maturity, by acceleration, or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the Adjusted Base Rate in effect from time to time plus the Applicable Margin plus 3.00% per annum. -33- 39 (c) Additional Interest on Eurodollar Rate Advances. The Borrower shall pay to each Bank, so long as any such Bank shall be required under regulations of the Federal Reserve Board to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities, additional interest on the unpaid principal amount of each Eurodollar Rate Advance of such Bank, from the effective date of such Advance until such principal amount is paid in full, at an interest rate per annum equal at all times to the remainder obtained by subtracting (A) the Eurodollar Rate for the Interest Period for such Advance from (B) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Bank for such Interest Period, payable on each date on which interest is payable on such Advance. Such additional interest payable to any Bank shall be determined by such Bank and notified to the Borrower through the Agent (such notice to include the calculation of such additional interest, which calculation shall be conclusive in the absence of manifest error). (d) Usury. (i) If, with respect to any Bank, the effective rate of interest contracted for under the Credit Documents, including the stated rates of interest and fees contracted for hereunder and any other amounts contracted for under the Credit Documents which are deemed to be interest, at any time exceeds the Maximum Rate, then the outstanding principal amount of the loans made by such Bank hereunder shall bear interest at a rate which would make the effective rate of interest for such Bank under the Credit Documents equal the Maximum Rate until the difference between the amounts which would have been due at the stated rates and the amounts which were due at the Maximum Rate (the "Lost Interest") has been recaptured by such Bank. (ii) If, when the loans made hereunder are repaid in full, the Lost Interest has not been fully recaptured by such Bank pursuant to the preceding paragraph, then, to the extent permitted by law, for the loans made hereunder by such Bank the interest rates charged under Section 2.08 hereunder shall be retroactively increased such that the effective rate of interest under the Credit Documents was at the Maximum Rate since the effectiveness of this Agreement to the extent necessary to recapture the Lost Interest not recaptured pursuant to the preceding sentence and, to the extent allowed by law, the Borrower shall pay to such Bank the amount of the Lost Interest remaining to be recaptured by such Bank. -34- 40 (iii) NOTWITHSTANDING the foregoing or any other term in this Agreement and the Credit Documents to the contrary, it is the intention of each Bank and the Borrower to conform strictly to any applicable usury laws. Accordingly, if any Bank contracts for, charges, or receives any consideration which constitutes interest in excess of the Maximum Rate, then any such excess shall be canceled automatically and, if previously paid, shall at such Bank's option be applied to the outstanding amount of the loans made hereunder by such Bank or be refunded to the Borrower. Section 2.09. Payments and Computations. (a) Payment Procedures. The Borrower shall make each payment under this Agreement and under the Notes not later than 10:00 a.m. (Dallas, Texas, time) on the day when due in Dollars to the Agent at 901 Main Street, 49th Floor, Dallas, Texas 75202 (or such other location as the Agent shall designate in writing to the Borrower), in same day funds. The Agent shall promptly thereafter cause to be distributed like funds relating to the payment of principal, interest or fees ratably (other than amounts payable solely to the Agent, the Issuing Bank, or a specific Bank pursuant to Section 2.07(b), 2.08(c), 2.11, 2.12, 2.13, 8.05, or 9.07, but after taking into account payments effected pursuant to Section 9.04) to the Banks for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Bank or the Issuing Bank to such Bank for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. (b) Computations. All computations of interest based on the Base Rate shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate and the Federal Funds Rate and of fees shall be made by the Agent, on the basis of a year of 360 days, in each case for the actual number of days (including the first day, but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by the Agent of an interest rate or fee shall be conclusive and binding for all purposes, absent manifest error. (c) Non-Business Day Payments. Whenever any payment shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be; provided, however, -35- 41 that if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (d) Agent Reliance. Unless the Agent shall have received written notice from the Borrower prior to the date on which any payment is due to the Banks that the Borrower shall not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such date an amount equal to the amount then due such Bank. If and to the extent the Borrower shall not have so made such payment in full to the Agent, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank, together with interest, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate for such day. Section 2.10. Sharing of Payments, Etc. If any Bank shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances or Letter of Credit Obligations made by it in excess of its Pro Rata Share of payments on account of the Advances or Letter of Credit Obligations obtained by all the Banks, such Bank shall notify the Agent and forthwith purchase from the other Banks such participations in the Advances made by them or Letter of Credit Obligations held by them as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Bank, such purchase from each Bank shall be rescinded and such Bank shall repay to the purchasing Bank the purchase price to the extent of such Bank's ratable share (according to the proportion of (a) the amount of the participation sold by such Bank to the purchasing Bank as a result of such excess payment to (b) the total amount of such excess payment) of such recovery, together with an amount equal to such Bank's ratable share (according to the proportion of (a) the amount of such Bank's required repayment to the purchasing Bank to (b) the total amount of all such required repayments to the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Borrower agrees that any Bank so purchasing a participation from another Bank pursuant to this Section 2.10 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Bank were the direct creditor of the Borrower in the amount of such participation. Section 2.11. Breakage Costs. If (a) any payment of principal of any Eurodollar Rate Advance is made other than on the last day of the Interest Period for -36- 42 such Advance, whether as a result of any payment pursuant to Section 2.04, the acceleration of the maturity of the Notes pursuant to Article VII, or otherwise, or (b) the Borrower fails to make a principal or interest payment with respect to any Eurodollar Rate Advance on the date such payment is due and payable, the Borrower shall, within 10 days of any written demand sent by any Bank to the Borrower through the Agent accompanied by the certificate described below, pay to the Agent for the account of such Bank any amounts required to compensate such Bank for any additional losses, out-of-pocket costs or expenses which it may reasonably incur as a result of such payment or nonpayment, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Bank to fund or maintain such Advance. Any Bank demanding payment under this Section 2.11 shall deliver to the Borrower and the Agent a statement reasonably setting forth the amount and manner of determining such loss, cost or expense, which statement shall be conclusive and binding for all purposes, absent manifest error. Section 2.12. Increased Costs. (a) Eurodollar Rate Advances. If, due to either (i) the introduction of, any change (other than any change by way of imposition or increase of reserve requirements included in the Eurodollar Rate Reserve Percentage) in, or any change in the interpretation of any law or regulation or (ii) the compliance with any law or regulation or any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to any Bank of agreeing to make or making, funding, or maintaining Eurodollar Rate Advances (other than any increase in income, profits or franchise taxes), then the Borrower shall from time to time, within 10 days after written demand by such Bank accompanied by the below-described certificate (with a copy of such demand to the Agent), immediately pay to the Agent for the account of such Bank additional amounts sufficient to compensate such Bank for such increased cost. The Borrower will not be responsible for paying any amounts pursuant to this Section 2.12(a) accruing prior to 180 days prior to the receipt by the Borrower of the certificate referred to in the preceding sentence; provided that if any law, rule or regulation or any interpretation or administration thereof, or any request or directive giving rise to such Bank's right to compensation under this paragraph has retroactive effect, such Bank shall be entitled to claim compensation under this paragraph for the period commencing on such date of retroactive effect through the date of adoption or change or promulgation thereof without regard to the foregoing limitation. A certificate identifying with reasonable specificity the basis for and the amount of such increased cost and detailing the -37- 43 calculation of such cost submitted to the Borrower and the Agent by such Bank shall be conclusive and binding for all purposes, absent manifest error. Any Bank claiming any additional amounts pursuant to this Section 2.12 shall use its commercially reasonable efforts (consistent with its internal policies and legal and regulatory restrictions) to avoid or minimize any additional amounts that otherwise would be payable pursuant to this Section, including changing the jurisdiction of its Applicable Lending Office if such change would eliminate the amount of any such additional amounts which may thereafter accrue; provided that no such change or action shall be required to be made or taken if, in the reasonable judgment of such Bank, such change would be disadvantageous to such Bank. (b) Capital Adequacy. If any Bank or the Issuing Bank determines in good faith that compliance with any law or regulation or any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Bank or the Issuing Bank or any corporation controlling such Bank or the Issuing Bank and that the amount of such capital is increased by or based upon the existence of such Bank's commitment to lend or the Issuing Bank's commitment to issue the Letters of Credit and other commitments of this type, then, upon 30 days' prior written notice by such Bank or the Issuing Bank accompanied by the below-described certificate (with a copy of any such demand to the Agent), the Borrower shall immediately pay to the Agent for the account of such Bank or to the Issuing Bank, as the case may be, from time to time as specified by such Bank or the Issuing Bank, additional amounts sufficient to compensate such Bank or the Issuing Bank, in light of such circumstances, (i) with respect to such Bank, to the extent that such Bank reasonably determines such increase in capital to be allocable to the existence of such Bank's commitment to lend under this Agreement and (ii) with respect to the Issuing Bank, to the extent that the Issuing Bank reasonably determines such increase in capital to be allocable to the issuance or maintenance of the Letters of Credit. The Borrower will not be responsible for paying any amounts pursuant to this Section 2.12(a) accruing prior to 180 days prior to the receipt by the Borrower of the certificate referred to in the preceding sentence; provided that if any law, rule or regulation or any interpretation or administration thereof, or any request or directive giving rise to such Bank's right to compensation under this paragraph has retroactive effect, such Bank shall be entitled to claim compensation under this paragraph for the period commencing on such date of retroactive effect through the date of adoption or change or promulgation thereof without regard to the foregoing limitation. A certificate as to such amounts and detailing the calculation of such amounts submitted to the Borrower by such Bank or the Issuing Bank shall be conclusive and binding for all purposes, absent manifest error. -38- 44 (c) Letters of Credit. If any change in any law or regulation or in the interpretation thereof by any court or administrative or Governmental Authority charged with the administration thereof shall either (i) impose, modify, or deem applicable any reserve, special deposit, or similar requirement against letters of credit issued by, or assets held by, or deposits in or for the account of, the Issuing Bank or (ii) impose on the Issuing Bank any other condition regarding the provisions of this Agreement relating to the Letters of Credit or any Letter of Credit Obligations, and the result of any event referred to in the preceding clause (i) or (ii) shall be to increase the cost to the Issuing Bank of issuing or maintaining any Letter of Credit (which increase in cost shall be determined by the Issuing Bank's reasonable allocation of the aggregate of such cost increases resulting from such event), then, within 10 days after written demand by the Issuing Bank accompanied by the below-described certificate, the Borrower shall pay to the Issuing Bank, from time to time as specified by the Issuing Bank, additional amounts which shall be sufficient to compensate the Issuing Bank for such increased cost. The Borrower will not be responsible for paying any amounts pursuant to this Section 2.12(a) accruing prior to 180 days prior to the receipt by the Borrower of the certificate referred to in the preceding sentence; provided that if any law, rule or regulation or any interpretation or administration thereof, or any request or directive giving rise to such Bank's right to compensation under this paragraph has retroactive effect, such Bank shall be entitled to claim compensation under this paragraph for the period commencing on such date of retroactive effect through the date of adoption or change or promulgation thereof without regard to the foregoing limitation. A certificate as to such increased cost incurred by the Issuing Bank, as a result of any event mentioned in clause (i) or (ii) above, and detailing the calculation of such increased costs submitted by the Issuing Bank to the Borrower, shall be conclusive and binding for all purposes, absent manifest error. Section 2.13. Taxes. (a) No Deduction for Certain Taxes. Any and all payments by the Borrower shall be made, in accordance with Section 2.09, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank, the Issuing Bank, and the Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Bank, the Issuing Bank, or the Agent (as the case may be) is organized or any political subdivision of the jurisdiction (all such non-excluded taxes, levies, imposts, deductions, charges, -39- 45 withholdings and liabilities being hereinafter referred to as "Taxes") and, in the case of each Bank and the Issuing Bank, Taxes by the jurisdiction of such Bank's Applicable Lending Office or any political subdivision of such jurisdiction. If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable to any Bank, the Issuing Bank, or the Agent, (i) the sum payable shall be increased as may be necessary so that, after making all required deductions (including deductions applicable to additional sums payable under this Section 2.13), such Bank, the Issuing Bank, or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made; provided, however, that if the Borrower's obligation to deduct or withhold Taxes is caused solely by such Bank's, the Issuing Bank's, or the Agent's failure to provide the forms described in paragraph (d) of this Section 2.13 and such Bank, the Issuing Bank, or the Agent could have provided such forms, no such increase shall be required; (ii) the Borrower shall make such deductions; and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) Other Taxes. In addition, within 10 days after written demand, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Notes, or the other Credit Documents (hereinafter referred to as "Other Taxes"). (c) Indemnification. THE BORROWER INDEMNIFIES EACH BANK, THE ISSUING BANK, AND THE AGENT FOR THE FULL AMOUNT OF TAXES OR OTHER TAXES (INCLUDING, WITHOUT LIMITATION, ANY TAXES OR OTHER TAXES IMPOSED BY ANY JURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 2.13) PAID BY SUCH BANK, THE ISSUING BANK, OR THE AGENT (AS THE CASE MAY BE) AND ANY LIABILITY (INCLUDING INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT THERETO, WHETHER OR NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLY ASSERTED. EACH PAYMENT REQUIRED TO BE MADE BY THE BORROWER IN RESPECT OF THIS INDEMNIFICATION SHALL BE MADE TO THE AGENT FOR THE BENEFIT OF ANY PARTY CLAIMING SUCH INDEMNIFICATION WITHIN 30 DAYS FROM THE DATE THE BORROWER RECEIVES WRITTEN DEMAND THEREFOR FROM THE AGENT ON BEHALF OF ITSELF AS AGENT, THE ISSUING BANK, OR ANY SUCH BANK. IF ANY BANK, THE AGENT, OR THE ISSUING BANK RECEIVES A REFUND IN -40- 46 RESPECT OF ANY TAXES PAID BY THE BORROWER UNDER THIS PARAGRAPH (C), SUCH BANK, THE AGENT, OR THE ISSUING BANK, AS THE CASE MAY BE, SHALL PROMPTLY PAY TO THE BORROWER THE BORROWER'S SHARE OF SUCH REFUND. (d) Foreign Bank Withholding Exemption. Each Bank and Issuing Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it shall deliver to the Borrower and the Agent (i) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 or successor applicable form, as the case may be, certifying in each case that such Bank is entitled to receive payments under this Agreement and the Notes payable to it, without deduction or withholding of any United States federal income taxes, (ii) if applicable, an Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding tax, and (iii) any other governmental forms which are necessary or required under an applicable tax treaty or otherwise by law to reduce or eliminate any withholding tax, which have been reasonably requested by the Borrower. Each Bank which delivers to the Borrower and the Agent a Form 1001 or 4224 and Form W-8 or W-9 pursuant to the next preceding sentence further undertakes to deliver to the Borrower and the Agent two further copies of the said letter and Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such letter or form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent letter and form previously delivered by it to the Borrower and the Agent, and such extensions or renewals thereof as may reasonably be requested by the Borrower and the Agent certifying in the case of a Form 1001 or 4224 that such Bank is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes. If an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any delivery required by the preceding sentence would otherwise be required which renders all such forms inapplicable or which would prevent any Bank from duly completing and delivering any such letter or form with respect to it and such Bank advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax, such Bank shall not be required to deliver such letter or forms. The Borrower shall withhold tax at the rate and in the manner required by the laws of the United States with respect to payments made to a Bank failing to timely provide the requisite Internal Revenue Service forms. -41- 47 Section 2.14. Replacement of Bank. If at any time (a) any of the provisions of Sections 2.11, 2.12 or 2.13 become applicable to and are utilized by any Bank so as to cause the Borrower to pay any material amount to such Bank under any such Section, (b) any Bank gives a notice pursuant to Section 2.03(c)(i) or 2.03(c)(iv), or (c) a Bank becomes a Nonconsenting Bank (as hereinafter defined), the Borrower shall have the right to replace such Bank with another Person; provided that (i) such new Person shall be acceptable to the Agent and such new Person shall execute an Assignment and Acceptance, (ii) the Borrower shall have no right to replace the Agent in its capacity as a Bank, (iii) neither the Agent, nor any Bank, shall have any obligation to the Borrower to find such other Person, and (iv) in the event of a replacement of a Nonconsenting Bank or a Bank utilizing Section 2.03, 2.11, 2.12 or 2.13, in order for the Borrower to be entitled to replace such a Bank, such replacement must take place no later than 180 days after (A) the date the Nonconsenting Bank shall notify Borrower and the Agent of its failure to agree to any requested consent, waiver or other modification, (B) the Bank demanded payment under Section 2.11, 2.12 or 2.13, as applicable, or (C) the Bank gave notice under Section 2.03. Each Bank (other than the Agent) agrees to its replacement at the option of the Borrower pursuant to this Section 2.14 and in accordance with Section 9.06; provided that the successor Bank shall purchase without recourse such Bank's interest in the Obligations of the Borrower to such Bank for cash in an aggregate amount equal to aggregate unpaid principal thereof, all unpaid interest accrued thereon, all unpaid commitment fees accrued for the account of such Bank, any breakage costs incurred by the selling Bank because of the prepayment of any Eurodollar Rate Advances, all other fees (if any) applicable thereto and all other amounts then owing to such Bank hereunder or under any other Credit Document and the Borrower and its Subsidiaries shall execute a release addressed to such Bank releasing such Bank from all claims arising in connection with the Credit Documents. In the event that (x) the Borrower or Agent has requested a Bank to consent to a departure or waiver of any of the provisions of the Credit Documents or to agree to any other modification thereto, (y) the consent, waiver or other modification in question requires the agreement of the Majority Banks or Banks, as the case may be, in accordance with the terms of Section 9.01 and (z) Banks holding at least 80% of the unpaid principal amounts outstanding under the Notes (or if no such amounts are outstanding, 80% of the Pro Rata Percentages) have agreed to such consent, waiver or other modification, then any Bank who does not agree to such consent, waiver or other modification shall be deemed a Nonconsenting Bank. -42- 48 ARTICLE III CONDITIONS OF LENDING Section 3.01. Conditions Precedent to Credit Agreement. The obligation of each Bank to make its initial Advance as part of the initial Borrowing and of the Issuing Bank to issue the initial Letters of Credit are subject to the conditions precedent that: (a) Documentation. On or before the day on which the initial Borrowing is made or the initial Letters of Credit are issued, the Agent shall have received the following duly executed by all the parties thereto, in form and substance satisfactory to the Agent and the Banks, and, where applicable, in sufficient copies for each Bank: (i) This Agreement and the Notes; (ii) A favorable opinion of the Borrower's counsel, dated as of the Effective Date and substantially in the form of the attached Exhibit H covering the matters discussed in such Exhibit and such other matters as any Bank through the Agent may reasonably request; (iii) A certificate of the Secretary or an Assistant Secretary of the Borrower certifying the existence of the Borrower, a certificate of good standing for the Borrower, the certificate of incorporation of the Borrower, the bylaws of the Borrower, the resolutions of the Board of Directors of the Borrower authorizing this Agreement and related transactions, and the incumbency and signatures of the officers of the Borrower authorized to execute this Agreement and related documents; (iv) Mortgages, deeds of trust, financing statements, or other security instruments granting an Acceptable Security Interest in the Borrower's and its Subsidiaries' Oil and Gas Properties with a loan value of at least 80% of the Borrowing Bases; (v) Title opinions prepared by counsel approved by the Agent in form and substance satisfactory to the Agent evidencing that the Borrower's and its Subsidiaries' Oil and Gas Properties with a loan value of at least 90% of the Borrowing Bases and are unencumbered except for title exceptions approved by the Agent; -43- 49 (vi) All Material Contracts affecting any of the Oil and Gas Properties described in the foregoing clauses (iv) and (v); and (vii) Such other documents, certificates, letters in lieu of transfer orders, opinions of Borrower's counsel, agreements, and lien searches as the Agent may reasonably request. (b) Payment of Fees. On the date of this Agreement, the Borrower shall have paid the fees required by Section 2.07(b) and (c) and all costs and expenses which have been invoiced and are payable pursuant to Section 9.04. Section 3.02. Conditions Precedent to All Borrowings. The obligation of each Bank to make an Advance on the occasion of each Borrowing and of the Issuing Bank to issue, increase, or extend any Letter of Credit shall be subject to the further conditions precedent that on the date of such Borrowing or the issuance, increase, or extension of such Letter of Credit the following statements shall be true (and each of the giving of the applicable Notice of Borrowing or Letter of Credit Application and the acceptance by the Borrower of the proceeds of such Borrowing or the issuance, increase, or extension of such Letter of Credit shall constitute a representation and warranty by the Borrower that on the date of such Borrowing, the issuance, increase, or extension of such Letter of Credit, such statements are true): (a) the representations and warranties contained in Article IV, the Security Documents, and the Guaranties are correct in all material respects on and as of the date of such Borrowing or the date of the issuance, increase, or extension of such Letter of Credit, before and after giving effect to such Borrowing or to the issuance, increase, or extension of such Letter of Credit and to the application of the proceeds from such Borrowing, as though made on and as of such date and (b) no Default has occurred and is continuing or would result from such Borrowing or from the application of the proceeds therefrom, from the issuance, increase, or extension of such Letter of Credit. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants as follows: -44- 50 Section 4.01. Corporate Existence; Subsidiaries. The Borrower is a corporation duly organized, validly existing, and in good standing under the laws of Delaware and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification and where a failure to be qualified could reasonably be expected to cause a Material Adverse Change. Each Guarantor is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification and where a failure to be qualified could reasonably be expected to cause a Material Adverse Change. The Borrower has no Subsidiaries other than Subsidiaries which have executed a Guaranty in compliance with Section 5.08. Section 4.02. Corporate Power. The execution, delivery, and performance by the Borrower of this Agreement, the Notes, and the other Credit Documents to which it is a party and by the Guarantors of the Guaranties and the consummation of the transactions contemplated hereby and thereby (a) are within the Borrower's and the Guarantor's corporate powers, (b) have been duly authorized by all necessary corporate action, (c) do not contravene (i) the Borrower's or any Guarantor's certificate or articles, as the case may be, of incorporation or by-laws or (ii) any law or any contractual restriction binding on or affecting the Borrower or any Guarantor, and (d) will not result in or require the creation or imposition of any Lien prohibited by this Agreement. At the time of each Borrowing, such Borrowing and the use of the proceeds of such Borrowing will be within the Borrower's corporate powers, will have been duly authorized by all necessary corporate action, (a) will not contravene (i) the Borrower's certificate of incorporation or by-laws or (ii) any law or any contractual restriction binding on or affecting the Borrower and (b) will not result in or require the creation or imposition of any Lien prohibited by this Agreement. Section 4.03. Authorization and Approvals. Except for the recording and filing of the instruments identified in Section 3.01(a)(iv), no authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery, and performance by the Borrower of this Agreement, the Notes, or the other Credit Documents to which the Borrower is a party or by each Guarantor of its Guaranty or the consummation of the transactions contemplated thereby. At the time of each Borrowing, no authorization or approval or other action by, and no notice to or filing with, any Governmental Authority will be required for such Borrowing or the use of the proceeds of such Borrowing. -45- 51 Section 4.04. Enforceable Obligations. This Agreement, the Notes, and the other Credit Documents to which the Borrower is a party have been duly executed and delivered by the Borrower and the Guaranties have been duly executed and delivered by the Guarantors. Each Credit Document is the legal, valid, and binding obligation of the Borrower and each Guarantor which is a party to it enforceable against the Borrower and each such Guarantor in accordance with its terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar law affecting creditors' rights generally and by general principles of equity. Section 4.05. Financial Statements. The audited consolidated balance sheet of the Borrower and its Subsidiaries as at December 31, 1996, and the related audited consolidated statements of income, cash flow, and retained earnings of the Borrower and its Subsidiaries for the fiscal year then ended, copies of which have been furnished to each Bank, and the consolidated balance sheet of the Borrower and its Subsidiaries as at September 30, 1997, and the related consolidated statements of income and cash flow of the Borrower and its Subsidiaries for the nine months then ended, copies of which have been furnished to the Agent, fairly present, subject, in the case of the balance sheet as at September 30, 1997, and said statements of income and cash flow for the nine months then ended, to year-end audit adjustments, the consolidated financial condition of the Borrower and its Subsidiaries as at such dates and the consolidated results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, and such consolidated balance sheets and consolidated statements of income, cash flow, and retained earnings were prepared in accordance with GAAP (or in compliance with the regulations promulgated by the United States Securities and Exchange Commission). Since the date of the Financial Statements, no Material Adverse Change has occurred. Section 4.06. True and Complete Disclosure. All factual information (excluding estimates, projections and pro forma financial information) heretofore or contemporaneously furnished by or on behalf of the Borrower or any of its Subsidiaries in writing to any Bank or the Agent for purposes of or in connection with this Agreement, any other Credit Document or any transaction contemplated hereby or thereby is (taken as a whole) true and accurate in all material respects on the date as of which such information is dated or certified and does not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements contained therein not misleading as of the date of this Agreement. All projections, estimates, and pro forma financial information furnished by the Borrower were prepared on the basis of assumptions, data, information, tests, or conditions believed to be reasonable at the time such projections, estimates, and pro forma financial information were furnished. This Section 4.06 shall supersede paragraph 3 of the Agent's Fee Letter. -46- 52 Section 4.07. Litigation. Set forth on Schedule 4.07 is an accurate description of all of the Borrower's and its Subsidiaries' pending litigation existing on the date of this Agreement which could reasonably be expected to cause a Material Adverse Change. There is no pending or, to the best knowledge of the Borrower, threatened action or proceeding against the Borrower or any of its Subsidiaries before any court, Governmental Authority or arbitrator, which could reasonably be expected to cause a Material Adverse Change or which purports to affect the legality, validity, binding effect, or enforceability of this Agreement, any Note, or any other Credit Document. Section 4.08. Use of Proceeds. All Advances and Letters of Credit shall be used to finance the exploration for, and development and production of, of oil and gas properties and for general corporate purposes of the Borrower and its Subsidiaries, but in no event for the payment of dividends or other distributions or advances to the shareholders of the Borrower. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U). No proceeds of any Advance will be used to purchase or carry any margin stock in violation of Regulation G, T, U or X. Section 4.09. Investment Company Act. Neither the Borrower nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 4.10. Public Utility Holding Company Act. Neither the Borrower nor any of its Subsidiaries is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 4.11. Taxes. Proper and accurate (in all material respects) federal, state, local, and foreign tax returns, reports and statements required to be filed (after giving effect to any extension granted in the time of filing) by or on behalf of the Borrower, its Subsidiaries, or any member of the Controlled Group (hereafter collectively called the "Tax Group") have been duly filed on a timely basis or appropriate extensions have been obtained with appropriate governmental agencies in all jurisdictions in which such returns, reports, and statements are required to be filed, except where the failure to so file would not be reasonably expected to cause a Material Adverse Change; and all taxes (which are material in amount) and other impositions due and payable have been timely -47- 53 paid prior to the date on which any fine, penalty, interest, late charge, or loss may be added thereto for non-payment thereof, except where contested in good faith by appropriate proceedings. The reserves for accrued taxes reflected in the financial statements delivered to the Banks under this Agreement are adequate in the aggregate for the payment of all unpaid taxes, whether or not disputed, for the period ended as of the date thereof and for any period prior thereto, and for which the Tax Group may be liable in its own right, as withholding agent or as a transferee of the assets of, or successor to, any Person, except for such taxes or reserves therefor, the failure to pay or provide for which does not and could not cause a Material Adverse Change. Timely payment of all material sales and use taxes required by applicable law has been made by the Borrower and all other members of the Tax Group. Section 4.12. Pension Plans. All Plans are in compliance with all applicable provisions of ERISA and the Code, except to the extent any noncompliance would not result in a Material Adverse Change. No Termination Event has occurred with respect to any Plan. No "accumulated funding deficiency" (as defined in Section 302 of ERISA) has occurred with respect to any Plan. Neither the Borrower nor any member of the Controlled Group has had a complete or partial withdrawal from any Multiemployer Plan for which there is any withdrawal liability that could reasonably be expected to cause a Material Adverse Change. As of the most recent valuation date applicable thereto, neither the Borrower nor any member of the Controlled Group would become subject to any liability under ERISA if the Borrower or any member of the Controlled Group has received notice that any Multiemployer Plan is insolvent or in reorganization. Section 4.13. Condition of Property; Casualties. The Borrower and each of the Guarantors has good and marketable title to all of its material Properties as is customary in the oil and gas industry in all material respects, free and clear of all Liens except for Permitted Liens. The material Properties used or to be used in the continuing operations of the Borrower and each of its Subsidiaries are in good repair, working order and condition, ordinary wear and tear excepted. Since the date of the Financial Statements, neither the business nor the material properties of the Borrower and each of its Subsidiaries, taken as a whole, has been materially and adversely affected 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 a Governmental Authority, riot, activities of armed forces, or acts of God or of any public enemy. -48- 54 Section 4.14. No Burdensome Restrictions; No Defaults. Neither the Borrower nor any of its Subsidiaries is a party to any indenture, loan, or credit agreement or any lease or other agreement or instrument or subject to any charter or corporate restriction or provision of applicable law or governmental regulation which could reasonably be expected to cause a Material Adverse Change. The Borrower and the Guarantors are not in default under or with respect to any contract, agreement, lease, or other instrument to which the Borrower or any Guarantor is a party and which could reasonably be expected to cause a Material Adverse Change. No Default has occurred and is continuing. Section 4.15. Environmental Condition. (a) Permits, Etc. Except as set forth on Schedule 4.15(a), the Borrower and its Subsidiaries (i) have obtained all Environmental Permits necessary for the ownership and operation of their respective Properties and the conduct of their respective businesses, except where such failure to obtain could not reasonably be expected to cause a Material Adverse Change; (ii) are in compliance with all terms and conditions of such Environmental Permits and with all other requirements of applicable Environmental Laws, except where such failure to comply could not reasonably be expected to cause a Material Adverse Change; (iii) have not received notice of any material violation or alleged violation of any Environmental Law or Environmental Permit; and (iv) are not subject to any actual or contingent Environmental Claim which could reasonably be expected to cause a Material Adverse Change. (b) Certain Liabilities. Except as set forth on Schedule 4.15(b), to the Borrower's actual knowledge, none of the present or previously owned or operated Properties of the Borrower or of any of its present or former Subsidiaries, wherever located, (i) has been placed on or proposed to be placed on the National Priorities List, the Comprehensive Environmental Response Compensation Liability Information System list, or their state or local analogs; (ii) is subject to a Lien, arising under or in connection with any Environmental Laws, that attaches to any revenues or to any Property owned or operated by the Borrower or any of its Subsidiaries, wherever located, which could reasonably be expected to cause a Material Adverse Change; or (iii) has been the site of any Release of Hazardous Substances or Hazardous Wastes from present or past operations which has caused at the site or at any third-party site any condition that has resulted in or could reasonably be expected to result in the need for Response that would cause a Material Adverse Change. (c) Certain Actions. Without limiting the foregoing (i) all necessary notices have been properly filed, and no further action is required under current Environmental -49- 55 Law as to each Response or other restoration or remedial project undertaken by the Borrower, or its present or former Subsidiaries on any of their presently or formerly owned or operated Properties and (ii) the present and, to the Borrower's best knowledge, future liability, if any, of the Borrower and its Subsidiaries which could reasonably be expected to arise in connection with requirements under Environmental Laws will not result in a Material Adverse Change. Section 4.16. Permits, Licenses, Etc. The Borrower and its Subsidiaries possess all permits, licenses, patents, patent rights or licenses, trademarks, trademark rights, trade names rights and copyrights which are required to the conduct of its business, except where such failure to possess would not reasonably be expected to cause a Material Adverse Change. The Borrower and its Subsidiaries manage and operate their business in accordance with all applicable Legal Requirements and good industry practices, except where such failure to manage or operate would not reasonably be expected to cause a Material Adverse Change. Section 4.17. Gas Contracts. Neither the Borrower nor any of its Subsidiaries, as of the date hereof, (a) is obligated in any material respect by virtue of any prepayment made under any contract containing a "take-or-pay" or "prepayment" provision or under any similar agreement to deliver hydrocarbons produced from or allocated to any of the Borrower's consolidated Oil and Gas Properties at some future date without receiving full payment therefor at the time of delivery, or (b) has produced gas, in any material amount, subject to, and none of the Borrower's consolidated Oil and Gas Properties is subject to, balancing rights of third parties or subject to balancing duties under governmental requirements, except as to such matters for which the Borrower or its relevant Subsidiary has established monetary reserves adequate in amount in accordance with GAAP to satisfy such obligations and has segregated such reserves from its other accounts. ARTICLE V AFFIRMATIVE COVENANTS So long as any Note or any amount under any Credit Document shall remain unpaid, any Letter of Credit shall remain outstanding, or any Bank shall have any Commitment hereunder, the Borrower agrees, unless the Majority Banks shall otherwise consent in writing, to comply with the following covenants. -50- 56 Section 5.01. Compliance with Laws, Etc. The Borrower shall comply, and cause each of its Subsidiaries to comply, with all Legal Requirements, except where such failure to comply could not reasonably be expected to cause a Material Adverse Change. Without limiting the generality and coverage of the foregoing, the Borrower shall comply, and shall cause each of its Subsidiaries to comply with all Environmental Laws and all laws, regulations, or directives with respect to equal employment opportunity and employee safety in all jurisdictions in which the Borrower, or any of its Subsidiaries do business, except where such failure to comply could not reasonably be expected to cause a Material Adverse Change; provided, however, that this Section 5.01 shall not prevent the Borrower, or any of its Subsidiaries from, in good faith and with reasonable diligence, contesting the validity or application of any such laws or regulations by appropriate legal proceedings. Section 5.02. Maintenance of Insurance. The Borrower shall maintain, and cause each of its Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates, provided that the Borrower or such Subsidiary may self-insure to the extent and in the manner normal for similarly situated companies of like size, type and financial condition that are part of a group of companies under common control. Section 5.03. Preservation of Corporate Existence, Etc. The Borrower shall preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its corporate existence, rights, franchises, and privileges in the jurisdiction of its incorporation, and qualify and remain qualified, and cause each such Subsidiary to qualify and remain qualified, as a foreign corporation in each jurisdiction in which qualification is necessary or desirable in view of its business and operations or the ownership of its properties, and, in each case, where failure to qualify or preserve and maintain its rights and franchises could reasonably be expected to cause a Material Adverse Change; provided, however, that nothing herein contained shall prevent any transaction permitted by Section 6.04. Section 5.04. Payment of Taxes, Etc. The Borrower shall pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, (a) all taxes, assessments, and governmental charges or levies imposed upon it or upon its income or profits or Property that are material in amount, prior to the date on which penalties attach thereto and (b) all lawful claims that are material in amount which, if unpaid, might by law become a Lien upon its Property; provided, however, -51- 57 that neither the Borrower nor any such Subsidiary shall be required to pay or discharge any such tax, assessment, charge, levy, or claim which is being contested in good faith and by appropriate proceedings, and with respect to which reserves in conformity with GAAP have been provided. Section 5.05. Visitation Rights. At any reasonable time and from time to time, upon reasonable notice, the Borrower shall, and shall cause its Subsidiaries to, permit the Agent and any Bank or any of its agents or representatives thereof, to (a) examine and make copies of and abstracts from the records and books of account of, and visit and inspect at its reasonable discretion the properties of, the Borrower and any such Subsidiary, and (b) discuss the affairs, finances and accounts of the Borrower and any such Subsidiary with any of their respective officers or directors; provided however, the Agent or the Bank for whose benefit such inspection and visitation is made assumes sole responsibility for the condition of any property of the Borrower or its Subsidiaries so visited and inspected, the access and egress thereto, and any vice or defect therein or thereon, and assumes all responsibility for and hereby releases and indemnifies the Borrower, its Affiliates, and their officers, directors, employees, and agents against any claim for damage or injury to or by the Agent or such Bank (or the representatives thereof) or to the Borrower's or its Subsidiaries' property which may be occasioned by such inspection and visitation of the Borrower's or its Subsidiaries' property. Section 5.06. Reporting Requirements. The Borrower shall furnish to the Agent and each Bank: (a) Annual Financials. As soon as available and in any event not later than 105 days after the end of each fiscal year of the Borrower, a copy of the annual audit report for such year for the Borrower and its Subsidiaries, including therein consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such fiscal year and consolidated statements of income, cash flows, and retained earnings of the Borrower and its Subsidiaries for such fiscal year, in each case certified by Arthur Andersen LLP or other independent certified public accountants of national standing and including any management letters delivered by such accountants to the Borrower in connection with such audit together with a certificate of such accounting firm to the Agent and the Banks stating that, in the course of the regular audit of the business of the Borrower and its Subsidiaries, which audit was conducted by such accounting firm in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge that a Default has occurred and is continuing, or if, in the opinion of such accounting firm, a Default has occurred and is continuing, a statement as to the nature thereof, together with a Compliance Certificate executed by the Chief Financial Officer or Chief Accounting Officer of the Borrower; -52- 58 (b) Quarterly Financials. As soon as available and in any event not later than 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, the unaudited consolidated balance sheet of Borrower and its Subsidiaries as of the end of such quarter and the consolidated statements of income and cash flows of the Borrower and its Subsidiaries for the period commencing at the end of the previous year and ending with the end of such quarter, all in reasonable detail and duly certified with respect to such consolidated statements (subject to year-end audit adjustments) by the Chief Financial Officer or Chief Accounting Officer of the Borrower as having been prepared in accordance with GAAP (or in compliance with the regulations promulgated by the United States Securities and Exchange Commission), together with a Compliance Certificate executed by the Chief Financial Officer or Chief Accounting Officer of the Borrower; (c) Oil and Gas Reserve Reports. (i) As soon as available but in any event on or before March 31 of each year, an engineering report in form and substance meeting the requirements of the Securities and Exchange Commission for financial reporting purposes, certified by Ryder Scott Company or other firm of independent consulting petroleum engineers approved by the Agent, as fairly setting forth (A) the proved, producing, and probable shut in, behind pipe, depleted and undeveloped oil and gas reserves (separately classified as such) attributable to the Borrower's consolidated Oil and Gas Properties as of the last day of the previous year, (B) the aggregate present value, determined on the basis of stated pricing assumptions, of the future Adjusted Net Income with respect to such Oil and Gas Properties, discounted at a stated per annum discount rate, and (C) projections of the annual rate of production, gross income, and Adjusted Net Income with respect to such Oil and Gas Properties; (ii)(A) So long as the Majority Banks have allocated any value to the Revolving B Borrowing Base, as soon as available but in any event on or before June 30, September 30, and December 31 of each year beginning with December 31, 1997, an internal engineering report in form and substance satisfactory to the Agent setting forth (1) the proved, producing, and probable shut in, behind pipe, depleted and undeveloped oil and gas reserves (separately classified as such) attributable to the Borrower's consolidated Oil and Gas Properties as of the last day of the calendar quarter immediately preceding such -53- 59 date, (2) the aggregate present value, determined on the basis of stated pricing assumptions, of the future net income with respect to such Oil and Gas Properties, discounted at a stated per annum discount rate, and (3) projections of the annual rate of production, gross income, and net income with respect to such Oil and Gas Properties and (B) If the Majority Banks have not allocated any value to the Revolving B Borrowing Base, then as soon as available but in any event on or before September 30 of each year an internal engineering report in form and substance satisfactory to the Agent setting forth (1) the proved, producing, and probable shut in, behind pipe, depleted and undeveloped oil and gas reserves (separately classified as such) attributable to the Borrower's consolidated Oil and Gas Properties as of June 30 of such year, (2) the aggregate present value, determined on the basis of stated pricing assumptions, of the future net income with respect to such Oil and Gas Properties, discounted at a stated per annum discount rate, and (3) projections of the annual rate of production, gross income, and net income with respect to such Oil and Gas Properties; and (iii) The Agent and the Banks acknowledge that the Oil and Gas Reserve Reports contain certain proprietary information including geological and geophysical data, maps, models, and interpretations necessary for determining the Borrowing Bases and the creditworthiness of the Borrower and the Guarantors. The Agent and the Banks agree to maintain the confidentiality of such information except as required by law. The Agent and the Banks may share such information with Eligible Assignees of their interests under this Agreement if such Eligible Assignees agree to maintain the confidentiality of such information; (d) Defaults. As soon as possible and in any event within 10 days after the occurrence of each Default known to a Responsible Officer of the Borrower or any of its Subsidiaries which is continuing on the date of such statement, a statement of the Chief Financial Officer of the Borrower setting forth the details of such Default and the actions which the Borrower has taken and proposes to take with respect thereto; (e) Securities Law Filings. Except as provided in paragraphs (a) and (b) above, promptly and in any event within 15 days after the sending or filing thereof, copies of all (i) Registration Statements (other than the exhibits thereto) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents), and which the Borrower or any of its Subsidiaries sends to or files with the United States Securities and Exchange -54- 60 Commission or (ii) financial statements, proxy statements, reports and other documents it sends to the shareholders of the Borrower; (f) Termination Events. As soon as possible and in any event (i) within 30 days after the Borrower or any member of the Controlled Group knows or has reason to know that any Termination Event described in clause (a) of the definition of Termination Event with respect to any Plan has occurred, and (ii) within 10 Business Days after the Borrower or any of its Affiliates knows or has reason to know that any other Termination Event with respect to any Plan has occurred, a statement of the Chief Financial Officer of the Borrower describing such Termination Event and the action, if any, which the Borrower or such Affiliate proposes to take with respect thereto; (g) Termination of Plans. Promptly and in any event within five Business Days after receipt thereof by the Borrower or any member of the Controlled Group from the PBGC, copies of each notice received by the Borrower or any such member of the Controlled Group of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan; (h) Other ERISA Notices. Promptly and in any event within five Business Days after receipt thereof by the Borrower or any member of the Controlled Group from a Multiemployer Plan sponsor, a copy of each notice received by the Borrower or any member of the Controlled Group concerning the imposition of withdrawal liability exceeding $100,000.00 annually pursuant to Section 4202 of ERISA; (i) Environmental Notices. Promptly and in any event within five Business Days after the receipt thereof by the Borrower or any of its Subsidiaries, a copy of any form of notice, summons or citation received from the EPA, or any other Governmental Authority, concerning (i) violations or alleged violations of Environmental Laws, which seeks to impose liability therefor, (ii) any action or omission on the part of the Borrower or any of its present or former Subsidiaries in connection with Hazardous Waste or Hazardous Substances which could reasonably result in the imposition of liability therefor, including without limitation any notice of potential responsibility under CERCLA, or (iii) concerning the filing of a Lien upon, against or in connection with the Borrower, its present or former Subsidiaries, or any of their leased or owned Property, wherever located; (j) Other Governmental Notices. Promptly and in any event within five Business Days after receipt thereof by the Borrower or any Subsidiary, a copy of any notice, summons, citation, or proceeding seeking to modify in any material respect, revoke, or suspend any material contract, license, or agreement with any Governmental Authority; -55- 61 (k) Material Changes. Prompt written notice of any condition or event of which the Borrower has knowledge, which condition or event has resulted or may reasonably be expected to result in (i) a Material Adverse Change or (ii) a breach of or noncompliance with any material term, condition, or covenant of any material contract to which the Borrower or any of its Subsidiaries is a party or by which they or their properties may be bound; (l) Disputes, Etc. Prompt written notice of the commencement of any litigation, legal, administrative or arbitral proceeding, investigation or other action against the Borrower, or any of its Subsidiaries which, if adversely determined, could reasonably be expected to cause a Material Adverse Change, or any material labor controversy of which the Borrower or any of its Subsidiaries has knowledge resulting in or reasonably considered to be likely to result in a strike against the Borrower or any of its Subsidiaries; and (m) Other Information. Such other information respecting the business or Properties, or the condition or operations, financial or otherwise, of the Borrower, or any of its Subsidiaries, as any Bank through the Agent may from time to time reasonably request. The Agent agrees to provide the Banks with copies of any material notices and information delivered solely to the Agent pursuant to the terms of this Agreement. Section 5.07. Maintenance of Property. Borrower shall, and shall cause each of its Subsidiaries to, maintain their owned, leased, or operated material property, equipment, buildings, and fixtures in good condition and repair, ordinary wear and tear excepted; and shall abstain from, cause each of its Subsidiaries to abstain from, and not knowingly or willfully permit the commission of waste or other injury, destruction, or loss of natural resources, or the occurrence of pollution, contamination, or any other condition in, on, or about the owned or operated property involving the Environment that could reasonably be expected to result in Response activities the costs of which would exceed the accrual established by Borrower or by any of its Subsidiaries for those purposes. Section 5.08. New Subsidiaries. Upon the creation of any Subsidiary after the date of this Agreement, the Borrower shall cause such Subsidiary to execute and deliver to the Agent (a) a Guaranty with such changes as the Agent may reasonably request; (b) such Security Documents as the Agent may request to grant an Acceptable Security -56- 62 Interest in such Subsidiary's Oil and Gas Properties; and (c) evidence of corporate authority to enter into such Guaranty and Security Documents as the Agent may reasonably request, including, without limitation, a legal opinion regarding the enforceability of such Guaranty. ARTICLE VI NEGATIVE COVENANTS So long as any Note or any amount under any Credit Document shall remain unpaid, any Letter of Credit shall remain outstanding, or any Bank shall have any Commitment, the Borrower agrees, unless the Majority Banks otherwise consent in writing, to comply with the following covenants. Section 6.01. Liens, Etc. The Borrower shall not create, assume, incur, or suffer to exist, or permit any of its Subsidiaries to create, assume, incur, or suffer to exist, any Lien on or in respect of any of its Property whether now owned or hereafter acquired, or assign any right to receive income, except that the Borrower and its Subsidiaries may create, incur, assume, or suffer to exist: (a) Liens securing the Obligations; (b) Liens specified in the attached Schedule 6.01 on the Property owned by the Borrower and its Subsidiaries which is specified therein securing only the Debt disclosed to be secured by such Liens therein, and any Liens extending such existing Liens, if the amount of Debt secured thereby is not increased; (c) Liens securing purchase money indebtedness permitted under Section 6.02(d), provided that each such Lien encumbers only the property acquired in connection with the creation of any such purchase money indebtedness, and any receivables, contract rights and similar intangibles related thereto and proceeds thereof; (d) Liens for taxes, assessments, or other governmental charges or levies not yet due or that (provided foreclosure, distraint, sale, or other similar proceedings shall not have been initiated) are being contested in good faith by appropriate proceedings, and such reserve as may be required by GAAP shall have been made therefor; -57- 63 (e) Liens in favor of vendors, carriers, warehousemen, repairmen, mechanics, workmen, materialmen, construction, or similar Liens arising by operation of law in the ordinary course of business in respect of obligations that are not yet due or that are being contested in good faith by appropriate proceedings, provided such reserve as may be required by GAAP shall have been made therefor; (f) Liens to operators and non-operators under joint operating agreements arising in the ordinary course of the business of the Borrower or the relevant Subsidiary to secure amounts owing, which amounts are not yet due or are being contested in good faith by appropriate proceedings, if such reserve as may be required by GAAP shall have been made therefor; (g) easements, rights-of-way, restrictions, and other similar encumbrances, and minor defects in the chain of title that are customarily accepted in the oil and gas financing industry, none of which interfere with the ordinary conduct of the business of Borrower or the relevant Subsidiary or materially detract from the value or use of the Property to which they apply; (h) Liens of record under terms and provisions of the leases, unit agreements, assignments, and other transfer of title documents in the chain of title under which the Borrower or the relevant Subsidiary acquired the Property, which have been disclosed to the Agent before the date of this Agreement or before the date of acquisition; (i) Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of business (i) in connection with workers' compensation, unemployment insurance and other types of social security or retirement benefits, or (ii) to secure the performance of tenders, statutory obligations, bids, leases, performance and return-of-money bonds and other similar obligations, in each case not incurred or made in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of property; (j) any attachment Lien, judgment Lien or other similar Lien arising in connection with court proceedings; provided that (i) the execution or other enforcement of such Lien is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings diligently conducted and effective to prevent the forfeiture or sale of any property of the Borrower or any Subsidiary or any interference with the ordinary use thereof by the Borrower or Subsidiary and (ii) such reserve or other appropriate provision, if any, in the amounts and of the types as shall be required by GAAP (or in the absence of any such -58- 64 requirement, as shall be reasonably adequate for the purpose) shall have been made therefor on the books and records of the Borrower and its Subsidiaries; (k) any Lien existing on any property acquired by the Borrower or any Subsidiary at the time such property is so acquired (whether or not the Debt secured thereby shall have been assumed), provided that (i) no such Lien shall have been created or assumed in contemplation of such acquisition of property, and (ii) each such Lien shall extend solely to the item or items of property so acquired and, if required by the terms of the instrument originally creating such Lien, other property that is an improvement to or is acquired for specific use in connection with such acquired property; (l) deposits of cash to secure insurance in the ordinary course of business; (m) banker's liens arising by operation of law, but not liens securing borrowed money; and (n) UCC protective filings with respect to personal property leased by the Borrower or a Subsidiary in the ordinary course of business. Section 6.02. Debts, Guaranties, and Other Obligations. The Borrower shall not, and shall not permit any of its Subsidiaries to, create, assume, suffer to exist, or in any manner become or be liable in respect of, any Debt except: (a) Debt of the Borrower and its Subsidiaries under the Credit Documents; (b) Debt of the Borrower existing on the date of this Agreement and disclosed in the attached Schedule 6.02 and any extensions, rearrangements, and modifications thereof which do not increase the principal amount thereof or the interest rate charged thereon above a market rate of interest; (c) Debt for borrowed money owed by any wholly-owned Subsidiary of the Borrower to the Borrower; (d) Debt existing in connection with Property acquired by the Borrower after the date of this Agreement not to exceed $100,000.00 in outstanding principal amount (excluding gas balancing liabilities assumed in the acquisition of Oil and Gas Properties); and -59- 65 (e) Debt in the form of obligations for the deferred purchase price of property or services incurred in the ordinary course of business which are either (i) not yet due and payable, (ii) are being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP have been established, (iii) which has been outstanding for less than 90 days since the invoice date, or (iv) which has been outstanding for more than 90 days since the original invoice date, in an aggregate amount not to exceed $200,000.00; (f) Debt in connection with the Borrower's production swap hedging program permitted by Section 6.07; (g) Debt subordinated to the Obligations, on terms and in form and substance satisfactory to the Banks; and (h) contingent obligations incurred to satisfy bonding requirements imposed by any governmental regulatory agency or body not to exceed, in the aggregate, $100,000. Section 6.03. Agreements Restricting Liens and Distributions. The Borrower shall not, nor shall it permit any of its Subsidiaries to, enter into any agreement (other than a Credit Document) which (a) except with respect to specific Property encumbered to secure payment of Debt related to such Property, imposes restrictions upon the creation or assumption of any Lien upon its Properties, revenues or assets, whether now owned or hereafter acquired or (b) limits Restricted Payments to or any advance by any of the Borrower's Subsidiaries to the Borrower. Section 6.04. Merger or Consolidation; Asset Sales. The Borrower shall not, and shall not permit any of its Subsidiaries to: (a) merge or consolidate with or into any other Person, except that the Borrower may merge with any of its wholly-owned Subsidiaries and any of the Borrower's wholly-owned Subsidiaries may merge with another of the Borrower's wholly-owned Subsidiaries, provided that immediately after giving effect to any such proposed transaction no Default would exist and, in the case of any such merger to which the Borrower is a party, the Borrower is the surviving corporation or (b) sell, lease, transfer, or otherwise dispose of any of its Oil and Gas Property (other than to the Borrower or a Subsidiary), except: -60- 66 (i) transactions as to which the net proceeds of sale of Oil and Gas Properties (with such net proceeds being the aggregate proceeds thereof received or to be received by the Borrower or any Subsidiary of the Borrower, without deduction for any portion thereof to be received by the Borrower or such Subsidiary at a later date, but less the reasonable expenses thereof to the Borrower or such Subsidiary, and less current and deferred taxes attributable to such sale, including income taxes, if any, after allocation of appropriate tax basis pursuant to the Code, and less the amount necessary to satisfy any indebtedness of the Borrower or any Subsidiary of the Borrower, payment of which is secured by a lien on the assets or properties which are the subject of such transaction) resulting from such transactions do not exceed $500,000 singly or in the aggregate during any fiscal year; (ii) sales or transfers of hydrocarbons in the ordinary course of business; (iii) farmouts or other similar transactions, including any assignments made pursuant thereto, entered into in the ordinary course of business, which lead to or encourage the exploration or development of the Oil and Gas Properties, provided, that such transactions do not, individually or in the aggregate, reduce the Borrower's working interests in its proved reserves as indicated in the most recent reserve report in any significant respect; (iv) sales or transfers of Oil and Gas Properties made in arm's length transactions at not less than fair market price, the entire net proceeds of which are used to make prepayments on the Advances in accordance with the provisions of this Agreement; (v) sales of or dispositions of unproductive, surplus, obsolete or worn equipment or inventory; and (vi) abandonment of Oil and Gas Properties not capable of producing hydrocarbons in paying quantities. Section 6.05. Restricted Payments. The Borrower shall not, and shall not permit any of its Subsidiaries to, make or pay any Restricted Payment other than Restricted Payments from a Subsidiary of the Borrower to the Borrower. Section 6.06. Investments. The Borrower shall not, and shall not permit any of its Subsidiaries to, make or permit to exist any loans, advances, or capital contributions to, or make any investment in, or purchase or commit to purchase any stock or other securities or evidences of indebtedness of or interests in any Person, except: -61- 67 (a) Liquid Investments; (b) trade and customer accounts receivable which are for goods furnished or services rendered in the ordinary course of business and are payable in accordance with customary trade terms; (c) ordinary course of business contributions, loans, or advances to, or investments in, (i) a directly or indirectly wholly-owned Subsidiary of the Borrower or (ii) the Borrower; (d) oil and gas farm-ins, oil and gas development joint ventures and limited partnerships, and similar transactions, in each case in the ordinary course of business; and (e) investments not permitted by clauses (a) through (d) above in an aggregate outstanding amount not to exceed $500,000.00. Section 6.07. Limitation on Speculative Hedging. The Borrower shall not, and shall not permit any of its Subsidiaries to, purchase, assume, or hold a speculative position in any commodities market or futures market. Borrower (a) may establish and continue a production swap hedging program policy to reduce price risk on quantities less than its total expected production and may in connection therewith enter into Hedge Agreements regarding oil and gas prices and (b) may enter into Hedge Agreements for interest rates in the ordinary course of business. Section 6.08. Affiliate Transactions. Except as expressly permitted elsewhere in this Agreement or otherwise approved in writing by the Agent, and except as required or contemplated under the partnership agreements existing on the date of this Agreement between the Borrower and its Subsidiaries and their Affiliates as described in Schedule 6.08, the Borrower shall not, and shall not permit any of its Subsidiaries to, make, directly or indirectly: (a) any investment in any Affiliate (other than a wholly-owned Subsidiary of the Borrower); (b) any transfer, sale, lease, assignment, or other disposal of any assets to any such Affiliate or any purchase or acquisition of assets from any such Affiliate; or (c) any arrangement or other transaction directly or indirectly with or for the benefit of any such Affiliate (including without limitation, guaranties and assumptions of obligations of an Affiliate); provided that the Borrower and its Subsidiaries may enter into any arrangement or other transaction with any such -62- 68 Affiliate providing for the leasing of property, the rendering or receipt of services or the purchase or sale of inventory and other assets in the ordinary course of business if the monetary or business consideration arising therefrom would be substantially as advantageous to the Borrower and its Subsidiaries as the monetary or business consideration which it would obtain in a comparable arm's length transaction with a Person not such an Affiliate. Section 6.09. Compliance with ERISA. The Borrower shall not, and shall not permit any of its Subsidiaries to, (a) terminate, or permit any Affiliate to terminate, any Plan so as to result in any material (in the opinion of the Majority Banks) liability of the Borrower or any of its Affiliates to the PBGC or (b) permit to exist any occurrence of any Reportable Event, or any other event or condition, which presents a material (in the opinion of the Majority Banks) risk of such a termination by the PBGC of any Plan. Section 6.10. Maintenance of Ownership of Subsidiaries. Except as permitted by Section 6.04, the Borrower shall not, and shall not permit any of its Subsidiaries to, sell or otherwise dispose of any shares of capital stock of any of the Borrower's Subsidiaries or permit any Subsidiary to issue, sell, or otherwise dispose of any shares of its capital stock or the capital stock of any of the Borrower's Subsidiaries. Section 6.11 Sale-and-Leaseback. The Borrower shall not, nor shall it permit any of its Subsidiaries to, sell or transfer to a Person (other than the Borrower or a Subsidiary of the Borrower) any property, whether now owned or hereafter acquired, if at the time or thereafter the Borrower or a Subsidiary of the Borrower shall lease as lessee such property or any part thereof or other property which the Borrower or a Subsidiary of the Borrower intends to use for substantially the same purpose as the property sold or transferred except such transactions (a) incident to transactions permitted by Section 6.04(b) and (b) from which arise lease obligations and other rental obligations not exceeding $100,000.00 during any fiscal year of the Borrower. Section 6.12. Change of Business. The Borrower shall not, nor shall it permit any of its Subsidiaries to, materially change the character of their business as presently and normally conducted or materially engage in any type of business not related to their business as presently and normally conducted. -63- 69 Section 6.13. Current Ratio. (a) So long as the Majority Banks have allocated any value to the Revolving B Borrowing Base, the Borrower shall not permit the ratio of the Borrower's consolidated current assets to the Borrower's consolidated current liabilities to be less than 1.35 to 1.00 as of the last day of any fiscal quarter. (b) If the Majority Banks have not allocated any value to the Revolving B Borrowing Base, the Borrower shall not permit the ratio of the Borrower's consolidated current assets to the Borrower's consolidated current liabilities to be less than 1.00 to 1.00 as of the last day of any fiscal quarter. (c) On any date for the calculation of the Borrower's current ratio before the Termination Date, the Borrowing Bases on such date minus the aggregate outstanding Advances on such date shall be added to the Borrower's consolidated current assets. Section 6.14. Net Worth. The Borrower shall not permit the consolidated Net Worth of the Borrower, as of the last day of each fiscal quarter, to be less than the sum of (a) $24,000,000.00 plus (b) an amount equal to 50% of the cumulative consolidated quarterly Adjusted Net Income of the Borrower from June 30, 1997, through the end of such fiscal quarter, but excluding consolidated Adjusted Net Income for any fiscal quarter in which consolidated Adjusted Net Income is not positive plus (c) an amount equal to 75% of the net cash proceeds (after offering expenses) from any sale of stock or other equity interests in the Borrower since September 30, 1997. ARTICLE VII REMEDIES Section 7.01. Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" under any Credit Document: (a) Payment. The Borrower shall fail to pay when due (i) any interest or fees payable hereunder or under the Notes within five days after the same becomes due and payable or (ii) any principal, reimbursements, indemnifications, or other amounts (other than interest and fees described in clause (i)) payable hereunder or under any other Credit Document within one Business Day after the same becomes due and payable; -64- 70 (b) Representation and Warranties. Any representation or warranty made or deemed to be made (i) by the Borrower in this Agreement or in any other Credit Document or (ii) by any Subsidiary of the Borrower in any Credit Document shall prove to have been incorrect in any material respect when made or deemed to be made; (c) Covenant Breaches. (i) The Borrower shall (A) fail to perform or observe any covenant contained in Section 5.01, 5.02, 5.05, 5.07, or 5.08 or in Article VI of this Agreement, (B) fail to perform or observe any covenant contained in Section 5.06 if such failure shall remain unremedied for 15 days, or (C) fail to perform or observe any other term or covenant set forth in this Agreement or in any other Credit Document which is not covered by clause (i)(A) or (B) above or any other provision of this Section 7.01 if such failure shall remain unremedied for 30 days after the earlier of written notice of such default shall have been given to such Person by the Agent or any Bank or such Person's actual knowledge of such default or (ii) any Guarantor shall fail to perform or observe any covenant contained in its Guaranty; (d) Cross-Defaults. (i) The Borrower or any of its Subsidiaries shall fail to pay any principal of or premium or interest on its Debt which is outstanding in a principal amount of at least $100,000.00 individually or when aggregated with all such Debt of the Borrower or its Subsidiaries so in default (but excluding Debt evidenced by the Notes) when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; (ii) any other event shall occur or condition shall exist under any agreement or instrument relating to Debt which is outstanding in a principal amount of at least $100,000.00 individually or when aggregated with all such Debt of the Borrower and its Subsidiaries so in default, and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or (iii) any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; (e) Insolvency. The Borrower or any of its Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any of its Subsidiaries seeking to adjudicate it as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its -65- 71 debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against the Borrower or any such Subsidiary, either such proceeding shall remain undismissed for a period of 60 days or any of the actions sought in such proceeding shall occur; or the Borrower or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this paragraph (e); (f) Judgments. Any judgment or order for the payment of money in excess of $50,000.00 (net of insurance proceeds which have been paid on which the insurance carrier has assented to pay) shall be rendered against the Borrower or any of its Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) Termination Events. Any Termination Event with respect to a Plan shall have occurred, and, 30 days after notice thereof shall have been given to the Borrower by the Agent, (i) such Termination Event shall not have been corrected; (ii) the then present value of such Plan's vested benefits exceeds the then current value of assets accumulated in such Plan by more than the amount of $100,000.00 (or in the case of a Termination Event involving the withdrawal of a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), the withdrawing employer's proportionate share of such excess shall exceed such amount); and (iii) the Termination Event could reasonably be expected to result in liability of the Borrower in an aggregate amount exceeding $100,000.00; (h) Plan Withdrawals. The Borrower or any member of the Controlled Group as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in an annual amount exceeding $100,000.00; (i) Borrowing Base. Any failure to cure any Borrowing Base deficiency in accordance with Section 2.04, including any failure of the dedicated cash flow from the production of the Borrower's and its Subsidiaries' Oil and Gas Properties to cure the Borrowing Base deficiency within the time period specified by and in accordance with Section 2.04(b); -66- 72 (j) Guaranties. Any provision of any Guaranty shall for any reason cease to be valid and binding on the applicable Guarantor or the applicable Guarantor shall so state in writing; (k) Security Documents. Any Security Document shall at any time and for any reason cease to create the Lien on the property purported to be subject to such agreement in accordance with the terms of such agreement, or cease to be in full force and effect, or shall be contested by the Borrower or any Guarantor; or (l) Change of Control. (i) As a result of one or more transactions after the date of this Agreement, any "person" or "group" of persons shall have "beneficial ownership" of more than 25% of the outstanding common stock of the Borrower (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations thereunder), provided that the relationships among the officers and directors of the Borrower and among the respective shareholders of the Borrower on the date of this Agreement shall not be deemed to constitute all or any combination of them as a "group" or (ii) during any period of 12 consecutive months, beginning with and after the date of this Agreement, individuals who at the beginning of such 12-month period were directors of the Borrower shall cease for any reason to constitute a majority of the board of directors of the Borrower at any time during such period. Section 7.02. Optional Acceleration of Maturity. If any Event of Default (other than an Event of Default pursuant to paragraph (e) of Section 7.01) shall have occurred and be continuing, then, and in any such event, (a) the Agent (i) shall at the request, or may with the consent, of the Majority Banks, by notice to the Borrower, declare the obligation of each Bank and the Issuing Bank to make extensions of credit hereunder, including making Advances and issuing Letters of Credit, to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Banks, by notice to the Borrower, declare all principal, interest, fees, reimbursements, indemnifications, and all other amounts payable under this Agreement, the Notes, and the other Credit Documents to be forthwith due and payable, whereupon all such amounts shall become and be forthwith due and payable in full, without notice of intent to demand, demand, presentment for payment, notice of nonpayment, protest, notice of protest, grace, notice of dishonor, notice of intent to accelerate, notice of acceleration, and all other notices, all of which are hereby expressly waived by the Borrower; -67- 73 (b) the Borrower shall, on demand of the Agent at the request or with the consent of the Majority Banks, deposit with the Agent into the Cash Collateral Account an amount of cash equal to the Letter of Credit Exposure as security for the Obligations; and (c) the Agent shall at the request of, or may with the consent of, the Majority Banks proceed to enforce its rights and remedies under the Security Documents, the Guaranties, and any other Credit Document for the ratable benefit of the Banks by appropriate proceedings. Section 7.03. Automatic Acceleration of Maturity. If any Event of Default pursuant to paragraph (e) of Section 7.01 shall occur, (a) (i) the obligation of each Bank and the Issuing Bank to make extensions of credit hereunder, including making Advances and issuing Letters of Credit, shall terminate, and (ii) all principal, interest, fees, reimbursements, indemnifications, and all other amounts payable under this Agreement, the Notes, and the other Credit Documents shall become and be forthwith due and payable in full, without notice of intent to demand, demand, presentment for payment, notice of nonpayment, protest, notice of protest, grace, notice of dishonor, notice of intent to accelerate, notice of acceleration, and all other notices, all of which are hereby expressly waived by the Borrower; (b) the Borrower shall deposit with the Agent into the Cash Collateral Account an amount of cash equal to the outstanding Letter of Credit Exposure as security for the Obligations; and (c) the Agent shall at the request of, or may with the consent of, the Majority Banks proceed to enforce its rights and remedies under the Security Documents, the Guaranties, and any other Credit Document for the ratable benefit of the Banks by appropriate proceedings. Section 7.04. Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, the Agent and each Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, 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 the Agent or such Bank to or for the credit or the account of the Borrower against any and all of the obligations of -68- 74 the Borrower now or hereafter existing under this Agreement, the Notes held by the Agent or such Bank, and the other Credit Documents, irrespective of whether or not the Agent or such Bank shall have made any demand under this Agreement, such Notes, or such other Credit Documents, and although such obligations may be unmatured. The Agent and each Bank agree to promptly notify the Borrower after any such set-off and application made by the Agent or such Bank, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Agent and each Bank under this Section 7.04 are in addition to any other rights and remedies (including, without limitation, other rights of set-off) which the Agent or such Bank may have. Section 7.05. Actions Under Credit Documents. Following an Event of Default, the Agent shall at the request, or may with the consent, of the Majority Banks, take any and all actions permitted under the other Credit Documents, including enforcing it rights under the Security Documents and the Guaranties for the ratable benefit of the Banks. Section 7.06. Non-exclusivity of Remedies. No remedy conferred upon the Agent is intended to be exclusive of any other remedy, and each remedy shall be cumulative of all other remedies existing by contract, at law, in equity, by statute or otherwise. ARTICLE VIII THE AGENT AND THE ISSUING BANK Section 8.01. Authorization and Action. Each Bank hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof and of the other Credit Documents, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement or any other Credit Document (including, without limitation, enforcement or collection of the Notes), the 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 the Majority Banks, and such instructions shall be binding upon all Banks and all holders of Notes; provided, however, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement, any other Credit Document, or applicable law. -69- 75 Section 8.02. Agent's Reliance, Etc. Neither the Agent nor any of its directors, officers, agents, or employees shall be liable to any Bank for any action taken or omitted to be taken (INCLUDING THE AGENT'S OWN NEGLIGENCE) by it or them under or in connection with this Agreement or the other Credit Documents, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent: (a) may treat the payee of any Note as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Agent; (b) may consult with legal counsel (including counsel for the Borrower), independent public accountants, and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants, or experts; (c) makes no warranty or representation to any Bank and shall not be responsible to any Bank for any statements, warranties, or representations made in or in connection with this Agreement or the other Credit Documents; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any other Credit Document on the part of the Borrower or its Subsidiaries or to inspect the property (including the books and records) of the Borrower or its Subsidiaries; (e) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency, or value of this Agreement or any other Credit Document; and (f) shall incur no liability under or in respect of this Agreement or any other Credit Document by acting upon any notice, consent, certificate, or other instrument or writing (which may be by telecopier or telex) believed by it to be genuine and signed or sent by the proper party or parties. Section 8.03. The Agent and Its Affiliates. With respect to its Commitments, the Advances made by it and the Notes issued to it, the Agent shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent. The term "Bank" or "Banks" shall, unless otherwise expressly indicated, include the Agent in its individual capacity. The Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower or any of its Subsidiaries, and any Person who may do business with or own securities of the Borrower or any such Subsidiary, all as if the Agent were not an agent hereunder and without any duty to account therefor to the Banks. Section 8.04. Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank and based on the -70- 76 Financial Statements and the Interim Financial Statements and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it shall, independently and without reliance upon the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. Section 8.05. Indemnification. THE BANKS SEVERALLY AGREE TO INDEMNIFY THE AGENT AND THE ISSUING BANK AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS (TO THE EXTENT NOT REIMBURSED BY THE BORROWER), ACCORDING TO THEIR RESPECTIVE PRO RATA SHARES FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE AGENT AND THE ISSUING BANK IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTION TAKEN OR OMITTED BY THE AGENT OR THE ISSUING BANK UNDER THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT (INCLUDING THE AGENT'S AND THE ISSUING BANK'S OWN NEGLIGENCE), PROVIDED THAT NO BANK SHALL BE LIABLE FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS RESULTING FROM THE AGENT'S AND THE ISSUING BANK'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. WITHOUT LIMITATION OF THE FOREGOING, EACH BANK AGREES TO REIMBURSE THE AGENT PROMPTLY UPON DEMAND FOR ITS RATABLE SHARE OF ANY OUT-OF-POCKET EXPENSES (INCLUDING COUNSEL FEES) INCURRED BY THE AGENT IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT, OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS, OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT, TO THE EXTENT THAT THE AGENT IS NOT REIMBURSED FOR SUCH BY THE BORROWER. Section 8.06. Successor Agent and Issuing Bank. The Agent or the Issuing Bank may resign at any time by giving written notice thereof to the Banks and the -71- 77 Borrower and may be removed at any time with or without cause by the Majority Banks upon receipt of written notice from the Majority Banks to such effect. Upon receipt of notice of any such resignation or removal, the Majority Banks shall have the right to appoint a successor Agent or Issuing Bank only with the consent of the Borrower, which consent shall not be unreasonably withheld. If no successor Agent or Issuing Bank shall have been so appointed by the Majority Banks with the consent of the Borrower, and shall have accepted such appointment, within 30 days after the retiring Agent's or Issuing Bank's giving of notice of resignation or the Majority Banks' removal of the retiring Agent or Issuing Bank, then the retiring Agent or Issuing Bank may, on behalf of the Banks and the Borrower, appoint a successor Agent or Issuing Bank, which shall be, in the case of a successor agent, a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000.00 and, in the case of the Issuing Bank, a Bank. Upon the acceptance of any appointment as Agent or Issuing Bank by a successor Agent or Issuing Bank, such successor Agent or Issuing Bank shall thereupon succeed to and become vested with all the rights, powers, privileges, and duties of the retiring Agent or Issuing Bank, and the retiring Agent or Issuing Bank shall be discharged from its duties and obligations under this Agreement and the other Credit Documents, except that the retiring Issuing Bank shall remain the Issuing Bank with respect to any Letters of Credit outstanding on the effective date of its resignation or removal and the provisions affecting the Issuing Bank with respect to such Letters of Credit shall inure to the benefit of the retiring Issuing Bank until the termination of all such Letters of Credit. After any retiring Agent's or Issuing Bank's resignation or removal hereunder as Agent or Issuing Bank, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent or Issuing Bank under this Agreement and the other Credit Documents. -72- 78 ARTICLE IX MISCELLANEOUS Section 9.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement, the Notes, or any other Credit Document, nor consent to any departure by the Borrower or any Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Banks and the Borrower, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver, or consent shall, unless in writing and signed by all the Banks, do any of the following: (a) waive any of the conditions specified in Section 3.01 or 3.02, (b) increase the Revolving A Commitment or the Revolving B Commitment of the Banks, (c) reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder or under any other Credit Document, (d) postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder or extend the Termination Date or the Maturity Date, (e) change the percentage of Banks which shall be required for the Banks or any of them to take any action hereunder or under any other Credit Document, (f) amend Section 2.10 or this Section 9.01, (g) amend the definition of "Majority Banks," (h) release any Guarantor from its obligations under any Guaranty, or (i) release any collateral securing the Obligations; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Agent or the Issuing Bank in addition to the Banks required above to take such action, affect the rights or duties of the Agent or the Issuing Bank, as the case may be, under this Agreement or any other Credit Document. Section 9.02. Notices, Etc. All notices and other communications shall be in writing (including, without limitation, telecopy or telex) and mailed by certified mail, return receipt requested, telecopied, telexed, hand delivered, or delivered by a nationally recognized overnight courier, at the address for the appropriate party specified in Schedule 1 or at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when so mailed, telecopied, telexed, or hand delivered or delivered by a nationally recognized overnight courier, be effective when received if mailed, when telecopy transmission is completed, when confirmed by telex answer-back, or when delivered by such messenger or courier, respectively, except that notices and communications to the Agent pursuant to Article II or VIII shall not be effective until received by the Agent. -73- 79 Section 9.03. No Waiver; Remedies. No failure on the part of any Bank, the Agent, or the Issuing Bank to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 9.04. Costs and Expenses. The Borrower agrees to pay within 30 days after written demand (a) all reasonable out-of-pocket costs and expenses of the Agent in connection with the preparation, execution, delivery, administration, modification, and amendment of this Agreement, the Notes, the Guaranties, and the other Credit Documents including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Agent with respect to advising the Agent as to its rights and responsibilities under this Agreement, and (b) all out-of-pocket costs and expenses, if any, of the Agent, the Issuing Bank, and each Bank (including, without limitation, reasonable counsel fees and expenses of the Agent, the Issuing Bank, and each Bank) in connection with the enforcement (whether through negotiations, legal proceedings, or otherwise) of this Agreement, the Notes, the Guaranties, and the other Credit Documents. Section 9.05. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Agent, and when the Agent shall have, as to each Bank, either received a counterpart hereof executed by such Bank or been notified by such Bank that such Bank has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agent, the Issuing Bank, and each Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights or delegate its duties under this Agreement or any interest in this Agreement without the prior written consent of each Bank. Section 9.06. Bank Assignments and Participations. (a) Assignments. Any Bank may assign to one or more Eligible Assignees all or any portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitments, the Advances owing to it, the Notes held by it, and the participation interest in the Letter of Credit Obligations held by it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all of such Bank's rights and obligations under this Agreement, (ii) the amount of the Commitments and Advances of such Bank being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall be, if to an entity other than a Bank, -74- 80 not less than $5,000,000.00 and shall be an integral multiple of $1,000,000.00, (iii) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with the Notes subject to such assignment, and (iv) each Eligible Assignee (other than the Eligible Assignee of the Agent) shall pay to the Agent a $2,500 administrative fee. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least three Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto for all purposes and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and (B) such Bank thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of such Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). (b) Term of Assignments. By executing and delivering an Assignment and Acceptance, the Bank thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency of value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the Guarantors or the performance or observance by the Borrower or the Guarantors of any of their obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.05 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such Bank, or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vi) such -75- 81 assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Bank. (c) The Register. The Agent shall maintain at its address referred to in Section 9.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the Commitments of, and principal amount of the Advances owing to, each Bank from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Agent, the Issuing Bank, and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Bank at any reasonable time and from time to time upon reasonable prior notice. (d) Procedures. Upon its receipt of an Assignment and Acceptance executed by a Bank and an Eligible Assignee, together with the Notes subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of the attached Exhibit A, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt notice thereof to the Borrower. Within five Business Days after its receipt of such notice, the Borrower shall execute and deliver to the Agent in exchange for the surrendered Notes (A) a new Revolving A Note to the order of such Eligible Assignee in an amount equal to the Revolving A Commitment assumed by it pursuant to such Assignment and Acceptance and a new Revolving B Note to the order of such Eligible Assignee in an amount equal to the outstanding principal amount of the Revolving B Commitment assigned to such Eligible Assignee and (B) if such Bank has retained any Revolving A Commitment hereunder, a new Revolving A Note to the order of such Bank in an amount equal to the Revolving A Commitment retained by it hereunder and a new Revolving B Note to the order of such Bank in an amount equal to the outstanding principal amount of the Revolving B Commitment retained by such Bank. Such new Notes shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the attached Exhibit D-1 and D-2, respectively. (e) Participations. Each Bank may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitments, the Advances owing to it, its participation interest in the Letter of Credit Obligations, and the Notes held by it); provided, however, that (i) such Bank's obligations under this -76- 82 Agreement (including, without limitation, its Commitments to the Borrower hereunder) shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of any such Notes for all purposes of this Agreement, (iv) the Borrower, the Agent, and the Issuing Bank and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement, and (v) such Bank shall not require the participant's consent to any matter under this Agreement or any other Credit Document, except for change in the principal amount of the Notes, reductions in fees or interest, releasing any collateral, or extending the Termination Date or the Maturity Date. The Bank selling any such participation shall give notice thereof to the Borrower, identifying the participant and the amount of such participation. The Borrower hereby agrees that participants shall have the same rights under Sections 2.11, 2.12, 2.13(c), and 9.07 as a Bank to the extent of their respective participations provided that no participant shall be entitled to recover under the aforedescribed provisions an amount in excess of the proportionate share which such participant holds of the original aggregate principal amount hereunder to which the assigning Bank would otherwise be entitled. (f) Disclosure. Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.06, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Bank by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any confidential information relating to the Borrower received by it from such Bank and such assignee or participant shall agree to be subject to the provisions of Section 9.13 hereof. Section 9.07. Indemnification. THE BORROWER SHALL INDEMNIFY THE AGENT, THE BANKS, THE ISSUING BANK, AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS FROM, AND DISCHARGE, RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, OR DAMAGES WHICH MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THEM IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTION TAKEN OR OMITTED BY THEM UNDER THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT (INCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSE INCURRED BY REASON OF THE PERSON BEING -77- 83 INDEMNIFIED'S OWN NEGLIGENCE), BUT EXCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSES INCURRED BY REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PERSON TO BE INDEMNIFIED. Section 9.08. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 9.09. Survival of Representations, Etc. All representations and warranties contained in this Agreement or made in writing by or on behalf of the Borrower in connection herewith shall survive the execution and delivery of this Agreement and the Credit Documents, the making of the Advances and any investigation made by or on behalf of the Banks, none of which investigations shall diminish any Bank's right to rely on such representations and warranties. All obligations of the Borrower provided for in Sections 2.11, 2.12, 2.13(c), 9.04, and 9.07 and all of the obligations of the Banks in Section 8.05 shall survive any termination of this Agreement and repayment in full of the Obligations. Section 9.10. Severability. In case one or more provisions of this Agreement or the other Credit Documents shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality, and enforceability of the remaining provisions contained herein or therein shall not be affected or impaired thereby. Section 9.11. Business Loans. The Borrower warrants and represents that the Loans evidenced by the Notes are and shall be for business, commercial, investment, or other similar purposes and not primarily for personal, family, household, or agricultural use, as such terms are used in Chapter One ("Chapter One") of the Texas Credit Code. At all such times, if any, as Chapter One shall establish a Maximum Rate, the Maximum Rate shall be the "indicated rate ceiling" (as such term is defined in Chapter One) from time to time in effect. Section 9.12. Governing Law. This Agreement, the Notes and the other Credit Documents shall be governed by, and construed and enforced in accordance with, the laws of the State of Texas. Without limiting the intent of the parties set forth above, (a) Chapter 15, Subtitle 3, Title 79, of the Revised Civil Statutes of Texas, 1925, as amended (relating to revolving loans and revolving tri-party accounts), shall not apply to this Agreement, the Notes, or the transactions contemplated hereby and (b) to the -78- 84 extent that any Bank may be subject to Texas law limiting the amount of interest payable for its account, such Bank shall utilize the indicated (weekly) rate ceiling from time to time in effect as provided in Article 5069-1.04 of the Revised Civil Statutes of Texas, as amended. Each Letter of Credit shall be governed by the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce Publication No. 500 (1993 version). Section 9.13. Confidentiality. The Agent and the Banks shall use their best efforts to keep confidential any proprietary information of the Borrower or any Subsidiary identified in writing by the Borrower as being proprietary and confidential; provided that the Agent or any Bank may disclose any such information (a) to enable it to comply with any governmental requirement applicable to it, (b) in connection with the defense of any litigation or other proceeding brought against it arising out of the transactions contemplated by this Agreement and the other Credit Documents, (c) in connection with the enforcement of the rights and remedies of the Agent and the Banks under any Credit Document, (d) to its legal counsel and independent certified public accountants, and (e) as set forth in Section 9.06(f). THE BORROWER, THE BANKS, THE ISSUING BANK AND THE AGENT HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN RESPECT OF ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER CREDIT DOCUMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY, AND IRREVOCABLY SUBMIT TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF HARRIS COUNTY, TEXAS, AND THE SOUTHERN DISTRICT OF TEXAS FOR THE RESOLUTION OF ANY DISPUTES UNDER THIS AGREEMENT AND THE CREDIT DOCUMENTS, AND HEREBY IRREVOCABLY WAIVE ANY CLAIM THAT SUCH JURISDICTION IS IMPRACTICAL OR INCONVENIENT. THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS, AS DEFINED IN THIS AGREEMENT, REPRESENT THE FINAL AGREEMENT AMONG 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 AMONG THE PARTIES. [Remainder of page intentionally left blank] -79- 85 EXECUTED as of the date first above written. BORROWER: 3DX TECHNOLOGIES INC. By: ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- AGENT: NATIONSBANK OF TEXAS, N.A. By: ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- BANK: NATIONSBANK OF TEXAS, N.A. REVOLVING A COMMITMENT By: ------------------------------------------ $25,000,000.00 Name: ---------------------------------------- REVOLVING B COMMITMENT Title: $25,000,000.00 TOTAL REVOLVING A COMMITMENTS $25,000,000.00 TOTAL REVOLVING B COMMITMENTS $25,000,000.00
-80- EX-11.1 3 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 CALCULATION OF NET LOSS PER COMMON SHARE
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Net Loss .............................. $(11,036,144) $ (2,735,364) $ (2,488,375) $ (385,013) $ (615,079) Preferred B dividend .................. -- -- (783,700) (421,696) (52,790) Preferred B accretion ................. -- (43,464) (43,464) (30,367) (14,353) Preferred B redemption premium ........ -- (365,810) -- -- -- Preferred C dividend .................. -- (520,393) (275,256) -- -- Preferred C accretion ................. -- (11,380) (4,944) -- -- ------------ ------------ ------------ ------------ ------------ Net loss attributable to common stock .............................. $(11,036,144) $ (3,676,411) $ (3,595,739) $ (837,076) $ (682,222) ============ ============ ============ ============ ============ Avg. weighted shares .................. 7,193,837 3,042,466 2,987,908 2,373,258 993,411 ============ ============ ============ ============ ============ Basic and diluted net loss per common share as reported .................. $ (1.53) $ (1.16) $ (1.14) $ (0.33) $ (0.59) Retroactive effect of change in accounting principle ............... -- (0.05) (0.06) (0.02) (0.10) ------------ ------------ ------------ ------------ ------------ Basic and diluted net loss per common share .............................. $ (1.53) $ (1.21) $ (1.20) $ (0.35) $ (0.69) ============ ============ ============ ============ ============
CALCULATION OF ACTUAL WEIGHTED AVERAGE SHARES OUTSTANDING
ANNUAL ACTUAL WEIGHTED ISSUE DATE SHARES AVERAGE ---------- ------ -------- Inception............................... 1/6/93 768,117 768,117 Common Stock Sales...................... 11/9/93 1,464,413 225,294 ---------- ----------- 1993 Ending Balance................. 12/31/93 2,232,530 993,411 ========= =========== 1994 Beginning Balance.................. 2,232,530 2,232,530 Common Stock Sales...................... 10/24/94 755,378 140,728 --------- ----------- 1994 Ending Balance................. 12/31/94 2,987,908 2,373,258 ========= ========== 1995 Beginning Balance.................. 2,987,908 2,987,908 Common Stock Sales...................... - - --------- --------- 1995 Ending Balance................. 12/31/95 2,987,908 2,987,908 ========= ========= 1996 Beginning Balance.................. 2,987,908 2,987,908 Option Exercise......................... 5/15/96 3,124 1,960 Conversion of Series C.................. 12/26/96 1,376,379 18,803 Conversion of Series C Warrants......... 12/26/96 73,766 1,008 Shares issued in IPO.................... 12/26/96 2,400,000 32,787 --------- --------- 1996 Ending Balance................. 12/31/96 6,841,177 3,042,466 ========= ========= 1996 Beginning Balance.................. 6,841,177 6,841,177 Shares issued for over-allotment........ 1/25/97 375,000 350,342 Option Exercise......................... 6/27/97 2,000 1,030 Option Exercise......................... 10/13/97 2,585 567 Option Exercise......................... 11/6/97 4,700 721 ---------- ---------- 1997 Ending Balance................. 12/31/97 7,225,462 7,193,837 ========== ==========
EX-23.1 4 CONSENT OF ARTHUR ANDERSEN & CO. LLP 1 EXHIBIT 23.1 (LETTERHEAD OF ARTHUR ANDERSEN LLP) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Form 10-K, into the Company's previously filed Registration Statement on Form S-8 (File No. 333-30187). ARTHUR ANDERSEN LLP Houston, Texas March 27, 1998 EX-23.2 5 CONSENT OF RYDER SCOTT COMPANY 1 EXHIBIT 23.2 (LETTERHEAD OF RYDER SCOTT COMPANY) CONSENT OF INDEPENDENT PETROLEUM ENGINEERS As independent petroleum engineers, we hereby consent to (a) the use of our name and references to our firm in the Annual Report on Form 10-K of 3DX Technologies Inc. for the year ended December 31, 1997 and (b) to the inclusion of the estimate of proved reserves and present value of the future net revenues included in our report dated February 9, 1998 in such Annual Report. We further consent to the incorporation by reference of the information set forth above which is included in such Annual Report into the Registration Statement on Form S-8, filed June 27, 1997, (No. 333-30187) pertaining to the stock option plan of 3DX Technologies Inc. RYDER SCOTT COMPANY PETROLEUM ENGINEERS Houston, Texas March 27, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1,568,091 0 1,181,083 0 0 2,859,855 35,499,590 17,127,846 21,309,640 3,491,752 0 0 0 72,255 17,745,633 21,309,640 3,045,447 3,630,601 436,243 14,666,745 0 0 0 (11,036,144) 0 (11,036,144) 0 0 0 (11,036,144) (1.53) (1.53)
EX-27.1 7 RESTATED FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 DEC-31-1996 17,521,745 0 554,210 0 0 18,241,050 13,278,627 4,702,296 26,827,189 2,253,565 0 0 0 68,412 24,505,212 26,827,189 851,827 1,099,787 107,676 3,835,151 0 0 0 (2,735,364) 0 (2,735,364) 0 0 0 (2,735,364) (1.21) (1.21)
EX-27.2 8 RESTATED FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1995 DEC-31-1995 5,704,014 1,595,167 113,704 0 0 7,498,671 5,278,671 2,343,578 10,450,504 233,908 0 14,181,659 0 29,879 (4,270,198) 10,450,504 274,511 510,697 78,533 2,999,072 0 0 0 (2,488,375) 0 (2,488,375) 0 0 0 (2,488,375) (1.20) (1.20)
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