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EXHIBIT 10.1
TERM LOAN AND SECURITY MASTER AGREEMENT
Between
VENUS DEVELOPMENT, INC.
and
STRATUM GROUP ENERGY PARTNERS, L.P.
_______________________________
Dated as of
October 8, 1996
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TABLE OF CONTENTS
Page
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ARTICLE I Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II The Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE III Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE IV Inducing Representations . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE V Financial Statements and Information; Certain Notices to Lender . . . 27
ARTICLE VI Acquisition Agreements . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE VII Special Provisions Relating to Equipment . . . . . . . . . . . . . . 31
ARTICLE VIII Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE IX Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE X Further Rights of Lender . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE XI Closing; Conditions Precedent to Closing . . . . . . . . . . . . . . 44
ARTICLE XII Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE XIII Remedies of Lender . . . . . . . . . . . . . . . . . . . . . . . . . 49
ARTICLE XIV General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . 51
ANNEX
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Annex A List of Closing Documents
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EXHIBITS
Exhibit 1. Descriptions of the Properties; Agreements Constituting
Collateral; Permitted Encumbrances; Wells
Exhibit 2. Inventory of Equipment
Exhibit 3. Lender's Interest Conveyance
Exhibit 4. List of Operating Agreements and Operators
Exhibit 5. Form of Property Operating Statement
Exhibit 6. Acquisition Agreements
Exhibit 7. Term Note
Exhibit 8. Notice of Security Interest to Borrower's Account Debtors,
Purchasers of Hydrocarbons, Operators and other Obligors
Exhibit 9. Schedule of Shareholders and Share Ownership
Exhibit 10. Opinion of Counsel to Borrower to be delivered at the Closing
Exhibit 11. Financial Statements of Borrower
Exhibit 12. Development Program
Exhibit 13. Reserve Report
Exhibit 14. Example of Market Price Calculations
Exhibit 15. Form of Pledge and Security Agreement
Exhibit 16. Forms of Purchase and Sale Option Agreements
Exhibit 17. [Reserved]
Exhibit 18. Form of Swap Agreement
Exhibit 19. Form of Drawdown Request
Exhibit 20. Contract Operating Agreement
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Exhibit 21. Equity Conversion Agreement
Exhibit 22. Lease Operating Expenses
Exhibit 23. Warrant Issuance Agreement
Exhibit 24. List of Joint Venture Partners
Exhibit 25. List of Calls on Production
Exhibit 26. List of Wells with Depth Limits
Exhibit 27. Form of Deed of Trust, Mortgage, Assignment of Production,
Security Agreement, Financing Statement and Fixture Filing
SCHEDULE
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THIS TERM LOAN AND SECURITY MASTER AGREEMENT (the "Master
Agreement"), which includes the schedule (the "Schedule") attached hereto, made
this 8th day of October, 1996, between Venus Development,Inc., a Texas
corporation, having its principal executive office and place of business at 700
N. St. Mary's Street, San Antonio, Texas 78205-3512 ("Borrower"), and STRATUM
GROUP ENERGY PARTNERS, L.P., a Delaware limited partnership, having an office
at 650 Fifth Avenue, 24th Floor, New York, New York 10019 ("Lender").
ARTICLE 1.
Definitions
1. As used herein and in the Schedule, the following terms shall have the
following meanings and, as the context requires, the singular shall
include the plural:
"AFE" shall have the meaning assigned to such term in Section 5.10 of this
Master Agreement.
"Acquisition Agreements" shall mean the agreements listed in Exhibit 6.
"Additional Loan" shall have the meaning assigned to such term in Section
14.3 of this Master Agreement.
"Affiliate" shall mean as to any Person (as hereinafter defined), any
other Person who directly or indirectly controls, is under common control with,
or is controlled by such Person. As used in this definition, "control"
(including, with its correlative meanings, "controlled by" and "under common
control with") shall mean possession, directly or indirectly, of power to
direct or cause the direction of management or policies (whether through
ownership of securities or partnership or other ownership interests, by
contract or otherwise), provided that, in any event (i) any Person who owns
directly or indirectly 10% or more of the securities having ordinary voting
power for the election of directors or other governing body of a corporation or
10% or more of the partnership or other ownership interests of any other Person
(other than as a limited partner of such other Person) will be deemed to
control such corporation or other Person, and (ii) any subsidiary of Borrower
shall be deemed to be an Affiliate of Borrower.
"AMI" shall mean an Area of Mutual Interest, the boundaries of which shall
be defined in the Schedule.
"Basic Documents" shall mean Leases (as hereinafter defined); Operating
Agreements (as hereinafter defined); Acquisition Agreements; Hydrocarbon
purchase, sales, processing, gathering, treatment, compression and
transportation agreements; farmout or farm-in
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agreements; unitization agreements; joint venture, exploration, limited or
general partnership, dry hole, bottom hole, acreage contribution, purchase and
acquisition agreements; area of mutual interest agreements; salt water disposal
agreements, servicing contracts; easement and/or pooling agreements; surface
leases, permits, licenses, servitudes or other interests appertaining to the
Properties and all other executory contracts and agreements relating to the
Properties.
"Basis Differential" shall mean the difference between the average NYMEX
prices for a given period of time as specified in the Schedule preceding the
effective date of the Reserve Report and the average price received at the
wellhead for the same period preceding the effective date.
"Borrower" shall have the meaning assigned to such term in the first
paragraph of this Master Agreement.
"Borrower's Parent" shall mean the company or Persons specified in the
Schedule as owning or controlling Borrower.
"Business Day" shall mean any day that is not a Saturday or Sunday and
that is not a day on which banking institutions in The City of New York
generally are authorized or obligated by law or executive order to close.
"Cash Balance Account" shall have the meaning assigned to such term in
Section 2.9 of this Master Agreement.
"Cash Flow Sharing Percentage" shall mean the percentage or percentages
outlined in the Schedule.
"CERCLA" shall mean the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended.
"Closing" shall mean the date of execution and delivery by Borrower and/or
other applicable parties to Lender of this Master Agreement, the Term Notes (as
hereinafter defined), the other Security Documents (as hereinafter defined) and
other related documents pursuant to Section 11.2 hereof.
"Closing Date" shall have the meaning assigned to such term in Section
11.1 of this Master Agreement.
"Collateral" shall mean (i) all of the right, title and interest owned or
acquired by Borrower, of every kind, nature and description, in any or all of
the Properties, and all of Borrower's present and future movable and immovable,
corporeal and incorporeal, real and personal property relating thereto of every
kind, nature and description and wherever located,
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including, without limitation, the Hydrocarbons (as hereinafter defined),
Equipment (as hereinafter defined), all of Borrower's goods, accounts, contract
rights, money, deposit accounts, claims, receivables, inventory, real property
and all appurtenances thereto, licenses, permits, Leases, insurance proceeds,
and other general intangibles (including tax refunds and any claims for tax
refunds), all books and records with respect to all of the foregoing, including
any seismic or geological data owned or controlled by Borrower or Borrower's
Parent to the extent Borrower or Borrower's Parent has the rights to such data,
the interests of the Borrower in the Acquisition Agreements, transportation,
processing agreements, delivery agreements, and other similar agreements listed
in Exhibit 1 annexed hereto and all products and proceeds of all of the
foregoing,(ii) all of the outstanding ownership interests in Borrower held by
the shareholders of Borrower which shall be held in escrow by the Lender
pursuant to the Pledge Agreement attached hereto as Exhibit 15; and (iii) any
additional items listed as such in the Schedule.
"Collateral Coverage Ratio" shall equal (at any particular time of
determination) the ratio of (a) the Collateral Value to (b) the outstanding
principal and accrued and unpaid interest on the Term Loan(s)(s).
"Collateral Value" shall mean, when calculated for the Properties, the sum
of (a) + (b) + (c); where:
(a) the present value (calculated using the "discount rate" of 10% per annum)
of the future net operating cash flow from proved developed producing reserves
with the annual quantity of those reserves risked (reduced) by a percentage set
forth in the Schedule, provided however, those proved developed producing
reserves that have been producing for less than six months shall be risked
(reduced) by a different percentage as set forth in the Schedule;
(b) the present value (calculated using the "discount rate" of 10% per annum)
of the future net operating cash flow from proved developed non-producing
reserves with the annual quantity of those reserves risked (reduced) by a
percentage set forth in the Schedule; and
(c) the present value (calculated using the "discount rate" of 10% per annum)
of the future net operating cash flow from proved undeveloped reserves with the
annual quantity of those reserves risked (reduced) by a percentage set forth in
the Schedule. Proved developed non-producing and proved undeveloped reserves
shall contribute no more to the Collateral Value than the percentage specified
in the Schedule.
The above calculation shall be based on the following assumptions:
(i) Reserves shall be adjusted for cumulative production since the
effective date of the most recent Reserve Report or the most recent
determination of the Collateral Value, whichever is applicable.
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(ii) (A) For all Crude Oil and Natural Gas to be sold by Borrower on
a fixed price basis pursuant to any bona fide contract or with respect to which
the price has been hedged pursuant to any New York Mercantile Exchange contract
or bona fide price swap agreement or arrangement, including any Price
Protection Agreement (such contract, agreement or hedging arrangement
acceptable to Lender), the price applied to such reserves shall be such fixed
price (as adjusted for appropriate quality, transportation and location
differentials) for such volumes as indicated in such contract, agreement or
arrangement.
(B) The price applied to all Crude Oil and Natural Gas which is
not subject to any hedging agreement shall be the Market Price (as defined
below) less the Basis Differential. Market Price for each year in which NYMEX
future prices are quoted for every month of such years shall mean the price
calculated by taking the average of the NYMEX settlement prices on the Pricing
Date for each year or partial year (provided that if the first year of the
Reserve Report is a partial year, the NYMEX prices for months which are not
included in the Reserve Report will not be included in the average price
calculation for that year). For years in which NYMEX future prices are quoted
for some, but not all, of the months in the year, the Market Price shall be
calculated by first calculating interpolated prices for the months not quoted
and then averaging the NYMEX prices with those interpolated prices. For each
year in which NYMEX future prices are not quoted for any month, the Market
Price shall be calculated by taking the average of NYMEX settlement prices on
the Pricing Date for the last year for which NYMEX prices are quoted. An
example of Market Price calculations is attached as Exhibit 14.
(iii) Reserves shall be adjusted to reflect revisions to volume
estimates of reserves since the effective date of the last Reserve Report.
(iv) Projected operating expenses shall be adjusted to reflect (i)
actual expense levels incurred since the effective date of the last Reserve
Report and (ii) projected increases or decreases in anticipated operating
expense levels. Operating expenses will not be risked (reduced) when
calculating Collateral Value.
(v) Although the Reserve Report may include probable and possible
reserves, in calculating the Collateral Value, no value shall be given to such
probable and possible reserves, acreage or production equipment.
(vi) Collateral Value shall be calculated net of Lender's Interest.
"Contract Operating Agreement" shall have the meaning assigned to such
term in the Schedule.
"COPAS" shall mean The Accounting Procedure Joint Operations Recommended
by the Council of Petroleum Accountants.
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"Crude Oil" shall mean all crude oil and/or condensate.
"Crude Oil Purchase and Sale Option Agreement" shall mean the agreement
dated as of the Closing Date pursuant to which Borrower has granted to Lender
as Purchaser the right to purchase from Borrower Crude Oil produced from or
allocable to certain Properties which Borrower has the right to sell,
substantially in the form annexed hereto as Exhibit 16.
"Cure Period" shall have the meaning assigned to such term in Section
12.1.
"Debtor Relief Laws" shall mean all applicable liquidation,
conservatorship, bankruptcy, insolvency, rearrangement, moratorium,
reorganization, or similar debtor relief laws affecting the rights of creditors
generally from time to time in effect.
"Default" shall mean an event which with the lapse of an applicable Cure
Period would become an Event of Default.
"Default Rate" shall have the meaning assigned to such term in Section
2.5(b) of this Master Agreement.
"Defensible Title" shall mean:
(a) with respect to each Property, such title that (i) entitles Borrower
to receive (free and clear of all royalties, overriding royalties or net
profits interests, except the Lender's Interest, or other burdens on or
measured by production of Hydrocarbons and associated gases) not less than the
Net Revenue Interest, as indicated on Exhibit 1 annexed hereto, of Borrower in
all Hydrocarbons produced, saved and marketed from such Property for the
productive life of such Property, free and clear of any security interest,
lien, encumbrance, mortgage, claim, security agreement or other charge, other
than the Permitted Encumbrances and any liens, mortgages and security interests
and property interests which are in favor of Lender and its Affiliates or are
permitted hereunder; and (ii) obligates Borrower to bear costs and expenses
relating to the maintenance, development and operation of such Property in an
amount not greater than the Working Interest of Borrower for the productive
life of such Property, as indicated on Exhibit 1 annexed hereto; and
(b) with respect to any Royalty Interests, net profits interests and/or
production interests, to the extent such rights are or have been acquired by
Borrower, good and valid title to such interests.
"Development Costs" shall mean actual costs incurred by, or on behalf of,
Borrower in connection with the development of the Properties, including
without limitation, costs of drilling, testing, re-entering, re-working,
injection, completion, equipping, plugging, abandonment and restoration in
accordance with the Development Program outlined in the Exhibit 12 hereto.
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"Development Program" shall mean the projected program for the development
of the Properties as outlined in Exhibit 12 annexed hereto.
"Drawdown Fee" shall mean a fee payable to Lender by Borrower upon each
drawdown in an amount set forth in the Schedule.
"Engineers" shall mean any of the engineering firms listed in the Schedule
or such other independent petroleum engineering firms acceptable to Lender.
"Environmental and Safety Regulations" shall mean all applicable federal,
state or local laws, ordinances, codes, rules, orders and regulations with
respect to any environmental, pollution, toxic or hazardous waste or health and
safety law, including, without limitation, those promulgated by the EPA, the
Federal Energy Regulatory Commission, the Department of Energy, the
Occupational Safety and Health Administration, the Department of the Interior,
MMS (as hereinafter defined), or any other federal or state regulatory agency,
or any of their predecessor or successor agencies.
"EPA" shall mean the United States Environmental Protection Agency, or any
successor thereto.
"Equipment" shall mean all surface or subsurface machinery, goods,
equipment, fixtures, inventory, facilities, supplies or other personal or
movable property of whatsoever kind or nature (excluding property taken to the
premises for temporary uses) described in Exhibit 2 annexed hereto now or
hereafter located on or under any of the lands attributable to the Properties
which are used for the production, gathering, treatment, processing, storage or
transportation of Hydrocarbons (together with all accessions, additions and
attachments to any thereof), including, without limitation, all oil wells, gas
wells, water wells, injection wells, casing, tubing, tubular goods, rods,
pumping units and engines, christmas trees, platforms, derricks, separators,
compressors, gun barrels, flow lines, tanks, gas systems (for gathering,
treating and compression), pipelines (including gathering lines, laterals and
trunklines), chemicals, solutions, water systems (for treating, disposal and
injection), power plants, poles, lines, transformers, starters and controllers,
machine shops, tools, storage yards and equipment stored therein, telegraph,
telephone and other communication systems, loading docks, loading racks,
shipping facilities, platforms, well equipment, meters, motors, pumps, tankage,
regulators, furniture, fixtures, automotive equipment, forklifts, storage and
handling equipment, together with all additions and accessions thereto, all
replacements and all accessories and parts therefor, all manuals, blueprints,
documentation and processes, warranties and records in connection therewith,
all rights against suppliers, warrantors, manufacturers, sellers or others in
connection therewith, and together with all substitutes for any of the
foregoing.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time.
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"Events of Default" shall have the meaning set forth in Article XII
hereof.
"Fixed Price Obligations" shall mean (i) the schedule of Notional Amounts
as specified in the Swap Agreement and/or (ii) the Minimum Delivery Amounts as
outlined in the Fixed Price Purchase and Sale Agreement and/or (iii) the
Minimum Delivery Amounts or Notional Amounts in any other price protection
agreement.
"Fixed Price Purchase and Sale Agreement" shall mean an agreement pursuant
to which Borrower grants to Lender or an affiliate as Purchaser, the right to
purchase from Borrower at a fixed price Hydrocarbons produced from or allocable
to certain Properties which Borrower has the right to sell, substantially in
the form annexed hereto as Exhibit 17.
"GAAP" shall mean generally accepted accounting principles consistently
applied and maintained throughout the period indicated and consistent with
applicable laws, except for changes mandated by the Financial Accounting
Standards Board or any similar accounting authority of comparable standing.
Whenever any accounting term is used herein which is not otherwise defined, it
shall be interpreted in accordance with GAAP.
"Hazardous Materials" shall mean and include (i) all elements or compounds
that are contained in the list of hazardous substances adopted by the EPA and
the list of toxic pollutants designated by Congress or the EPA or under any
Hazardous Substance Laws (as hereinafter defined), and (ii) any "hazardous
waste," "hazardous substance," "toxic substance," "regulated substance,"
"pollutant" or "contaminant" as defined under any Hazardous Substance Laws.
"Hazardous Substance Laws" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et
seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section
6901 et seq., the Federal Water Pollution Control Act, as amended, 33 U.S.C.
Section 1251 et seq., the Toxic Substances Control Act, 15 U.S.C. Section 2601
et seq., the Hazardous Liquid Pipeline Safety Act of 1979, as amended, 40
U.S.C. Section 2001 et seq., the Federal Insecticide, Fungicide, and
Rodenticide Act, 7 U.S.C. Section 136 et seq., the Federal Clean Air Act, 42
U.S.C. Section 7401 et seq., any so-called federal, state or local "superfund"
or "superlien" statute, and any other federal, state or local law, rule,
regulation or ordinance related to the remediation, clean-up or reporting of
environmental pollution or contamination or imposing liability (including
strict liability) or standards of conduct concerning any Hazardous Materials.
"H-S-R Act" shall mean the Hart-Scott-Rodino Anti-Trust Improvement Act of
1976, as amended or supplemented from time to time, and the rules and
regulations promulgated thereunder.
"Hydrocarbons" shall mean all Crude Oil, Natural Gas, distillate and
sulphur, natural gas liquids and all products recovered in the processing of
natural gas liquids, including,
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without limitation, natural gasoline, iso-butane, normal butane, propane and
ethane (including such methane allowable in commercial ethane).
"Indebtedness" shall mean and include (i) all obligations for borrowed
money of any kind or nature, including funded and unfunded debt or guarantees
thereof, and (ii) all obligations for the acquisition or use of any fixed asset
or improvements thereto, including capitalized leases, which are payable over a
period longer than one year or guarantees thereof, regardless of the term
thereof or the Person or Persons (each as hereinafter defined) to whom the same
is payable; provided, however, that Indebtedness shall not include trade
payables incurred in the ordinary course of business.
"Investment" in any Person shall mean the amount paid or committed to be
paid or the value of property or wages contributed or committed to be
contributed by the Person making the Investment on its account for or in
connection with its acquisition of any stock, bonds, notes, debentures,
partnership or other ownership interest or any other security of the Person in
whom such Investment is made or any evidence of indebtedness by reason of a
loan, advance, extension of credit, guaranty or other similar obligation of any
debt, liability or indebtedness of such Person in whom the Investment is made.
"Lease" or "Leases" shall mean, whether one or more, (i) those certain oil
and gas leases set forth in the description of the Properties in Exhibit 1
annexed hereto, comprising a part of such Properties, and any other interests
in the Leases and any extension, renewals, corrections, modifications,
elections or amendments (such as those relating to unitization) of any such
Lease or Leases, or (ii) other oil, gas and/or mineral leases or other
interests pertaining to the Properties which may now and hereafter be made
subject to the lien of any of the Security Documents and any extension,
renewals, corrections, modifications, elections or amendments (such as those
relating to unitization) of any such lease or leases.
"Lease Operating Expenses" shall mean those expenses set forth in the
Reserve Report delivered at Closing and made a part of the Contract Operating
Agreement, unless otherwise specified in the Schedule.
"Lender" shall have the meaning assigned to such term in the first
paragraph of this Master Agreement.
"Lender's Closing Expenses" shall mean all fees, expenses and other out-of
pocket costs and expenses incurred by Lender in connection with the due
diligence, negotiation and preparation of this Master Agreement, the Purchase
and Sale Option Agreements, the Price Protection Agreement, Lender's Interest
Conveyance, the Pledge Agreement, the Security Documents and all other related
documents including but not limited to fees and expenses of Lender's legal
counsel and engineering, environmental and other consultants of Lender.
"Lender's Interest" shall mean the net profits interest and/or the
overriding royalty
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interest, as specified in the Schedule, in the Properties conveyed by Borrower
to Lender pursuant to the Lender's Interest Conveyance.
"Lender's Interest Conveyance" shall mean the Lender's Interest
Conveyance, dated of even date herewith, from Borrower to Lender covering the
Properties, substantially in the form annexed hereto as Exhibit 3.
"Lender's Post-Closing Expenses" shall mean all fees, expenses and other
out-of-pocket costs and expenses incurred by Lender in connection with the due
diligence, negotiation and preparation of the documents delivered pursuant to
Section 11.3 and all related documents, including but not limited to fees and
expenses of Lender's legal counsel and engineering, environmental and other
consultants of Lender, all of which are incurred after the Closing date as
provided in Section 14.4.
"Loan Termination Date" shall mean the earliest of (i) the date specified
in the Schedule as the termination date of the Term Loans, (ii) the date on
which Borrower has paid and discharged in full all Obligations (as hereinafter
defined) to Lender, or (iii) the date on which Lender has notified Borrower of
the acceleration of payment of all Obligations hereunder because of the
occurrence of an Event of Default.
"MMS" shall mean the United States Department of the Interior, Minerals
Management Service, or any successor thereto.
"Named Operators" shall mean the Operators specified in the Schedule.
"Natural Gas" shall mean all natural gas, and any natural gas liquids and
all products recovered in the processing of natural gas (other than
condensate), including, without limitation, natural gasoline, iso-butane,
normal butane, propane and ethane (including such methane allowable in
commercial ethane).
"Natural Gas Purchase and Sale Option Agreement" shall mean the agreement
dated as of the Closing Date pursuant to which Borrower has granted to Lender
as Purchaser the right to purchase from Borrower Natural Gas produced from or
allocable to certain Properties which Borrower has the right to sell,
substantially in the form annexed hereto as Exhibit 16.
"Net Revenue" shall mean the positive difference between the following
Revenues generated and the following Expenses incurred with respect to the
Properties from and after the date as indicated in the Schedule:
"Revenues" (calculated before Lender's Interest):
(i) Borrower's Net Revenue Interest in all revenue from the sale of
Hydrocarbons produced from or allocable to Borrower's Working Interest in the
Properties (including any
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amounts distributed to Borrower from any plugging and abandonment trust or
other arrangement relating thereto), plus
(ii) all revenues or other payments or receipts of Borrower received in
settlement, judgment or assignment of claims or litigation, plus
(iii) revenues from Borrower's share of Royalty Interests, net profits
interests and production payments, plus
(iv) all other revenues received by Borrower, including, all revenues
received by Borrower from the blending, treatment, transportation or storage of
Hydrocarbons or the treatment, transportation or disposal of water for third
parties, payments received by Borrower pursuant to any "take-or-pay" agreement
or pursuant to gas balancing arrangements, plus
(v) all revenue earned by Borrower pursuant to the Price Protection
Agreement, plus
(vi) any other revenues received by Borrower attributable to the
Properties, plus
(vii) any other revenues and payments, including those as described in the
Schedule.
Less the sum of:
"Expenses"
(A) the revenues due Lender pursuant to the Lender's Interest Conveyance,
plus
(B) applicable production and property related taxes, plus
(C) all payments due and payable by Borrower pursuant to the Price
Protection Agreement, plus
(D) Lease Operating Expenses as outlined in the Schedule, plus
(E) any other expenses as outlined in the Schedule.
"Net Revenue Interest" shall mean, with respect to any Property, the
decimal or percentage share of production from or allocable to such Property,
after deduction of all overriding royalties and other burdens on production
applicable thereto, that an owner of a Working Interest is entitled to receive.
"Obligations" shall mean and include all loans and advances (including the
Term
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Loan), debts, liabilities, obligations, covenants and duties owing by Borrower
or any Affiliate of Borrower to Lender of any kind or nature, present or
future, whether or not evidenced by any note, guaranty or other instrument,
arising, directly or indirectly, under this Master Agreement, the Term Note,
the Security Documents, the Price Protection Agreement, the Purchase and Sale
Option Agreements, and any other agreement executed in connection herewith,
including those listed in the Schedule. The term includes, but is not limited
to, all interest, reasonable charges, expenses, consultants' and attorneys'
fees and any other sum chargeable to Borrower under this Master Agreement, the
Term Note, the Security Documents, including those listed in the Schedule or
any other agreement with Lender or any of its Affiliates in connection
therewith. Obligations shall not include obligations under the Lender's
Interest Conveyance.
"Operating Agreements" shall mean all operating agreements relating to the
Properties, including, without limitation, the agreements listed in Exhibit 4
hereto.
"Operators" shall mean the Named Operators and any other operators
(including contract operators) specified in the Schedule as of Closing and any
other Operators as approved by Lender pursuant to Section 10.6 hereof.
"Origination Fee" shall have the meaning assigned to such term in the
Schedule.
"PDP Collateral Coverage Ratio" shall equal (at any particular time of
determination) the ratio of (a) the Collateral Value with respect to proved
developed producing reserves only, to (b) the outstanding principal and accrued
and unpaid interest on the Term Loan.
"Permitted Encumbrances" shall mean those liens, encumbrances, agreements
and other matters to which the Collateral is subject as set forth in Exhibit 1
annexed hereto.
"Person" shall mean an individual, corporation, partnership, joint
venture, trust or unincorporated organization, joint stock company or other
similar organization, government or any political subdivision thereof, a court,
or any other legal entity, whether acting in an individual, fiduciary or other
capacity.
"Pledge Agreement" shall mean a Pledge and Security Agreement
substantially in the form annexed hereto as Exhibit 15 between the shareholders
of Borrower and Lender as further described in paragraph (f) of Article III
hereof.
"Pledged Shares" shall have the meaning assigned to such term in paragraph
(f) of Article III hereof.
"Price Protection Agreement" shall mean the Swap Agreement, the Fixed
Price Purchase and Sale Agreement and any other price protection agreement
which Borrower has entered into pursuant to the terms of this Master Agreement.
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"Pricing Date" shall be the date selected as such by the Borrower at its
discretion, provided that it is one of the first five Business Days of the
month prior to the first month of production in the Reserve Report.
"Property" or "Properties" shall mean the interests as described in
Exhibit 1 to this Master Agreement, as such Exhibit 1 shall be supplemented
during the term of this Master Agreement with additional properties developed
or acquired by Borrower including, without limitation, all Leases, subleases,
rights of way, farmouts, farmins, operating rights, royalties, overriding
royalties, reversionary interests, net profits interests, production payments,
working interests, mineral rights and similar mineral interests associated
therewith, and all unsevered and unextracted oil, gas and other minerals in,
under or attributable to such property and all production from or allocable to
such property and the proceeds from the sale thereof and all Equipment and
other personal property located thereon or used or obtained in connection
therewith, including any interests acquired within the AMI.
"Property Operating Statement" shall mean the monthly statement, in the
form annexed hereto as Exhibit 5, to be delivered by Borrower to Lender,
pursuant to Section 2.6 hereof, which details Borrower's Crude Oil and Natural
Gas production, revenue and Lease Operating Expenses, and any other income or
expenses with respect to each Property for the purpose of determining the Net
Revenue.
"Purchasers of Hydrocarbons" shall mean all Persons, including, without
limitation, Lender or an Affiliate of Lender who purchase Hydrocarbons
attributable or allocable to Borrower's Net Revenue Interest in the Properties.
"Released" shall mean Hazardous Materials that are pumped, spilled,
leaked, disposed of, emptied, discharged or otherwise released into the
environment.
"Repayment Date" shall mean the day each month as specified in the
Schedule for repayment of the Term Loans.
"Reserve Report" shall mean a petroleum engineering reserve report
prepared by any one of the Engineers in accordance with the Society of
Petroleum Engineers definition of reserves and attached hereto as Exhibit 13.
"Royalty Interests" shall mean the volume of production from or allocable
to any particular Property which the owners of royalty rights, including but
not limited to overriding royalty rights and other rights to receive
production, other than by virtue of ownership of Working Interests, in any
particular Property are entitled to take in kind or for which they are entitled
to be paid.
"Security Documents" shall mean any agreement or writing evidencing any
assignment, lien, encumbrance or security interest executed in favor of Lender
in or on the Collateral and
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any other documents relevant thereto, including without limitation, documents
listed as "Security Documents" in Annex A attached hereto, except the Lender's
Interest Conveyance.
"Seller" or "Sellers" shall mean the Person or Persons identified as such
in the Schedule and any other Person that sold, conveyed or transferred or will
sell, convey or transfer a Working Interest and/or Net Revenue Interest in any
of the Properties to Borrower.
"SG Account" shall have the meaning assigned to such term in Section
2.7(a) of this Master Agreement.
"Solvent" shall mean when used with respect to any Person, that as of the
date as to which the Person's solvency is to be measured:
(a) the fair saleable value of its assets is in excess of the total amount
of its liabilities (including income tax liabilities) as they become absolute
and matured; and
(b) it is able to meet its debts as they mature.
"Stock Option Agreement" shall mean the Stock Option Agreement dated as of
the Closing Date as further defined in the Schedule.
"Swap Agreement" shall mean the agreement dated as of the date hereof
between Lender and Borrower providing for the fixed price payments to Borrower
from Lender for specified Notional Amounts, as that term is defined in the Swap
Agreement, against market floating price payments to Lender from Borrower,
substantially in the form annexed hereto as Exhibit 18.
"Term Loan" shall have the meaning assigned to such term in Section 2.1 of
this Master Agreement.
"Term Notes" shall have the meaning assigned to such term in Section 2.4
of this Master Agreement, and shall be substantially in the form annexed hereto
as Exhibit 7.
"Warrants" shall have the meaning assigned to such term in the Schedule.
"Well" shall mean any existing oil or gas well or salt water disposal well
or any other well located on or related to the Properties, as described on
Exhibit 1 annexed hereto, or any well which may hereafter be drilled and/or
completed thereon, or any facility or equipment in addition to or replacement
of any thereof.
"Working Capital" shall mean the difference between current assets and
current liabilities calculated in accordance with GAAP except for that current
portion of long term debt pertaining to the Term Loan and the interest thereon
and otherwise in accordance with the Schedule.
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"Working Interest" shall mean the property interest which entitles the
owner thereof to explore and develop certain land for oil and gas production
purposes, whether under an oil and gas lease or unit, a compulsory pooling
order or otherwise.
2. Capitalized terms not otherwise defined in Section 1.1 hereof shall have
the meanings so given elsewhere in this Master Agreement or in the
Schedule.
3. Any additional provisions including, without limitation, additional
representations, covenants and conditions, contained in the Schedule shall
be deemed to constitute a part of this Agreement. In the event of
inconsistency between the provisions of the Schedule and other provisions
of this Master Agreement, the Schedule will prevail.
ARTICLE 2.
The Loans
1. Maximum Amount of Facilities. Subject to the terms and conditions hereof,
Lender agrees to make one or more secured term loans (the "Term Loan") to
Borrower in the amounts specified in the Schedule. Borrower acknowledges
that Lender does not intend to advance Borrower any amount which would at
any point in time exceed the aggregate principal amount of the Term Loan;
provided, however, should obligations of Borrower under the Term Loan
exceed such aggregate principal amount, all such obligations shall
nevertheless constitute Obligations under this Master Agreement and shall
be entitled to the benefit of all security interests in, and mortgage
liens on, the Collateral granted hereunder or contemplated hereby.
2. Purpose of Drawdowns.
Drawdowns may be used solely for the purposes specified in Section 2.2 of
the Schedule.
3. Drawdown Procedure. The procedure for drawdowns under the Term Loan will
be as follows:
(a) Borrower must give Lender at least two Business Days' notice in
advance of each drawdown specifying the date, amount and purpose thereof
accompanied by supporting documentation as specified in this Master Agreement
and as reasonably requested by Lender. All drawdown requests in any such notice
for Development Costs shall be evidenced to Lender by AFEs, which shall
represent the Development Costs, with invoices, contracts or other appropriate
support documentation as Lender may reasonably request. All drawdowns under
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the Term Loan must be in an amount equal to at least $50,000, subject to other
provisions of this Master Agreement.
(b) Multiple drawdowns shall be permitted, with the last drawdown to occur
not later than the date specified in the Schedule.
(c) Upon receipt of any drawdown notice from Borrower and upon
satisfaction of the conditions set forth in this Article II and as set forth in
the Schedule and Section 11.3, Lender shall disburse to Borrower the drawdown
requested in such notice.
(d) Lender shall not be obligated to disburse the funds in any drawdown
request referenced in this Section 2.3 at any time that a Default has occurred
and is continuing or an Event of Default has occurred.
4. Term Notes. Borrower's obligation to repay the Term Loan shall be
evidenced by one or more promissory notes of Borrower (each, a "Term
Note"), substantially in the form of Exhibit 7 annexed hereto in favor of
Lender, executed by Borrower. The Term Notes shall be dated and delivered
to Lender on the Closing Date.
5. Interest. Borrower shall pay interest at the rate specified in the
Schedule on the outstanding borrowed and unpaid principal amount of the
Term Loan compounded monthly for the period commencing on the date of the
initial drawdown until all Obligations are paid in full in accordance with
this Master Agreement.
(b) Upon the occurrence and during the continuance of a Default or upon
the occurrence of an Event of Default, the rate of interest applicable to the
Term Notes hereunder shall increase by an additional rate equal to the lower
of: (i) the rate specified in the Schedule, or (ii) the highest rate permitted
by applicable law (the "Default Rate").
(c) All interest shall be computed on the actual number of days elapsed
over a year comprised of 360 days. Interest shall be due and payable in
accordance with Section 2.6 hereof in immediately available funds monthly in
arrears on the Repayment Date and in full on the Loan Termination Date.
(d) Notwithstanding anything in this Master Agreement or the Term Notes to
the contrary, the obligation of Borrower to make payments of interest shall be
subject to the limitation that payments of interest shall not be required to be
made to Lender to the extent that Lender's receipt thereof would not be
permissible under the law or laws applicable to Lender limiting rates of
interest which may be charged or collected by Lender. Any such amount of
interest which is not paid as a result of the limitation referred to in the
preceding sentence shall be carried forward and paid by Borrower to Lender on
the earliest date or dates on which any interest is payable under this Master
Agreement and on which the receipt thereof is permissible under the laws
applicable to Lender limiting rates of interest which may be charged or
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collected by Lender. Such deferred payments shall not bear interest.
6. Repayment of Principal of and Interest on the Term Loan. On each Repayment
Date, Borrower shall pay Lender the Cash Flow Sharing Percentage of Net
Revenue which shall be applied against the entire outstanding principal
balance of the Term Loan and interest accrued thereon during the term of
the Term Loan. Net Revenue shall be calculated by Lender based on the
Property Operating Statement delivered by Borrower each month as specified
herein.
1. Payments shall be applied first to accrued interest, then to
principal. Notwithstanding the foregoing, all unpaid interest and
outstanding principal shall be paid in full on the Loan Termination
Date.
7. Time and Place of Payments. To the extent not satisfied by debits from the
Cash Balance Account pursuant to Section 2.9 hereof, all payments to be
made hereunder (whether of principal, interest, legal expenses, fees,
costs, indemnities or otherwise) by Borrower to Lender shall be made in
accordance with, and to the account specified in, the Schedule or to such
other account as Lender may from time to time designate by notice in
writing to Borrower (the "SG Account").
1. If any payment to be made hereunder falls due on a day that is not a
Business Day, such payment shall be payable on the next succeeding
Business Day.
8. Deposits into SG Account. (a) As specified in paragraph (b) of Article III
hereof, until the Loan Termination Date, Borrower shall direct and cause
all of Borrower's account debtors, including Operators and Purchasers of
Hydrocarbons, all obligors, including payors of overriding interests, net
profit interests and production payment interests, relating to Borrower's
Working Interest in the Properties and/or Net Revenue Interests to deposit
all payments of any nature whatsoever due and owing by such Persons to
Borrower directly into the SG Account.
(b) Notwithstanding anything to the contrary contained herein and
regardless of whether any Default or Event of Default exists, any amounts
deposited into the SG Account owing to third party Working Interest and Royalty
Interest holders, once received and identified by Lender, shall be remitted to
Borrower for further disbursement to such third party Working Interest and
Royalty Interest holders or, at Lender's option, remitted directly by Lender to
such third parties.
9. Cash Balance Account (a) Lender shall also establish a sub-account on its
own books and records (the "Cash Balance Account") and shall credit to
such Cash Balance Account all collected funds which constitute payments
referred to in Section 2.8(a) above at such time as the amount to be
credited has been identified to Lender's reasonable satisfaction.
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(b) Borrower authorizes Lender to debit the Cash Balance Account (i) for
the payment of all Obligations hereunder when due, and (ii) for the payment of
Lender's Interests immediately as the funds to be paid have been received and
identified by Lender.
(c) If no Event of Default has occurred, Borrower may on at least two
Business Days' written notice request a release of amounts credited to the Cash
Balance Account at such times and for such expenses as outlined in the
Schedule. All such requests must be accompanied by documentation as Lender may
require. Notwithstanding anything contained herein, Borrower may not request
funds to pay items expected to come due more than 10 days after such funds are
released to Borrower.
(d) Except as required to be paid pursuant to applicable laws and
regulations) upon the occurrence of an Event of Default, any funds in the Cash
Balance Account shall be applied against all unpaid Obligations and the Cash
Flow Sharing Ratio shall increase to 100%.
(e) Lender will provide Borrower with a monthly accounting of all activity
in the Cash Balance Account during the previous month on or before the last
calendar day of each month.
10. Optional Prepayment of the Term Loan. Borrower's right to prepay the Term
Loan shall be in accordance with the Schedule.
11. Mandatory Prepayment of the Term Loan. Borrower shall cause any Seller to
assign and promptly pay to Lender 100% of the amounts, if any, owed by any
Seller to Borrower pursuant to any closing or post-closing settlement of
revenues pursuant to the Acquisition Agreements, including, without
limitation, 100% of all revenues attributable to Borrower's Working
Interest and/or Net Revenue Interest in the Properties, net of costs and
expenses attributable thereto and which funds shall be applied as payment
of the Term Loan in accordance with the provisions of Section 2.6 hereof.
To the extent that Borrower receives any funds for disposed Equipment
pursuant to Article VII hereof, all proceeds shall be immediately applied
as payment of the Term Loan in accordance with the provisions of Section
2.6 hereof. In addition, in the event that Borrower shall sell to any
Person all or any portion of Borrower's Working Interest and/or Net
Revenue Interest in the Properties with Lender's prior written consent,
Borrower shall be required to immediately pay to Lender 100% of all funds
received, which funds shall be applied as a payment of the Term Loan in
accordance with the provisions of Section 2.6 hereof.
12. Revenues Remaining in the Cash Balance Account. Upon the Loan Termination
Date, and the discharge by Borrower of all Obligations to Lender
hereunder, Lender will pay to Borrower all funds remaining, if any, in the
Cash Balance Account.
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ARTICLE 3.
Security
1. As security for all of its Obligations to Lender under this Master
Agreement, including those pursuant to the agreements listed in the
Schedule, and pursuant to the Security Documents, Borrower will grant to
Lender a first mortgage lien on and first priority and perfected security
interest in (i) the Collateral, and (ii) all of the accounts receivable,
contract rights and cash proceeds therefrom, all of the foregoing of which
are subject only to the Permitted Encumbrances. Further, to effectuate
Lender's rights with respect to the portion of Lender's Collateral covered
thereby and not described in the preceding sentence, subject to the terms
and conditions of the provisions hereof, Borrower hereby (i) grants to
Lender a valid first and perfected security interest in and to all of
Borrower's goods, accounts, inventory, Equipment and general intangibles
relating to the Properties, and (ii) assigns, transfers and conveys to
Lender Borrower's entire interest in and to all of Borrower's personal
property, in each case subject only to the Permitted Encumbrances.
2. All of Borrower's account debtors, including Operators and Purchasers of
Hydrocarbons, all obligors, including payors of overriding interest, net
profits interests and production payment interests, relating to Borrower's
Working Interest in the Properties and/or Net Revenue Interest will
receive notification from Lender, as assignee, and Borrower, in
substantially the form annexed hereto as Exhibit 8, of the assignment into
the SG Account of all proceeds from sales of all production from or
allocable to Borrower's Net Revenue Interest in the Properties.
3. Without limiting the foregoing, Borrower, upon request, will properly
execute any and all documents necessary or desirable, in the opinion of
Lender, to perfect Lender's security interests in, and/or mortgage liens
on, the Collateral.
4. Borrower will, at its own expense and upon the request of Lender, cause
such Uniform Commercial Code or similar searches with respect to Borrower
to be conducted as Lender may reasonably request from time to time in
order to evidence, perfect, maintain or continue perfection, or confirm
the rights and remedies, of Lender in and to the Collateral granted hereby
and to perfect such security interests in after-acquired property
constituting the Properties and to continue the perfection of the security
interests granted therein and file financing statements against Borrower
relating to the security interests securing any Obligations.
5. Upon the payment and performance in full of all Obligations, Lender shall
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deliver to Borrower, at Borrower's expense, releases and satisfactions of
all financing statements and all other Security Documents with an
acknowledgment that the same have been terminated and Borrower shall
deliver to Lender, a general release of all of Lender's liabilities and
obligations under this Master Agreement, other than those directly caused
by Lender's sole and not concurrent gross negligence or willful misconduct
occurring prior to the payment and performance in full of all Obligations.
(f) Pledged Shares. Borrower will cause its shareholders to enter into a
Pledge Agreement with Lender on or before the Closing Date pursuant to which
the shareholders shall grant to Lender, as security for all of the Obligations,
a security interest in all of the ownership interests of Borrower (the "Pledged
Shares") .
(g) The Pledged Shares shall be evidenced by certificates, all of which
shall be delivered to and held in the possession of Lender or a third party
acting on its behalf pursuant hereto. Upon delivery to Lender, the Pledged
Shares shall be in suitable form for transfer by delivery or shall be
accompanied by duly executed instruments of transfer or assignment in blank,
with signatures appropriately guaranteed, all in form and substance
satisfactory to Lender.
ARTICLE 4.
Inducing Representations
In order to induce Lender to make the Term Loan, Borrower (and where the
context requires, Borrower's Parent) makes the following representations and
warranties to Lender as of the Closing Date, each and all of which shall
survive the execution and delivery of this Master Agreement:
1. Borrower is a corporation duly organized and validly existing and in good
standing under the laws of the State named in the Schedule. Borrower is
qualified to do business in every jurisdiction where the nature of its
business or the ownership of its property requires it to be so qualified
and where failure to so qualify might materially affect its business or
assets.
2. Borrower's executive offices are at the address set forth in the first
paragraph of this Master Agreement. Borrower's registered agent in its
principal place of business is set forth in the Schedule.
3. Borrower has no subsidiaries. All of Borrower's issued and outstanding
stock is owned by the Persons specified in the Schedule.
4. The execution, delivery and performance of this Master Agreement, the
Acquisition
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Agreements, the Term Notes, the Lender's Interest Conveyance, the other
Security Documents and all and any other agreements, instruments and
documents to be delivered by Borrower hereunder and under Annex A hereto
and the creation of all liens, mortgages and security interests provided
for herein are within Borrower's corporate power and authority and, only
with respect to inducing representations outlined on the signature page of
this Master Agreement, Borrower's Parent's corporate power and authority,
have been duly authorized by all necessary and proper corporate action
(including the consent of shareholders where required), are not in
contravention of (i) any agreement or indenture to which Borrower or
Borrower's Parent, is a party or by which any of them is bound, (ii) the
Certificate of Incorporation or By-Laws of Borrower and Borrower's Parent
and (iii) any provision of law, and the same do not require the consent,
approval, authorization or license of any governmental body, agency,
authority or any other Person which has not been obtained and a copy
thereof furnished to Lender. This Master Agreement, the Acquisition
Agreements, the Term Notes, the Lender's Interest Conveyance and the other
Security Documents constitute the valid and legally binding obligations of
the Borrower in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights
and to general equity principles.
5. Each of Borrower and Borrower's Parent is Solvent.
6. The pro forma balance sheet of Borrower, as of the Closing Date, certified
by Borrower's President or chief financial officer, a copy of which has
been delivered to Lender pursuant to Section 11.2 and attached hereto as
Exhibit 11, is complete and correct and fairly presents its financial
condition. Borrower does not have any contingent liabilities, liabilities
for taxes, unusual forward or long-term commitments, or unrealized or
unanticipated losses from any commitment which are not disclosed in such
financial statements or the exhibits thereto which, either individually or
in the aggregate, would be material. The balance sheet delivered pursuant
to this Section 4.6 shall have been prepared in accordance with GAAP.
7. There has been no material adverse change in the business, properties,
condition (financial or otherwise) or operations, present or prospective,
of Borrower or Borrower's Parent since the date specified in the Schedule
(date of acceptance of the Commitment Letter).
8. All written data, reports and information which Borrower has supplied to
Lender or caused to be so supplied by a third party on its behalf in
connection with the obtaining of the credit facility provided for in this
Master Agreement or in connection with the business transactions giving
rise to Borrower's seeking such credit are complete and accurate in all
material respects and contain no material omission or misstatement except
such as have been corrected in a writing, delivered to Lender prior to the
Closing Date.
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9. Borrower is not engaged in any joint venture or partnership with any other
Person.
10. No broker's or finder's fees or commissions have been paid or will be
payable by Borrower or any Affiliate thereof to any Person in connection
with the transactions contemplated by this Master Agreement. Borrower will
indemnify Lender and its Affiliates and their respective officers,
directors, employees and agents from and against, and hold each of such
parties harmless on demand from, all liabilities, costs, damages and
expenses, including, but not limited to, attorneys' fees and disbursements
relating to any third parties concerning finder's, brokerage, financing or
similar fees arising in connection with the transactions contemplated
under this Master Agreement.
11. Each of Borrower and Borrower's Parent has filed all tax returns (Federal,
State or local) required to be filed and paid all taxes shown thereon to
be due including interest and penalties or has provided adequate reserves
(in accordance with GAAP) therefor. No assessments have been made against
either Borrower or Borrower's Parent by any taxing authority nor has any
penalty or deficiency been made by any such authority. No Federal or other
income tax return of either Borrower or Borrower's Parent is presently
being examined by the Internal Revenue Service or any State or local tax
authority nor are the results of any prior examination by the Internal
Revenue Service or any State or local tax authority being contested by
either Borrower or Borrower's Parent. All ad valorem, property,
production, excise, severance, windfall profit and similar taxes and
assessments based on or measured by the ownership of property or the
production or removal of Hydrocarbons or the receipt of proceeds therefrom
from the Properties have been and will be timely paid. Borrower,
Borrower's Parent and all predecessors in interest to any of the
Properties have paid all taxes required to be paid by them such that no
taxing authority has any right to assert any lien over or other interest
in the Properties.
12. No action or proceeding is now pending or is threatened against either
Borrower or Borrower's Parent or any Named Operator with respect to the
Properties, at law, in equity or otherwise, before any court, board,
commission, agency or instrumentality of the Federal or State government
or of any municipal government or any agency or subdivision thereof, or
before any arbitrator or panel of arbitrators and neither Borrower nor
Borrower's Parent nor any Named Operator has accepted liability for any
such action or proceeding. There is no proceeding pending before any
governmental agency (Federal, State or local) and, to the knowledge of
each of Borrower and Borrower's Parent, no investigation has been
commenced before any such government agency the effect of which, if
adversely decided, would materially adversely affect or impair Borrower's,
Borrower's Parent's or any Named Operator's respective business or
financial condition.
13. The Collateral is or will be owned by Borrower, and the Lender's Interest
will be conveyed to Lender by Borrower, free and clear of any security
interest, lien, encumbrance, mortgages, security agreement or other charge
other than the Permitted Encumbrances and liens, mortgages and security
interests and property interests which
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are in favor of Lender and its Affiliates or are permitted hereunder.
Borrower has Defensible Title to Borrower's Working Interest and/or Net
Revenue Interest, and, if applicable, any Royalty Interest owned by
Borrower, in the Properties, including each Lease related thereto. Except
for Permitted Encumbrances, Borrower's Interest is not subject to any
mineral reservations or top leases. Except for Permitted Encumbrances, and
except for this Master Agreement and the Security Documents, there are no
unrecorded documents or agreements which may result in impairment or loss
of Borrower's or Lender's ability to convey the Property. Subject to the
Permitted Encumbrances, Borrower has all beneficial right, title and
interest in and to the Net Revenue Interest in all production from or
allocable to Borrower's interest in the Properties (including each Lease)
and has the exclusive right to sell the same subject to any right in the
owners of Royalty Interests to take their royalty interest in kind.
14. Upon consummation of the transactions contemplated hereunder and under the
Security Documents, Borrower will have outstanding no Indebtedness in
excess of the amount stated in the Schedule, other than the Term Loan,
that is not specifically identified and disclosed to the Lender in the
list of Permitted Encumbrances or the balance sheet referred to in Section
4.6 above or Indebtedness incurred in the usual course of business since
the date of such balance sheet.
15. Borrower possesses, or will possess prior to the date on which each
Property is fully operational, all trademarks, trade names, trade styles,
copyrights and patents necessary to conduct its business relating to each
of the Properties as it is presently conducted or as Borrower intends to
conduct it hereafter without any infringement or conflict with the rights
of any other Person.
16. Borrower is not the lessor or lessee under any leases other than Leases
included in the Properties and the lease on its principal executive office
and except for any leases that are Permitted Encumbrances.
17. Borrower (i) has not committed to make any Investment other than in
connection with the Acquisition Agreements and/or Development Program,
(ii) is not a party to any indenture, agreement, contract, instrument or
lease or subject to any charter, by-law or other corporate restriction or
any injunction, order, restriction or decree, which would materially and
adversely affect its business, operations, properties or assets; (iii) is
not a party to any "take or pay" contract or settlement or any other
contract or agreement; or (iv) has no material contingent or long term
liability or commitment which would materially affect its business that
has not been disclosed to Lender in writing.
18. On and after the Closing Date, Borrower and the applicable Operator will
have all permits, licenses and other authorizations which are required
under Environmental and Safety Regulations with respect to safety,
pollution or protection of the environment relating to each Property,
including laws relating to actual or threatened emissions,
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discharges or releases of pollutants, raw materials, products,
contaminants or hazardous or toxic materials or wastes into ambient air,
surface water, groundwater or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or hazardous or toxic
materials or wastes, the failure of which to obtain would materially and
adversely affect the value, use or operation of any portion of the
Property. Borrower is, and shall be and shall cause any Operator or agent
with respect to any of the Properties to be, in compliance, in all
material respects with all terms and conditions of such Environmental and
Safety Regulations, and such permits, licenses and authorizations, and
also in compliance in all material respects with all other limitations,
restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in such laws or contained
in any regulation, code, plan, order, decree, judgment, notice or demand
letter issued, entered, promulgated or approved thereunder relating to the
Collateral, the failure to comply with which would materially affect the
value, use or operation of any of the Properties. Borrower has not
received notice of any violation of or investigation relating to any
Environmental and Safety Regulations relating to any Property.
19. All licenses, permits, operating authorities and other authorizations
necessary to operate each of the Properties have been obtained and
maintained. All such licenses, permits and authorizations are valid and in
full force and effect. There are no pending fees, assessments or penalties
relating to such permits, licenses and operating authorities. The
continuation, validity and effectiveness of each such license, permit and
other authorization are not and will in no way be adversely affected by
the transactions contemplated by this Master Agreement, the Security
Documents, the Lender's Interest Conveyance or the agreements as specified
in the Schedule. Neither Borrower nor any Operator is in breach of, or in
default under the terms of, and has not engaged in any activity which
would cause revocation or suspension of, any such licenses, permits or
authorizations and no action or proceeding looking to or contemplating the
revocation or suspension of any thereof is pending or threatened against
Borrower or any Operator. Neither Borrower nor any Operator is in
violation of any law, ordinance, administrative or governmental rule or
regulation or court decree relating to any of the Properties or otherwise
applicable to Borrower.
20. Neither Borrower nor any Operator is in violation of, or in default under,
any material agreement in respect of any lease or any other contract or
agreement to which it is a party or is bound.
21. Borrower has not assumed, guaranteed or endorsed, or otherwise become
directly or contingently liable in connection with, any liability of any
other Person, except for the endorsement of checks and other negotiable
instruments for collection in the ordinary course of business.
22. The Security Documents and this Master Agreement constitute and will
continue to
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constitute a valid security interest in, and mortgage lien on, the
Collateral and other assets covered thereby in accordance with Article III
hereof, enforceable against Borrower and its successors and assigns, and
securing the payment of all Obligations, purported to be secured thereby,
and all filings and other actions necessary to perfect and protect such
liens and security interests have been or will be duly taken.
23. Except for the Permitted Encumbrances, there is no restriction or other
limitation on Lender's right to obtain or exercise its security interests
in the Equipment, including, without limitation, the right to foreclose on
and sell such Equipment or to exercise all other rights and remedies of a
secured party under the laws of each jurisdiction applicable to the
Collateral other than Debtor Relief Laws, laws related to the rights of
co-owners of property and laws related to the enforcement of security
interests on personal property.
24. Borrower has and, to Borrower's knowledge after diligent investigation,
each Seller has, no unpaid bills for improvements to the Collateral that
may give rise to mechanics', materialmen's or other similar liens arising
by operation of applicable law should any such bills remain unpaid.
25. Borrower is not engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulations G,
U, or X of the Board of Governors of the Federal Reserve System). Neither
Borrower nor any of its Affiliates or any person or entity acting on their
behalf has taken any action which might cause this Master Agreement or the
Term Notes to violate any of such Regulations G, T, U, or X, or any other
regulation of the Board of Governors of the Federal Reserve System or to
violate the Securities Exchange Act of 1934, in each case as now in effect
or as the same may hereafter be in effect.
26. Neither Borrower nor any Affiliate is a "holding company" or a "subsidiary
company" of a "holding company" or an "affiliate" of a "holding company"
or a "public utility" within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
27. Neither Borrower nor any Affiliate is an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
28. There is no agreement in force and effect (including, without limitation,
letters of intent), whether written or oral, between Borrower or any of
its Affiliates with any Person regarding the acquisition or financing of
any of the Properties and the purchase and sale of production from or
allocable to the Properties, and no Person has any call upon, option to
purchase or similar rights under any agreement with respect to Borrower's
Working Interest and/or Net Revenue Interest in the Properties or to the
production therefrom.
29. No suit or other proceeding by any third party is pending or, to
Borrower's knowledge after diligent investigation, threatened before any
court or governmental agency seeking
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to restrain, enjoin or prohibit or declare illegal, or seeking substantial
damages from Borrower in connection with, the transactions contemplated by
this Master Agreement.
30. No approvals, filings or any other action is required under or pursuant to
the H-S-R Act in connection with the transactions contemplated by this
Master Agreement.
31. Borrower has no employees on account of whom the Borrower or any Affiliate
thereof (i) is required to comply in any respect with ERISA or (ii) could
have any liability to any party under or in connection with ERISA.
Borrower maintains no employee pension benefit plans or similar
arrangements for any employees.
32. All Wells are, in all respects, operated in compliance with all applicable
rules, regulations, permits, judgments, orders and decrees of any court or
the federal and state regulatory authorities having jurisdiction thereof.
All of the Wells have been drilled and completed or are being drilled
within the boundaries of the Lease or Leases for such Wells or within the
limits otherwise permitted by contract, pooling or unit agreement and by
law.
33. With respect to the Properties, unit agreements, pooling agreements,
commutization agreements, and other Basic Documents creating interests
constituting the Properties, (i) Borrower has, and each Operator has, in
all respects fulfilled all requirements including but not limited to, all
filings, certificates, disclosures to parties in interest, and other
similar matters contained in such leases, contracts or other documents (or
otherwise applicable thereto by law, rule or regulation) granting or
governing the operation or maintenance of the Properties, and Borrower is
and will be fully qualified to own, hold and exercise such rights under
such Property or other documents; (ii) except as set forth in the Schedule
and Exhibit 12 hereto, there are no obligations to drill additional wells
or to engage in other development operations, except for obligations
arising under offset well provisions, obligations arising under provisions
of Operating Agreements which allow the parties thereto to elect whether
or not they will participate and obligations hereunder; provided, however,
to Borrower's knowledge, there is no current proposal to drill any such
wells or engage in other development operations; (iii) there are no
limitations as to the depths covered or substances to which such interests
purport to apply; (iv) there are no royalty provisions (other than those
allowing a lessor the right to take in kind) requiring the payment of
royalties on any basis other than as specified in the Lease or disclosed
as a Permitted Encumbrance in Exhibit 1 hereto; and (v) the Leases and
other interests will not expire on a date certain, nor after a specific
number of years from some starting date.
34. With respect to the joint, unit or other Operating Agreements relating to
Borrower's Working Interest and/or Net Revenue Interest in the Properties
there are no outstanding calls for payments under authorities for
expenditures or payments which are due or which Borrower or any
predecessor of Borrower has committed to make which have not been
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paid, and there are no operations under the Operating Agreements with
respect to which Borrower has become a non- consenting party nor are there
any non-consenting penalties not reflected in the Net Revenue Interest or
Working Interest of Borrower as indicated in Exhibit 1 hereto.
35. All agreements applicable to Borrower's Working Interest and/or Net
Revenue Interest in the Properties are of the type generally found in the
oil and gas industry, do not (individually or in the aggregate) contain
unusual provisions which may operate in an adverse manner with respect to
Borrower's Working Interest in the Properties and/or Net Revenue Interest,
and are in form and substance considered conventional within the oil and
gas industry.
36. Except as disclosed by Borrower to Lender in writing prior to execution of
this Master Agreement, as of the Closing Date, none of the proceeds from
the sale of Hydrocarbons produced from Borrower's Working Interest in the
Properties and/or Net Revenue Interest are (i) subject to refund, (ii)
subject to a "take or pay" contract in which the gas purchaser may take
gas previously paid for or (iii) subject to balancing rights of third
parties. Except as disclosed by Borrower to Lender in writing prior to
execution of this Master Agreement, as of the Closing Date, all proceeds
from the sale of Hydrocarbons from Borrower's Working Interest in the
Properties and/or Net Revenue Interest are being received in all respects
in a timely manner and are not being held in suspense for any reason.
37. The proceeds of the Term Loan will be used only for the purposes set forth
in Section 2.2 of the Schedule.
4.38 The Lender's Interest Conveyance is enforceable against the Borrower
and its successors and assigns.
4.39 With respect to the Basic Documents: (i) all are in full force and
effect in accordance with their terms and are valid and binding obligations;
(ii) all payments (including, without limitation, royalties, delay rentals,
shut-in royalties, and joint interest or other billings under unit or Operating
Agreements) due by Borrower thereunder have been made by Borrower; (iii) no
other party to any Basic Document (or any successor in interest thereto) is in
breach or default to Borrower's knowledge with respect to any of its
obligations thereunder; (iv) no party to any Basic Document has given or has
threatened to give notice of any action to terminate, cancel, rescind or
procure a judicial reformation of any Basic Document or any provision thereof;
and (v) the execution and delivery of this Master Agreement and the
consummation of the transactions contemplated hereby will not result in a
breach of, constitute a default under, or result in a violation of the
provisions of any Basic Document.
4.40 Borrower's federal taxpayer identification number is as specified in
the Schedule.
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4.41 Borrower is and will remain duly qualified to own or hold leases as
required by 43 U.S.C.A. Section 1337 and 30 C.F.R. Section 256.35 with respect
to all leases subject thereto.
4.42 Borrower has Defensible Title in the Property, free and clear of any
lien, claim or encumbrance except Permitted Encumbrances or arising under this
Master Agreement or the Security Documents.
4.43 No suspension of production on the Properties is in effect other than
in the ordinary course of business and otherwise in accordance with any
applicable Lease.
4.44 Exhibit 9 hereto sets forth a true and complete list of the issued
and outstanding shares of common stock, par value per share as listed in such
Exhibit 9 (the "Common Stock"), of Borrower, which constitute 100% of the
issued and outstanding shares of capital stock of Borrower. The Common Stock
have been duly and validly authorized and are fully paid and non-assessable.
4.45 All representations and warranties of Borrower hereunder shall
survive any investigation by or on behalf of Lender until all Obligations to
Lender have been fulfilled by Borrower.
ARTICLE 5.
Financial Statements and Information;
Certain Notices to Lender
So long as there are any Obligations to Lender under this Master
Agreement, Borrower shall deliver to Lender the following items:
1. at least two Business Days prior to Repayment Date of each month, a
Property Operating Statement detailing production revenue and lease
operating expenses for the prior month, prepared by Borrower and
accompanied by a certification of Borrower's President or Chief Financial
Officer dated the date of the delivery thereof to Lender, stating that
there is no Default or Event of Default;
2. within thirty (30) days after the end of each month, a balance sheet,
income statement and statement of cash flows of Borrower for such month,
prepared by Borrower and accompanied by a certification of the President
or Chief Financial Officer of Borrower, dated the date of the delivery
thereof to Lender, stating that there is no Default or Event of Default;
3. within sixty (60) days after the close of each fiscal year, a copy of the
annual financial statements of Borrower consisting of a balance sheet,
income statement and statement
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showing changes in financial position, all audited by independent
certified public accountants retained by Borrower, and acceptable to
Lender and accompanied by such accountants' certification that, in the
normal course of their audit, such accountants have not become aware of
any existing state of facts constituting any Default or Event of Default;
4. promptly after becoming aware of the existence of any Default or Event of
Default under this Master Agreement or any Operating Agreement or after
becoming aware of any developments or other information which might
materially and adversely affect Borrower's properties, Collateral,
business, prospects, profits or condition (financial or otherwise) or its
ability to perform this Master Agreement, including, without limitation,
the following:
1. any substantial dispute (including tax liability disputes)
that may arise between Borrower or any Operator and any governmental
regulatory body or law enforcement authority;
2. the commencement of any litigation or proceeding affecting
Borrower or any Operator (whether by service of process or by
attachment or arrest of any asset);
3. any labor dispute or controversy resulting in or threatening
to result in a strike or work stoppage against Borrower or any
Operator;
4. any proposal by any public authority to acquire the assets or
business of Borrower or any Operator;
5. the location of any Collateral other than at the places
indicated in or as permitted under this Master Agreement;
6. any proposed or actual change of Borrower's or any Operator's
name, identity or corporate structure;
7. the loss of, suspension, termination or change to any of the
permits, licenses, operating authorities and other authorizations
referred to in Sections 4.18 and 4.19 hereof;
8. the failure to make any payment when due with respect to any
Indebtedness or to comply with the terms of any agreement to which
the Borrower or any Operator is a party; or
9. any other matter which has resulted or may result in a
material adverse change in Borrower's or any Operator's financial
condition or operations;
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in each case Borrower shall provide Lender with telephonic or
telecopy notice specifying and describing the nature of such Default
or Event of Default or development or information, and such
anticipated effect, which telephonic or telecopy notice shall be
confirmed by Borrower in writing within five (5) days.
5. (a) on a semi-annual basis on the dates set forth in the Schedule, at
Borrower's sole expense, a Reserve Report setting forth, without
limitation, the projected recoverable reserves attributable to Borrower's
Working and Net Revenue Interest for all of the Properties.
(b) Borrower or Lender, at the sole option of any of them, may cause
additional Reserve Reports to be prepared and to be delivered to the other
parties. The costs and expenses of such additional reports shall be borne by
the party requesting such Reserve Report. Notwithstanding the foregoing, if a
Default occurred and is continuing or an Event of Default has occurred, then
Lender may request an additional Reserve Report to be prepared at the sole
expense of Borrower.
6. such other information representing the financial condition of Borrower or
any property of Borrower in which Lender may have a security interest in
or mortgage lien on as Lender reasonably may, from time to time, request.
7. maintenance, re-work and daily drilling reports on a weekly basis with
respect to its activities regarding the Development Program and routine
maintenance and development of the Property, in form and substance
satisfactory to Lender.
8. weekly reports by telecopy setting forth the quantities, types and
specifications of Crude Oil and Natural Gas produced from or allocable to
each of the Properties, in form and substance satisfactory to Lender.
9. on or before the 15th day of each month, a report (the "Forecast") by
telecopy setting forth in respect of the following month a projection of
the quantities, types and specifications of Natural Gas and Crude Oil to
be produced from or allocable to each of the Properties and the
availability thereof for delivery, as well as estimated revenues, taxes
and any other income or expenses specified in the Schedule, and such
report shall indicate whether such production is less than Borrower's
Fixed Price Obligations for that following month.
10. authorizations for expenditures, describing the Development Costs or any
other capital expenditures, repair or reworking activity each of which
shall be supported by appropriate invoices, contracts or other appropriate
support documentation (each such authorization, together with such
support, an "AFE"), prior to commencing the activity contemplated by such
AFE.
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11. Prior to the Closing, and annually thereafter, a revenue and lease
operating expense forecast by month covering Borrower's Interest in the
Properties for the succeeding 12 month period.
12. Borrower shall also provide Lender with such additional reports as may be
specified in the Schedule.
ARTICLE 6.
Acquisition Agreements
1. The Acquisition Agreements have been duly approved by the Board of
Directors of Borrower, and to Borrower's knowledge after diligent
investigation, the Board of Directors or such other approvals as are
deemed reasonably necessary of each Seller under each such Acquisition
Agreement. Any other conditions necessary to the consummation of the
transactions contemplated by the Acquisition Agreements (including,
without limitation, the consent of any other Person) have been or will be
satisfied or obtained.
2. The Acquisition Agreements, annexed hereto as Exhibit 6 have not and will
not be amended, terminated, rescinded or withdrawn, and no provisions
thereof have been, or will be, waived by Borrower, without the written
consent of Lender.
3. Borrower has paid and will pay and perform all of its remaining
obligations, if any, to the Sellers under the Acquisition Agreements.
4. Insofar as it may have any rights against any Seller under the Acquisition
Agreements or under any agreement or instrument constituting a part
thereof, Borrower has used and will use prudent business judgment
concerning its preservation of, and decisions whether to enforce, the same
against such Seller.
5. The Acquisition Agreements do not and will not grant any Seller or any
other party a security interest, lien or other encumbrance on or in any
Collateral, the Lender's Interest Conveyance, if any, or stock of
Borrower.
6. To Borrower's knowledge, neither the execution and delivery of the
Acquisition Agreements nor the consummation of any of the transactions
contemplated thereby constitute a breach of, or an event of default under,
any contract or agreement to which any Seller is a party or by which they
or their respective assets are bound, or constitute the happening of an
event or condition upon which any other party to such a contract or
agreement may exercise any right or option which will materially adversely
affect any of Borrower's Working Interest and/or Net Revenue Interest in
the Properties or the transfer
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of the same to Borrower.
ARTICLE 7.
Special Provisions Relating to Equipment
Borrower represents and warrants that, so long as there are any
Obligations to Lender, it will comply with the following covenants, provided
however, that, with respect to any provision contained in this Article VII that
requires the Borrower to cause Operators that are not Affiliates of Borrower to
perform certain obligations to ensure compliance with these covenants, Borrower
shall, exercising all rights and remedies available to it under the terms of
the applicable Operating Agreements, cause such Operators to perform such
obligations and shall, to the extent such rights and remedies available under
the terms of the applicable Operating Agreements are insufficient, use its best
efforts in good faith to do each and every act and thing as may be necessary or
requested and to cooperate fully with Lender to cause such Operators to perform
such obligations, provided further, that nothing contained in this paragraph
shall relieve Borrower of its obligation to comply with the provisions
contained in this Article VII, Borrower will:
1. All Equipment currently owned or hereafter acquired by or on behalf of
Borrower will be kept at the applicable Property except as permitted by
this Master Agreement or except with the prior written consent of Lender,
and except that Borrower or any Operator may dispose of Equipment in
accordance with the terms of the applicable Operating Agreements and may
dispose of obsolete, broken or worn Equipment, without Lender's consent
but upon prompt notification to Lender. Borrower shall, and shall cause
all Operators at all times hereafter (i) to keep correct and accurate
records itemizing and describing the location, kind, type, age and
condition of all controllable Equipment, the cost therefor and accumulated
depreciation thereof and (ii) to make all such records available during
each such Operator's usual business hours on demand to any of the
officers, employees or agents of Borrower and Lender. Exhibit 2 annexed
hereto sets forth the information described in the preceding sentence for
all Equipment owned by Borrower as of the Closing Date.
2. Borrower shall, and shall cause all Operators to, keep all Equipment in an
effective and safe state of repair and operating condition in accordance
with all Environmental and Safety Regulations, and will make all repairs
and replacements when and where necessary, will not waste or destroy the
Equipment or any part thereof, and will not be negligent in the care or
use thereof. Borrower shall, and shall cause all Operators to repair and
maintain all Equipment in a manner sufficient to continue the operation of
Borrower's business. All Equipment shall be used in accordance with law
and the manufacturer's instructions. Equipment shall not be removed from
the applicable Property without Lender's prior written consent except in
the ordinary course of
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Borrower's business.
3. Where Borrower is permitted to dispose of any Equipment under this Master
Agreement or by any consent thereto hereafter given by Lender, it shall do
so, or shall cause any Operator to do so, at arm's-length, in good faith
and by obtaining the maximum amount of recovery practicable therefor and
without impairing the operating integrity of the remaining Equipment.
ARTICLE 8.
Affirmative Covenants
Borrower represents and warrants that, so long as there are any
Obligations to Lender, it will comply with the following covenants, provided
however, that, with respect to any provision contained in this Article VIII
that requires the Borrower to cause Operators that are not Affiliates of
Borrower to perform certain obligations to ensure compliance with these
covenants, Borrower shall, exercising all rights and remedies available to it
under the terms of the applicable Operating Agreements, cause such Operators to
perform such obligations and shall, to the extent such rights and remedies
available under the terms of the applicable Operating Agreements are
insufficient, use its best efforts in good faith to do each and every act and
thing as may be necessary or requested and to cooperate fully with Lender to
cause such Operators to perform such obligations, provided further, that
nothing contained in this paragraph shall relieve Borrower of its obligation to
comply with the provisions contained in this Article VIII, Borrower will:
1. preserve and maintain its separate corporate existence in good standing
and rights, privileges and franchises in connection therewith and remain
qualified to do business in every jurisdiction where the nature of its
business or the ownership of its property requires it to be so qualified
and where failure so to qualify might materially affect its business or
assets. Borrower will transact business in its own name;
2. conduct transactions with any of its Affiliates on an arm's-length basis;
3. pay and discharge, and cause any Operator to pay or discharge, all ad
valorem, property, excise, severance, windfall profits and other taxes,
assessments, government charges and levies and all payments to owners of
Royalty Interests imposed upon its income or its profits, upon any
property belonging to it or upon the production or removal of Hydrocarbons
or other receipt of proceeds therefrom prior to the date on which
penalties attach thereto, except where the same may be contested and
appropriate reserves established in accordance with GAAP in good faith by
appropriate proceedings;
4. comply, and cause the applicable Operator to comply, with all Federal,
State or local
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laws and regulations regarding the collection, payment and deposit of
employees' income, unemployment and Social Security taxes and will cause
the applicable Operator to make all royalty or overriding royalty
payments, including payments under any and all MMS royalties;
5. keep adequate records and books of account with respect to its business
activities in which proper entries are made in accordance with GAAP
reflecting all financial transactions of Borrower and cause the applicable
Operator to keep adequate records and books in accordance with the
provisions of the applicable Operating Agreements;
6. give Lender prompt written notice of any suit at law or in equity against
or any investigation or proceeding before or by any administrative or
governmental agency the effect of which could be to limit, prohibit or
restrict the manner in which Borrower and any Operator presently conducts
its business or to declare any substance contained in any product used,
sold or distributed by Borrower to be dangerous;
7. give Lender prompt written notice of any destruction or substantial damage
to any of the Collateral causing a loss in excess of the amount specified
in the Schedule or causing material loss or damage to Borrower's or any
Operator's business or operations and of the occurrence of any condition
or event which has caused, or may cause, loss or depreciation in excess of
the amount specified in the Schedule in the value of any property subject
to Lender's liens or security interests or the Security Documents;
8. maintain, and cause any Operator of any of the Properties to maintain, all
authorizations, licenses, permits, charters and registrations necessary to
conduct its business;
9. duly observe and conform and cause any Operator or agent to duly observe
and conform to all laws, rules and regulations made by any governmental
authority, and all valid requirements of any regulatory body which may
acquire jurisdiction, which apply or relate to any or all of the
Properties, including, without limitation, Environmental and Safety
Regulations;
10. operate, and/or cause each Operator to so operate, any property owned by
Borrower (whether or not such property constitutes a "facility" as defined
by CERCLA) so that no cleanup or other obligation arises in respect of
CERCLA or other applicable Federal law or under any state, local or
municipal law, statute (including, without limitation, Hazardous Substance
Laws), ordinance, rule or regulation designed to protect the environment
or relating to the disposition, generation or transportation of hazardous
waste, which would constitute a lien or charge on any property of Borrower
prior to that of Lender. If any such claim be made or any obligation
should nevertheless arise hereafter, Borrower will, at its own expense,
immediately cure or cause a third party to immediately cure the same and
indemnify and hold harmless Lender and its officers, directors, agents and
employees from any liability, responsibility or obligation in respect
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thereof or in respect of any cleanup or other liability as successor,
secured party or otherwise (regardless of whether or not Lender may be
deemed to be an "owner or operator" under CERCLA) for any reason
including, without limitation, the enforcement of Lender's rights as a
secured party under this Master Agreement, the Security Documents or by
operation of law;
11. comply with, and cause any Operator or agent to, ensure compliance by all
of its or their agents and invitees with all Environmental and Safety
Regulations with respect to Hazardous Materials, and keep any or all of
the Properties free and clear of any liens imposed pursuant thereto. In
the event that Borrower receives any notice from any Person with regard to
the Release of Hazardous Materials on, or from, any or all of the
Properties, Borrower shall give and shall cause any Operator or agent to
give prompt written notice thereof to Lender (and, in any event, prior to
the expiration of any period in which to respond to such notice under any
applicable Environmental and Safety Regulation);
12. continuously keep, all of the Property insured by insurance companies
licensed or approved to do business in the State of New York and the
States where the Properties are located with a Best's rating of A or
better or as otherwise satisfactory to Lender. Borrower shall deliver the
policy or policies of such insurance or certificates of insurance to
Lender if Lender so requests and whether or not so delivered such policies
and all proceeds thereof shall be security for all Obligations. All
insurance proceeds received by Lender shall be retained by Lender at its
option, for application to the payment of such portion of the Obligations
as Lender may determine in its sole discretion or shall be applied to
repair any such insurable loss or damage. Borrower shall promptly notify
Lender of any event or occurrence causing a material loss or decline in
value of property insured or the existence of an event justifying a
material claim under any insurance and the estimated amount thereof.
Borrower shall continuously keep and maintain in full force and effect
during the term of this Master Agreement, at Borrower's sole cost and
expense, original insurance policies for which the payment of premiums are
current containing waivers of subrogation by the respective insurers,
non-contributory standard mortgagee clauses or their equivalent, a
satisfactory mortgagee loss payable endorsement in favor of Lender and an
endorsement showing Lender as an additional party insured, all as agent
for the benefit of itself, providing the following types of insurance
covering each of the Properties and the interest and liabilities incident
to the ownership, possession and operation thereof:
1. Worker's Compensation Insurance and Employer's Liability Insurance
for the amounts specified in the Schedule covering the employees of
Borrower and any Operator engaged in operations hereunder in
compliance with all applicable state and federal law. This policy
shall be endorsed to provide all states coverage, and occupational
disease.
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2. Comprehensive or Commercial General Liability Insurance, on an
"Occurrence" form unless otherwise agreed to in writing by Lender.
This policy shall be endorsed to provide coverage for: Explosion,
Collapse and Underground Property Damage hazards; Contractual
Liability; operations of Independent Contractors; Products and
Completed Operations; and Underground Resources with a combined
single limit for Bodily Injury, Personal Injury and Property Damage
liability coverage in an amount not less than the amount specified in
the Schedule.
3. To the extent not covered under either Section 8.12(b) or Section
8.12(e) hereof, Pollution Liability Insurance applying to all
operations of the Borrower in a form satisfactory to Lender with a
combined single limit for Bodily Injury and Property Damage Liability
in an amount not less than the amount specified in the Schedule.
4. Comprehensive Automobile Liability Insurance covering all owned,
hired or non-owned vehicles with a combined single limit for Bodily
Injury and Property Damage liability in an amount not less than the
amount specified in the Schedule.
5. Operator's Extra Expense (OEE) or Energy Exploration and Development
(EED) Insurance, covering Control of Well (including Underground
Control of Well); Redrilling/Extra Expense (including Unlimited
Redrill); and Care, Custody and Control Seepage and Pollution,
Cleanup and Containment; and such other extensions of coverage as may
be considered appropriate by Lender in an amount not less than the
amount specified in the Schedule.
6. Property Insurance on an "All Risk" or other form satisfactory to
Lender, covering the replacement value of like kind and quality of
all property and in amounts of insurance sufficient to comply with
the minimum coinsurance requirements of the policies.
7. Builder's Risk and Worker's Compensation Insurance. During the period
of any construction or any improvements of any improvements
comprising a part of any or all of the Properties, Borrower shall, or
Borrower shall cause, as applicable, its respective subcontractors to
obtain and maintain builder's risk insurance including Commercial,
General, Liability and Automobile Insurance in such form and amounts
as Lender may from time to time reasonably request and worker's
compensation insurance covering all persons employed by Borrower or
its agents or subcontractors of any tier in connection with any
construction affecting any or all of the Properties, including,
without limitation, all agents and employees of Borrower and
Borrower's subcontractors with respect to whom death or bodily injury
claims could be asserted against Borrower. In addition, Borrower
shall fulfill all applicable laws, regulations, ordinances and codes
with respect to worker's compensation insurance.
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8. The amounts of insurance required in this Section 8.12 may be
satisfied by the purchase of separate Primary and Umbrella (or
Excess) Liability policies which when combined together provide the
total limits of insurance specified.
9. To the extent that any Operator has arranged for and bound insurance
on behalf of Borrower to cover Borrower's Working Interest and Net
Revenue Interest in the applicable Properties, such insurance shall
be permitted for purposes of this Section 8.12, provided that
Borrower is appropriately named as loss payee of such insurance, with
standard Additional Insured Working Interest Owner endorsement and
such insurance is acceptable to Lender; provided however Borrower
shall be required to bind coverage under Sections (a), (b) and (d)
hereof even though Operator may have arranged such coverage for
Borrower's Working Interest.
13. deliver to Lender certified copies of all insurance policies and all
endorsements and original certificates thereto which are required to be
obtained and maintained by Borrower and any Operator. Such valid
counterparts or certificates shall show that (i) such insurance is in full
force and effect in accordance with the provisions of this Master
Agreement, (ii) such insurance is non-cancelable without at least thirty
(30) days' prior written notice to Lender sent by United States registered
or certified mail, return receipt requested, and (iii) written notice
shall be sent to Lender in the same manner at least thirty (30) days prior
to any non-renewal of such policies;
14. obtain at least thirty (30) days prior to the expiration date of each
policy maintained pursuant to Section 8.13 hereof, a renewal or
replacement thereof and deliver to Lender a valid counterpart or
certificate of such renewal or replacement policy;
15. deliver, and cause any Operator to deliver, to Lender upon its request
copies of all contracts, statements, invoices, notices, receipted vouchers
under which Borrower and such Operator has incurred or is to incur costs
and deliver to Lender all other data or documents in connection with the
operations of the Properties as Lender may from time to time reasonably
request;
16. promptly upon Lender's request, provide Lender with a statement showing
the identity of Borrower's creditors, the amount due to each, and the date
each payment is due. Borrower shall notify Lender immediately if Borrower
and, to the best knowledge of Borrower, any Operator, fails to make any
payment to lessors, suppliers, vendors, owners of Royalty Interests or tax
authorities or others, including, without limitation, owners or holders of
overriding royalty interests, net profit interests, production payments,
or any other liens or burdens from or relating to the Property, where such
non-payment would create any lien rights against any item of Collateral or
otherwise interfere with or jeopardize performance by Borrower under this
Master Agreement. In such case, Lender may, in its sole discretion, but
need not, make such payments or agree to pay such persons as are required
to enable Borrower to complete performance under this Master Agreement
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or to protect the interests of Lender and any of its Affiliates in
production from or allocable to Borrower's Net Revenue Interest in the
Properties to any or all of the Properties or other Collateral, and such
payments will be immediately reimbursed to Lender or any of its
Affiliates, as the case may be, by Borrower on demand. Borrower's
obligation to reimburse all such payments shall be covered by the security
interests and collateral assignments granted herein and the liens granted
under the Security Documents;
17. prudently develop, continuously operate and cause any Operator or agent to
prudently develop, continuously operate and maintain, the Properties to
produce the output from or allocable to such Properties in a good and
workmanlike manner consistent with prudent operator practices to maximize
production from or allocable to the Properties over the production life
thereof and shall cause each Operator to exercise its commercially
reasonable efforts as a prudent operator to timely perform the development
and operation schedule as described in the Development Program attached as
Exhibit 12 hereto. Borrower shall pay and cause each of the Operators to
pay all costs and expenses incurred in connection with Borrower's Working
Interest in the Properties before they become delinquent, and furnish
Lender with copies of all authorizations for expenditures, representing an
estimate of work to be done, each of which shall be supported by an AFE on
material operations prior to the commencement thereof. Immediate notice
shall be given by Borrower to Lender of any problem which may result in a
significant diminution in, or cessation of, production or involve a
significant risk of loss to the Net Revenue Interests in the Properties;
18. so long as any Obligation remains unfulfilled or any Collateral remains
located at any of the Properties or other facilities owned, leased, or
used by Borrower, (i) accord, and cause each of the Operators to accord,
Lender or its agent or consultants, including without limitation, the
Engineers, full and unrestricted access to the Properties and such other
facilities, to the financial and operational records of Borrower and each
of the Operators and to any other facilities including pipelines, so as to
permit Lender or its agents or its consultants to, among other things,
witness workovers and other field activities, audit records or take
delivery of production, (ii) allow Lender to examine and inspect all
property, including, without limitation, the Collateral and to examine,
inspect and copy all books and records with respect thereto or relevant to
the Obligations, in each case (i) and (ii) during Borrower's normal
business hours with such notice to Borrower as is reasonable under the
circumstances, and in case (i) subject to reasonable safety restrictions
and in accordance with custom in the industry and the applicable Operating
Agreement. Borrower shall give Lender due notice of workovers and other
field activities to permit Lender to exercise its rights under clause (i)
above. Borrower will allow the Lender access to appropriate officers,
employees and agents of Borrower to discuss the affairs, finances and
accounts of Borrower at such reasonable times and as often as Lender may
request, and will allow Lender to discuss with Borrower's officers,
independent consultants, and Operators, and other Persons, and such
Persons are hereby authorized to discuss with Lender, Borrower's business,
assets, liabilities, financial
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condition, results of operations and business prospects, and Borrower
hereby irrevocably authorizes Lender to obtain from such Persons
maintaining any such records, any service records relating to Borrower or
any of the Property subject to Lender's security interest or lien;
19. obtain upon Lender's request, opinions from counsel and/or other
consultants reasonably satisfactory to Lender that Borrower, the Operators
and contract operators, as the case may be, have all of the necessary EPA
and MMS permits and other licenses and the planned operation of the
Properties is in compliance with all applicable laws and requirements;
20. in the event of a failure by any Operator to perform its obligations under
the Operating Agreements or upon the occurrence of an Event of Default
under this Master Agreement with respect to an Operator, in addition to
the rights set forth in Section 10.6 hereof, immediately upon the request
of Lender, remove such Operator or commence such proceedings as may be
necessary under the applicable Operating Agreement to remove such Operator
or assign to Lender or any of its Affiliates its right to remove any
Operator with respect to the Properties, seek indemnification or damages
from such party and its successors or assigns for any loss or liability
incurred by Borrower and/or pay the owners of royalty interests directly
and deliver and cause such Operator to deliver to any successor Operator
all books, agreements, contracts, papers, records (including but not
limited to royalty payment records, computerized tapes and other royalty
payment information), division orders, farm-in and farmout agreements, and
any and all other records, contracts, agreements, papers or documents,
written, printed or computerized, which may be pertinent in any way to the
operations to be conducted by such successor Operator, or which may have
formerly been conducted by such Operator, and shall cooperate,and shall
cause such Operator to fully cooperate, with the successor Operator to
ensure that the Properties are not terminated or their value diminished by
virtue of such resignation or removal, and take all steps, and shall cause
such Operator to take all steps, necessary to ensure such results as may
be directed by such successor Operator; Borrower shall promptly reimburse
Lender for all payments made, if any, pursuant to this Section 8.20 upon
the occurrence of any non- performance under an Operating Agreement;
21. in the event that any Purchaser of Hydrocarbons is, in Lender's judgment,
not creditworthy, upon the request of Lender, Borrower shall (i) cause the
relevant Operator to cause such Purchaser of Hydrocarbons to provide one
or more letters of credit, in form, substance and from a bank satisfactory
to Lender in connection with its purchase of Hydrocarbons from the
Properties, (ii) cause the relevant Operator to sell Hydrocarbons only to
Purchasers who are creditworthy in Lender's judgment, or (iii) exercise
its right to take the Hydrocarbons in kind and sell to Purchasers of
Hydrocarbons who are creditworthy in Lender's judgment;
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22. if the Forecast delivered by Borrower pursuant to section 5.9 indicates
that the anticipated production attributable to the Properties is less
than the Fixed Price Obligations for one or more months, but Borrower and
Lender believe that the production allocable to the Properties will
otherwise be equal to or greater than the aggregate Fixed Price
Obligations, Borrower shall agree, if so requested by Lender, to adjust
the schedule of the Fixed Price Obligations accordingly. Any gain or loss
resulting from such adjustment shall be for the Borrower's account.
ARTICLE 9.
Negative Covenants
So long as there are any Obligations to Lender hereunder and unless Lender
has first consented thereto in writing, Borrower will not:
1. create, incur, assume or suffer to exist any Indebtedness, except
Obligations to Lender or obligations secured by Permitted Encumbrances or
sell, discount or factor its accounts, instruments, intangibles, leases or
chattel paper;
2. assume, guaranty or endorse or otherwise become directly or contingently
liable in connection with any liability of any other Person except for the
indemnification contained herein; provided, however, that the foregoing
shall not prohibit the endorsement of negotiable instruments for deposit
or collection or incurrence of obligations under the Operating Agreements
and similar transactions in the ordinary course of business. For the
purposes hereof "guaranty" shall include any agreement, whether such
agreement is on a contingency basis or otherwise, to purchase, repurchase
or otherwise acquire any obligation or liability of any other Person, or
to purchase, sell or lease, as lessee or lessor, property or services, in
any such case primarily for the purpose of enabling another Person to make
payment of any such debt or liability, or to make any payment (whether as
a capital contribution, purchase of an equity interest or otherwise) to
assure a minimum equity, asset base, working capital or other balance
sheet or financial condition, in connection with debt or liability of
another Person, or to supply funds to or in any manner invest in another
Person in connection with such Person's debt or liability;
3. suffer any change in ownership, merge into or with or consolidate with any
other corporation;
4. enter into any new business other than its present business;
5. acquire or commit or agree to acquire all or any material portion of the
stock, securities or assets of any other Person;
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6. subject to section 7.3, sell, transfer, assign or grant any Person an
option to acquire any of its assets (as "asset" is defined in accordance
with GAAP) or take any action in furtherance thereof except for the sale
of production or inventory in the ordinary course of Borrower's business;
7. cancel any claim or debt during the terms of the Term Loan, except for
consideration and in the ordinary course of its business, or prepay any
Indebtedness other than Obligations owing to Lender hereunder;
8. cause a default under any lease, mortgage, deed of trust or lien on real
estate owned or leased by Borrower or suffer any such default to exist;
9. make any loan or advance or extend any credit during the terms of the Term
Loan (except in the ordinary course of business) to any Person, whether or
not an Affiliate of Borrower;
10. suffer to exist any lien (other than liens that are bonded or discharged
within 30 days of their occurrence), encumbrance, mortgage or security
interest or consent to the filing of any financing statement on any of its
property (including Borrower's Working Interest or Net Revenue Interest in
the Properties) other than the security interest, lien and encumbrance
granted to Lender herein and liens created by the Security Documents
granted herein and the Permitted Encumbrances. Borrower shall not
dedicate, sell, encumber or dispose of, or suffer to exist any agreement
for the sale, disposition or encumbrance of, Borrower's Working Interest
and/or Net Revenue Interest in the Properties or of any oil and gas
production attributable to Borrower's Working Interest and/or Net Revenue
Interest in the Properties except in the ordinary course of business.
Borrower shall not reserve any recorded or unrecorded executory rights in
Borrower's Working Interest and/or Net Revenue Interest in the Properties,
upon which a lien is not created in favor of Lender by Borrower pursuant
to the Security Documents;
11. make, or suffer to exist, any Investment, other than the acquisition of
the Properties to be made pursuant to the Acquisition Agreements on the
Closing Date;
12. create any direct or indirect subsidiary or divest itself of any material
assets by (i) transferring them to any future subsidiary or (ii) by
entering into a partnership, joint venture, or similar arrangement; or
make any material change in its capital structure or enter into any
management contract (not including an employment contract for the full
time employment of an officer or employee entered into in the regular
course of Borrower's business) permitting a third party management rights
with respect to Borrower's business other than pursuant to the Operating
Agreements;
13. transfer its executive offices or transfer its registered office in the
State specified under Section 4.2 in the Schedule or change its corporate
name or keep Collateral at any
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locations other than those at which the same are presently kept or
maintained, except with Lender's prior written consent and after the
delivery to Lender of financing statements or other security documents in
form satisfactory to Lender. If such financing statements or other
security documents shall be so delivered, Lender will not unreasonably
withhold its consent;
14. change its fiscal year;
15. violate any Environmental and Safety Regulation or any regulations imposed
by the MMS, if applicable;
16. use or permit the Properties or any parts thereof to be used to generate,
treat, store, handle, transport or dispose of Hazardous Materials except
in strict compliance with all applicable Environmental and Safety
Regulations. Upon the occurrence of any Release of Hazardous Materials,
Borrower shall promptly commence and perform, or cause to be promptly
commenced and performed, without cost to Lender, all investigations,
studies, sampling and testing, and all remedial, removal and other actions
necessary to clean up and remove all Hazardous Materials so Released, in
compliance with the requirements of all applicable Environmental and
Safety Regulations;
17. declare or pay any cash dividends, declare or make any capital
distribution in cash or other property or return of capital, purchase or
redeem any of its capital stock or other securities, retire any of its
capital stock or take any action which would have an effect equivalent to
any of the foregoing; or issue or pledge shares of its capital stock to
any Person, except that Borrower may distribute its share of Net Revenue
(if applicable) in accordance with the Cash Flow Sharing Percentage to
Borrower's Parent;
18. alter, amend or cause the alteration or amendment of any of the Security
Documents without the prior written consent of Lender;
19. vote or take any other action with respect to the resignation, replacement
or withdrawal of any Operator without the approval of Lender;
20. except in cases of emergency or as required by law or a governmental
regulatory agency, Borrower shall not commit to capital expenditures other
than (i) capital expenditures contemplated by the Development Program,
(ii) capital expenditures permitted in the definition of Net Revenue or
(iii) capital expenditures proposed by one of the Operators and the
applicable Operator has received all necessary approvals in accordance
with the terms of the applicable Operating Agreement. Without the approval
of Lender, Borrower shall not give its consent under the terms of any
applicable Operating Agreement to any capital expenditure in excess of the
amount specified in the Schedule;
21. allow (i) the abandonment of any Well capable of commercial production, or
the release
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or abandonment of all or any part of Borrower's Working Interest and/or
Net Revenue Interest in the Properties capable of commercial production,
or release or abandon all or any portion of the Properties except in
accordance with prudent operation standards; (ii) Borrower's Net Revenue
Interest in the Properties to be developed, maintained or operated in a
manner less favorable than prudent operator standards; and (iii) any
material alterations in the Basic Documents or enter into any new
contracts relating to the Properties that would be material in the context
of any particular Lease;
22. fail to observe all of the provisions of Article IV hereof after the
Closing, to the extent not already provided hereinabove in this Article
IX;
23. enter into any farmout agreements with any Person.
ARTICLE 10.
Further Rights of Lender
1. Until the Loan Termination Date, Borrower, at its own expense, shall do
all things and shall deliver all instruments requested by Lender to
protect or perfect any security interest, mortgage or lien given hereunder
or under any Security Documents, including, without limitation, financing
statements under the Uniform Commercial Code. Borrower authorizes Lender
to execute alone any financing statement or other documents or instruments
that Lender may require to perfect, protect or establish any lien or
security interest hereunder or under any Security Documents and further
authorizes Lender to sign Borrower's name on the same. Borrower hereby
authorizes Lender to appoint such Person or Persons as Lender may
designate as its agent and attorney-in-fact to endorse the name of
Borrower on any checks, notes, drafts or other forms of payment or
security that may come into the possession of either Lender or any
Affiliate of Lender, to sign Borrower's name on invoices or bills of
lading, drafts against customers, notices of assignment, verifications and
schedules and, generally, to do all things necessary to carry out this
Master Agreement and the Security Documents. Upon the occurrence of an
Event of Default, such agent and attorney-in-fact may also notify the Post
Office authorities to change the address of delivery of mail to an address
designated by Lender, and open and dispose of mail addressed to Borrower.
The powers granted herein, being coupled with an interest, are
irrevocable. Neither Lender nor the agent and attorney-in-fact shall be
liable for any act or omission, error in judgment or mistake of law so
long as the same is not malicious or grossly negligent. Upon payment and
performance of all Obligations of Borrower to Lender, such power of
attorney will become null and void.
2. In the event that Borrower fails to purchase or maintain insurance (where
applicable) in accordance with the requirements of this Master Agreement,
or to pay any tax,
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assessment, government charge or levy, except as the same may be otherwise
permitted hereunder, or in the event that any lien, encumbrance or
security interest prohibited hereby shall not be paid in full or
discharged, or in the event that Borrower shall fail to perform or comply
with any other covenant, promise or Obligation to Lender hereunder or
under any related document, Lender may, but shall not be required to,
perform, pay, satisfy, discharge or bond the same for the account of
Borrower, and all monies so paid by Lender, including reasonable
attorneys' fees and disbursements, shall be treated as an additional
Obligation of Borrower to Lender hereunder or under any of the Security
Documents.
3. Borrower will pay all costs to be paid on taxes, assessments, governmental
charges or private encumbrances levied, assessed, imposed or payable upon
or with respect to the Collateral or any part thereof.
4. Upon the occurrence of an Event of Default, Lender may (i) enter
Borrower's premises or any other premises of the Borrower at which any
books or records relating to the Borrower or the Properties are maintained
at any time; and (ii) until it completes the enforcement of its rights in
the Equipment or other Collateral subject to its security interest or lien
hereunder and the sale or other disposition of any property subject
thereto, take possession of such premises without charge, rent or payment
therefor, or place custodians in control thereof, remain on such premises
and use the same and any of Borrower's Equipment and other Collateral for
the purpose of completing any work in process, preparing any Collateral
for disposing of or collecting any Collateral.
5. Borrower will indemnify Lender and its officers, directors, employees and
authorized agents and hold each respective party harmless from and against
any and all injuries, claims, damages, judgments, liabilities, costs and
expenses (including, without limitation, fees and disbursements of
counsel), charges and encumbrances which may be incurred by or asserted
against Lender or any of its officers, directors, employees or authorized
agents in connection with or arising out of any assertion, declaration or
defense of Lender's rights or security interests under the provisions of
this Master Agreement or any Security Document or in connection with (i)
the acquisition or operation of the Collateral; (ii) the realization,
repossession, safeguarding, insuring or other protection of the
Collateral; (iii) the collecting, perfecting or protecting of Lender's
liens and security interests hereunder; or (iv) any investigation,
litigation, or proceeding related to any present or future acquisition
(including, without limitation, the acquisition of the Properties from the
respective Sellers) or proposed acquisition by Borrower. Borrower waives
any right it might have in connection with any suit or action against
Lender to claim special, indirect, consequential (unless due to Lender's
sole and not concurrent gross negligence or willful misconduct), or
punitive damages to it, its business or its prospects. Borrower has
consulted with its counsel with respect to the provisions of this Section
10.5 and understands that it is to be interpreted broadly against
Borrower. Notwithstanding any other provision in this Master Agreement,
the provisions of this Section 10.5 shall
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continue in full force and effect and shall survive any cancellation,
prepayment or payment in full of all of the Obligations hereunder.
6. To the extent permissible under the Operating Agreements, Lender shall
have the right to approve or disapprove any action taken by Borrower to
appoint, remove or replace any Operator of any of the Properties.
ARTICLE 11.
Closing; Conditions Precedent to Closing
1. Subject to the conditions stated in this Master Agreement, the Closing
shall occur at a mutually agreeable time on or before the time and date
specified as such in the Schedule. The time and date the Closing actually
occurs is referred to herein as the "Closing Date". The Closing shall be
held at the offices of Sullivan & Cromwell, 125 Broad Street, New York,
New York 10004, on the Closing Date, or at such other place and time as
Borrower and Lender may agree in writing.
2. Subject to the Schedule, as conditions precedent to the making of the Term
Loan hereunder, on or before the Closing Date the Borrower shall deliver
those documents as listed in Annex A, duly executed by the applicable
parties and in form and substance satisfactory to Lender, including
without limitation or duplication:
1. an opinion of counsel named in the Schedule, in the form annexed
hereto as Exhibit 10;
2. Borrower's pro forma financial statements, including balance sheet
prepared in accordance with GAAP, dated and certified as of the
Closing Date by Borrower's President or chief financial officer
showing the financial position of Borrower after giving effect to
this Master Agreement and the related transactions (including payment
of all fees and expenses to be paid or payable in connection
therewith);
(c) the financial statements of Borrower's Parent for the three fiscal
years ending prior to Closing audited by an independent accounting firm
acceptable to Lender;
(d) (1) Certificate of Borrower's Secretary dated the Closing
Date, certifying the incumbency of its officers
executing this Agreement and any other documents
required hereby and certifying corporate resolutions of
the Board of Directors of Borrower authorizing
Borrower's execution and delivery of the Acquisition
Agreements, this Agreement,
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the Lender's Interest Conveyance, each of the other
Security Documents and any other agreements related
hereto;
(2) a certified copy of the Articles of Incorporation of
Borrower which has been certified by the Secretary of
State of the State of incorporation of the Borrower
within nine (9) days prior to the Closing Date;
(3) a copy of the Bylaws of Borrower and any amendments
thereto which have been certified by the Secretary of
Borrower;
(e) Borrower shall have a minimum Working Capital of the amount specified
in the Schedule.
(f) Borrower shall deliver to Lender (i) "Letters in Lieu of Transfer
Orders" executed by the Borrower to each Purchaser of Hydrocarbons, each
Operator and any other obligors, in a format acceptable to Lender, (ii)
proposed organization chart for Borrower together with a proposed management
structure, including resumes on the management and operating teams, and (iii)
such other documents and instruments as specified in the Schedule.
(g) Borrower's Parent shall deliver to Lender a Certificate of President
of Borrower's Parent dated the Closing Date making the representations and
warranties set forth in Sections 4.4, 4.5, 4.11 and 4.12 on behalf of
Borrower's Parent.
(h) Lender shall be satisfied that Borrower has the corporate internal
control, financial and accounting procedures to complete the Development
Program, to operate the Properties, and to meet the financial and reporting
requirements contemplated herein.
(i) Borrower shall pay to Lender the Drawdown Fee.
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3. Subject to the Schedule, the following additional conditions precedent
apply to the making of each drawdown of the Term Loan:
1. Borrower shall deliver to Lender a certificate in the form attached
hereto as Exhibit 17, dated the date of such drawdown, of Borrower's
President and accompanied by an appropriate resolution of Borrower's
Board of Directors if requested by Lender, certifying that (i) each
of the documents previously delivered to Lender pursuant to Section
11.2 hereof (A) has not been terminated, amended or modified and
lists any failure by any party to comply with any of the terms
thereof, (B) remains in full force and effect and (C) there has been
no failure to comply with the terms and conditions set forth therein;
(ii) there is no Default or Event of Default; (iii) all
representations and warranties of Borrower herein including, but not
limited to those made in Article IV hereof, are true and correct as
if made on the date of such drawdown; and (iv) Borrower has kept and
maintained in full force and effect all insurance policies, with the
payment of premiums current containing the endorsements and coverage
as required by the term of this Master Agreement.
2. Upon Lender's request, Borrower shall deliver to Lender a Certificate
of Good Standing of Borrower in the State of incorporation of the
Borrower dated within five days of the date of the drawdown;
3. Lender shall have received such instruments and documents including,
without limitation, lien waivers (which Borrower shall use its best
efforts to obtain) and other documents from the service companies and
suppliers as Lender may from time to time request, in form and
content, and containing such certificates, approvals and other data
and information as Lender may reasonably require; and
4. Borrower shall deliver to Lender such other documents as specified in
the Schedule or as Lender may reasonably request.
ARTICLE 12.
Events of Default
1. Each of the following shall constitute an Event of Default hereunder
unless a period of time is specified with respect to a particular Event of
Default giving the Borrower time to cure ("Cure Period"), then such
failure, occurrence or event shall be considered a Default until the end
of such Cure Period when it shall constitute an Event of Default:
1. Borrower shall fail to make payment under this Master Agreement, the
Term Notes or any Security Document when due and such failure
continues beyond a
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Cure Period of five (5) days from the date such payment was
originally due; or
2. If Borrower shall fail to comply with any term, condition, covenant
of or in this Master Agreement, other than (i) in Articles V, VII or
VIII the provisions for which are set out in Section 12.1(c) below
and (ii) a payment Obligation which shall be governed by Section
12.1(a); or
(c) the Borrower shall fail to comply with any term, condition, covenant
under Articles V, VII or VIII and such failure shall continue beyond a Cure
Period of 15 (fifteen) days after the earlier to occur of (i) notice thereof to
the Borrower by the Lender or (ii) the Borrower otherwise becomes aware of such
failure provided, however, there shall be no Cure Period if Borrower fails to
comply with any term, condition or covenant under Sections 5.4, 8.6, 8.7, 8.10,
8.11 and 8.12; or
(d) Borrower or a Named Operator shall (i) execute an assignment for the
benefit of its creditors, (ii) become or be adjudicated a bankrupt or
insolvent, (iii) admit in writing its inability to pay its debts generally as
they become due, (iv) apply for or consent to the appointment of a conservator,
receiver, trustee, or liquidator of Borrower or of all or a substantial part of
its assets, (v) file a voluntary petition seeking reorganization or an
arrangement with creditors, or to take advantage of or seek any other relief
under any Debtor Relief Laws, (vi) file an answer admitting the material
allegations of or consenting to, or default in, a petition filed against it in
any proceeding under any Debtor Relief Laws, or (vii) institute or voluntarily
be or become a party to any other judicial proceedings intended to effect a
discharge of its debts, in whole or in part, or a postponement of the maturity
or the collection thereof, or a suspension of any of the rights of Lender or
any of its Affiliates granted in any of the Security Documents; or
(e) (i) an order, judgment, or decree shall be entered by any court of
competent jurisdiction approving a petition seeking reorganization of Borrower
or a Named Operator or appointing a conservator, receiver, trustee, or
liquidator of Borrower or any Named Operator or of all or any substantial part
of its assets, and such order, judgment, or decree is not permanently stayed or
reversed within a Cure Period of thirty (30) days after the entry thereof, or
(ii) a petition is filed against Borrower, a Named Operator seeking
reorganization, an arrangement with creditors, or any other relief under any
Debtor Relief Laws, and such petition is not discharged within a Cure Period of
thirty (30) days after the filing thereof; or
(f) if any statement or representation contained or made in or pursuant to
this Master Agreement, any Security Document, any financial statement or
certificate delivered by Borrower to Lender shall have been false or misleading
in any material respect when so made; or
(g) if any federal tax lien or any other lien is filed of record against
Borrower or a Named Operator and during a Cure Period of 30 days such lien is
not bonded or discharged; or
(h) if a judgment for an amount greater than that specified in the
Schedule shall be
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entered against Borrower or a Named Operator (except a judgment where the claim
is covered by insurance and the insurance company has accepted liability
therefor or for which Borrower has adequate reserves under GAAP) and such
judgment has not been stayed, vacated, bonded, paid, or discharged within a
Cure Period of 30 days; or
(i) upon the occurrence of any material violation by Borrower or a Named
Operator at any Property of any Environmental and Safety Regulation which is
not cured within a period of time prescribed by the relevant environmental
regulatory authority; or
(j) if Borrower shall fail to pay any Indebtedness (other than
Indebtedness hereunder) or any interest or premium thereon, when due (whether
at scheduled maturity or by acceleration, demand or otherwise) and such failure
shall continue after the applicable grace period, if any, specified in the
agreement or instrument relating to any such Indebtedness and the effect of
such failure or event is to accelerate or to permit the acceleration of the
maturity of such Indebtedness, or if any such Indebtedness shall be declared to
be due and payable or is required to be prepaid prior to the stated maturity
thereof; or
(k) (i) the declaration of an event of default (as defined in the
applicable document) under the Security Documents, the Price Protection
Agreement or any other agreement specified in the Schedule, or (ii) the failure
of any party other than the Lender to perform its obligations under the
Lender's Interest Conveyance, the Contract Operating Agreement, the Pledge
Agreements, the Warrants or any other agreement specified in the Schedule; or
(l) Lender shall at any time not have a perfected security interest and/or
mortgage lien on the Collateral as required by Article III hereof except due to
an act or omission of Lender; or
(m) this Master Agreement, any Term Note or any other Security Document
shall cease to be in full force and effect or shall be declared null and void
or the validity or enforceability thereof shall be contested or challenged by
Borrower, any Affiliate of Borrower or any of their respective shareholders, or
Borrower shall deny that it has any further liability or obligation under this
Master Agreement, any Term Note or any of the Security Documents; or
(n) any State, the MMS, the EPA or any other governmental authorities
shall take any act which could result in the termination of any leasehold
interest in any Property or any reduction of Borrower's Net Revenue Interest or
Working Interest in any Property; or
(o) if Borrower or a Named Operator fails to obtain or maintain any bond
required by the MMS or any applicable state authority, or shall fail to
promptly comply in all material respects with all pertinent federal, MMS, any
applicable federal or state rules, regulations, orders or requirements
pertaining in any way to Borrower or any Operator or the Property Equipment or
Hydrocarbons; or
(p) a Named Operator withdraws or is removed as Operator of the Properties
and is not
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replaced by a new Operator reasonably satisfactory to Lender; or
(q) if Borrower's Working Interest and/or Net Revenue Interest on the
Properties is decreased, other than by virtue of the Lender's Interest
Conveyance, if any, from those set forth in Exhibit 1 hereto without the prior
written consent of Lender, which consent shall not be unreasonably withheld; or
(r) any amendment or modification to the Operating Agreements which may
materially and adversely affect the Net Revenue Interest or Working Interest in
the Properties; or
(s) if Net Revenue for any given month is insufficient to cover, at a
minimum the interest under the Term Loan due and payable to the Lender under
this Master Agreement for that given month; provided, however, that such
failure shall not constitute an Event of Default if remedied by Borrower within
a Cure Period of five (5) Business Days of receipt of notice of such failure by
Lender; or
(t) if the Collateral Coverage Ratio is less than the ratio specified in
the Schedule; or
(u) if the PDP Collateral Coverage Ratio is less than the ratio specified
in the Schedule; or
(v) if production attributable to Borrower's Net Revenue Interest fails to
meet the Fixed Price Obligations; or
(w) if Proved Developed Producing (as defined by the Society of Petroleum
Engineers) production as determined by the recent Collateral Value (which will
include for purposes of this calculation, other proven reserves that will
become Proved Developed Producing subject to the completion of certain phases
of the Development Program), is less than the Fixed Price Obligations; or
(x) if Borrower's Working Capital is at any time below the amount
specified in the Schedule; or
(y) if any other event specified as an Event of Default in the Schedule
occurs.
ARTICLE 13.
Remedies of Lender
1. Upon the occurrence of any Event of Default, Lender may terminate this
Master Agreement without prior notice or demand to Borrower or may demand
payment of all Obligations (whether otherwise then payable on demand or
not) without terminating this
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Master Agreement and shall, in any event, be under no further
responsibility to extend any credit or afford any financial accommodation
to Borrower, whether under this Master Agreement or otherwise. The
occurrence of an Event of Default shall constitute the Loan Termination
Date, provided that Lender elects to terminate the Agreement or demand
payment of all Obligations. Upon such termination of this Master Agreement
following an Event of Default, Lender shall have, in addition to all of
its other rights under this Master Agreement, any Security Document, by
operation of law or otherwise (which rights shall be cumulative), all of
the rights and remedies of a secured party under the Uniform Commercial
Code and shall have the right to enter upon any premises where the
Collateral is kept and peacefully retake possession thereof.
2. Lender shall not have any obligation to preserve rights to any Collateral
against prior parties or to proceed first against any Collateral or to
marshal any Collateral of any kind for the benefit of any other creditor
of Borrower or any other Person. Lender is hereby granted a license or
other right to use, without charge, Borrower's labels, patents,
copyrights, rights of use of any name, trade secrets, trade names,
trademarks and advertising matter, or any property of a similar nature, as
it pertains to the Collateral, in completing production of, advertising
for sale, and selling any Collateral and Borrower's rights under all
licenses and any franchise, sales or distribution agreements shall inure
to Lender's benefit.
3. Borrower shall pay all costs and expenses of amending, administering,
implementing, perfecting, collecting, defending, declaring and enforcing
Lender's rights, security interests in the Collateral hereunder or under
any Security Document or other instrument or agreement delivered in
connection herewith, including, without limitation, searches and filings
at all times, and Lender's attorneys' fees (regardless of whether any
litigation is commenced, whether default is declared hereunder, and
regardless of tribunal or jurisdiction).
4. Upon the occurrence of an Event of Default, Lender shall have the right to
set-off and apply against the Obligations in such manner as Lender may
determine, at any time to Borrower, any and all deposits (general or
special, time or demand, provisional or final, other than deposits held by
Borrower for the account of third parties and designated as such) or other
sums at any time credited by or owing from Lender or any depositary to
Borrower whether or not the Obligations are then due. Lender shall provide
notice to Borrower not later than five days following any application of
such funds. As further security for the Obligations, Borrower hereby
grants to Lender a security interest in all money, instruments, and other
property of Borrower now or hereafter held by Lender, including, without
limitation, property held in safekeeping. In addition to Lender's right of
set-off and as further security for the Obligations, Borrower hereby
grants to Lender a security interest and lien in all deposits (general or
special, time or demand, provisional or final) and other accounts of
Borrower now or hereafter on deposit with or held by Lender or any
depositary and all other sums at any time credited by or owing from Lender
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or any depositary to Borrower. The rights and remedies of Lender hereunder
are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which Lender may have.
5. Upon the occurrence of an Event of Default, Lender shall have the right to
exercise Borrower's rights under the Operating Agreements.
ARTICLE 14.
General Provisions
1. Lender's rights and remedies under this Master Agreement shall be
cumulative and non-exclusive of any other rights or remedies which it may
have under any other agreement or instrument, by operation of law or
otherwise.
2. This Master Agreement is entered into for the benefit of the parties
hereto and their respective successors and assigns. It shall be binding
upon and shall inure to the benefit of such parties and their respective
successors and assigns.
3. Borrower hereby agrees that in connection with any additional development
work on the Properties, Lender shall have the right as outlined in the
Schedule, but not the obligation, to extend credit to Borrower (such
extension of credit being defined as an "Additional Loan") pursuant to the
same terms and conditions as those contained in this Master Agreement and
the related documents. In connection with such Additional Loan, Borrower
will execute such documents and agreements in form and substance
satisfactory to Lender as are necessary to evidence the Additional Loan
and security therefor.
4. Borrower will pay all of Lender's Closing Expenses and Lender's Post-
Closing Expenses during the pendency of this Master Agreement, including
the reasonable fees and out-of-pocket expenses of Lender's counsel(s) and
any other consultant engaged by Lender in connection with the
administration or enforcement of, or any amendments, modifications or
waivers with respect to, this Master Agreement or any other agreement or
instrument delivered in connection herewith, including but not limited to
costs of search, recording taxes or fees, filing fees, and any other
out-of-pocket expenses incurred by Lender.
5. Any notice, demand or document which either party is required or may
desire to give hereunder shall be in writing and, except to the extent
provided in the other provisions of this Master Agreement, given by
messenger, telex, telecopy or other electronic transmission, or United
States registered or certified mail, postage prepaid, return receipt
requested, addressed to such party at its address, telex and telecopy
number shown in the Schedule, or at such other address as either party
shall have furnished to the other by
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notice given in accordance with this provision. Any notice delivered or
made by messenger, telex, telecopy, or United States mail shall be deemed
to be given on the date of actual delivery as shown by messenger receipt,
the addressee's telex confirmation, the addressor's telecopy machine
confirmation or other verifiable electronic receipt, or the registry or
certification receipt. Lender need not delay action on notice transmitted
orally until receipt of written confirmation of such notice. In the event
that a discrepancy exists between the notice received by Lender orally and
the written confirmation, or in the absence of a written confirmation, the
oral notice, as understood by Lender will be deemed the controlling and
proper notice.
6. Neither the failure nor any delay on the part of any party hereto to
exercise any right, remedy, power, privilege or option under this Master
Agreement shall operate as a waiver of such or any other right, remedy,
power, privilege or option. No single or partial exercise of any right,
remedy, power, privilege or option under this Master Agreement shall
preclude any other or further exercise thereof or the exercise of any
other right, remedy, power, privilege or option. No waiver of any right,
remedy, power, privilege or option with respect to any occurrence shall be
construed as a waiver of such right, remedy, power, privilege or option
with respect to any subsequent or other occurrence. No waiver whatever
shall be valid unless in writing and signed by an officer of the party to
whom such waiver applies and then only to the extent therein set forth.
7. Except as may be required by law, rule or regulation or in response to
legal process, and such filings as are necessary or appropriate to create,
maintain and perfect liens and security interests contemplated hereby,
Borrower shall not release this Master Agreement or any other document,
agreement or instrument relating to or executed in conjunction with this
Master Agreement, or disclose the substantive terms hereof or thereof,
except to its attorneys, accountants or engineers on a need-to-know basis,
without the prior express written consent of Lender. Without limitation of
the foregoing, neither party or any of their respective Affiliates shall
issue any press release or make any other public announcement relating to
this Master Agreement without the written approval of the other party.
8. This Master Agreement, including the Schedule, together with all exhibits
annexed hereto, and the other agreements to which this Master Agreement
refers, constitute the final, entire agreement among the parties hereto
and supersede any and all prior oral or written and any and all
contemporaneous oral proposals, commitments, promises, agreements and
understandings between the parties with respect to the subject matter
hereof and thereof, all of which are merged herein or therein and replaced
hereby or thereby. It is expressly understood and agreed that this Master
Agreement and the Security Documents to which Borrower is a party may not
be terminated, waived, altered, amended, modified or otherwise changed in
any respect or particular whatsoever except in writing duly executed by
authorized representatives of the party to be charged.
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9. Borrower waives presentment, protest, notice of dishonor and notice of
protest upon any instrument on which it may be liable to Lender as maker,
endorser, guarantor or otherwise.
10. THIS MASTER AGREEMENT, THE TERM NOTES, THE LENDER'S INTEREST CONVEYANCE,
AND EACH OF THE OTHER SECURITY DOCUMENTS HAS BEEN MADE AND EXECUTED AND IS
TO BE PERFORMED IN THE STATE OF NEW YORK (OTHER THAN THE SECURITY
DOCUMENTS GOVERNED BY THE LAWS OF THE STATE WHERE THE COLLATERAL IS
LOCATED) . THE VALIDITY OF THIS MASTER AGREEMENT, THE TERM NOTES AND EACH
OF THE SECURITY DOCUMENTS AND OF ALL TRANSACTIONS PROVIDED FOR HEREIN OR
THEREIN SHALL BE GOVERNED BY, INTERPRETED AND CONSTRUED UNDER, AND IN
CONNECTION WITH, THE LAWS OF THE STATE OF NEW YORK. IN THE EVENT ANY
CONTROVERSY ARISES OUT OF OR RELATING TO THE MASTER AGREEMENT,
REPRESENTATIVES OF THE BORROWER AND LENDER SHALL FIRST MEET IN NEW YORK,
NEW YORK AND ATTEMPT TO NEGOTIATE A RESOLUTION OF THEIR DISPUTE. IN THE
EVENT SUCH NEGOTIATION SHALL FAIL TO RESOLVE ANY SUCH CONFLICT, THE
PARTIES HEREBY AGREE TO SUBMIT TO ARBITRATION ADMINISTERED BY THE AMERICAN
ARBITRATION ASSOCIATION UNDER ITS THEN CURRENT COMMERCIAL ARBITRATION
RULES. ANY SUCH CONTROVERSY SHALL BE SUBMITTED IN NEW YORK, NEW YORK TO A
PANEL OF THREE (3) ARBITRATORS, ONE CHOSEN BY EACH PARTY AND THE THIRD
UNDER THE AMERICAN ARBITRATION RULES. AT LEAST TWO (2) OF THE ARBITRATORS
SHALL HAVE OIL AND GAS INDUSTRY RELATED EXPERIENCE. THE ARBITRATORS WILL
HAVE NO AUTHORITY TO AWARD PUNITIVE OR OTHER DAMAGES NOT MEASURED BY THE
PREVAILING PARTY'S ACTUAL DAMAGES AND MAY NOT, IN ANY EVENT, MAKE ANY
RULING, FINDING, OR AWARD THAT DOES NOT CONFORM TO THE TERMS AND
CONDITIONS OF THE MASTER AGREEMENT. THE PARTIES SHALL FAITHFULLY OBSERVE
THIS AGREEMENT AND SUCH RULES, AND WILL ABIDE BY AND PERFORM ANY AWARD
RENDERED BY THE ARBITRATORS, AND A JUDGMENT OF ANY COURT HAVING
JURISDICTION MAY BE ENTERED ON THE AWARD. THE PROVISIONS OF THIS SECTION
RELATING TO ARBITRATION OF DISPUTES SHALL NOT APPLY TO THE ENFORCEMENT OF
ANY RIGHTS OR OBLIGATIONS OR THE SETTLEMENT OF DISPUTES IN CONNECTION WITH
THE SECURITY DOCUMENTS, AS TO WHICH THE DISPUTE RESOLUTION PROCEDURES WILL
BE SUCH AS ARE SET FORTH IN SUCH SECURITY DOCUMENTS. IN ANY ACTION WHICH
MAY BE INSTITUTED AGAINST BORROWER ARISING OUT OF OR RELATING TO THIS
MASTER AGREEMENT, THE TERM NOTES, THE LENDER'S INTEREST CONVEYANCE, OR ANY
OTHER SECURITY DOCUMENT, BORROWER HEREBY CONSENTS TO THE SERVICE OF
PROCESS IN CONNECTION WITH ANY ACTION BY THE MAILING THEREOF BY REGISTERED
OR CERTIFIED MAIL AT THE ADDRESS SET FORTH IN SECTION 14.5 OF THE
SCHEDULE.
11. Subject to Section 14.2 hereof, the benefits of this Master Agreement
shall not inure to any third party. Notwithstanding anything contained in
the Security Documents, or any conduct or course of conduct by the parties
hereto, before or after signing the Security Documents, this Master
Agreement shall not be construed as creating any rights, claims or causes
of action against Lender, or any of its officers, directors, agents or
employees by any Person other than Borrower.
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12. Any section, clause, subsection, sentence, paragraph, provision or portion
thereof of this Master Agreement held by a court of competent jurisdiction
to be invalid, illegal, or ineffective shall not impair, invalidate or
nullify the remainder of this Master Agreement, but the effect thereof
shall be confined to the section, clause, subsection, sentence, paragraph
or provision, or portion thereof so held to be invalid, illegal or
ineffective.
13. The headings, captions and arrangements contained in this Master Agreement
have been inserted for convenience only and shall not be deemed in any
manner to modify, explain, enlarge or restrict any of the provisions
hereof.
14. Borrower and Lender acknowledge that each of them has had the benefit of
legal counsel of its own choice and has been afforded an opportunity to
review this Master Agreement, the Term Notes and the other Security
Documents with its legal counsel and that this Master Agreement and the
other Security Documents shall be construed as if jointly drafted by
Borrower and Lender.
15. From time to time after the date hereof, each of the parties hereto agrees
to execute and deliver or cause to be executed and delivered, such
reasonable documents and instruments, and take such other reasonable and
lawful action as the other party shall deem necessary or desirable to
perfect or evidence perfection of its security interest, to enforce its
obligations hereunder or to otherwise effectuate the purposes of this
Master Agreement.
16. Lender may assign, transfer or otherwise dispose of any of its rights or
obligations hereunder without the prior written consent of Borrower
provided that Borrower continues to deal only with Lender in regard to
funding and reporting requirements hereunder and no assignment shall
relieve Lender of its obligations hereunder. Borrower may not assign any
of its rights or obligations hereunder without the prior written approval
of Lender.
17. This Master Agreement may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Master Agreement
as of the date and year first above written.
VENUS DEVELOPMENT INC.
By:
------------------------------------
Name:
Title:
Executed as a Deed for and on behalf of
VENUS ENERGY PLC (solely with respect
to its obligations under Sections 4.4,
4.5, 4.11, 4.12) in the presence of:
Director:
------------------------------
Name:
Director:
------------------------------
Name:
VENUS EXPLORATION, INC.
(solely with respect to its obligations
under Sections 4.4, 4.5, 4.11, 4.12)
By:
------------------------------------
Name:
Title:
STRATUM GROUP ENERGY PARTNERS, L.P.
By Stratum Corp., as its general partner
By:
------------------------------------
Name:
Title:
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SCHEDULE TO THE TERM LOAN AND SECURITY MASTER AGREEMENT, made as of this 8th
day of October, 1996 between Venus Development, Inc., a Texas corporation,
having its principal executive office and place of business at One Riverwalk
Place, 700 N. St. Mary's Street, San Antonio, Texas 78205-3512 ("Borrower"),
and Stratum Group Energy Partners, L.P. a Delaware limited partnership, having
an office at 650 Fifth Avenue, New York, New York 10019 ("Lender").
ARTICLE I Definitions
Terms not defined herein shall have the meanings assigned to them in the Term
Loan and Security Master Agreement dated the date hereof between Borrower and
Lender (the "Master Agreement"). In the event of any inconsistency between the
provisions of this Schedule and other provisions of the Master Agreement, this
Schedule will prevail. If a Section in the Master Agreement references the
Schedule, but the Schedule does not contain a corresponding reference to such
Section, the Master Agreement shall apply without modification. Section
numbers in this Schedule correspond to Section numbers in the Master Agreement.
In the event of any inconsistency between the provisions of the Master
Agreement and any Deed of Trust, Mortgage, Assignment of Production, Security
Agreement and Financing Statement delivered in connection therewith, the Master
Agreement will prevail.
Defined terms and information required to complete definitions:
"Affiliate" Under clause (i) in the definition of "Affiliate": The
references to 10% are hereby deleted and replaced in their entirety with
the following: "20%".
"AMI" boundaries: not applicable.
"Basis Differential" shall be calculated using the twelve month period
preceding the effective date of the Reserve Report.
"Borrower's Parent" shall mean Venus.
"Cash Flow Sharing Percentage" shall equal 90%, provided that after
completion of the Development Program contemplated under Tranche A, if the
PDP coverage ratio is equal to or greater than 1.4 to 1.0, then the Cash
Flow Sharing Percentage shall equal 85%; provided further that if
drawdowns under Tranche B cause the PDP Coverage Ratio to drop below 1.4
to 1.0, then the Cash Flow Sharing Percentage shall increase to 90% until
such time as the PDP Coverage Ratio is equal to or greater than 1.4 to
1.0.
"Collateral Value" Under the definition of "Collateral Value":
(1) (a) proved developed producing reserves shall be risked (reduced) by 5%,
provided, however, proved developed producing reserves that have been
producing for three continuous months or
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less shall be risked in accordance with their prior reserve
classification;
(b) proved developed non-producing reserves shall be risked (reduced) by
15%;
(c) proved undeveloped reserves shall be risked (reduced) by 40%.
(2) Maximum percentage of proved developed non-producing and proved
undeveloped reserves that can make up the Collateral Value: Not
applicable.
(3) With respect to the future net operating cash flow from paragraphs (b) and
(c) of the definition of Collateral Value, the Collateral Value shall be
calculated net of capital costs attributable to those reserves unless the
capital costs have already been incurred and funded or, in cases in which
the Collateral Value is being compared to a prospective loan amount,
included in such loan amount.
(4) The present value shall be determined using future monthly net operating
cash flow.
"Contract Operating Agreement" shall mean the agreement dated as of the
date hereof in which Borrower appoints Venus Exploration, Inc. as Operator
for certain Properties and details certain matters concerning such
appointment, substantially in the form annexed hereto as Exhibit 20.
"Defensible Title" Under clause (a)(i) and (ii) of the definition of
"Defensible Title": The following language is deleted in its entirety:
"for the productive life of such Property".
"Development Program" shall mean the projected program for the development
of Properties as outlined in Exhibit 12 annexed to the Master Agreement,
as such program may be amended as mutually agreed by Lender and Borrower.
"Drawdown Fee" shall mean the Drawdown Fee equal to 1% of the amount of
each drawdown under the Term Loan payable to Lender at the time of each
drawdown.
"Equity Conversion Agreement" shall mean the Equity Conversion Agreement,
dated as of the date hereof, between Venus PLC and Stratum Group, L.P.
annexed hereto as Exhibit 21.
"Engineers" shall include (a) Netherlands Sewell and Associates, (b)
Cawley, Gillespie & Associates, Inc., (c) Ryder Scott Company and (d)
Williamson Petroleum Consultants or such other independent petroleum
engineering firms that shall be acceptable to Lender.
"Fixed Price Purchase and Sale Agreement" The definition of Fixed Price
Purchase and Sale Agreement (and all references thereto) are hereby
deleted.
"Lease Operating Expenses" shall mean the lease operating expenses
attributable to the Properties allowed under the applicable Operating
Agreements and/or the Contract Operating Agreements (and calculated in
accordance with COPAS), but not to exceed, in the aggregate, on an average
per well basis, those monthly amounts set forth in Exhibit 22 hereto, and,
if applicable, one-time extraordinary maintenance expense items customary
for properties similar
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to the Properties and any extraordinary expenses incurred to remedy or
mitigate a force majeure event.
"Lender's Closing Expenses" Under the definition of "Lender's Closing
Expenses": The following language is inserted before "fees" in each case
in which such word appears: "reasonable".
"Lender's Interest" shall mean the overriding royalty interest equal to 5%
(five percent) of Borrower's Net Revenue Interest in all revenues and
proceeds attributable to the Properties, as set forth in the Lender's
Interest Conveyance, substantially in the form annexed to the Master
Agreement as Exhibit 3, beginning (i) from September 1, 1996 with respect
to Properties described in Exhibit 1 hereto as of the Closing Date, and
(ii) from the effective date of the applicable acquisition with respect to
Properties acquired by Borrower subsequent to the date hereof.
"Loan Termination Date": The termination date of the Term Loan for
purposes of clause (i) of the definition of Loan Termination Date is (a)
with respect to Section 2.2(a)(i), (ii) and (iii) and the portion of
Section 2.2(a)(iv) relating to Tranche A, October 8, 2001 and (b) with
respect to Section 2.2(b) and the portion of Section 2.2(a) (iv) relating
to Tranche B, seven (7) years from the date of the first drawdown under
Tranche B.
"Named Operators" shall include: Venus Exploration, Inc.
"Net Revenue" Under the definition of "Net Revenue":
(1) Date after which revenues and expenses are deemed part of the calculation
of Net Revenue: September 1, 1996.
(2) Additional allowable expenses for purposes of calculating Net Revenue:
(E) the cost of preparing the Reserve Report on a semi-annual basis.
"Obligations" The following language is deleted in the first sentence of
the definition of "Obligations": "or any Affiliate of Borrower".
"Origination Fee" is deleted in its entirety.
"Repayment Date" shall mean the last business day of each month,
commencing November 30, 1996.
"Total Proved Coverage Ratio" shall equal (at any particular time of
determination) the ratio of (a) the Collateral Value with respect to all
reserve categories, to (b) the outstanding principal and accrued and
unpaid interest on the Term Loan.
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"Venus" shall mean Venus Exploration, Inc.
"Venus PLC" shall mean Venus Energy PLC, a U.K. corporation.
"Warrant Agreement" shall mean the Warrant Issuance Agreement, dated as of
the date hereof, between Venus PLC and Stratum Group, L.P. annexed hereto
as Exhibit 23.
"Warrants" shall mean the warrants issued pursuant to the Warrant
Agreement.
"Well" shall mean any existing oil or gas well or salt water disposal well
or any other well located on or related to the Properties, as described on
Exhibit 1 annexed to the Master Agreement, or any well which may hereafter
be drilled and/or completed thereon during the term of this Master
Agreement, except as provided in Section 14.3, or any facility or
equipment in addition to or replacement of any thereof. "Well" shall also
include a "production unit" around any Well, which shall mean the amount
of acreage permitted or prescribed by the applicable governmental
authority having jurisdiction to qualify any such Well for the maximum
production allowable or, in the absence of such governmental requirements,
forty (40) acres for each oil Well and one hundred sixty (160) acres for
each gas Well, the determination of "oil" and "gas" to be made in
accordance with applicable state law and regulation. The production units
for each Well hereunder shall, to the extent practicable, be in the form
of a square, with the Well at the approximate center thereof.
"Working Capital" shall mean the difference between current assets and
current liabilities calculated in accordance with GAAP excluding the
current portion of long term debt pertaining to the Term Loan and the
interest thereon and any post-closing revenue adjustments relating to
current assets.
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ARTICLE II The Loan
Section 2.1 Maximum Amount of the Facilities.
Maximum aggregate amount of the Term Loan: $20,000,000. The parties
agree that for tax allocation purposes $30,000 of the amount initially
drawn under Tranche A of the Term Loan shall be deemed to be the payment
by Stratum Group, L.P. for the Conversion Option (as defined in the
Equity Conversion Agreement).
Section 2.2 Purpose of Drawdowns.
a) "Tranche A": A maximum amount of $2,628,000 will be used to finance or
refinance as the case may be:
(i) up to $1,728,000 of the costs associated with the development
of the Properties with proven reserves (as classified by an
Engineer as of Closing);
(ii) up to $600,000 of the costs associated with the development of
Properties classified as probable, possible or exploratory (as
classified by an Engineer as of Closing) and/or the cost of options
purchased pursuant to any Price Protection Agreement;
(iii) up to $100,000 of Lender's Closing Expenses and to the extent
all of Lender's Closing Expenses have been paid and financed
hereunder and this Section 2.2(a)(iii) is not fully drawn, the cost
of the Reserve Report delivered at Closing and/or Borrower's legal
expenses related to Closing; and
(iv) up to $200,000 of the Drawdown Fee.
b) "Tranche B": Up to $17,372,000 to finance or to refinance, as the case
may be:
(i) the costs associated with the continued development of proved
and/or other oil and gas reserves; and/or
(ii) the future acquisition and development of properties to be
identified by Borrower subsequent to the Closing; and/or
(iii) exploratory drilling costs incurred in connection with proved
oil and gas reserves the continued development of which is financed
under clause (i) above.
Section 2.3 Drawdown Procedure.
Section 2.3(c) Additional requirements for drawdown:
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65
A) Tranche A. Multiple drawdowns under Section 2.2(a)(i) will be permitted
after Closing pursuant to the Development Program and upon presentation
of AFEs and invoices supporting each drawdown request.
Subject to Section 11.3, multiple drawdowns under Section 2.2(a)(ii) will
be permitted after Closing provided that (i) after giving effect to each
such drawdown, the Total Proved Coverage Ratio shall be equal to or
greater than 1.50 to 1.0; (ii) based on the calculation of Collateral
Value, it is projected that the Term Loan will be amortized by the Loan
Termination Date; (iii) each such drawdown is made pursuant to the
Development Program; (iv) Borrower shall have delivered AFEs and invoices
supporting each drawdown request; and (v) the fixed prices achieved for
the additional volumes to be hedged in connection with each such drawdown
must be reasonably acceptable to Lender, and the hedged volumes will be
increased such that the amount of such additional volumes at the hedged
price, together with any other volumes hedged under the Term Loan, is
120% of the amount outstanding under the Term Loan.
Multiple drawdowns under Section 2.2(a)(iii) and for the portion of
Section 2.2(a)(iv) pertaining to Tranche A will be permitted immediately
upon Closing. Multiple drawdowns under Section 2.2(a)(iv) with respect to
those amounts pertaining to Tranche B will be permitted at the time of
each drawdown under Tranche B. The final drawdown with respect to Section
2.2(a)(i), (ii) and (iii) shall occur no later than May 8, 1997.
B) Tranche B. Subject to Section 11.3, multiple drawdowns under Section
2.2(b) will be permitted provided that (i) prior to giving effect to each
such drawdown, the PDP Collateral Coverage Ratio is equal to or greater
than 1.25 to 1.0; (ii) after giving effect to each such drawdown, the
Total Proved Coverage Ratio shall be equal to or greater than 1.50 to
1.0; (iii) based on the calculation of Collateral Value, it is projected
that the Term Loan will be amortized by the Loan Termination Date; (iv)
each such drawdown is made pursuant to a new development program
acceptable to Lender and/or an acquisition agreement acceptable to
Lender; (v) Borrower shall have delivered AFEs and invoices supporting
each drawdown request; (vi) the fixed prices achieved for the additional
volumes to be hedged in connection with each such drawdown must be
acceptable to Lender, and the hedged volumes will be increased such that
the amount of such additional volumes at the hedged price, together with
any other volumes hedged under the Term Loan, is 120% of the amount
outstanding under the Term Loan and (vii) the documents and agreements
required pursuant to Section 11.4 herein, in form and substance
satisfactory to Lender, shall be delivered to Lender duly executed by the
applicable parties. The final drawdown under Tranche B shall occur no
later than October 8, 1998.
The following additional subsection is added to Section 2.3:
" 2.3(e) Unless otherwise instructed by Borrower in the applicable
drawdown request, Lender shall disburse drawdowns under Section 2.3(c) by
wire transfer to the account of Borrower identified below:
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Account name: IBC-San Antonio Branch, for further credit to
Venus Development, Inc.
Account number: 65277-11
Bank: International Bank of Commerce, Laredo Texas
ABA#: 114902528"
Section 2.5 Interest.
2.5(a) Term Loan Interest Rate: a fluctuating rate equal to 1.0% (one
percent) per annum above the Prime Rate with each change in such
fluctuating interest rate to take effect simultaneously with the
corresponding change in Prime Rate. "Prime Rate" as used in this Master
Agreement shall mean the per annum rate of interest announced from time
to time by Bank One, Texas, N.A. as its prime lending rate or, if
unavailable, the then prevailing comparable rate announced by any
successor thereof.
Section 2.5(b) of the Master Agreement is hereby deleted and replaced in
its entirety with the following language:
"(b) Upon the occurrence of an Event of Default, the rate of interest
applicable to the Term Notes hereunder shall increase by an additional
rate equal to the lower of: (i) 2% (two percent), or (ii) the highest
rate permitted by applicable law (the "Default Rate")."
Section 2.7 Time and Place of Payments.
2.7 (a) The SG Account:
Account number: 1890324906
Account name: Stratum Group Energy Partners, L.P.
Bank: Bank One, Texas, N.A.
ABA #: 111000614
The SG Account shall be maintained with an FDIC-insured bank.
Section 2.8 Deposits into SG Account
2.8(a) The following language is inserted in Section 2.8(a) of the Master
Agreement following "Working Interest": "and Lender's Interest".
Section 2.9 Cash Balance Account.
2.9(c) If no Event of Default has occurred, Borrower may request a
release of amounts credited to the Cash Balance Account on a monthly
basis for (i) royalty payment distributions and Borrower's production and
property related taxes, (ii) Borrower's share of Net Revenue in
accordance with the Cash Flow Sharing Ratio and (iii) Lease Operating
Expenses incurred in the
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prior month. If no Event of Default has occurred, Borrower may request a
release of amounts credited to the Cash Balance Account on a semi-annual
basis for expenses incurred in connection with the preparation of the
Reserve Report. If an Event of Default has occurred, and Borrower has not
requested a release of amounts credited to the Cash Balance Account on a
monthly basis for (i) and (iii), Lender shall remit directly such amounts
to the appropriate parties.
Section 2.10 Optional Prepayment of the Term Loan.
Prepayment will not be permitted until the occurrence of the earlier of
(i) the drawdown of all amounts under Section 2.2 and (ii) the three-year
anniversary of the date of Closing. Prepayment will thereafter be
permitted without penalty.
ARTICLE III Security
(d) The following language is inserted following "from time to time" in
paragraph (d) of Article III of the Master Agreement: "on an annual
basis".
The following additional paragraph is inserted in Article III of the
Master Agreement.
"(h) Each of Venus and Venus PLC is executing this Master Agreement
solely for the purpose of making the representations, warranties,
covenants and agreements contained in Sections 4.4, 4.5, 4.11 and 4.12 of
this Master Agreement, to the extent such Sections contain
representations, warranties, covenants or agreements with respect to
Venus and Venus PLC, respectively. Notwithstanding anything to the
contrary in this Master Agreement, except to the extent set forth in the
preceding sentence, Lender shall have no recourse to Venus, Venus PLC or
their officers, directors or shareholders for the payment or performance
of the Obligations, and such officers, directors and shareholders shall
have no liability as a result of this Master Agreement, and Lender shall
have no recourse to the officers, directors or shareholders of Borrower
for the payment or performance of the Obligations.
ARTICLE IV Inducing Representations
Section 4.1 Borrower's state of incorporation: Texas.
Section 4.2 Borrower's registered agent in its principal place of
business: Will C. Jones IV
Section 4.3 Shareholder of Borrower's issued and outstanding stock:
Venus Exploration, Inc.
Section 4.4 The first sentence of Section 4.4 of the Master Agreement is
deleted and replaced in its entirety with the following:
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"The execution, delivery and performance of this Master
Agreement, the Acquisition Agreements, the Term Notes, the
Lender's Interest Conveyance, the other Security Documents
and all and any other agreements, instruments and documents
to be delivered by Borrower hereunder and under Annex A
hereto and the creation of all liens, mortgages and security
interests provided for herein are within Borrower's corporate
power and authority and, only with respect to inducing
representations outlined on the signature page of this Master
Agreement, each of Borrower's Parent's and Venus PLC's
corporate power and authority, have been duly authorized by
all necessary and proper corporate action (including the
consent of shareholders where required), are not in
contravention of (i) any agreement or indenture to which
Borrower, Borrower's Parent or Venus PLC, is a party or by
which any of them is bound, (ii) the Certificate of
Incorporation or By-Laws of Borrower, Borrower's Parent and
Venus PLC and (iii) any provision of law, and the same do not
require the consent, approval, authorization or license of
any governmental body, agency, authority or any other Person
which has not been obtained and a copy thereof furnished to
Lender."
Section 4.5 Section 4.5 of the Master Agreement is deleted and replaced
in its entirety with the following new Section 4.5:
"4.5 Each of Borrower, Borrower's Parent and Venus PLC is
Solvent."
Section 4.6 Date of the Balance Sheet to be delivered by Borrower:
Closing Date.
Section 4.7 Date of acceptance of the Commitment Letter: August 7, 1996.
Section 4.9 The following language is inserted at the beginning of
Section 4.9 of the Master Agreement:
"Except as set forth in Exhibit 24,"
Section 4.11 Section 4.11 of the Master Agreement is deleted and replaced
in its entirety with the following new Section 4.11:
"4.11 Each of Borrower, Borrower's Parent and Venus PLC has
filed all tax returns (including, but not limited to,
Federal, State and local) required to be filed and paid all
taxes shown thereon to be due including interest and
penalties or has provided adequate reserves (in accordance
with GAAP) therefor. No assessments have been made against
any of Borrower, Borrower's Parent or Venus PLC by any taxing
authority nor has any penalty or deficiency been made by any
such authority. No Federal or other income tax return of any
of Borrower, Borrower's Parent or Venus PLC is presently
being examined by the Internal Revenue Service or any State,
local or other tax authority nor are the results of any prior
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examination by the Internal Revenue Service or any State,
local or other tax authority being contested by any of
Borrower, Borrower's Parent or Venus PLC. All ad valorem,
property, production, excise, severance, windfall profit and
similar taxes and assessments based on or measured by the
ownership of property or the production or removal of
Hydrocarbons or the receipt of proceeds therefrom from the
Properties have been and will be timely paid. Borrower,
Borrower's Parent, Venus PLC and all predecessors in interest
to any of the Properties have paid all taxes required to be
paid by them such that no taxing authority has any right to
assert any lien over or other interest in the Properties.
Section 4.12 Section 4.12 of the Master Agreement is deleted and replaced
in its entirety with the following new Section 4.12:
"4.12 No action or proceeding is now pending or is threatened
against any of Borrower, Borrower's Parent, Venus PLC or any
Named Operator with respect to the Properties, at law, in
equity or otherwise, before any court, board, commission,
agency or instrumentality of the Federal or State government
or of any municipal government or any agency or subdivision
thereof, or before any arbitrator or panel of arbitrators and
neither Borrower, Borrower's Parent, Venus PLC, nor any Named
Operator has accepted liability for any such action or
proceeding. There is no proceeding pending before any
governmental agency (including, but not limited to, Federal,
State or local) and, to the knowledge of each of Borrower,
Borrower's Parent and Venus PLC, no investigation has been
commenced before any such government agency the effect of
which, if adversely decided, would materially adversely
affect or impair Borrower's, Borrower's Parent's, Venus PLC's
or any Named Operator's respective business or financial
condition.
Section 4.14 Outstanding Indebtedness at Closing Date: None.
Section 4.17 Borrower may commit to make Investments in connection with
the acquisitions and/or development funded under Tranche B
subject to Lender's approval.
Section 4.19 Additional agreements between Lender and Borrower with
respect to which Borrower must represent that the
transactions contemplated by such agreements will not
adversely affect any license, permit or authorization: Crude
Oil Purchase and Sale Option Agreement, the Natural Gas
Purchase and Sale Option Agreement, the Price Protection
Agreement, the Equity Conversion Agreement and the Warrant
Agreement.
Section 4.21 The following language is inserted in Section 4.21 of the
Master Agreement following the words "in the ordinary course
of business":
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"and such liabilities arising under the Operating Agreements
in the ordinary course of business".
Section 4.28 The following language is inserted at the beginning of
Section 4.28 of the Master Agreement:
"Except as set forth in Exhibit 25,"
Section 4.33 The following language is inserted at the beginning of clause
(iii) of Section 4.33 of the Master Agreement:
"except as set forth in Exhibit 26,"
Clause (v) of Section 4.33 is deleted and replaced in its
entirety with the following new clause (v):
"(v) the terms of the Leases and other interests do not
provide that they will expire on a date certain, nor after a
specific number of years from some starting date."
Section 4.40 Borrower's federal taxpayer identification number:
74-2795040.
ARTICLE V Financial Statements and Information; Certain Notices to Lender
Section 5.2 In Section 5.2 of the Master Agreement, "thirty (30)" is
hereby deleted and replaced in its entirety with the
following: "forty-five (45)".
Section 5.5 Dates for delivery of the Reserve Report on a semi-annual
basis: The first Reserve Report with an effective date of
September 1, 1996 shall be delivered no later than Closing
and thereafter within thirty (30) days after the March 31
effective date and the September 30 effective date of each
Reserve Report each year.
Section 5.8 The following language is inserted before "satisfactory to
Lender" in Section 5.8 of the Master Agreement: "reasonably".
ARTICLE VIII Affirmative Covenants
Section 8.7 Threshold for notice as to damage or destruction or loss or
depreciation of Collateral: $50,000.
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Section 8.12 Section 8.12 is amended to add the following:
"(j) Business Interruption Insurance, customary for the
industry, in an amount not less than the amount specified in
the Schedule."
Borrower shall or shall cause Venus to maintain Worker's
Compensation/Employer's Liability Insurance, Comprehensive or
Commercial General Liability Insurance, Pollution Liability
Insurance, Comprehensive Automobile Liability Insurance and
Operator's Extra Expense or Energy Exploration and
Development Insurance, "All Risk" Property Insurance,
Builder's Risk Insurance and Business Interruption Insurance
in the amounts to be determined prior to the first drawdown
hereunder.
Section 8.18 Section 8.18 of the Master Agreement is deleted and replaced
in its entirety with the following new Section 8.18:
"8.18 so long as any Obligation remains unfulfilled or any
Collateral remains located at any of the Properties or other
facilities owned, leased, or used by Borrower, (i) accord,
and cause each of the Operators to accord, Lender or its
agent or consultants, including without limitation, the
Engineers, at their sole cost, risk, and expense, full and
unrestricted access to the Properties and such other
facilities, to the financial and operational records of
Borrower and each of the Operators and to any other
facilities including pipelines, so as to permit Lender or its
agents or its consultants to, among other things, witness
workovers and other field activities, audit records or take
delivery of production, (ii) allow Lender to examine and
inspect all property, including, without limitation, the
Collateral and to examine, inspect and copy all books and
records with respect thereto or relevant to the Obligations,
in each case (i) and (ii) during Borrower's normal business
hours with such notice to Borrower as is reasonable under the
circumstances, and subject to reasonable safety restrictions
and in accordance with custom in the industry and the
applicable Operating Agreement. Borrower shall give Lender
due notice of workovers and other field activities to permit
Lender to exercise its rights under clause (i) above.
Borrower will allow the Lender access to appropriate
officers, employees and agents of Borrower to discuss the
affairs, finances and accounts of Borrower at such reasonable
times and as often as Lender reasonably may request, and will
allow Lender to discuss with Borrower's officers, independent
consultants, and Operators, and other Persons, and such
Persons are hereby authorized to discuss with Lender,
Borrower's business, assets, liabilities, financial
condition, results of operations and business prospects, and
Borrower hereby irrevocably authorizes Lender to obtain from
such Persons maintaining any such records, any service
records relating to Borrower or any of the Property subject
to Lender's security interest or lien;"
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Section 8.20 The following is inserted in the first clause of the first
sentence of Section 8.20 of the Master Agreement after
"Operating Agreements":
"in all material respects".
ARTICLE IX Negative Covenants
Section 9.6 The following is inserted in Section 9.6 of the Master
Agreement after the word "assets":
"with a value greater than $50,000 per occurrence or $100,000
per annum"
Section 9.11 Section 9.11 of the Master Agreement is deleted and replaced
in its entirety with the following new Section 9.11:
"make, or suffer to exist, any Investment, other than in
connection with the acquisitions and/or development funded
under Tranche B subject to Lender's approval;"
Section 9.19 The following is inserted at the end of Section 9.19:
"which approval shall not be unreasonably withheld".
Section 9.20 Borrower shall not give its consent under the terms of the
applicable Operating Agreements to any capital expenditure in
excess of $50,000 for any one capital expenditure or in
excess of $100,000 in the aggregate during any twelve-month
period without the approval of Lender except in cases of
emergency or as required by law.
Section 9.21 The following is inserted in clause (i) of Section 9.21 of
the Master Agreement following "commercial production,":
"except to the extent that Lender's Interest causes such Well
to become uneconomic, in which case Lender shall convert the
Lender's Interest into a net profits interest or a working
interest at Lender's discretion based on a methodology to be
mutually agreed by Lender and Borrower at such time; provided
that, if, subsequent to the conversion of the Lender's
Interest, such Well becomes or continues to be uneconomic,
and Lender does not believe that such Well should be
abandoned, Borrower may transfer all of its interest in such
Well to Lender in exchange for the salvage value of all
Equipment and the express assumption of all plugging and
abandonment liability relating to such Well, and if,
subsequent to the conversion of the Lender's Interest into a
Working Interest, such Well becomes or continues to be
uneconomic, and Borrower does not
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believe that such Well should be abandoned, Lender may
transfer all of its interest in such Well to Borrower
in exchange for the salvage value of all Equipment and
the express assumption of all plugging and abandonment
liability relating to such Well"
ARTICLE XI Closing; Conditions Precedent to Closing
Section 11.1 Closing Date: October 8, 1996.
Section 11.2 The following is inserted in the first sentence of
Section 11.2 of the Master Agreement after the first
reference to the word "documents":
"and satisfy those conditions."
Section 11.2(a) Name of Borrower's counsel providing the legal opinions
required by Section 11.2(a) of the Master Agreement:
Andrews & Kurth L.L.P.
Section 11.2(c) Section 11.2(c) of the Master Agreement is deleted and
replaced in its entirety with the following new Section
11.2(c):
"Venus' unaudited financial statements, including
balance sheets, dated as of July 31, 1996 and August
31, 1996 (estimated), each prepared in accordance with
GAAP, dated and certified as of the Closing Date by
Venus' President or chief financial officer showing the
financial position of Venus and a summary of the
financial history and historical balance sheets of
Venus Oil Company."
Section 11.2(e) Minimum Working Capital of Borrower at Closing Date:
$100,000.
Section 11.2(f)(iii) Additional documents to be delivered by Borrower in form
and substance acceptable to Lender and other conditions
to be satisfied at Closing (including without
limitation those documents listed in Annex A):
(A) Contract Operating Agreement.
(B) Venus PLC shall execute and deliver to Lender the
Warrant Agreement and the Equity Conversion Agreement
in the forms attached hereto as Exhibits 23 and 21,
respectively.
(C) Evidence that the prices achievable under the
Price Protection Agreement shall be equal to or
greater than $17.25 BO and $1.85 MMBTU based on NYMEX
prices.
Section 11.3(c) The following language is inserted at the end of Section
11.3(c) of the Master Agreement:
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"including, to the extent Borrower is required to deposit the
proceeds of any drawdown hereunder into an escrow account in
connection with the development of the Properties,
documentation evidencing the assignability of the related
escrow agreement to Lender and the requirement that any
escrowed funds not released in accordance with the terms of
the escrow agreement be returned to Lender"
Section 11.3(d) (i) Title opinions issued by counsel or other title
materials, in each case reasonably acceptable to Lender, with
respect to the Properties relating to such drawdown including
any farm-out agreements and other development contracts; (ii)
Exhibit 1 to the Master Agreement in form and substance
satisfactory to Lender; (iii) documentation evidencing
ownership by the Borrower of the Properties relating to the
drawdown, including assignments and transfers of contract
rights and other property interests (including interests
created pursuant to farm-out agreements, if any) to Borrower;
(iv) satisfaction of the requirements set forth in Section
11.2(a); (v) insurance required by Section 8.12 in amounts
satisfactory to the Lender; (vi) if such drawdown relates to
the Nome property, environmental review of the Nome property;
(vii) AFEs and well plats with respect to the Properties;
(viii) list of Borrower's account debtors, purchasers of
Hydrocarbons, Operators and other obligors to whom notices of
assignment of proceeds shall be sent and (ix) Exhibits 24, 25
and 26 to the Master Agreement and Exhibit 1 to the Crude Oil
Purchase and Sale Master Option Agreement and the Natural Gas
Purchase and Sale Option Master Agreement.
The following additional section is added to Article XI of the Master
Agreement:
Section 11.4 "11.4 (a) In addition to the conditions precedent outlined
in Section 11.3 and Section 2.3 herein, as conditions
precedent to the making of the initial drawdown with respect
to each new development and/or acquisition project under
Tranche B approved by Lender, on or before the date on which
such drawdown is requested, with respect to the Properties
relating to such drawdown, Borrower shall deliver the
following documents and agreements, to the extent not
previously delivered under Section 11.2, duly executed by the
applicable parties and in form and substance satisfactory to
Lender:
(i) an opinion of counsel named in the Schedule (or local counsel
as necessary) substantially in the form annexed hereto as
Exhibit 10 to the extent applicable;
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(ii) Amendment to Exhibit 6 hereto adding the documentation
evidencing ownership by the Borrower of the Properties
relating to the drawdown, including assignments and transfers
of contract rights and other property interests (including
interests created pursuant to farm-out agreements, if any) to
Borrower;
(iii) Amendment to Exhibit 1 hereto adding the Properties relating
to the drawdown;
(iv) Amendment to Exhibit 2 hereto adding the Equipment located on
or under any of the lands attributable to the Properties
relating to the drawdown;
(v) Amendments to the Crude Oil Purchase and Sale Option
Agreement and the Natural Gas Purchase and Sale Option
Agreement giving the Lender the right to purchase the
production attributable to the Properties relating to the
drawdown;
(vi) Lender's Interest Conveyance;
(vii) Operating Agreements;
(viii) Notice of security interest to Borrower's account debtors,
Purchasers of Hydrocarbons, Operators and other obligors
substantially in the form of Exhibit 8 hereto;
(ix) Title opinions issued by counsel or other title materials, in
each case reasonably acceptable to Lender, with respect to
the Properties relating to such drawdown including any farm-
out agreements and other development contracts;
(x) Deed of Trust, Mortgage, Assignment of Production, Security
Agreement and Financing Statement substantially in the form
of Exhibit 27 hereto;
(xi) UCC financing statements for filing in the appropriate
jurisdictions;
(xii) a Reserve Report, in form and substance acceptable to Lender,
prepared by one of the Engineers if the reserves attributable
to the Properties relating to the drawdown were not covered
in the Reserve Report delivered at Closing;
(xiii) Amendment to the Price Protection Agreement to augment or
adjust the Notional Amount as necessary; and
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(xiv) evidence that the Operator has obtained from any other
working interest owners of the Properties relating to the
drawdown (A) the consent of each such working interest owner
to the drilling of the applicable well if such consents are
required pursuant to the applicable Operating Agreement and
(B) payment of each working interest owner's share of the
cost of drilling such well to the extent required pursuant to
the terms of the applicable Operating Agreement."
ARTICLE XII Events of Default
Section 12.1(a) The following language is inserted at the end of Section
12.1(a) of the Master Agreement: "unless such failure results
from the event described in Section 5.3(a) of the Natural Gas
Purchase and Sale Option Master Agreement or the Crude Oil
Purchase and Sale Option Master Agreement"
Section 12.1(b) The following language is inserted prior to "Articles V," in
Section 12.1(b) of the Master Agreement: "Section 4.13,"
Section 12.1(c) The following language is inserted prior to "Articles V," in
Section 12.1(c) of the Master Agreement: "Section 4.13,"
Section 12.1(h) The threshold amount for any judgement, above which there is
an Event of Default: $50,000.
Section 12.1(l) The following language is inserted at the end of Section
12.1(l) of the Master Agreement: "or its agents".
Section 12.1(u) PDP Collateral Coverage Ratio below which there would be an
Event of Default: 1.25 to 1.0; provided, however, Borrower
will not be required to meet this ratio until the completion
of the development contemplated under Tranche A. Upon the
commencement of each additional project funded under Tranche
B, the PDP Collateral Coverage Ratio requirement will be
suspended until the completion of each such development
project. Upon completion of each such development project,
the PDP Collateral Coverage Ratio below which there would be
an Event of Default: 1.25 to 1.0. In the event that more than
one project is ongoing, the PDP Collateral Coverage Ratio
shall be measured at the completion of each project without
giving effect to the additional loan amount associated with
not yet completed projects.
Section 12.1(x) Borrower's minimum Working Capital (calculated in accordance
with
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GAAP but excluding the current portion of long-term debt)
below which there would be an Event of Default: $100,000.
ARTICLE XIV General Provisions
Section 14.3 Additional terms and conditions pursuant to Section 14.3 of
the Master Agreement:
Until the earlier of (i) the date on which all amounts under
Tranche A and Tranche B have been drawn, or (ii) the date on
which all amounts drawn under Tranche A and Tranche B have
been repaid in full, Lender shall have the right of first
refusal to finance any future acquisition and/or development
of the Properties on the same terms and conditions set forth
herein so long as such development meets the criteria of
Tranche B herein. If Lender does not exercise its right to
finance any particular acquisition and/or development, then
Borrower may seek to obtain alternate financing, and Lender
agrees (A) to reconvey its Lender's Interest with respect to
additional Wells attributable to such future development and
(B) to release any mortgage it holds on such Wells (or
portions of the Properties) where such future development
will occur, in each case if and as necessary to permit
another financial institution or industry participant to
finance or fund such future development.
Section 14.4 It is understood in this Section 14.4 that Borrower is
obligated to pay only up to $100,000 of Lender's Closing
Expenses.
Section 14.5 The last two sentences of Section 14.5 of the Master
Agreement are deleted and replaced in their entirety with the
following:
"Lender need not delay action on notice transmitted orally by
Borrower until receipt of written confirmation of such
notice. In the event that a discrepancy exists between the
notice received by Lender orally and the written
confirmation, or in the absence of a written confirmation,
the oral notice, as understood by Lender will be deemed the
controlling and proper notice until written confirmation is
received."
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Addresses for notices:
If the Lender, to:
c/o Stratum Group, L.P.
650 Fifth Avenue
New York, NY 10019
Attention of Richard E. Bani, Senior Vice President
Telephone: (212) 641-1500
Telecopy: (212) 262-0596
with a copy to:
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
Attention of Kenneth M. Raisler, Esq.
Telephone: (212) 558-4575
Telecopy: (212) 558-3588
If the Borrower, to:
c/o Venus Exploration, Inc.
One Riverwalk Place
700 N. St. Mary's Street
San Antonio, Texas 78205-3512
Attention of Eugene L. Ames, Jr., Chairman and Chief Executive Officer
Telephone: (210) 222-9481
Telecopy: (210) 226-6133
with a copy to:
Jones & Faye PLLC
112 E. Pecan, Suite 2500
San Antonio, Texas 78205
Attention of Will C. Jones, Esq.
Telephone: (210) 227-4260
Telecopy: (210) 227-4268
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Section 14.18 The following additional section is added to Article XIV:
"Section 14.18 If Lender sells, conveys or otherwise transfers the
Lender's Interest, or any part thereof, to any party who is not an
Affiliate of Lender (except in the case of a reconveyance to Borrower
pursuant to Section 14.3 hereof), Borrower and Lender agree that the
Equity Conversion Agreement shall terminate, and neither the Lender, nor
any successor or assignee thereof, shall have any rights thereunder."
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