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EXHIBIT 10.4
CONVERTIBLE PROMISSORY NOTE
$8,000,000.00 Dallas, Texas June 30, 1999
FOR VALUE RECEIVED, the undersigned, VENUS EXPLORATION, INC., a
Delaware corporation ("MAKER"), hereby unconditionally promises to pay to the
order of EXCO RESOURCES, INC., a Texas corporation ("PAYEE"), at 5735 Pineland
Dr., Suite 235, Dallas, Texas 75231, or such other address given to Maker by
Payee, the principal sum of EIGHT MILLION AND 00/100 DOLLARS ($8,000,000.00),
or so much thereof as may be advanced in accordance with the terms of this
Note, in lawful money of the United States of America, together with interest
(calculated on the basis of a 360-day year) on the unpaid principal balance
from day-to-day remaining, computed until maturity at the rate per annum which
shall from day-to-day be equal to the lesser of (a) the Applicable Rate
(defined below), and (b) the Maximum Rate (defined below).
1. DEFINITIONS. When used in this Note, the following terms shall have
the respective meanings specified herein or in the section referred to:
"ADJUSTMENT EVENT" is defined in SECTION 8(d)(i) hereof.
"AGREEMENT AMONG MEMBERS" means that certain Agreement Among Members
dated of even date hereof, between Payee and Maker, and all modifications,
amendments, substitutions, and replacements thereof.
"APPLICABLE RATE" means (a) for each day during the following periods
in which no Event of Default exists, the rate of interest set forth opposite
the applicable period below:
PERIOD APPLICABLE RATE
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Date hereof through June 30, 2000 10%
July 1, 2000 through June 30, 2001 11%
July 1, 2001 through June 30, 2002 12%
July 1, 2002 through June 30, 2003 13%
July 1, 2003 through June 30, 2004 14%
July 1, 2004 and thereafter 15%
and (b) for each day in which an Event of Default exists, fifteen percent (15%).
"BUSINESS DAY" means any day other than a Saturday, Sunday, or other
day on which a bank is authorized to be closed under the laws of the State of
Texas.
"CHANGE OF CONTROL" means either of the following: (a) the
consummation of any transaction or series of any related transactions
(including without limitation, by way of merger) the result of which
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is that any "person" (as defined in Section 13(d) of the Exchange Act) or
"group" (as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act)
becomes the "beneficial owner" (as defined in Rule 13(d)(3) and 13(d)(5) under
the Exchange Act) of more than fifty percent (50%) of the voting power of the
Common Stock; or (b) either Eugene L. Ames, Jr. or John Y. Ames ceases to be a
member of the Board of Directors of Maker.
"COMMON STOCK" means the Common Stock, par value $0.01 per share, of
Maker, any successor class or classes of common equity (however designated) of
Maker into or for which such Common Stock may hereafter be converted,
exchanged, or reclassified and any class or classes of common equity (however
designated) of Maker which may be distributed or issued with respect to such
Common Stock or successor class or classes to holders thereof generally.
"COMPANIES" means Maker and its Subsidiaries, and "COMPANY" means any
one of the Companies.
"CONVERSION PRICE" means $1.50 per share as adjusted as provided in
SECTION 8(c) below and as may be reduced pursuant to SECTIONS 8(k) and (l)
below.
"CURRENT MARKET PRICE" means, when used with respect to any security
as of any date, the last sale price, regular way, or, in case no such sale
takes place on such date, the closing bid price, regular way, of such security
in either case as reported on the Nasdaq National Market, or, if such security
is not listed or admitted to trading on the Nasdaq National Market, as reported
on the Nasdaq SmallCap Market, or if such security is not listed or admitted to
trading on any national or international securities exchange or the Nasdaq
National Market or the Nasdaq SmallCap Market, the average of the high bid and
low asked prices of such security in the over-the-counter market as reported by
the National Association of Securities Dealers, Inc. Automated Quotations
System or such other system then in use or, if such security is not quoted by
any such organization, the average of the closing bid and asked prices of such
security furnished by an New York Stock Exchange member firm selected by Maker.
If such security is not quoted by any such organization and no such New York
Stock Exchange member firm is able to provide such prices, then the Current
Market Price of such security shall be the fair market value thereof as
determined in good faith by the Board of Directors of Maker.
"EQUITY ISSUANCE" means the issuance or sale by any Company of any
Common Stock or any other shares, options, warrants, or other ownership
interests (regardless of how designated) of or in any Company, or any other
security or instrument convertible into, or exchangeable for, Common Stock.
"EVENT OF DEFAULT" is defined in SECTION 4 hereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXISTING CREDIT AGREEMENT" means the Credit Agreement dated June 5,
1997, executed by Maker and Wells Fargo Bank (Texas) N.A.
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"INTEREST CONVERSION PRICE" means, as of any date, (a) the sum of the
Current Market Price of the Common Stock for each of the twenty (20) Trading
Days immediately preceding such date, divided by (b) twenty (20).
"INTEREST PAYMENT DATE" means (a) each January 1 and July 1 of each
calendar year during the term of this Note, and (b) the Maturity Date.
"JOINT VENTURE" means EXUS Energy, LLC, a Delaware limited liability
company.
"LOAN DOCUMENTS" means this Note, the Pledge Agreement, and all other
loan and collateral documents evidencing or securing the Obligation.
"MATURITY DATE" means July 1, 2004.
"MAXIMUM RATE" means the highest non-usurious rate of interest (if
any) permitted from day to day by applicable law. Payee hereby notifies and
discloses to Maker that, for purposes of Tex. Rev. Civ. Stat. Ann. art.
5069-1D.001 (codified in the Texas Finance Code ss. 303.001), as it may from
time to time be amended, the "applicable ceiling" shall be the "weekly ceiling"
from time to time in effect as limited by article 5069-1D.009 (codified in the
Texas Finance Code ss. 303.305); provided, however, that to the extent
permitted by applicable law, Payee reserves the right to change the "applicable
ceiling" from time to time by further notice and disclosure to Maker.
"NET PROCEEDS" means, with respect to any Equity Issuance by any
Company, the amount of cash received by such Company in connection with such
transaction after deducting therefrom the aggregate, without duplication, of
the following amounts to the extent properly attributable to such transaction:
(a) reasonable brokerage commissions, attorneys' fees, finder's fees, financial
advisory fees, accounting fees, underwriting fees, investment banking fees, and
other similar commissions and fees and expenses and disbursements of any of the
foregoing, in each case to the extent paid or payable by such Company; (b)
printing and related expenses of filing and recording or registration fees or
charges or similar fees or charges paid by such Company; and (c) taxes paid or
payable by such Company to any governmental authority as a result of such
transaction.
"OBLIGATION" shall mean all indebtedness, liabilities, and
obligations, of Maker arising under this Note and the other Loan Documents.
"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, charitable
foundation, unincorporated organization, government or any agency or political
subdivision thereof, or any other entity.
"PLEDGE AGREEMENT" means that certain Pledge Agreement dated of even
date hereof, executed by Maker in favor of Payee, and all modifications,
amendments, substitutions, and replacements thereof.
"REGISTRATION RIGHTS AGREEMENT" means that certain Registration Rights
Agreement dated of even date hereof, between Payee and Maker, and all
modifications, amendments, substitutions, and replacements thereof.
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"REQUIRED STOCKHOLDER CONSENT" is defined in SECTION 8(i) hereof.
"SEC" means the Securities and Exchange Commission and any successor
thereof.
"STOCK" means all shares, options, warrants, general or limited
partnership interests, membership interests, or other ownership interests
(regardless of how designated) of or in a corporation, partnership, limited
liability company, trust, or other entity, whether voting or nonvoting,
including common stock, preferred stock, or any other "equity security" (as
such term is defined in Rule 3a11-1 of the General Rules and Regulations
promulgated by the Securities and Exchange Commission under the Exchange Act).
"SUBSIDIARY" means any Person of which more than fifty percent (50%)
(in number of votes) of the issued and outstanding Stock having ordinary voting
power for the election of at least a majority of the directors is owned or
controlled, directly or indirectly, by Maker, any Subsidiary of Maker, or any
combination thereof.
"TRADING DAY" means each Monday, Tuesday, Wednesday, Thursday, and
Friday, other than any day on which securities are not traded on the applicable
securities exchange or in the applicable securities market.
2. ADVANCES; PAYMENT.
(a) ADVANCES.
(i) On the date hereof, Payee shall lend to Payee, in a
single advance, the sum of $7,000,000.00 (the "INITIAL ADVANCE").
(ii) So long as no Event of Default has occurred and Maker
has obtained the Required Stockholder Consent, then at the request of
Maker after January 1, 2000 and before the Maturity Date, Payee shall
lend to Maker, in a multiple advances not to exceed in the aggregate
$1,000,000.00 (the "SUBSEQUENT ADVANCES"). Each Subsequent Advance
shall be in the amount of $100,000.00 or a greater integral multiple
of $50,000.00. Payee may indicate the Initial Advance and any
Subsequent Advances on a schedule attached hereto, or on a
continuation of such schedule, provided that the failure of Payee to
so indicate any advances shall not affect the obligation of Maker
hereunder.
(b) INTEREST AND PRINCIPAL PAYMENTS. The unpaid principal of, and
interest on, this Note shall be due and payable as follows:
(i) Interest, computed as aforesaid, shall be due and payable
semi-annually as it accrues on each Interest Payment Date, commencing
on January 1, 2000; and
(ii) the unpaid principal of, and interest on, this Note
shall be finally due and payable on the Maturity Date.
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(c) MAKER'S RIGHT TO CONVERT INTEREST PAYMENTS INTO COMMON STOCK. If
Maker obtains the Required Stockholder Consent, Maker may, at its election,
cause the accrued interest on this Note as of any date to be converted into the
number of shares of Common Stock obtained by dividing (i) such unpaid accrued
interest by (ii) the Interest Conversion Price; provided that (A) Maker shall
notify Payee in writing of its election to cause a conversion under this
SECTION 2(c) at least thirty (30) days prior to the date such interest is to be
converted into Common Stock, and (B) if any fractional share of the Common
Stock would be issuable upon the conversion of any portion of the accrued
interest on this Note, then Maker shall pay a cash adjustment therefor in
respect of such fractional share equal to the product of (x) the percentage
representing such fractional share, and (y) the Interest Conversion Price.
(d) VOLUNTARY PREPAYMENT. Maker reserves the right, upon thirty (30)
days' prior written notice to Payee, to prepay the outstanding principal
balance of this Note, in whole or in part, at any time and from time to time;
provided that: (i) if such prepayment occurs on or before July 1, 2000, then
such prepayment shall be accompanied by a prepayment penalty in an amount equal
to the product of (A) the principal amount prepaid, and (B) 3.5714286%; and
(ii) if such prepayment is after July 1, 2000, then Payee shall have the right
to convert the principal amount of this Note prepaid, together with accrued
unpaid interest thereon, into Common Stock pursuant to SECTION 8(a) below. All
prepayments shall be made together with payment of interest accrued on the
amount of principal being prepaid through the date of such prepayment.
(e) MANDATORY PREPAYMENTS.
(i) Contemporaneously with the receipt thereof by any
Company, Maker shall prepay the outstanding principal balance of, and
accrued unpaid interest on, this Note in an amount equal to fifty
percent (50%) of the Net Proceeds of each Equity Issuance by any
Company on or after the date hereof (excluding the first $5,000,000.00
of aggregate Net Proceeds of all Equity Issuances by all Companies on
or after the date hereof).
(ii) If Maker fails to obtain the Required Stockholder
Consent on or before December 31, 1999, then Maker shall immediately
prepay the unpaid principal of this Note in immediately available
funds an amount equal to $3,000,000.00 together with any accrued
unpaid interest on such amount; provided that Maker may, in lieu of
such prepayment, (A) transfer to Payee, pursuant to documents
reasonably acceptable to Payee, membership interests in the Joint
Venture constituting 21.4285714% of the issued and outstanding
membership interests in the Joint Venture, and (B) pay to Payee in
immediately available funds any accrued unpaid interest on
$3,000,000.00 of the principal of this Note. Upon the transfer of
membership interests in the Joint Venture, as provided in the
immediately preceding sentence, the unpaid principal of this Note
shall be reduced by the amount of $3,000,000.00.
(f) PAYMENTS GENERALLY. Except as otherwise provided herein, all
payments of principal of and interest on this Note shall be made by Maker to
Payee in federal or other immediately available funds. Should the principal of,
or any installment of the principal of or interest on, this Note become due and
payable on any day other than a Business Day, the maturity thereof shall be
extended to the next succeeding Business Day, and interest shall be payable
with respect to such extension. Payments made to Payee by Maker hereunder shall
be applied first to accrued interest and then to principal.
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3. WAIVER. Except as provided herein, Maker and each surety, endorser,
guarantor, and other party ever liable for payment of any sums of money payable
upon this Note, jointly and severally waive presentment, demand, protest,
notice of protest and non-payment, or other notice of default, notice of
acceleration and intention to accelerate, or other notice of any kind, and
agree that their liability under this Note shall not be affected by any renewal
or extension in the time of payment hereof, or in any indulgences, or by any
release or change in any security for the payment of this Note, and hereby
consent to any and all renewals, extensions, indulgences, releases, or changes,
regardless of the number of such renewals, extensions, indulgences, releases,
or changes.
4. EVENTS OF DEFAULT AND REMEDIES. An "EVENT OF DEFAULT" shall exist
hereunder if any one or more of the following events shall occur and be
continuing: (a) Maker shall fail to pay when due any principal of, or interest
upon, this Note or the Obligation and such failure shall continue for three (3)
days after such payment became due; or (b) Maker shall fail to perform any of
the covenants or agreements contained herein or in any other Loan Document and
such failure shall continue unremedied for thirty (30) days after written
notice thereof; or (c) any representation or warranty made by Maker to Payee
herein or in any other Loan Document shall prove to be untrue or inaccurate in
any material respect; or (d) any Company or the Joint Venture shall (1) apply
for or consent to the appointment of a receiver, trustee, intervener,
custodian, or liquidator of itself or of all or a substantial part of its
assets, (2) be adjudicated bankrupt or insolvent or file a voluntary petition
for bankruptcy or admit in writing that it is unable to pay its debts as they
become due, (3) make a general assignment for the benefit of creditors, (4)
file a petition or answer seeking reorganization or an arrangement with
creditors or to take advantage of any bankruptcy or insolvency laws, or (5)
file an answer admitting the material allegations of, or consent to, or default
in answering, a petition filed against it in any bankruptcy, reorganization, or
insolvency proceeding, or take corporate action for the purpose of effecting
any of the foregoing; or (e) an order, judgment, or decree shall be entered by
any court of competent jurisdiction or other competent authority approving a
petition seeking reorganization of any Company or the Joint Venture or
appointing a receiver, trustee, intervener, or liquidator of any Company or the
Joint Venture, or of all or substantially all of its assets, and such order,
judgment, or decree shall continue unstayed and in effect for a period of
thirty (30) days; or (f) the dissolution or liquidation of any Company or the
Joint Venture; or (g) a Change of Control; or (h) a default or event of default
shall occur under the Existing Credit Agreement (as such agreement shall be
modified, amended, renewed, extended, or restated from time to time) and such
default or event of default shall continue unremedied after the expiration of
any period of grace or notice, if any; or (i) any Company shall default in the
payment of any indebtedness of such Company in excess of $50,000.00
individually or in the aggregate or default shall occur in respect of any note
or credit agreement relating to any such indebtedness and such default shall
continue for more than the period of grace, if any, specified therein; or (j)
any final judgment(s) for the payment of money in excess of the sum of
$50,000.00 individually or in the aggregate shall be rendered against any
Company and such judgment(s) shall not be satisfied or discharged at least ten
(10) days prior to the date on which any of such Company's assets could be
lawfully sold to satisfy such judgment(s); or (k) Maker shall breach either the
Agreement Among Members or the Registration Rights Agreement.
Upon the occurrence of any Event of Default hereunder, then the holder
hereof may, at its option, (i) declare the entire unpaid principal balance and
accrued interest upon the Obligation to be immediately due and payable without
presentment or notice of any kind which Maker waives pursuant to SECTION 3
herein, and/or (ii) pursue and enforce any of Payee's rights and remedies
available pursuant
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to any applicable law or agreement; provided, however, in the case of any Event
of Default specified in PARAGRAPH (d) or (e) of this SECTION 4 with respect to
any Company, without any notice to Maker or any other act by Payee, the
principal balance and interest accrued on this Note shall become immediately
due and payable without presentment, demand, protest, or other notice of any
kind, all of which are hereby waived by Maker.
5. REPRESENTATIONS AND COVENANTS.
(a) REPRESENTATIONS. Maker represents and warrants to Payee that:
(i) each Company is duly organized and in good standing under
the laws of the state of its incorporation, formation, or organization
and has the power to own its property and to carry on its business in
each jurisdiction in which such Company operates;
(ii) Maker has full power and authority to enter into this
Note and the other Loan Documents, to execute and deliver the Loan
Documents, and to incur the obligations provided for in the Loan
Documents, all of which has been duly authorized by all necessary
action;
(iii) the Loan Documents are the legal and binding
obligations of Maker, enforceable in accordance with their respective
terms;
(iv) neither the execution and delivery of this Note and the
other Loan Documents, nor consummation of any of the transactions
herein or therein contemplated, nor compliance with the terms and
provisions hereof or thereof, will contravene or conflict with any
provision of law, statute, or regulation to which any Company is
subject or any judgment, license, order, or permit applicable to any
Company or any indenture, mortgage, deed of trust, or other instrument
to which any Company may be subject; no consent, approval,
authorization, or order of any court, governmental authority, or third
party is required in connection with the execution, delivery, and
performance by Maker of this Note or any of the other Loan Documents
or to consummate the transactions contemplated herein or therein;
(v) all financial statements delivered by Maker to Payee
prior to the date hereof fairly present the financial condition of the
Companies, and have been prepared in accordance with generally
accepted accounting principles, consistently applied, and no material
adverse change has occurred in the financial condition or business of
the Companies since the date of the most-recent financial statements
which Maker has delivered to Payee;
(vi) no litigation, investigation, or governmental proceeding
is pending, or, to the knowledge of any of Maker's officers,
threatened against or affecting any Company, which may result in any
material adverse change in any Company's business, properties, or
operations;
(vii) there is no fact known to Maker that Maker has not
disclosed to Payee in writing which may result in any material adverse
change in any Company's business, properties, or operations;
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(viii) the Companies own all of the assets reflected on the
Companies' most recent balance sheet free and clear of all liens,
security interests, or other encumbrances, except liens reflected on
SCHEDULE 2 attached hereto;
(ix) the principal office, chief executive office, and
principal place of business of each Company is in San Antonio, Bexar
County, Texas;
(x) all taxes required to be paid by each Company have in
fact been paid;
(xi) except as disclosed on SCHEDULE 3 attached hereto, no
Company is in violation of any law, ordinance, governmental rule, or
regulation to which it is subject, and is not in default under any
material agreement, contract, or understanding to which it is a party;
(xii) each Company and any properties or assets owned by such
Company are not in violation of, in any material respect, any
environmental laws, nor is there existing, pending, or threatened any
investigation or inquiry by any governmental authority pursuant to any
environmental laws, nor is there existing or pending any remedial
obligations under any environmental laws;
(xiii) Maker has filed all reports, schedules, forms,
statements, and other documents required to be filed by Maker with the
SEC pursuant to the reporting requirements of the Exchange Act (all of
the foregoing filed prior to the date hereof and all exhibits included
therein and financial statements and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the
"SEC DOCUMENTS");
(xiv) as of their respective dates, the SEC Documents
complied in all material respects with the requirements of the
Exchange Act and the rules and regulations of the SEC promulgated
thereunder applicable to the SEC Documents and none of the SEC
Documents, at the time they were filed with the SEC, contained any
untrue statement of material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading; and
(xv) all material agreements of the Companies or to which the
property or assets of any Company are subject have been filed as
exhibits to the SEC Documents as required.
(b) AFFIRMATIVE COVENANTS. Until payment in full of the Obligation,
Maker agrees and covenants that Maker shall and shall cause each of the other
Companies to:
(i) conduct its business in an orderly and efficient manner
consistent with good business practices and in accordance with all
valid regulations, laws, and orders of any governmental authority and
will act in accordance with customary industry standards in
maintaining and operating its assets, properties, and investments;
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(ii) maintain complete and accurate books and records of its
transactions in accordance with generally accepted accounting
principles, and, if an Event of Default exists, will give Payee access
during business hours to all books, records and documents of the
Companies and permit Payee to make and take away copies thereof;
(iii) furnish to Payee as soon as available and in any event
within forty-five (45) days after the end of each quarterly fiscal
period (except the last) of each fiscal year of the Companies, copies
of the balance sheet of the Companies as of the end of such fiscal
period, statements of income and retained earnings, changes in cash
flow, and stockholder's equity of the Companies for such quarterly
fiscal period and for the portion of the fiscal year ending with such
period, and corresponding notes to such financial statements, all in
reasonable detail, and certified by the chief financial officer of
Maker as being true and correct and as having been prepared in
accordance with generally accepted accounting principles, consistently
applied, subject to year-end adjustments;
(iv) furnish to Payee as soon as available and in any event
within ninety (90) days after the close of each fiscal year of the
Companies, copies of the balance sheet of the Companies as of the
close of such fiscal year, statements of income and retained earnings,
changes in cash flow, and stockholder's equity of the Companies for
such fiscal year, and corresponding notes to such financial
statements, in each case setting forth in comparative form the figures
for the preceding fiscal year, all in reasonable detail and
accompanied by an opinion hereon of independent public accountants of
recognized national standings selected by Maker and satisfactory to
Payee, to the effect that (A) such financial statements have been
prepared in accordance with generally accepted accounting principles
(except for changes in which such accountants concur), (B) the
examination of such accounts in connection with such financial
statements has been made in accordance with generally accepted
auditing standards, and, accordingly, includes such tests of the
accounting records and such other auditing procedures as were
considered necessary in the circumstances, and (C) in making their
audit, such accountants have not become aware of any condition or
event which would constitute a default or an Event of Default under
any of the terms or provisions of this Note or the other Loan
Documents (insofar as any such terms or provisions pertain to
accounting matters) and, if any such condition or event then exists,
specifying in the nature and period of existence thereof;
(v) furnish to Payee, immediately upon becoming aware of the
existence of any condition or event constituting an Event of Default
or event which, with the lapse of time and/or giving of notice would
constitute an Event of Default, written notice specifying the nature
and period of existence thereof and any action which Maker is taking
or proposes to take with respect thereto;
(vi) promptly notify Payee of: (A) any material adverse
change in its financial condition or business; (B) any default under
any material agreement, contract, or other instrument to which any
Company is a party (including, without limitation, the Existing Credit
Agreement) or by which any of its properties are bound, or any
acceleration of any maturity of any indebtedness owing by any Company
(including, without limitation, the Existing Credit Agreement); (C)
any material adverse claim against or affecting any Company or any of
its
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properties; and (D) any litigation, or any claim or controversy which
might become the subject of litigation, against any Company or
affecting any Company's property, if such litigation or potential
litigation might, in the event of an unfavorable outcome, have a
material adverse effect on any Company's financial condition or
business or might cause an Event of Default;
(vii) promptly furnish to Payee, at Payee's reasonable
request, such additional financial or other information concerning
assets, liabilities, operations, and transactions of any Company as
Payee may from time to time reasonably request including audit
reports, registration statements, or other reports or notices provided
to stockholders of Maker or filed with the Securities and Exchange
Commission;
(viii) promptly pay all lawful claims, whether for labor,
materials, or otherwise, which might or could, if unpaid, become a
lien or charge on any property or assets of any Company, unless and to
the extent only that the same are being contested in good faith by
appropriate proceedings and reserves have been established therefor;
(ix) maintain on its properties insurance of responsible and
reputable companies in such amounts and covering such risks as is
prudent and is usually carried by companies engaged in businesses
similar to that of the Companies; Maker shall furnish Payee, on
request, with certified copies of insurance policies or other
appropriate evidence of compliance with the foregoing covenant;
(x) comply with all applicable legal requirements of any
governmental authority;
(xi) preserve and maintain all licenses, privileges,
franchises, certificates, and the like necessary for the operation of
its business;
(xii) pay and discharge all taxes, assessments, and
governmental charges or levies imposed upon it or upon its income or
profits, or upon any property belonging to it, before such amounts
become delinquent;
(xiii) comply with all terms, conditions, and agreements set
forth in the Existing Credit Agreement, as the Credit Agreement has
been modified and amended through the date hereof;
(xiv) use the Initial Advance solely to acquire to make the
initial capital contributions to the Joint Venture; and
(xv) use the proceeds of the Subsequent Advances solely to
fund capital contributions to the Joint Venture and/or to fund the
expenses of one (1) Equity Issuance
(c) NEGATIVE COVENANTS. Until payment in full of the Obligation, Maker
covenants that Maker shall not and shall not permit any other Company to:
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(i) without the prior written consent of Payee (such consent
not to be unreasonably withheld), (A) sell all or substantially all
the Companies' assets, or (B) pay any dividends on any of its
outstanding capital stock (except by any Company to Maker), or
purchase, redeem, or repurchase any of its capital stock;
(ii) sell, transfer, mortgage, assign, encumber, hypothecate,
or grant a security interest in any of the collateral pledged pursuant
to the Pledge Agreement; or
(iii) permit John Y. Ames to cease to be the President of
Maker or Eugene Y. Ames to cease to be the Chairman of Maker.
6. NO WAIVER. No waiver by Payee of any of its rights or remedies
hereunder or under any other document evidencing or securing this Note or
otherwise, shall be considered a waiver of any other subsequent right or remedy
of Payee; no delay or omission in the exercise or enforcement by Payee of any
rights or remedies shall ever be construed as a waiver of any right or remedy
of Payee; and no exercise or enforcement of any such rights or remedies shall
ever be held to exhaust any right or remedy of Payee.
7. USURY LAWS. Regardless of any provision contained in this Note,
Payee shall never be deemed to have contracted for or be entitled to receive,
collect, or apply as interest on this Note (whether termed interest herein or
deemed to be interest by judicial determination or operation of law) any amount
in excess of the Maximum Rate, and, in the event that Payee ever receives,
collects, or applies as interest any such excess, such amount which would be
excessive interest shall be applied to the reduction of the unpaid principal
balance of this Note, and, if the principal balance of this Note is paid in
full, then any remaining excess shall forthwith be paid to Maker. In
determining whether or not the interest paid or payable under any specific
contingency exceeds the highest Maximum Rate, Maker and Payee shall, to the
maximum extent permitted under applicable law, (a) characterize any
non-principal payment (other than payments which are expressly designated as
interest payments hereunder) as an expense or fee rather than as interest, (b)
exclude voluntary prepayments and the effect thereof, and (c) spread the total
amount of interest throughout the entire contemplated term of this Note so that
the interest rate is uniform throughout such term; provided, that if this Note
is paid and performed in full prior to the end of the full contemplated term
hereof, and if the interest received for the actual period of existence thereof
exceeds the Maximum Rate, if any, then Payee or any holder hereof shall refund
to Maker the amount of such excess, or credit the amount of such excess against
the aggregate unpaid principal balance of all advances made by the Payee or any
holder hereof under this Note at the time in question.
8. CONVERSION RIGHTS.
(a) CONVERSION PRIVILEGE. During the period of time commencing on July
1, 2000 and continuing until the payment in full of this Note, Payee, at its
option may convert all or any portion of outstanding principal balance of, and
all accrued interest on, this Note into the number of shares of Common Stock
obtained by dividing (i) the unpaid principal amount of, and interest through
the date of conversion on, this Note to be converted, by (ii) the Conversion
Price.
CONVERTIBLE PROMISSORY NOTE - 11 -
12
(b) CONVERSION PROCEDURE. To convert this Note pursuant to this
SECTION 8, Payee must (i) complete and sign the "Form of Election to Convert"
attached hereto as EXHIBIT A, (ii) pay any transfer or similar tax if required
by SECTION 8(f), and (iii) if the conversion is of the entire unpaid principal
of, and interest on, this Note, then surrender this Note to Maker. As promptly
as practicable after delivery of an Election to Convert in accordance with this
SECTION 8(b), Maker shall issue and deliver to Payee, a certificate or
certificates for the full number of whole shares of Common Stock issuable upon
the conversion of this Note in accordance with the provisions of this SECTION
8.
(c) CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES. No fractional shares
of Common Stock or scrip representing fractional shares of Common Stock shall
be issued upon conversion of the principal of, or interest on, this Note. If
any fractional share of Common Stock would be issuable upon the conversion of
any portion of this Note, Maker shall pay a cash adjustment therefor in respect
of such fractional share equal to the product of (i) the percentage
representing such fractional share multiplied by (ii) the Conversion Price.
(d) ADJUSTMENT OF CONVERSION PRICE.
(i) If Maker shall (A) pay a dividend or other distribution,
in Common Stock, on any class of capital stock of Maker, (B) subdivide
the outstanding Common Stock into a greater number of shares by any
means or (C) combine the outstanding Common Stock into a smaller
number of shares by any means (including, without limitation, a
reverse stock split) (any such event being an "ADJUSTMENT EVENT"),
then in each such case the Conversion Price shall be decreased or
increased as follows: the adjusted Conversion Price shall be equal to
the Conversion Price in effect immediately prior to the effective date
of the Adjustment Event, multiplied by a fraction whose numerator is
the number of shares of Common Stock issued and outstanding
immediately prior to such effective date, and whose denominator is the
number of such shares outstanding immediately after such effective
date. An adjustment made pursuant to this SECTION 8(d)(i) shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and
shall become effective immediately after the effective date of such
subdivision or combination, as the case may be;
(ii) The provisions of this SECTION 8(d) shall similarly
apply to all successive events of the type described in this SECTION
8(d). Notwithstanding anything contained herein to the contrary, no
adjustment in the Conversion Price shall be required unless cumulative
adjustments would require an increase or decrease of at least 1% in
the Conversion Price then in effect; provided, however, that any
adjustments which by reason of this SECTION 8(d) are not required to
be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this SECTION 8 shall be
made by Maker and shall be made to the nearest cent and Maker shall be
entitled to rely conclusively thereon. Notwithstanding anything
contained in this SECTION 8(d) to the contrary, Maker shall be
entitled to make such reductions in the Conversion Price, in addition
to those required by this SECTION 8(d), if the Board of Directors of
Maker has made a determination that such reduction would be in the
best interests of Maker, which determination shall be conclusive as it
in its discretion shall determine to be advisable in order that any
stock dividends, subdivision of shares, distribution of rights
CONVERTIBLE PROMISSORY NOTE - 12 -
13
to purchase stock or securities, or distribution of securities
convertible into or exchangeable for stock hereafter made by Maker to
its stockholders shall not be taxable. Except as provided in this
SECTION 8, no adjustment in the Conversion Price will be made for the
issuance of Common Stock or any securities convertible into or
exchangeable for Common Stock or carrying the right to purchase Common
Stock or any securities so convertible or exchangeable. In addition,
no adjustment in the Conversion Price shall be made in the event of
the issuance of Common Stock upon the conversion or exercise of
options, preferred stock or warrants of Maker outstanding on the date
hereof, unless the conversion or exercise price thereof is changed
after the date hereof (other than solely by operation of the
anti-dilution provisions hereof); or pursuant to employee stock option
or stock ownership plans, duly adopted by Maker.
(iii) Whenever the Conversion Price is adjusted as provided
herein, Maker shall promptly provide Payee with written notice of such
adjustment setting forth the Conversion Price in effect after such
adjustment and setting forth a brief statement of the facts requiring
such adjustment.
(e) EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER, OR SALE. In the
event of (i) any reclassification (including, without limitation, a
reclassification effected by means of an exchange or tender offer by Maker) but
excluding a change in par value, or from par value to no par value, or from no
par value to par value, or as a result of a subdivision or combination), (ii)
any consolidation, merger or combination of Maker with another corporation as a
result of which holders of Common Stock shall be entitled to receive securities
or other property (including cash) with respect to or in exchange for Common
Stock or (iii) any sale or conveyance of the property of Maker as, or
substantially as, an entirety to any other corporation as a result of which
holders of Common Stock shall be entitled to receive securities or other
property (including cash) with respect to or in exchange for Common Stock, then
Maker or the successor or purchasing corporation, as the case may be, shall
enter into an Amended and Restated Note providing that this Note shall be
convertible into the kind and amount of securities or other property (including
cash) receivable upon such reclassification, change, consolidation, merger,
combination, sale or conveyance which Maker of this Note would have received if
this Note had been converted immediately prior to such reclassification,
change, consolidation, merger, combination, sale or conveyance. Such Amended
and Restated Note shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
SECTION 8.
Whenever an Amended and Restated Note is entered into as provided
herein, Maker shall promptly provide Payee with an Officer's Certificate
setting forth a brief statement of the facts requiring such Amended and
Restated Note.
The provisions of this SECTION 8 shall similarly apply to all
successive events of the type described in this SECTION 8.
(f) TAXES ON SHARES ISSUED. The issuance of a certificate or
certificates on conversion of this Note shall be made without charge to the
Payee for any tax or charge with respect to the issuance thereof. Maker shall
not, however, be required to pay any tax or charge which may be payable with
respect to any transfer involved in the issuance and delivery of a certificate
or certificates in any name other than that of Payee, and Maker shall not be
required to issue or deliver any such certificate or
CONVERTIBLE PROMISSORY NOTE - 13 -
14
certificates unless and until the Person or Persons requesting the issuance
thereof shall have paid to Maker the amount of such tax or charge or shall have
established to the satisfaction of Maker that such tax or charge has been paid.
(g) RESERVATION OF SHARES; SHARES TO BE FULLY PAID; COMPLIANCE WITH
GOVERNMENT REQUIREMENTS; LISTING OF COMMON STOCK. Maker shall reserve, out of
its authorized but unissued Common Stock or its Common Stock held in treasury,
sufficient shares of Common Stock to provide for the conversion of all of this
Note.
Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value, if any, of the Common Stock issuable
upon conversion of this Note, Maker will take all corporate action which may,
in the opinion of its counsel, be necessary in order that Maker may validly and
legally issue Common Stock at such adjusted Conversion Price.
Maker covenants that all Common Stock which may be issued upon
conversion of this Note will, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issuance and delivery thereof.
Maker covenants that if any Common Stock issued or delivered upon
conversion of this Note hereunder requires registration with or approval of any
governmental authority under any applicable federal or state law (excluding
federal or state securities laws) before such Common Stock may be lawfully
issued, Maker will in good faith and as expeditiously as possible endeavor to
secure such registration or approval, as the case may be.
Maker shall exercises its reasonable best efforts to list 10,133,333
shares of Common Stock by July 31, 1999 and shall promptly secure the listing
of additional Registrable Securities not previously listed as such shares are
issued (as defined in the Registration Rights Agreement) on the Nasdaq SmallCap
Market and each other subsequent market on which the Common Stock is then
listed or traded and shall maintain, so long as any other shares of Common
Stock shall be so listed, such listing of all Registrable Securities from time
to time issuable under the terms hereof. Maker shall maintain the Common
Stock's authorization for listing on the Nasdaq SmallCap Market. Maker shall
not take any action which may result in the delisting or suspension of the
Common Stock on the Nasdaq SmallCap Market (other than to switch listing from
the Nasdaq SmallCap Market to the Nasdaq National Market or a stock exchange).
(h) NOTICE TO PAYEE PRIOR TO CERTAIN ACTIONS. In the event that:
(i) Maker shall declare or authorize any event which could
result in an adjustment in the Conversion Price under SECTION 8(D) or
require the execution of an amended and restated Note; or
(ii) Maker shall authorize the combination, consolidation or
merger of Maker for which approval of any stockholders of Maker is
required, the sale or transfer of all or substantially all of the
assets of Maker or the voluntary or involuntary dissolution,
liquidation or winding-up of Maker in whole or in part;
CONVERTIBLE PROMISSORY NOTE - 14 -
15
then, in each such case, Maker shall give or cause to be given to Payee, as
promptly as possible but in any event at least 15 days prior to the applicable
date hereinafter specified, a notice stating the date on which a record is to
be taken for the purpose of determining the holders of outstanding Common Stock
entitled to participate in such event, the date on which such event is expected
to become effective or occur and the date on which it is expected that holders
of outstanding Common Stock of record shall be entitled to surrender their
shares, or receive any items, in connection with such event. Failure to give
such notice, or any defect therein, shall not affect the legality or validity
of such event.
(i) PROXY STATEMENT. On or before November 1, 1999 (the "PROXY
STATEMENT TRIGGER DATE"), Maker shall provide each stockholder entitled to vote
at the next meeting of stockholders of Maker, which meeting shall not be later
than forty-five (45) days after the Proxy Statement Trigger Date (the
"STOCKHOLDER MEETING DEADLINE"), a proxy statement, which has been previously
submitted for review by Payee, soliciting each such stockholder's affirmative
vote (such affirmative vote being the "REQUIRED STOCKHOLDER CONSENT") at such
stockholder meeting for approval of Maker's issuance of all of the Common Stock
as described in this Note (including the approval of issuances at a discount to
market as may be required by the Rules of the Nasdaq Stock Market, Inc.), and
Maker shall use its best efforts to solicit its stockholders' approval of such
issuance of the Common Stock and cause the Board of Directors of Maker to
recommend to the stockholders that they approve such proposal. Such proxy
statement shall not seek approval of any matters other than the approval
described in the preceding sentence, the election of Directors, and approval of
the appointment of the independent auditor of Maker.
(j) LIMITATION ON NUMBER OF COMMON SHARES. Notwithstanding any other
provision herein, Maker shall not be obligated to issue any shares of Common
Stock upon the conversion of this Note, or any portion thereof, if the issuance
of such shares of Common Stock would exceed the number of shares of Common
Stock that Maker may issue upon conversion of this Note, or such portion
thereof, without breaching Maker's obligations under the rules or regulations
of The Nasdaq Stock Market, Inc., except that such limitation shall not apply
in the event that Maker (i) obtains the approval of its stockholders as
required by the rules and regulations of The Nasdaq Stock Market, Inc. for
issuances of Common Stock in excess of such amount, or (ii) obtains a written
opinion from outside counsel to Maker that such approval is not required, which
opinion shall be reasonably satisfactory to Payee.
(k) REDUCTION IN CONVERSION PRICE AS A RESULT OF EQUITY ISSUANCES. It
is expressly contemplated that after the date hereof and prior to payment in
full of the principal and interest due to Payee hereunder, Maker may, subject
to the limitations contained herein, if any, do one or more of the following:
(i) issue Common Stock at a price which is less than the
Conversion Price in effect on the date of issuance;
(ii) issue or incur indebtedness that is convertible into
Common Stock (either directly or indirectly) at a price which is less
than the Conversion Price in effect on the date such indebtedness is
issued or incurred;
CONVERTIBLE PROMISSORY NOTE - 15 -
16
(iii) issue a class of capital stock of Maker that is
convertible into Common Stock (either directly or indirectly) at a
price which is less than the Conversion Price in effect on the date
such capital stock is issued; or
(iv) enter into an agreement or arrangement which could
result in the ultimate issuance of Common Stock at a price which is
less than the Conversion Price in effect on the date such agreement or
arrangement is entered into.
Each and every time that one or more of the events described in paragraphs (I)
through (IV) occurs, the Conversion Price in effect hereunder on and after the
date of occurrence of such event and until the occurrence of the next such
event shall change to the price at which: (A) such Common Stock is issued with
respect to paragraph (I) above; (B) the indebtedness incurred or issued is
convertible into the Common Stock with respect to paragraph (II) above; (C) the
class of capital stock of Maker is convertible into Common Stock with respect
to paragraph (III) above; or (D) such Common Stock of may ultimately be issued
with respect to paragraph (IV) above. In the event more than one of the events
described in paragraphs (I) through (IV) occur simultaneously, the Conversion
Price shall change to the lowest of the Conversion Prices determined for such
simultaneous events hereunder. The foregoing is subject to the limitation that
the amount of the principal payable hereunder to which a change in the
Conversion Price applies shall be limited to an amount equal to the total of
the amounts received by Maker in connection with each event described in
paragraphs (I) through (IV) above after the date hereof.
9. NOTICE. Whenever this Note requires or permits any notice,
approval, request, or demand from one party to another, the notice, approval,
request, or demand must be in writing and shall be deemed to have been given
when personally served or when deposited in the United States mails, registered
or certified, return receipt requested, addressed to the party to be notified
at the following address (or at such other address as may have been designated
by written notice):
Payee: EXCO Resources, Inc.
5735 Pineland Dr.
Suite 235
Dallas, Texas 75231
Attention: President
Telecopy No.: (214) 368-2087
Maker: Venus Exploration, Inc.
1250 N.E. Loop 410
Suite 1000
San Antonio, Texas 78209
Attention: President
Telecopy No.: (210) 828-6016
10. AMENDMENT. This Note may be amended or modified only by written
instrument duly executed by Maker and Payee.
CONVERTIBLE PROMISSORY NOTE - 16 -
17
11. COSTS. If this Note is placed in the hands of an attorney for
collection, or if it is collected through any legal proceeding at law or in
equity, or in bankruptcy, receivership, or other court proceedings, then Maker
agrees to pay all costs of collection, including, but not limited to, court
costs and reasonable attorneys' fees, including all costs of appeal.
12. SUCCESSORS AND ASSIGNS. This Note shall inure to the benefit of
Payee and its successors and assigns; provided, however, Payee may not (without
the prior written consent of Maker, such consent not to be unreasonably
withheld or delayed and such consent not to be required if an Event of Default
exists) assign or negotiate this Note to any Person.
13. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED,
INTERPRETED, AND APPLIED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
14. LIMITATION OF LIABILITY. Anything in this Note to the contrary
notwithstanding, it is specifically provided that Maker shall not have any
personal or corporate liability for the payment of this Note or be liable for a
money judgment or otherwise in the event of an Event of Default, it being
understood that the holders of this Note may look only to the security provided
by the Pledge Agreement and the other Loan Documents to enforce the payment of
the Obligation, except for the interest of Maker in the collateral pledged by
the Pledge Agreement or any other property of Maker covered by a lien or
security interest securing payment of the Obligation; provided, however, that
the liability of Maker shall at all times be one hundred percent (100%)
liability for (a) any and all damages, costs, and expenses suffered or incurred
by Payee as a result of, in connection with or relating to any representation
or warranty made by Maker to Payee which shall prove to be untrue or inaccurate
in any material respects, and (b) the costs, expenses, and fees, including but
not limited to, court costs and reasonable attorneys' fees, arising in
connection with the collection of the Obligation.
15. FINAL AGREEMENT. THIS NOTE REPRESENTS THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO ORAL AGREEMENTS
BETWEEN THE PARTIES.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE TO FOLLOW]
CONVERTIBLE PROMISSORY NOTE - 17 -
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MAKER:
VENUS EXPLORATION, INC., a Delaware corporation
By: /s/ JOHN Y. AMES
-----------------------------------------
Name: John Y. Ames
------------------------------------
Title: President
-----------------------------------
CONVERTIBLE PROMISSORY NOTE - 18 -
19
SCHEDULE 1
EXISTING DEBT
1. Wells Fargo Facility - balance due as of June 23, 1999 is $3,770,509.
2. Inter-Tel Leasing, Inc. - telephone equipment lease balance due as of
June 23, 1999 was $18,953.
3. Principal amount of an aggregate of $1,000,000 7.0% Convertible
Subordinated Notes, dated in 1999.
CONVERTIBLE PROMISSORY NOTE - 19 -
20
SCHEDULE 2
EXISTING LIENS
1. Wells Fargo Facility - the bank has a lien on all of Venus' oil and
gas properties.
2. Inter-Tel Leasing, Inc. has a lien on Venus' telephone equipment. As
of June 23, 1999, the net book value of the telephone equipment was
$17,326.
CONVERTIBLE PROMISSORY NOTE - 20 -
21
SCHEDULE 3
DISCLOSURES
Maker is not in compliance with two financial covenants of its Existing Credit
Agreement, the tangible net worth and current ratio requirements. Maker has not
been in compliance with these requirements throughout 1999 and has obtained
short-term waivers from the lender. The current waiver expires on August 31,
1999. Maker's Existing Credit Agreement as well as the noncompliance issue is
discussed in more detail in Maker's Form 10-Q for the first quarter 1999 and
Form 10-K for the year ended December 31, 1998.
CONVERTIBLE PROMISSORY NOTE - 21 -
22
EXHIBIT A
FORM OF ELECTION TO CONVERT
TO VENUS EXPLORATION, INC.:
The undersigned owner of this Convertible Promissory Note hereby
irrevocably exercises the option to convert this Convertible Promissory Note,
or the portion below designated, into shares of Common Stock of Venus
Exploration, Inc. in accordance with the terms of this Convertible Promissory
Note, and directs that the shares issuable and deliverable upon conversion,
together with any check in payment for fractional shares, be issued in the name
of and delivered to the undersigned registered Holder hereof, unless a
different name has been indicated in the assignment below. If shares are to be
issued in the name of a person other than the undersigned, the undersigned will
pay all transfer taxes payable with respect thereto. Any amount required to be
paid by the undersigned on account of interest accompanies this Convertible
Promissory Note.
Dated:
-----------------
Portion of Security to be
converted ($1,000 or an
integral multiple thereof):
$ Your Signature:
---------------------- -----------------------------------------
(Sign exactly as your name appears on the
face of this Convertible Promissory Note)
If shares of Common Stock are to be issued and registered
otherwise than to the registered Holder named above, please
print or typewrite name and address, including zip code, and
social security or other taxpayer identification number.
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Signature Guarantee:
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(Participant in recognized signature guarantee medallion program
or other assurance reasonably acceptable to the Company)
CONVERTIBLE PROMISSORY NOTE - 22 -