EXHIBIT 10.7
LOAN AGREEMENT
by and among
CHANCELLOR GROUP, INC.,
GRYPHON PRODUCTION COMPANY, LLC,
AND
GRYPHON FIELD SERVICES, LLC
as Borrowers,
and
WESTERN NATIONAL BANK,
as Lender
$5,000,000.00 April 13, 2007
LOAN AGREEMENT
This Loan Agreement (this "Agreement"), dated as of April 13, 2007, is
made and entered into by and among CHANCELLOR GROUP, INC., a Nevada corporation,
whose address for purposes of this Agreement is 216 S. Price Road, Pampa, Texas
79065 ("Chancellor"), GRYPHON PRODUCTION COMPANY, LLC, a Texas limited liability
company, whose address for purposes of this Agreement is P.O. Box 742, Pampa,
Texas 79066 ("Production"), and GRYPHON FIELD SERVICES, LLC, a Texas limited
liability company, whose address for purposes of this Agreement is P.O. Box 742,
Pampa, Texas 79066 ("Field Services", and together with Chancellor and
Production, the "Borrowers"); and WESTERN NATIONAL BANK, a national banking
association, whose address for purposes of this Agreement is 508 West Wall
Street, Suite 1100, Midland, Texas 79701 (the "Lender").
Recitals
The Borrowers have requested that the Lender extend credit to the
Borrowers in the form of a multiple advance facility not to exceed $5,000,000.00
outstanding at any time (subject to the limitations and reductions as herein set
forth), to be used to fund: (a) up to $2,300,000.00 of the acquisitions costs of
working interests from Caldwell Production Co., Inc. in Carson and Gray
Counties, Texas; and (b) fees and expenses associated with this Facility (as
defined below).
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained and of the Facility and Commitment (as defined below)
hereinafter referred to, the Borrowers and the Lender agree as follows:
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
1.1 - Defined Terms. In addition to the terms defined in the preamble
and elsewhere in this Agreement, the following terms shall have the following
meanings:
"Acceptable Hedging Agreement" means a Hedging Agreement meeting all of
the following criteria:
(a) the quantity of hydrocarbons owned by Borrowers subject to Hedging
Agreements shall not be less than seventy-five percent (75%) of the
monthly production of all of Borrowers' Proved Developed Producing
Borrowing Base Properties forecast in Lender's most recent engineering
evaluation for the period covered by the Hedging Agreement;
(b) the "strike prices" under the Hedging Agreement shall not be less
than $55 per barrel of crude oil (NYMEX Basis).
(c) the Hedging Agreement must have a maturity of twenty-four (24)
months or more; and
(d) once Borrowers have identified the counter-parties with whom they
wish to enter into a Hedging Agreement, the Borrowers will provide
Lender with written notice of the identity of those counter-parties.
Lender must approve of such counter-parties in order for a Hedging
Agreement to be an Acceptable Hedging Agreement.
"Advance" means any loan disbursement to or on behalf of Borrowers
under any of the Loan Documents, including, without limitation, all amounts
advanced upon the execution hereof under the Note and all Subsequent Advances.
"Affiliate" means, as to any person, (a) any other person (other than a
Subsidiary) which, directly or indirectly, is in control of, is controlled by,
or is under common control with, such person or (b) any person who is a
director, officer or partner (i) of such person, (ii) of any Subsidiary of such
person or (iii) of any person described in the preceding clause (a). For
purposes of this definition, "control" of a person means the power, directly or
indirectly, either to (i) vote 10% or more of the ownership interests having
ordinary voting power for the election of directors or managers of such person
or (ii) direct or cause the direction of the management and policies of such
person whether by contract or otherwise.
"Agreement" means this Loan Agreement, as amended, restated,
supplemented or otherwise modified from time to time.
"Bank Liens" means Liens in favor of Lender, securing all or any
portion of the Obligation, including, but not limited to, Rights in any
Collateral created in favor of Lender, whether by mortgage, pledge,
hypothecation, assignment, transfer, or other grant or creation of Liens.
"Borrowing Base" means at any date the amount determined pursuant to
Section 2.2 of this Agreement at such date.
"Borrowing Base Period" means each six (6) month period commencing on
February 1 and August 1 of each year.
"Borrowing Base Properties" means at any time, any and all Mineral
Interests that cover or relate to Proved Reserves and that have been given value
by Lender in the then most recent determination of the Borrowing Base.
"Business Day" means every day on which Lender is open for banking
business.
"Collateral" means the Mortgaged Properties identified in and covered
by the Deeds of Trust, as defined below, and the equipment and other personal
property identified in and covered by the Security Agreement, as defined below.
"Commitment" means the obligation of the Lender as set forth herein
from the date hereof through the Maturity Date to extend credit to the Borrower
by means of Advances, with the sum of all such Advances made pursuant to Section
2.1 not to exceed at any time the Commitment Limit.
"Commitment Limit" means at any time the lesser of (a) $5,000,000.00 or
(b) the then existing Borrowing Base.
"Consolidated Cash Flow" means, with respect to any period of
calculation thereof, the sum of (i) the consolidated net income (or loss) from
continuing operations of the Borrowers and their Subsidiaries during such period
(excluding extraordinary gains and income and expenses generated and incurred as
a result of transactions between the Borrowers and their Subsidiaries, but
including extraordinary expenses) calculated after any and all dividends or
distributions to shareholders, members or owners, plus (ii) interest,
depreciation, depletion, and amortization expenses of the Borrowers during such
period, all determined on a consolidated basis in accordance with GAAP.
"Consolidated Debt Service Coverage Ratio" means, with respect to any
period of calculation thereof, the ratio of Consolidated Cash Flow during any
specified time period, to the sum of (a) Borrowers' payments of principal and
interest required under any Debt (including, without limitation, the Note, the
Subordinate Debt, and current maturities of long term debt and current interest
expenses) now or hereafter owed by Borrowers, plus (b) the Borrowers'
Subsidiaries' payments of principal and interest required under any Debt now or
hereafter owed by such Subsidiaries (including, current maturities of long term
Debt and current interest expenses).
"Contractual Rights" shall have the meaning given to such term in that
certain Bill of Sale and Assignment of Contractual Rights, dated of even date
herewith, by and among the Borrowers and CapWest Resources, Inc.
"Debt" means, for any person, at any particular date, and without
duplication, the sum at such date of (i) all indebtedness of such person for
borrowed money or for the deferred purchase price of property or services for
which such person is liable, contingently or otherwise, as obligor, guarantor or
otherwise, or in respect of which such person otherwise assures a creditor
against loss; (ii) all obligations of such person under leases which shall have
been, or should have been, in accordance with tax basis accounting principles in
effect on the date of this Agreement, recorded as capital leases in respect of
which such person is liable, contingently or otherwise, as obligor, guarantor or
otherwise, or in respect of which obligations such person otherwise assures a
creditor against loss, (iii) unfunded vested benefits under each ERISA Plan;
(iv) all indebtedness and other liabilities secured by any Lien on any property
owned by such person even though such person has not assumed or otherwise become
liable for payment thereof; (v) all obligations of such person in respect of
letters of credit, acceptances or similar obligations issued or created for the
account of such person; and (vi) indebtedness of such person evidenced by a
bond, debenture, note or similar instrument; provided, however, Debt shall not
include accounts payable incurred in the ordinary course of such person's
business.
"Deeds of Trust" mean those mortgages, deeds of trust, assignments of
production, security agreements, and financing statements, as amended from time
to time, in favor of Lender encumbering every interest of Borrowers in Mineral
Interests now owned or hereafter acquired by Borrowers with proceeds furnished
by Lender and which such property interests are selected by Lender to become
Mortgaged Properties, the Mortgaged Properties being security for the
Obligation, including, without limitation, any such property consisting of
royalty interests, overriding royalty interests, working interests, and
reversionary rights relating to either developed or undeveloped leasehold
acreage.
"Default Rate" means the Prime Rate plus eight percent (8%).
"Environmental Complaint" means any complaint, order, citation, notice
or other written communication from any person or Governmental Authority with
respect to the existence or alleged existence of a violation of any requirement
of law or liability resulting from any air emission, water discharge, noise
emission, asbestos, Hazardous Substance or any other environmental, health or
safety matter at, upon, under, or within any of the property owned, operated, or
used by Borrowers.
"ERISA Plan" shall have the meaning given to such term as set forth in
Section 4.12 of this Agreement.
"Event of Default" shall have the meaning given to such term as set
forth in Section 8.1 of this Agreement.
"Facility" means the Loan advanced pursuant to Section 2.1 of this
Agreement.
"Facility Fee" means the fee of one percent (1.0%) of the initial
Borrowing Base, to be paid by the Borrowers to the Lender upon the execution of
this Agreement.
"GAAP" means generally accepted accounting principles as in effect from
time to time, applied on a basis consistent (except for changes approved by
Borrowers' independent public accountant) with the most recent financial
statements of Borrowers delivered to Lender.
"Governmental Authority" means any nation or government, any state or
other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Grant Subordination Agreement" means that certain Subordination
Agreement dated of even date herewith by and among Axis Network Pty, Ltd., a
private company owned solely by Maxwell Grant, the Lender, the Subordinate
Lender, and Borrowers, as amended from time to time, under which Axis Network
Pty, Ltd. agrees to subordinate the payment of its overriding royalty interest
in Borrowers' properties to the payment of the Senior Debt and the Subordinate
Debt.
"Gross Oil and Gas Proceeds" means, for any period, the aggregate
amount of all revenue paid to and received by Borrowers and derived from any
disposition of oil, gas, or associated hydrocarbons, and any revenues derived
from the sale or settlement of crude oil or natural gas options attributable to
the Mortgaged Properties, less all: (a) amounts attributable to production,
severance, excise, ad valorem, windfall profits or any other tax or assessment
against the Mortgaged Properties or levied on or measured by production; (b)
payments due to other working interest owners in the Mortgaged Property; (c)
payments due to the owners (other than Borrowers) of any royalties, overriding
royalties, net profits interests (other than the interest of CapWest Resources,
Inc. in Contractual Rights, as provided for under the Subordinate Loan
Agreement), production payments and any other similar interests which are
payable out of or attributable to any production of such oil, gas, or associated
hydrocarbons in existence as of the date of this Agreement; and (d) payments for
delay rentals, shut-in royalty payments and other similar types of payments to
lessors or similar parties reasonably required to maintain the Mortgaged
Properties in effect.
"Hazardous Substance" shall have the meaning given to such term as set
forth in Section 4.16 of this Agreement.
"Hedging Agreement" means any transaction (including an agreement with
respect thereto) now existing or hereafter entered into which is a rate swap,
basis swap, forward rate transaction, commodity swap, put option, commodity
option, equity or equity index swap, equity or equity index option, bond option,
interest rate option, bond option, interest rate option, foreign exchange
transaction, cap transaction, forward transaction, collar transaction, forward
transaction, currency swap transaction, cross-currency rate swap transaction,
currency option or any other similar transaction (including any option with
respect to any of these transactions) or any combination thereof, whether linked
to one or more interest rates, foreign currencies, commodity prices, equity
prices or other financial measures.
"Highest Lawful Rate" means the maximum rate of interest (or, if the
context so requires, an amount calculated at such rate) which Lender is allowed
to contract for, charge, take, reserve or receive under applicable law after
taking into account, to the extent required by applicable law, any and all
relevant payments or charges under the Loan Documents.
"Letter of Credit" shall have the meaning given to such term as set
forth in Section 2.1(b) of this Agreement.
"Lien" means any interest in property securing an obligation owed to,
or a claim by, a person other than the owner of the property, whether such
interest is based on the common law, statute or contract, and including but not
limited to the lien or security interest arising from any mortgage, encumbrance,
pledge, hypothecation, assignment, deposit arrangement, or preference, priority
or other security agreement (including, without limitation, any conditional sale
or other title retention agreement or trust receipt or a lease, consignment or
bailment for security purposes). The term "Lien" shall also include
reservations, exceptions, encroachments, easements, rights of way, covenants,
conditions, restrictions, leases and other title exceptions and encumbrances
affecting any of the Mortgaged Properties.
"Loan Documents" means: (i) this Agreement; (ii) the Note; and (iii)
any and all notes, mortgages, Deeds of Trust, security agreements, financing
statements, guaranties, and other agreements, documents, certificates, letters
and instruments ever delivered or executed pursuant to, or in connection with,
this Agreement, whether existing on the date hereof or thereafter created, as
any of the same may hereafter be amended, supplemented, extended, or restated.
"Material Adverse Effect" means any set of circumstances or events
which: (i) has, will or could reasonably be expected to have any material
adverse effect upon the validity, performance or enforceability of any Loan
Document; (ii) is or could reasonably be expected to be material and adverse to
the financial condition or business operations of any Borrower, as represented
to Lender in this Agreement; (iii) will or could reasonably be expected to
impair the ability of any Borrower to fulfill its obligations under the terms
and conditions of the Loan Documents; or (iv) will or could reasonably be
expected to cause an Event of Default.
"Material Agreement" of any person means any written or oral agreement,
contract, commitment, arrangement or understanding to which such person is a
party, by which such person is directly or, to such person's knowledge,
indirectly bound, or to which any asset of such person may be subject, which is
not subject to cancellation by such person upon 30 days or less notice without
liability for further payment other than nominal penalties, excluding, however,
such agreements, contracts, commitments, arrangements or understandings pursuant
to which the subject matter thereof does not exceed $50,000 in the aggregate.
"Maturity Date" means April 15, 2010.
"Mineral Interests" means Rights, estates, titles, and interests in and
to oil, gas, sulphur, or other mineral (or any combination thereof), leases (and
all extensions, amendments, ratifications, and subleases thereof or thereunder),
and any mineral interests, royalty and overriding royalty interests, working
interests, production payment and net profits interests, mineral fee interests,
contractual rights, and Rights therein, including, without limitation, any
reversionary or carried interests relating to the foregoing, together with
Rights, titles, and interests created by or arising under the terms of any
contract or agreement, unitization, communitization, secondary recovery and
pooling agreements or arrangements, and all properties, Rights, and interests
covered thereby, whether arising by contract, by order, or by operation of law,
which now or hereafter include all or any part of the foregoing.
"Mortgaged Property" or "Mortgaged Properties" means those Mineral
Interests covered or to be covered, by the Deeds of Trust.
"Net Revenue Interest" means the gross working interest or cost-bearing
interest owned by Borrowers in any of the oil and gas leases covering the
Mortgaged Properties, less and except Borrowers' proportionate share of payments
due to the owners (other than Borrowers) of any royalties, overriding royalties,
net profits interests (other than the interest of CapWest Resources, Inc. in
Contractual Rights, as provided for under the Subordinate Loan Agreement),
production payments and any other similar interests which are payable out of or
attributable to any production of such oil, gas, or associated hydrocarbons in
existence as of the date of this Agreement.
"Note" means the Multiple Advance Term Promissory Note, as further
described in Section 2.1(a) of this Agreement.
"Obligation" means the obligations of Borrowers:
(a) to pay all indebtedness arising out of this Agreement, any
future advances under this Agreement, and all renewals,
extensions or amendments of such indebtedness or any part
thereof or any such future advances;
(b) to pay the principal of and interest on the Note in accordance
with the terms thereof, and all renewals, extensions,
modifications and amendments of such Note or any part thereof,
and any future advances made pursuant thereto;
(c) to repay to Lender all amounts advanced by Lender hereunder or
under the other Loan Documents on behalf of Borrowers,
including, without limitation, advances for principal or
interest payments to prior secured parties, mortgagees, or
lienors, or for taxes, levies, insurance, rent, repairs to or
maintenance or storage of any of the Collateral;
(d) to pay any and all other indebtedness of Borrowers to Lender
of every kind, nature and description, direct or indirect,
primary or secondary, secured or unsecured (including overs),
joint or several, absolute or contingent, due or to become
due, now existing or hereafter arising, regardless of how it
may be evidenced, including without limitation all future
advances, whether or not presently contemplated by the parties
hereto;
(e) to pay any and all obligations, contingent or otherwise,
whether now existing or hereafter arising of Borrowers to
Lender arising under or in connection with any Acceptable
Hedging Agreement which Borrowers may have with Lender, or any
affiliate of Lender;
(f) to perform fully all of the terms and provisions of each of
the instruments constituting the Loan Documents; and
(g) to reimburse Lender, on demand, for all of Lender's expenses
and costs, which the Loan Parties are obligated to pay
pursuant to the terms of the Loan Documents.
"Permitted Liens" means: (a) liens in favor of Lender; (b) liens for
taxes, assessments or similar charges, incurred in the ordinary course of
business that are not yet due and payable or that are being contested in good
faith; (c) liens of mechanics, materialmen, warehousemen, carriers, operators,
and other like liens securing obligations incurred in the ordinary course of
business that are not yet due and payable or that are being contested in good
faith; (d) landlord's liens for rentals not yet due and payable or that are
being contested in good faith; (e) royalties, overriding royalties, reversionary
interests, production payments and similar burdens, (f) sales contracts or other
arrangements for the sale of hydrocarbons which would not (when considered
cumulatively with the matters discussed in clause (e) immediately preceding)
deprive any Borrower of any material right in respect of such Borrower's assets
or properties; (g) liens permitted by the Deeds of Trust or the Security
Agreement; (h) purchase money mortgages, liens, or security interests on any
property hereafter acquired; (i) contracts, agreements, lease provisions,
defects, and irregularities which were in effect when the properties were
acquired and which are not such as to materially interfere with the operation,
value, or use thereof; and (j) liens in favor of CapWest Resources, Inc., which
are subordinate to liens in favor of Lender pursuant to the Subordination
Agreement.
"Person" means a corporation, an association, a joint venture, an
organization, a business, an individual or a government or political subdivision
thereof or any governmental agency.
"Plan" means any pension plan that is covered by Title IV of ERISA and
maintained by any Borrower or any such plan to which any Borrower is required to
contribute.
"Prime Rate" means that variable rate of interest per annum established
in the money rate table of The Wall Street Journal, a Dow Jones publication.
Such rate is used by Lender as a general reference rate of interest, taking into
account such factors as Lender may deem appropriate, it being understood that it
is not necessarily the lowest or best rate actually charged to any customer and
that Lender may make various commercial or other loans at rates of interest
having no relationship to such rate.
"Proved" reserves means those reserves denominated as such and
determined in accordance with the methods commonly accepted by the Society of
Petroleum Engineers for evaluating oil and gas reserves.
"Proved Developed Producing" (PDP) reserves means those reserves
denominated as such and determined in accordance with the methods commonly
accepted by the Society of Petroleum Engineers for evaluating oil and gas
reserves.
"Relevant Environmental Law" shall mean all requirements of law from
time to time applicable to any property owned, operated or used by Borrowers or
any part thereof with respect to (i) the installation, existence or removal of
asbestos; (ii) the existence, discharge or removal of Hazardous Substances;
(iii) air emissions, water discharges, noise emissions and any other
environmental, health or safety matters; and (iv) effects on the environment of
any of such properties or any part thereof or of any activity theretofore, now
or hereafter conducted on any of such properties.
"Rights" means rights, remedies, powers, privileges and benefits.
"Security Agreement" means that certain Security Agreement, dated as of
the date hereof, executed by Field Services in favor of Lender, in which Field
Services pledges and grants a security interest to Lender in the oilfield
equipment and other personal property described therein to secure the payment of
the Obligation, as the same may be amended, restated, supplemented, and/or
modified from time to time.
"Security Documents" means collectively, the Deeds of Trust and the
Security Agreement.
"Senior Borrowing Base" means the "Borrowing Base" as defined in and
determined pursuant to the terms of the Senior Loan Agreement.
"Senior Debt" means the Obligation of the Borrowers owed to the Senior
Lender and governed by the Senior Loan Agreement.
"Senior Lender" means Western National Bank and its successors and
assigns, including any person or entity that participates in extending the
Senior Debt to the Borrowers, joins the Senior Lender through the syndication of
the Senior Debt, or refinances all or any portion of the Senior Debt.
"Senior Loan Agreement" means this Agreement, as such Agreement may be
amended, restated, supplemented, or modified from time to time.
"Subordinate Borrowing Base" means the "Borrowing Base" as defined in
and determined pursuant to the terms of the Subordinate Loan Agreement.
"Subordinate Debt" means the Debt of the Borrowers owed to the
Subordinate Lender and governed by the Subordinate Loan Agreement.
"Subordinate Lender" means CapWest Resources, Inc. and its successors
and assigns, including any person or entity that participates in extending the
Subordinate Debt to the Borrowers, joins the Subordinate Lender through the
syndication of the Subordinate Debt, or refinances all or any portion of the
Subordinate Debt.
"Subordinate Loan Agreement" means that certain Loan Agreement, dated
of even date herewith, by and between the Borrowers and CapWest Resources, Inc.,
as such agreement may be amended, restated, supplemented, or modified from time
to time.
"Subordination Agreement" means that certain Subordination Agreement
dated of even date herewith by and among the Lender, the Subordinate Lender, and
Borrowers, as amended from time to time.
"Subsequent Advance" means any disbursement to or on behalf of
Borrowers after the initial Advance under the Note, pursuant to the provisions
of Section 2.1 hereof.
"Subsidiary" means, as to any Borrower or any other designated person,
a corporation, partnership, or other entity of which shares of stock or other
ownership interests having ordinary voting power (other than stock or such other
ownership interests having such power only by reason of the happening of a
contingency) to elect a majority of the board of directors or other managers of
such corporation, partnership or other entity are at the time owned, or the
management of which is otherwise controlled, directly or indirectly, through one
or more intermediaries, or both, by such Borrower or such other designated
person.
1.2 - Accounting Principles. Where the character or amount of any asset
or liability or item of income or expense is required to be determined or any
consolidation or other accounting computation is required to be made for the
purposes of this Agreement or any other Loan Document, such determination,
consolidation or computation shall be made in accordance with GAAP, except where
such principles are inconsistent with the requirements of this Agreement.
1.3 - Directly or Indirectly. When any provision in this Agreement
refers to action to be taken by any person, or which such person is prohibited
from taking, such provision shall be applicable where the action in question is
taken directly or indirectly.
1.4 - Plural and Singular Forms. The definitions given to terms defined
herein shall be equally applicable to both the singular and plural forms of such
terms where the context so permits.
1.5 - References. The words "hereof", "herein", "hereunder" and words
of similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and section,
subsection, schedule, and exhibit references are to this Agreement unless
otherwise specified.
ARTICLE II
Amount and Terms of the Loan
2.1 - The Loan. - Subject to and upon the terms and conditions and
relying on the representations and warranties contained in this Agreement,
Lender agrees to make the Facility available to the Borrowers as follows:
(a) Advancing Line of Credit/Term Loan. - Contemporaneously with the
execution and delivery hereof, Borrowers shall execute and deliver to the Lender
the Note, in the original principal amount of Five Million and No/100 Dollars
($5,000,000.00). The Note shall mature on April 15, 2010, and shall bear
interest on the unpaid principal amount thereof from time to time outstanding at
the applicable interest rate per annum as provided in the Note. Principal and
interest on the Note shall be payable in the manner specified herein and on the
dates specified in the Note.
(b) Letter of Credit. - The Lender shall, upon request of the
Borrowers, issue a standby Letter of Credit to the Texas Railroad Commission for
the account of the Borrowers (the "Letter of Credit") having an aggregate face
amount of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00). All
payments by the Lender under the Letter of Credit shall be considered as
Advances outstanding under this Agreement, shall bear interest at the applicable
interest rate per annum as provided in the application and agreement governing
such Letter of Credit, and shall be secured by the Security Documents. Borrowers
will sign and deliver Lender's customary forms for the issuance of letters of
credit. Borrowers shall pay to Lender a letter of credit fee equal to two
percent (2%) of the face amount of the Letter of Credit, such fee to be due upon
the issuance of the Letter of Credit. Any renewal or extension of the Letter of
Credit will be treated as a new issuance of the Letter of Credit and shall
require the payment of an additional letter of credit fee in the amount
previously stated.
(c) Commitment. - Borrowers and Lender agree that the sum of the
aggregate principal amount of all Advances outstanding at any one time under the
Note shall never exceed the lesser of (i) $5,000,000.00; (ii) the Borrowing Base
then in effect; or (iii) the Lender's legal lending limit then in effect plus
any amounts of the Note sold by the Lender to participating banks or other
financial institutions.
2.2 - Borrowing Base.
(a) The initial Borrowing Base is hereby established at
$2,300,000.00.
(b) The Borrowing Base shall be redetermined by the Lender
for each Borrowing Base Period, with the first such
redetermination to commence as of August 1, 2007, and
thereafter semi-annually on each February 1 and August
1, and to be effective as of the date set forth in a
notice of redetermination delivered to the Borrowers.
(c) The determination of the Borrowing Base shall be made,
at the sole discretion of the Lender, in accordance with
its usual and customary practices, which include
reviewing the estimates of the projected rate of
production and projected revenues from the Borrowing
Base Properties and such other credit factors
(including, without limitation, the assets, liabilities,
cash flow, current Acceptable Hedging Agreements,
business, properties, prospects, management and
ownership of Borrowers and the Borrowing Base) as the
Lender in its sole discretion deems significant. The
Lender may make adjustments, in good faith and at its
sole discretion and in accordance with its customary
practices, to such estimates of the projected rate of
production and projected revenues.
(d) In addition to scheduled Borrowing Base redeterminations
pursuant to Subsection 2.2(b), each of the Lender and
the Borrowers may cause a redetermination of the
Borrowing Base at any one time during each Borrowing
Base Period. In the event the Borrowers request such a
Borrowing Base redetermination, the Borrowers shall
deliver written notice of such request to the Lender
with: (i) a report, in form and substance satisfactory
to the Lender, prepared by the Borrowers' in-house
petroleum engineer or an independent reservoir engineer,
which report shall set forth, as of a date not more than
sixty (60) calendar days prior to the date of such
request, projections of future net income from
hydrocarbons classified as "Proved Reserves"
attributable to all of the Borrowing Base Properties;
(ii) such other information concerning such Borrowing
Base Properties as the Lender may reasonably request,
including, without limitation, engineering, geological,
geophysical, and performance data; and (iii) the amount
of the Borrowing Base requested by the Borrowers to
become effective. Likewise, in the event the Lender
exercises its option for a Borrowing Base
redetermination pursuant to this Subsection 2.2(d), upon
written request and notification by the Lender to the
Borrowers, the Borrowers shall furnish the information
described above within thirty (30) days of such request.
The Lender shall redetermine the Borrowing Base in
accordance with the procedures set forth in Subsection
2.2(c) which redetermined Borrowing Base shall then be
the effective Borrowing Base until further
redetermination.
(e) In the event the outstanding balance of the Note at the
time of the Borrowing Base redetermination is greater
than the newly established Borrowing Base, creating a
"Borrowing Base Deficiency", Borrowers will, within 30
days from the Borrowing Base redetermination, either:
(i) prepay the difference between the outstanding Note
balance and the Borrowing Base; (ii) notify Lender that
Borrowers will repay the difference between the
outstanding Note balance and the Borrowing Base in five
equal monthly installments, which shall be in addition
to those principal and interest payments regularly
scheduled in the Note; or (iii) provide additional
Collateral acceptable to Lender to increase the
Borrowing Base to an amount at least equal to the
outstanding principal balance of the Note. Borrowers'
failure to remedy (or commence to remedy by repayment
under Subpart (ii) of this Subsection (e)) of the
Borrowing Base Deficiency within thirty (30) days as
described above will be an Event of Default.
2.3 - Manner of Borrowing under the Note.
(a) Each request by Borrowers to Lender for an Advance under the
Facility shall specify the aggregate amount (not to be less
than $50,000.00 per Advance) of such requested Advance and the
requested date of such Advance. Each such request shall be
accompanied by copies of such invoices, authorizations for
expenditures ("AFE's"), budgets or Joint Interest Billings,
and the like, supporting the request for the Advance.
Borrowers shall furnish to Lender each request for Advance at
least one (1) Business Day prior to the requested borrowing
date (which must be a Business Day).
(b) Upon fulfillment of all applicable conditions set forth in
Article IV hereof, Lender shall, before 2:00 o'clock p.m.
(Midland, Texas time) on the day prior to the requested
borrowing date, pay or deliver each Advance under the Facility
to or upon the order of Borrowers at the principal office of
Lender in Midland, Texas, in immediately available funds.
2.4 - Payment Procedure. Two (2) payments of accrued interest under the
Note shall be due on May 15, 2007 and June 15, 2007. Beginning on July 15, 2007,
payments will be due on the fifteenth day of each month. Payments will be the
greater amount of (a) accrued interest; or (b) fifty-one percent (51%) of
Borrowers' Gross Oil and Gas Proceeds for the immediately preceding month. If
the payment is made on the basis of the Borrowers' Gross Oil and Gas Proceeds,
such payment shall be applied first to principal and accrued interest then due
under the Senior Note, then to accrued interest under the Subordinate Note, and
then to the principal then due under the Subordinate Note. Following full and
final payment of the Senior Facility, such payments will be calculated on the
same basis as stated above and continue to be due to the Subordinate Lender on
the fifteenth day of each month. Oil and gas revenues derived from the Mortgaged
Properties will be deposited into one of the Borrowers' depository accounts that
will be maintained with the Lender. For any month in which payment is based upon
a percentage of Borrowers' Gross Oil and Gas Proceeds, the calculation of Gross
Oil and Gas Proceeds shall be made using production volumes and expenses
incurred in the third month preceding the month in which the payment is due. For
example, the payment due on July 15, 2007, if based upon Borrowers' Gross Oil
and Gas Proceeds, would be determined based upon production which occurred and
expenses which were incurred during the month of April 2007.
2.5 - Interest. The Obligation shall bear interest from day to day at a
rate per annum which shall from day to day be equal to the lesser of: (a) the
Prime Rate in effect from day to day (calculated on the basis of actual days
elapsed, but computed as if each calendar year consisted of 360 days) plus two
percent (2.0%) (the "Variable Rate"), but in no event to be less than nine and
one-quarter percent (9.25%); or (b) the Highest Lawful Rate. Each change in the
rate of interest charged under the Note shall, subject to the terms hereof,
become effective, without notice to Borrowers, upon the effective date of each
change in the Prime Rate or the Highest Lawful Rate, as the case may be.
Notwithstanding the foregoing, if at any time the Variable Rate exceeds the
Highest Lawful Rate, the rate of interest on the Note shall be limited to the
Highest Lawful Rate, but any subsequent reductions in the Variable Rate shall
not reduce the rate of interest thereon below the Highest Lawful Rate until the
total amount of interest accrued thereon approximately equals the amount of
interest which would have accrued thereon if the Variable Rate had at all times
been in effect. In the event that at maturity (stated or by acceleration), or at
final payment of the Note, the total amount of interest paid or accrued thereon
is less than the amount of interest which would have accrued if the Variable
Rate had at all times been in effect, then, at such time and to the extent
permitted by applicable laws, Borrowers shall pay to Lender an amount equal to
the difference between: (x) the lesser of the amount of interest which would
have accrued if the Variable Rate had at all times been in effect or the amount
of interest which would have accrued if the Highest Lawful Rate had at all times
been in effect, and (y) the amount of interest actually paid or accrued on the
Note. All of the past due Obligation and accrued interest thereon shall, at the
option of Lender, bear interest from maturity (stated or by acceleration) until
paid at a rate per annum equal to the lesser of the Default Rate or the Highest
Lawful Rate. Interest calculations may be made prior to any interest installment
due date under the Note, in which event, if there is an adjustment in the
interest rate in accordance with the terms hereof during the intervening period,
then Borrowers shall subsequently, on demand, pay to Lender any underpayment, or
Lender shall pay to Borrowers any overpayment, as the case may be, as a result
of any adjustment during such period.
2.6 - Order of Application. Except as otherwise provided in the Loan
Documents, all payments and prepayments on the Obligation, including proceeds
from the exercise of any Rights of Lender under the Loan Documents, shall be
applied to the Obligation in the following order: (i) first, to reasonable
expenses for which Lender shall not have been reimbursed under the Loan
Documents and then to all amounts to which Lender is entitled to indemnification
under the Loan Documents; (ii) to the accrued interest on the Note being paid or
prepaid; (iii) to the principal of the Note being paid or prepaid, with the
amounts so prepaid to be applied upon installments of most remote maturity; and
(iv) to the remaining Obligation.
2.7 - Facility Fee. Upon Closing, the Borrowers will pay to Lender the
Facility Fee.
ARTICLE III
Collateral
3.1 Mortgaged Properties. The payment and performance of the Note and
all of the other Obligations hereunder and under the Loan Documents shall be
secured by (i) a first and superior lien against the entire interest of
Borrowers in the Mortgaged Properties pursuant to the terms of one or more Deeds
of Trust, which shall be in form and substance satisfactory to Lender, (ii) a
first and superior lien against all oilfield equipment and other personal
property owned by Field Services pursuant to the Security Agreement, which shall
be in form and substance satisfactory to Lender, and (iii) a $1,000,000 life
insurance policy on the life of Brad Fischer, the proceeds of which shall be
payable to Lender. The Deeds of Trust shall cover the Borrower's interests in
the Mortgage Properties, and the Security Agreement shall cover Field Service's
interests in the oilfield equipment and other personal property associated with
the Mortgaged Properties. Notwithstanding any of the provisions contained herein
or in any of the other Loan Documents to the contrary, all of the Collateral to
be pledged pursuant to the terms of this Agreement will be deemed to cross
collateralize Borrowers' and any guarantor's performance under any and all loans
now or hereafter advanced directly by Lender to any Borrower or any guarantor of
such Borrower's obligations, and conversely, all of the Collateral pledged by
any Borrower or any guarantor to secure their performance under any loans made
directly to them by Lender will be deemed to cross collateralize their
performance in connection with the Obligations.
ARTICLE IV
Representations and Warranties
As an inducement to Lender to enter into this Agreement, Borrowers
represent and warrant to Lender that:
4.1 - Authorization. Each Borrower is duly authorized and empowered to
create and issue the Note and to execute and deliver this Agreement, the Note,
the other Loan Documents and all other instruments referred to or mentioned
herein, and all action on the part of the Borrowers requisite for the due
execution, delivery, and performance of this Agreement, the Note, and the other
Loan Documents has been duly and effectively taken.
4.2 - Enforceable Obligations. This Agreement is, and the other Loan
Documents when duly executed and delivered will be, legal, valid, and binding
obligations of the Borrowers, enforceable in accordance with their respective
terms (subject to applicable bankruptcy, insolvency or other laws generally
affecting the enforcement of creditors' rights).
4.3 - No Conflicts or Consents. The execution and delivery by Borrowers
of the Loan Documents, the performance by Borrowers under such Loan Documents,
and the consummation of the transactions contemplated by the various Loan
Documents, do not and will not: (a) conflict with any provision of the
organizational documents under which any Borrower was created, or (b) except as
to matters that could not reasonably be expected to have a Material Adverse
Effect, result in the acceleration of any Debt owed by any Borrower, or conflict
with any law, statute, rule, regulation or Material Agreement, judgment,
license, order or permit applicable to or binding upon any Borrower or any of
its properties or assets, or require the consent, approval, authorization or
order of, or notice to or filing with, any Governmental Authority or third
party, or result in or require the creation of any Lien upon any material assets
or properties of any Borrower, except as permitted in the Loan Documents.
4.4 - Other Obligations. As of the date hereof and except for the
Subordinate Debt, no Borrower has any outstanding Debt or other material
liabilities, direct or indirect, absolute or contingent, which is, in the
aggregate, material to such Borrower and not shown in the financial statements
previously provided to Lender. No Borrower is aware of any fact, circumstance,
act, condition or development that will have or that threatens to have any
Material Adverse Effect on such Borrower's present financial condition.
4.5 - Investments and Guaranties. At the date of this Agreement, and
except for usual and customary investments in oil and gas properties, no
Borrower has made investments in, advances to or guaranties of the obligations
of any Person, except as reflected in the financial statements referred to in
Section 5.1(g) hereof or otherwise disclosed to the Lender in writing.
4.6 - Litigation. As of the date of this Agreement, there is no
litigation, legal, administrative or arbitral proceeding, investigation or other
action of any nature pending or, to the knowledge of the Borrowers, threatened
against or affecting any Borrower which involves the possibility of any judgment
or liability not fully covered by indemnity agreements or insurance, and which
would have a Material Adverse Effect. No unusual or unduly burdensome
restriction, restraint, or hazard exists by contract, law or governmental
regulation or otherwise relative to the business, properties or assets of any
Borrower, except as disclosed to the Lender in writing.
4.7 - Taxes. All tax returns required to be filed by the Borrowers with
all Governmental Authorities have been filed, and to Borrowers' knowledge, all
taxes, assessments, fees and other governmental charges upon Borrowers or upon
any of their properties, income or franchises which are due and payable, have
been paid (other than any the amount or validity of which are currently being
contested in good faith by appropriate proceedings and with respect to which
reserves in conformity with tax basis accounting principles have been provided
on the books of the Borrowers); and no tax lien has been filed and, to the
knowledge of Borrowers, no claim is being asserted with respect to any such tax,
fee or other charge.
4.8 - Purpose of Loan. The proceeds of the Facility made pursuant to
Section 2.1 and evidenced by the Note will be used to (a) finance a portion of
the acquisition of working interests in Carson and Gray Counties, Texas from
Caldwell Production Co., Inc.; and (b) fund fees and expenses associated with
this Facility.
4.9 - Title to Properties; Liens. As of the execution of this
Agreement, Borrowers have good record and defensible title to, or a valid
leasehold interest in the Collateral and, except for Permitted Liens, there are
no Liens on the Collateral.
4.10 - Leases. All material lease agreements under which any Borrower
is lessee or tenant are in full force and effect, and no default or potential
default exists thereunder.
4.11 - No Default. No Borrower is in default under or with respect to
any Material Agreement in any respect, other than defaults which could not have
a Material Adverse Effect. No Event of Default has occurred and is continuing.
4.12 - ERISA Plans. No Borrower has any plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA Plan").
4.13 - Principal Business Offices and Location of Records. The
principal place of business and chief executive office of Borrowers are located
at 216 S. Price Road, Pampa, Texas 79065, and the records of Borrowers
concerning their ownership of assets, businesses, and operations are located at
such address.
4.14 - Licenses, Permits and Franchises, etc. Each Borrower has all
rights, licenses, permits, franchises, patents, patent rights, trademarks,
trademark rights, and copyrights which are necessary or required for the
ownership or operation of any of its properties and the conduct of its business.
No Borrower is aware of any fact or condition that might cause any of such
rights not to be renewed in due course.
4.15 - No Material Omissions or Misstatements. No information, exhibit,
or report furnished to Lender by any Borrower in connection with the negotiation
of this Agreement contains any material misstatement of fact or omitted to state
a material fact or any fact necessary to make the statements contained therein
not misleading. Without limiting the generality of the foregoing, there are no
material facts relating to the Loan Documents or the financial condition,
assets, liabilities, results of operations or business of the Borrowers that
could, collectively or individually, have a Material Adverse Effect and that
have not been disclosed in writing to Lender as an exhibit to this Agreement or
in the financial statements of the Borrowers referred to in Section 5.1(g) of
this Agreement.
4.16 - Environmental Matters.
(a) No notice, notification, demand, request for information,
citation, summons or order has been issued, no complaint has
been filed, no penalty has been assessed and, to the knowledge
of Borrowers, no investigation or review is pending or
threatened by any Governmental Authority or other person: (i)
with respect to any alleged violation of any law, ordinance,
rule, regulation or order of any Governmental Authority in
connection with the property, operations or conduct of the
business of any Borrower; (ii) with respect to any alleged
failure to have any permit, certificate, license, approval,
requisition, or authorization required in connection with the
property, operations, or conduct of the business of any
Borrower; or (iii) with respect to any generation, treatment,
storage, recycling, transportation, disposal, or release, all
as defined in 42 USC 9601(22) (each a "Release") (other than
Releases in compliance with Relevant Environmental Laws or
permits issued thereunder), of any toxic, caustic, or
otherwise hazardous substance, including petroleum, its
derivatives, by-products, and other hydrocarbons, solid waste,
contaminants, polychlorinated biphenyls, paint containing
lead, urea, formaldehyde, foam insulation, and discharge of
sewage or effluent, whether or not regulated under federal,
state or local environmental statutes, ordinances, rules,
regulations or orders ("Hazardous Substance") generated by the
operations or business, or located at any property, of any
Borrower.
(b) To the knowledge of Borrowers and except in substantial
compliance with Relevant Environmental Laws and permits issued
thereunder: (i) none of the Borrowers nor any business
conducted by any Borrower have placed, held, located or
disposed of any Hazardous Substance on, under or at any
property now or previously owned or leased by any Borrower,
and none of such properties has been used as a dump site or
storage (whether permanent or temporary) site for any
Hazardous Substance; (ii) no polychlorinated biphenyls, urea
or formaldehyde is or has been present at any property now or
previously owned or leased by any Borrower; (iii) no asbestos
is or has been present at any property now or previously owned
or leased by any Borrower; (iv) there are no underground
storage tanks that have been used to store or have contained
any Hazardous Substance, active or abandoned, located on any
property now or previously owned or leased by any Borrower;
(v) no Hazardous Substance has been released at, on, or under
any property previously owned or leased by any Borrower; and
(vi) no Hazardous Substance has been released or is present,
in a reportable or threshold quantity, where such a quantity
has been established by statute, ordinance, rule, regulation
or order, at, on or under any property now or previously owned
by any Borrower.
(c) No Borrower has transported or arranged for the transportation
(directly or indirectly) of any Hazardous Substance to any
location which is listed or proposed for listing under the
Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986 ("CERCLA"), the Comprehensive
Environmental Response, Compensation and Liability Information
System ("CERCLIS") or on any similar state list or which is
the subject of federal, state or local enforcement actions or
other investigations.
(d) There are no environmental Liens on property owned or leased
by any Borrower, and no actions by any Governmental Authority
have been taken or are in process which could subject any of
such properties to such Liens.
(e) Prior to the date hereof, Borrowers have provided to Lender
all environmental investigations, studies, audits, tests,
reviews or other analyses conducted by or which are in the
possession of Borrowers in relation to any property or
facility now or previously owned or leased by any Borrower.
4.17 - Investment Company Act. None of the Borrowers nor any entity in
which any Borrower owns the controlling interest is an "investment company" or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended.
4.18 - Public Utility Holding Company Act. None of the Borrowers nor
any entity in which any Borrower owns the controlling interest is a "holding
company," or a "subsidiary company" of a "holding company," or an "affiliate" of
a "holding company" or of a "subsidiary company" of a "holding company," or a
"public utility" within the meaning of the Public Utility Holding Act of 1935,
as amended.
ARTICLE V
Conditions Precedent
5.1 - Conditions to Initial Advance. The obligation of Lender to make
the initial Advance pursuant to this Agreement under the Note shall be subject
to the satisfaction and fulfillment of each of the following conditions
precedent which shall have occurred on or before the date of that initial
Advance, unless compliance therewith shall have been waived in writing by
Lender:
(a) Execution of Loan Documents: Borrowers shall have executed and
delivered to the Lender the following:
(1) this Agreement;
(2) the Note;
(3) the Deeds of Trust;
(4) the Security Agreement;
(5) the Subordination Agreement;
(6) the Grant Subordination Agreement;
(7) within thirty (30) days of Closing, a $1,000,000 life
insurance policy on the life of Brad Fischer, the
proceeds of which shall be payable to Lender; and
(8) such other documents or instruments as Lender may
require.
(b) Entity Documentation. Lender shall have received, reviewed,
approved of such evidence as Lender requires as to the
existence, good standing, authority and capacity of each
Borrower, including a Certificate of Secretary or Certificate
of Authority, as applicable, for each Borrower, having
attached thereto (i) a true and complete copy of an executed
copy of its Articles of Incorporation or Articles of
Organization, as applicable, and all amendments thereto and
(ii) a true and complete copy of an executed copy of its
Bylaws, Company Agreement, or other organizational documents,
as applicable, and all amendments thereto; if the jurisdiction
of its formation is other than Texas, satisfactory evidence of
qualification to do business in good standing in Texas; a list
of each Borrower's current executive management and investors,
with appropriate biographical information; valuation
information concerning the Mortgaged Properties; and each
Borrower's most recent financial statements.
(c) Acceptable Purchase and Sale Agreement. Lender shall have
received, reviewed, and approved an executed Purchase and Sale
Agreement, or other contract, that confirms the Borrowers'
Right to acquire working interests of Caldwell Production Co.
in the Mortgaged Properties.
(d) Asset Valuation. Borrowers shall have submitted to Lender an
independent reservoir engineering report, or such other data
as Lender requires, substantiating the value of the Mortgaged
Properties to be acquired with funding in the form of the
Initial Advance.
(e) Title Assurances. Borrowers shall have delivered to Lender an
acquisition title opinion and data acceptable to Lender
reflecting that the Borrowers own or shall acquire marketable
title to the Mineral Interests of Borrowers in the Mortgaged
Properties, and Borrowers shall have taken such curative
actions with respect to title as Lender shall require.
(f) Environmental Report. Borrowers shall have delivered to Lender
a Phase 1 Environmental Site Assessment on the Mortgaged
Properties that is acceptable to the Lender.
(g) Financial Statements. Borrowers shall submit financial
statements, in form and substance satisfactory to the Lender,
covering the financial performance of the Borrowers during the
most recent period for which financial statements have been
prepared by Borrowers.
(h) Subordinate Debt. Borrowers shall confirm to Lender's
satisfaction that Borrowers have entered into the Subordinate
Loan Agreement with the Subordinate Lender pursuant to which
the Subordinate Lender will fund a minimum of Three Million
Seven Hundred Thousand and No/100 Dollars ($3,700,000) of the
amount required to purchase the Mortgaged Properties. The
Subordinate Debt shall be funded upon terms and conditions
satisfactory to the Lender. Final maturity under the
Subordinate Debt shall occur no earlier than one month after
the Maturity Date. In connection with the Subordinate Debt,
Lender and the Subordinate Lender shall have reached an
agreement regarding the terms of a Subordination Agreement,
pursuant to which the Subordinate Lender shall agree to
subordinate its position to that of the Lender and the
Subordinate Lender shall be subject to a 180-day blockage
period.
(i) Insurance Certificate. Lender shall have received evidence
that Borrowers have complied with the provisions of Section
6.6 hereof.
(j) Opinion of Borrowers' Counsel. Borrowers shall have provided
Lender with an opinion of Borrowers' counsel confirming the
terms of the Borrowers' representations, in form and substance
satisfactory to Lender.
(k) Ownership of Equipment and Personal Property. Borrowers shall
have taken such steps as are necessary to transfer the
ownership of all oilfield equipment and other personal
property associated with the Mortgaged Properties into Field
Services.
(l) Lease Operating Statement. Borrowers shall have provided to
Lender a copy of the lease operating statement prepared for
2006, which contains a complete breakdown of all leasehold
expenses associated with the Mortgaged Properties, which has
been audited by the Borrowers, and which is prepared upon the
same form previously provided by Borrowers to Lender for the
years of 2004 and 2005.
5.2 - Conditions to All Advances. In addition to the conditions
precedent stated in Section 5.1 above, the obligation of the Lender to make any
subsequent Advance under the Note requested by the Borrowers on any date,
including the initial Advance, shall be subject to the satisfaction of the
following conditions precedent:
(a) Representations and Warranties. Each of the representations
and warranties made by the Borrowers in or pursuant to the
Loan Documents shall be true and correct in all material
respects on and as of such date as if made on and as of such
date.
(b) No Event of Default. No Event of Default shall have occurred
and be continuing on such date or after giving effect to the
Advance requested by the Borrowers on such date.
(c) Maintenance of Borrowing Base. Notwithstanding Section 2.2,
after giving effect to the Advances under the Note requested
by Borrowers to be made on any date, the aggregate principal
amount of the Note then outstanding shall not exceed the
lesser of: (i) $5,000,000.00; (ii) the Borrowing Base then in
effect; or (iii) the Lender's legal limit then in effect plus
any amounts of the Note sold by the Lender to participating
banks or other financial institutions.
(d) No Material Litigation and No Material Adverse Change. No
litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority shall be pending or, to
the knowledge of the Borrowers, threatened by or against the
Borrowers or the Lender with respect to the closing of the
transactions contemplated by this Agreement or the other Loan
Documents.
(e) Advances to Fund Hedging Agreement. Each request for an
Advance to fund the purchase of a Hedging Agreement shall be
accompanied by a copy of the agreement to be funded, and
Lender shall determine that the agreement is an Acceptable
Hedging Agreement.
(f) No Material Changes. Lender shall have received satisfactory
evidence that (A) no Material Adverse Change has occurred in
the business, assets, liabilities (actual or contingent),
operations, condition (financial or otherwise) or prospects of
the Borrowers since the closing date of their most recent
financial statements; and (B) there is no suit, action,
investigation or proceeding pending or threatened in any court
or before any arbitrator or governmental authority that
purports to: (1) affect materially and adversely the
Borrowers, or (2) to affect any transaction contemplated by
the Loan Documents, or the ability of the Borrowers to perform
their obligations thereunder.
(g) Expenses. Borrowers shall have paid all reasonable expenses of
Lender in connection with the preparation of the Loan
Documents and the making of the Loan, including but not
limited to, the fees and expenses of counsel for Lender.
(h) Other Conditions. Borrowers shall have fulfilled such other
conditions as the Lender may reasonably impose.
ARTICLE VI
Affirmative Covenants
As an inducement to Lender to enter into this Agreement, and unless
otherwise expressly consented to in writing by Lender, Borrowers covenant and
agree that from the date hereof until payment in full of the Obligation:
6.1 - Financial Statements and Other Information. Borrowers shall
promptly furnish to Lender copies of: (i) such information regarding their
business and affairs and financial condition as Lender may reasonably request,
and (ii) without request, the following:
(a) as soon as available, but in any event not later than 120 days
after the end of each fiscal year of the Borrowers, a
consolidated financial statement covering the Borrowers' and
their Subsidiaries' financial performance as of the end of
such year and the related statements of income, changes in
retained earnings, and changes in cash flows for such year, to
be prepared in accordance with GAAP, audited by a recognized
independent accounting firm which is acceptable to Lender, and
certified by a senior financial officer of the Borrowers,
beginning with the 2007 fiscal year;
(b) as soon as available, but in any event not later than
forty-five (45) days after the end of each calendar month, a
monthly consolidated balance sheet and consolidated statement
of income, retained earnings, and cash flow, prepared in
accordance with GAAP, covering Borrowers and their
Subsidiaries as of the end of such month, to be certified by a
senior financial officer of the Borrowers;
(c) as soon as available, but in any event not later than thirty
(30) days after filing such tax return, copies of all federal
tax returns, together with all supporting schedules, filed by
any Borrower, beginning with the 2007 tax year;
(d) as soon as available, but in any event not later than
forty-five (45) days after the end of each calendar month, a
monthly report of production volumes, revenue, capital
expenditures, and lease operating expenses attributable to the
Borrowers' oil and gas properties as of the end of such month;
(e) as soon as reasonably possible, but in any event not later
than three (3) days after the date of the report, a daily
drilling report on any wells being drilled, deepened,
reworked, recompleted, side-tracked, or plugged and abandoned
on the Mortgaged Property;
(f) as soon as available, but in any event not later than February
1 of each year, beginning on February 1, 2008, an annual
independent engineering report detailing the value of the
Borrowers' oil and gas properties as of December 31 of the
previous year, with each report to be prepared by an engineer
or an engineering firm acceptable to the Lender;
(g) as soon as available, but in any event not later than August 1
of each year, a mid-year engineering report as of June 30 of
such year, to be internally prepared in a format consistent
with the independent consultant's report, with the first of
such reports to be due for the year 2007;
(h) an engineering report based upon an independent or internal
evaluation effective as of a date not more than 60 days prior
to the Borrowing Base redetermination date, for any
unscheduled Borrowing Base redetermination;
(i) as soon as available, but in any event not later than 15 days
of filing such a report, copies of all regulatory reports
filed by the Borrowers with any administrative agency having
jurisdiction over the Mortgaged Properties;
(j) immediately upon becoming aware of the existence of, or any
material change in the status of, any litigation which could
have a Material Adverse Effect if determined adversely against
any Borrower, a written communication to Lender of such
matter;
(k) immediately upon becoming aware of an Event of Default or the
existence of any condition or event which constitutes, or with
notice or lapse of time, or both, would constitute an Event of
Default, a verbal notification to Lender specifying the nature
and period of existence thereof and what action Borrowers are
taking or propose to take with respect thereto and,
immediately thereafter, a written confirmation to Lender of
such matters; and
(l) immediately upon becoming aware that any Person has given
notice or taken any action with respect to a claimed default
under any indenture, mortgage, deed of trust, promissory note,
loan agreement, note agreement, joint venture agreement or any
other Material Agreement or other undertaking to which any
Borrower is a party, a verbal notification to Lender
specifying the notice given or action taken by such person and
the nature of the claimed default and what action such
Borrower is taking or proposes to take with respect thereto
and, immediately thereafter, a written communication to Lender
of such matters.
6.2 - Taxes; Other Claims. Borrowers shall promptly pay and discharge
all taxes, assessments, and governmental charges or levies imposed upon
Borrowers, or upon or in respect of all or any part of the income, property or
business of Borrowers, all trade accounts payable in accordance with usual and
customary business terms, and all claims for work, labor or materials, which, if
unpaid, might become a Lien or charge upon any or all of the property of the
Borrowers; provided, however, the Borrowers shall not be required to pay any
such tax, assessment, charge, levy, account payable or claim if: (a) the
validity, applicability or amount thereof is currently being contested in good
faith by appropriate actions or proceedings diligently conducted which will
prevent the forfeiture or sale of any property of Borrowers or any material
interference with the use thereof by the Borrowers, and (b) the Borrowers shall
have set aside on their books reserves therefore deemed adequate under tax basis
accounting principles.
6.3 - Commodity Hedging. Borrowers will hedge their actual hydrocarbon
production volumes in a manner satisfactory to Lender pursuant to Acceptable
Hedging Agreements. Such Acceptable Hedging Agreements shall cover no less than
seventy-five percent (75%) of their Proved Developed Producing volumes for any
given month, nor for less than a twenty-four month period, without the Lender's
approval.
6.4 - Letters-in-Lieu. To the extent that the Borrowers are unable to
provide Lender with accurate information concerning the purchasers of production
from any Mortgaged Property recently acquired by Borrowers prior to or
simultaneously with Closing, Borrowers will provide such information and execute
the necessary letters-in-lieu within thirty (30) days of the occurrence of
Closing.
6.5 - Maintenance. Borrowers will: (a) observe and comply with all
governmental requirements; and (b) maintain their equipment, properties and
assets (and any properties, equipment and assets leased by or consigned to them
or held under title retention or conditional sales contracts) in good and
workable condition at all times and make all repairs, replacements, additions,
betterments and improvements to their properties, equipment and assets as are
needful and proper so that the business carried on in connection therewith may
be conducted properly and efficiently at all times.
6.6 - Maintenance of Insurance. Borrowers now maintain and will
continue to maintain with financially sound and reputable insurers, insurance
with respect to the Mortgaged Properties against such liabilities, risks, and
contingencies and in such types and amounts as is customarily carried by
companies engaged in the same or similar businesses and similarly situated. From
time to time, the Borrowers will furnish Lender with copies of certificates,
binders, and policies necessary to give Lender reasonable assurance of the
existence of such coverage. Borrowers agree to promptly notify Lender of any
termination or other material change in such insurance coverage and, if
requested by Lender, to provide Lender with all information about the renewal of
each policy at least 15 days prior to the expiration thereof. In the case of any
fire, accident, or other casualty causing loss or damage to any Collateral of
Borrowers, the proceeds of such policies in excess of $50,000 shall, at the
option of the Lender, be used to: (i) replace the lost or damaged property with
similar property having a value at least equivalent to the lost or damaged
property, or (ii) prepay the Note. Borrowers shall take steps as are necessary
to name Lender as an additional payee on any and all insurance policies
maintained by the Borrowers.
6.7 - Reimbursement of Fees and Expenses. Borrowers shall pay all
reasonable fees and expenses incurred by Lender and its designated
representatives in connection with this Agreement, all renewals hereof, the
other Loan Documents or other transactions pursuant hereto or to the other Loan
Documents, whether the services provided thereunder are provided directly by
Lender or by a third party selected by Lender, as well as all costs of filing
and recordation, all legal and accounting fees, all costs associated with
enforcing any of Lender's Rights under the Loan Documents, including, without
limitation, costs of repossessing, storing, transporting, preserving and
insuring any Collateral that Borrowers may pledge to Lender, all court costs
associated with enforcing or defending Lender's Rights against Borrowers or any
third party challenging said Rights and any other cost or expense incurred by
Lender or its designated representatives in connection herewith or with the
other Loan Documents, together with interest at the Default Rate per annum on
each such amount commencing on the date notice of such expenditure is given to
Borrowers by Lender until the date it is repaid to Lender.
6.8 - Indemnification. Borrowers shall indemnify and hold Lender and
its respective directors, officers, agents, and employees harmless from and
against any and all liabilities, actions, claims, judgments, costs, charges and
reasonable attorneys' fees, made against or incurred by Lender in any way
relating to or arising out of any act or failure to act on the part of Borrowers
in connection with or affecting this Agreement, the Note or any other Loan
Document, which may be claimed by third parties, either before or after the
payment in full of the Obligation, and either before or after the release,
either partially or wholly, of the Bank Liens. The covenants and conditions of
this Section 6.8 shall remain in full force and effect notwithstanding the
payment in full of the Obligation and the release, either partially or wholly,
of the Bank Liens or any foreclosure thereunder. All such claims, judgments,
costs, charges and attorneys' fees as may be paid by Lender shall bear interest
at the Default Rate per annum on each such amount commencing on the date notice
of such claims, judgments, costs, charges or attorneys' fees is given to
Borrowers by Lender until paid by Borrowers and shall be part of the Obligation.
6.9 - Further Assurances. Borrowers shall promptly use their best
efforts to cure any defects in the execution and delivery of any of the Loan
Documents, and in any other instrument or document referred to or mentioned
herein. Borrowers shall immediately execute and deliver to Lender upon Lender's
request, all such other and further instruments as may be reasonably required by
Lender from time to time in compliance with or accomplishment of the covenants
and agreements of Borrowers made herein and in the other Loan Documents.
Additionally, the Borrowers will provide the Lender with any and all information
reasonably requested.
6.10 - Inspection and Visitation. Borrowers shall permit any officer,
employee, agent or representative of Lender to visit and inspect any of the
Collateral, examine all of their books, records and accounts, and take copies
and extracts therefrom, all at such reasonable times as Lender may request and,
further, Borrowers shall allow and do hereby grant Lender the right to contact
at anytime any member of the Borrowers' management team, the members of which as
of the date of this Agreement, are identified as Al Wright, Brad Fischer, Max
Grant, Robert Gordon, Peter Reid, and Dudley Muth, and any of Borrowers'
associates, Affiliates, officers, accounts, and auditors. Moreover, after
providing the Borrowers with seventy-two (72) hours written notice, Lender shall
also have the right to contact any other employees or customers of Borrowers as
Lender may desire for purposes of obtaining additional information.
6.11 - Lender as Principal Depository. With the exception of an
operating account to be maintained by the Borrowers with Bank of America, N.A.
in Pampa, Texas, Borrowers shall maintain Lender as their principal depository
bank, including for the maintenance of business, each management, operating, and
administrative deposit accounts.
6.12 - Compliance With Laws. Borrowers shall comply with all laws,
ordinances, or rules and regulations to which they are subject, the violation of
which could have a Material Adverse Effect.
6.13 - Accounts and Records. The Borrowers will keep books of record
and account in which full, true and correct entries will be made of all dealings
or transactions in relation to their business and activities, in accordance with
GAAP.
6.14 - Environmental Complaints. Borrowers shall promptly give notice
to Lender: (a) of any Environmental Complaint affecting any Borrower, any
property owned, operated or used by any Borrower or any part thereof or the
operations of any Borrower, or any other person on or in connection with such
property or any part thereof (including receipt by any Borrower of any notice of
(i) the happening of any event involving the use, spill, release, leak, seepage,
discharge or clean-up of any Hazardous Substance or (ii) any complaint, order,
citation or notice with regard to air emissions, water discharges, or any other
environmental, health or safety matter affecting any Borrower from any person or
entity (including without limitation the United States Environmental Protection
Agency), and (b) of any notice from any person of (i) any violation or alleged
violation of any Relevant Environmental Law relating to any such property or any
part thereof or any activity at any time conducted on any such property, (ii)
the occurrence of any release, spill or discharge in a quantity that is
reportable under any Relevant Environmental Law, or (iii) the commencement of
any clean-up pursuant to or in accordance with any Relevant Environmental Law of
any Hazardous Substance on or about any such property or any part thereof.
ARTICLE VII
Negative Covenants
As an inducement to Lender to enter into this Agreement, Borrowers
covenant and agree that from the date hereof until payment in full of the
Obligation:
7.1 - Consolidated Debt Service Coverage Ratio. Beginning ninety (90)
days after the date of this Agreement, Borrowers shall not permit their
Consolidated Debt Service Coverage Ratio to be less than 1.25 to 1.0 at any
time. The Consolidated Debt Service Coverage Ratio shall be calculated monthly
based upon year-to-date figures for the current calendar year, beginning January
1, 2007, and shall be reported to Lender within forty-five (45) days after the
end of each calendar month, beginning July 31, 2007.
7.2 - Liens. No Borrower shall create, incur, assume or permit to exist
any Lien upon any of the Collateral, whether now owned or hereafter acquired, or
agree to do any of the foregoing, except Permitted Liens.
7.3 - Merger, Etc. No Borrower shall enter into any merger or
consolidation or liquidation or dissolution.
7.4 - Extensions of Credit. No Borrower shall make any loan or advance
to any individual, partnership, corporation, or other entity without consent of
Lender, except (a) intercompany adjustments among Borrowers and their
Subsidiaries or Affiliates occurring in the ordinary course of business, and (b)
advances made to employees of Borrowers for the payment by them of items for
which an expense report or voucher will be filed and which items will constitute
ordinary and necessary business expenses of Borrowers.
7.5 - Borrowings. No Borrower shall create, incur, assume, or become
liable in any manner for any indebtedness (for borrowed money, deferred payment
for the purchase of assets, lease payments, as surety or guarantor for the debt
for another, or otherwise) other than to Lender, except for (a) the Subordinate
Debt; (b) normal trade debts incurred in the ordinary course of Borrowers'
business; (c) existing indebtedness disclosed to Lender in writing and
acknowledged by Lender prior to the date of this Agreement; (d) leases of
personal property which are not "capital leases" under GAAP and for which the
lessor's remedy for a breach by the lessee thereunder is limited to recovery of
the item leased; (e) indebtedness created under Acceptable Hedging Agreements;
and (f) other unsecured indebtedness in addition to that permitted by clauses
(b) through (f) immediately preceding in an aggregate principal amount not
exceeding $50,000.00 at any time outstanding.
7.6 - Dividends and Distributions. No Borrower shall declare or pay any
dividends; or purchase, redeem, retire or otherwise acquire full value any of
its capital stock, membership interests or ownership interests, now or hereafter
outstanding; or make any distribution of assets to its shareholders, members or
owners, as such, in excess of 10% of Gross Oil and Gas Proceeds (or attributable
to properties unrelated to the Mortgaged Properties), whether in cash, assets,
or in obligations of any Borrower; or allocate or otherwise set apart any sum
for the payment of any dividend or distribution on, or for the purchase,
redemption, or retirement of any capital stock, membership interests or
ownership interests, or make any other distribution by reduction of capital or
otherwise in respect of any of its capital stock, membership interests or
ownership interests.
7.7 - Hedging Transactions. No Borrower shall enter into any Hedging
Agreement, other than an Acceptable Hedging Agreement.
7.8 - Investments. No Borrower shall invest in (by capital contribution
or otherwise), or acquire or purchase or make any commitment to purchase the
obligations or stock of, any entity, except: (a) temporary investments in
securities of the United States having maturities not in excess of one (1) year;
(b) certificates of deposit issued by Lender; (c) readily marketable commercial
paper rated "A-1" by Standard & Poor's Corporation (or similar rating by any
similar organization which rates commercial paper); (d) readily marketable
direct obligations of any state of the United States of America or any political
subdivision of any such state given on the date of such investment a credit
rating of at least AA by Standard & Poor's Corporation due within one year from
the acquisition thereof; (e) repurchase agreements with respect to the
investments referred to in the preceding clauses with any bank or trust company
organized under the laws of the United States of America or any state thereof
and having combined capital, surplus and undivided profits of not less than
$500,000,000 (as of the date of its most recent financial statements) and having
deposits that have received one of the two highest ratings obtainable from
Standard & Poor's Corporation; (f) Eurodollar time accounts or Eurodollar
certificates of deposit each with banker's acceptances of any bank or trust
company organized under the laws of the United States of America or any state
thereof having combined capital, surplus and undivided profits of not less than
$500,000,000 (as of the date of its most recent financial statements) and having
deposits that have received one of the two highest ratings obtainable from
Standard & Poor's Corporation; and (g) such other investments as may be approved
by Lender.
7.9 - Change of Operator. Borrower shall take such steps as are
necessary to maintain in place Production as primary operator of the Mortgaged
Properties for any reason.
7.10 - Change of Control of Borrower. No Borrower shall permit the
change of control of any Borrower. "Change of Control" as used in the preceding
sentence means that point in time when the management or ownership of any
Borrower changes.
7.11 - Change in Management. No Borrower shall effect a material change
in its management.
7.12 - Modification of Organizational Documents. No Borrower shall
materially modify, directly or indirectly, or change, waive any provision of,
amend, supplement, substitute, terminate, cancel, or replace its Articles of
Incorporation or Articles of Organization, as applicable, or its Bylaws, Company
Agreement or other organizational documents; provided, however, such
organizational documents may be amended if (a) such Borrower gives Lender prior
written notice thereof, and (b) the proposed modification or amendment does not
in Lender's judgment, adversely affect the interests of Lender under the Loan
Documents or constitute or result in a breach of any of the provisions contained
in any of the Loan Documents, and (c) no Event of Default or potential Event of
Default has occurred and is continuing.
7.13 - Change in Nature of Business. No Borrower shall conduct any
business other than, or make any material change in the nature of, its business
as carried on as of the date hereof.
7.14 - Arm's Length Transactions. No Borrower shall enter into a
transaction with any other Borrower, Subsidiary or Affiliate, except a
transaction upon terms that are not less favorable to it than would be obtained
in a transaction negotiated at arm's length with an unrelated third party.
7.15 - Subsidiaries. No Borrower shall form or acquire any Subsidiaries
other than those in existence on the date hereof.
7.16 - Plan Obligations. No Borrower shall assume or otherwise become
subject to an obligation to contribute to or maintain any Plan or acquire any
entity which has at any time had an obligation to contribute to or maintain any
Plan.
ARTICLE VIII
Default and Remedies
8.1 - Events of Default. If any one or more of the following shall
occur and shall not have been remedied in the period, if any, provided for, an
"Event of Default" shall be deemed to have occurred hereunder and with respect
to all of the Obligation, unless waived in writing by Lender:
(a) default shall occur in the payment when due of any installment
of principal or interest on the Note or any other Obligation,
including the Subordinated Debt;
(b) any representation or warranty made by any Borrower herein or
in any of the other Loan Documents or in any certificate,
document or financial or other statement furnished to Lender
under or in connection with this Agreement or any other Loan
Document shall be or shall prove to have been incorrect or
untrue or misleading in any material respect on or as of the
date made or deemed made and shall continue unremedied for a
period of 15 days after the earlier of (i) the date on which
such Borrower becomes aware of such default or (ii) the date
on which Lender gives notice thereof to such Borrower;
(c) default shall be made by any Borrower in the due performance
or observance of any covenant, condition or agreement
contained in this Agreement or in any of the other Loan
Documents and such default shall continue unremedied for a
period of 15 days after the earlier of (i) the date on which
such Borrower becomes aware of such default or (ii) the date
on which Lender gives notice thereof to such Borrower;
(d) Any Borrower shall (i) apply for or consent to the appointment
of a receiver, trustee or liquidator of such Borrower of all
or a substantial part of the assets of such Borrower; (ii) be
unable, or admit in writing its inability, or fail to confirm
its ability (when requested to do so by Lender) to pay its
debts as they become due; (iii) make a general assignment for
the benefit of creditors; (iv) be adjudicated a bankrupt or
insolvent or file a voluntary petition in bankruptcy; (v) file
a petition or an answer seeking reorganization or an
arrangement with creditors or to take advantage of any
bankruptcy or insolvency law; (vi) 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 proceedings; or (vii) take any
action for the purpose of effecting any of the foregoing;
(e) an order, judgment or decree shall be entered by any court of
competent jurisdiction appointing a receiver, trustee or
liquidator of any Borrower or of all or a substantial part of
its assets, and such order, judgment or decree shall continue
unstayed in effect for any period of 30 consecutive days;
(f) the failure of any Borrower to have discharged within a period
of 30 days after the commencement thereof any attachment,
sequestration or similar proceeding against any of its
properties or assets having a value of $50,000 or more;
(g) any acceleration, notice of default, default, filing of suit
or notice of breach by any lender, lessor, creditor or other
party to any Material Agreement to which any Borrower is a
party, or to which the Mortgaged Properties are subject;
(h) the failure to remedy (or commence to remedy within the time
provided in Section 2.2(e)(ii) hereof) any Borrowing Base
Deficiency within thirty (30) days as described in Section
2.2(e).
(i) the occurrence of a Material Adverse Effect with respect to
any Borrower;
(j) final judgment or judgments shall be entered against any
Borrower involving in the aggregate a liability (not paid or
fully covered by insurance or not otherwise covered by
indemnity agreements acceptable to Lender in its sole
discretion) of $50,000 or more, and such judgment or judgments
shall not have been vacated, discharged, stayed or bonded
pending appeal within 60 days from the entry thereof;
(k) Invalidity of any of the Loan Documents not cured within
fifteen (15) days after request by Lender; or
(l) default shall occur under the Subordinate Loan Agreement.
8.2 - Remedies.
(a) Upon the occurrence of any Event of Default described in
Section 8.1(d) or Section 8.1(e) hereof, the lending
obligations, if any, of Lender hereunder shall immediately
terminate, and the entire principal amount of all Obligations
then outstanding together with interest then accrued and
unpaid thereon shall become immediately due and payable, all
without demand and presentment for payment, notice of
nonpayment, protest, notice of protest, notice of dishonor,
notice of intention to accelerate maturity or notice of
acceleration of maturity, or any other notice of default of
any kind, all of which are hereby expressly waived by each
Borrower.
(b) Upon the occurrence and at any time during the continuance of
any Event of Default specified in Section 8.1 hereof, other
than an Event of Default of the type described in subparagraph
8.2(a), Lender may, after giving written notice to Borrowers
and a thirty (30)-day time period within which Borrowers may
cure the Event of Default, (i) declare the entire principal
amount of all Obligations then outstanding together with
interest then accrued and unpaid thereon to be immediately due
and payable without demand and presentment for payment, notice
of nonpayment, protest, notice of protest, notice of dishonor,
notice of intention to accelerate maturity or notice of
acceleration of maturity, or any other notice of default of
any kind, all of which are hereby expressly waived by each
Borrower, and (ii) terminate the lending obligations, if any,
of Lender hereunder unless and until Lender shall reinstate
same in writing.
(c) Should any Borrower be in default of, or fail to comply with
any covenant contained in this Agreement, and if such Borrower
shall fail to cure such default or failure to comply with such
covenant within ten (10) days after the receipt of written
notice of such default or failure to comply, then, Lender may,
at Lender's option, increase the interest rate provided for in
the Note to reflect the increased monitoring by Lender and
increased risk to Lender of such Borrower's non-compliance.
Lender may increase the interest rate an additional one
percent (1.00%) for failure to comply with reporting
requirements regarding financial statements and other
information as required by this Agreement, and an additional
one percent (1.00%) for Borrowers' noncompliance with
performance standards detailed in the financial covenants
contained in this Agreement. Nothing in this paragraph shall
require or obligate Lender to exercise this option to increase
the interest rate on the Note in lieu of any other remedy
available to Lender, including that of acceleration of the
Note. If the interest rate on the Note is increased as
provided for in this paragraph, and thereafter Borrowers
achieve compliance with all of their covenants contained in
this Agreement, then Lender, upon Borrowers' written request,
will reinstate the interest rate provided for in the Note.
8.3 - Right of Setoff. Upon the occurrence and during the continuance
of any Event of Default, or if any Borrower becomes insolvent, however
evidenced, Lender is hereby authorized at any time and from time to time,
without prior notice to any Borrower (any such notice being expressly waived by
the Borrowers), to setoff and apply any and all deposits (except as to special
deposits, where there would be excluded any funds held in trust or otherwise for
the benefit of third parties) at any time held and other indebtedness at any
time owing by Lender to or for the credit or the account of any Borrower against
any and all of the Obligations, to the extent permitted by Texas law now in
effect. Lender agrees promptly to notify Borrowers after any such setoff and
application, provided that the failure to give such notice shall not affect the
validity of such setoff and application. The rights of Lender under this Section
8.3 are in addition to other rights and remedies (including, without limitation,
other rights of setoff) which Lender may have.
8.4 - Delegation of Duties and Rights. Lender may perform any of its
duties or exercise any of its Rights under the Loan Documents by or through its
officers, directors, employees, attorneys, agents or other representatives.
8.5 - Lender Not in Control. None of the covenants or other provisions
contained in this Agreement or the other Loan Documents shall, or shall be
deemed to, give Lender the Right to exercise control over the affairs or
management of any Borrower.
8.6 - Waivers by Lender. The acceptance by Lender at any time and from
time to time of part payment on the Obligation shall not be deemed to be a
waiver of any Event of Default then existing. No waiver by Lender of any Event
of Default shall be deemed to be a waiver of any other then-existing or
subsequent Event of Default. No delay or omission by Lender in exercising any
Right under this Agreement or any of the other Loan Documents shall impair such
Right or be construed as a waiver thereof or any acquiescence therein.
8.7 - Cumulative Rights. All Rights available to Lender under this
Agreement and the other Loan Documents are cumulative of, and in addition to,
all other Rights available to Lender at law or in equity. The exercise or
partial exercise of any such Right shall not preclude the exercise of any other
Right under the Loan Documents or otherwise.
8.8 - Expenditures by Lender. All court costs, reasonable attorneys'
fees, other costs of collection, and other sums spent by Lender pursuant to the
exercise of any Right provided herein shall be payable to Lender on demand,
shall become part of the Obligation, and shall bear interest at the Default Rate
per annum on each such amount commencing on the date notice of such claims,
judgments, costs, charges or attorneys' fees is given to Borrowers by Lender
until the date paid by Borrowers.
ARTICLE IX
Miscellaneous
9.1 - Survival of Representations and Warranties. All representations
and warranties of each Borrower made hereunder, in the other Loan Documents and
in any document, certificate or statement delivered pursuant hereto or in
connection herewith shall survive the execution and delivery of this Agreement
and the Note.
9.2 - Communications. Any notice of an Event of Default to be provided
by Lender to Borrowers shall be transmitted to Borrowers by certified mail,
return receipt requested. Unless specifically otherwise provided, whenever any
Loan Document requires or permits any consent, approval, notice, request, or
demand from one party to another, such communication must be in writing (which
may be by cable, telex, telecopy, fax, or other similar means of remote
facsimile transmission) to be effective and shall be deemed to have been given
on the day actually delivered or, if mailed, on the third day (or if such third
day is not a Business Day, then on the next succeeding Business Day) after it is
enclosed in an envelope, addressed to the party to be notified at the address
stated below, properly stamped, sealed, and deposited in the appropriate
official postal service. Until changed by notice pursuant hereto, the address of
each party for purposes of this Agreement is as follows:
BORROWERS:
Chancellor Group, Inc.
216 S. Price Road
Pampa, Texas 79065
Phone: (806) 688-9697
Fax: (806) 688-9697
Gryphon Production Company, LLC
P.O. Box 742
Pampa, Texas 79066
Phone: (806) 688-9697
Fax: (806) 688-9697
Gryphon Field Services, LLC
P.O. Box 742
Pampa, Texas 79066
Phone: (806) 688-9697
Fax: (806) 688-9697
LENDER:
Western National Bank
508 West Wall Street, Suite 1100
Midland, Texas 79701
Attention: Marshall N. Vicknair
Phone: 432-570-4181
Fax: 432-570-9567
9.3 - Binding on Successors. All covenants and agreements herein
contained by or on behalf of Borrowers shall bind their successors and assigns
and shall inure to the benefit of Lender and its successors and assigns;
provided, however, that no Borrower may assign its Rights or obligations
hereunder without the prior written consent of Lender.
9.4 - Choice of Law and Venue. (a) THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS
OF LAWS) OF THE STATE OF TEXAS AND SHALL BE PERFORMABLE IN MIDLAND COUNTY,
TEXAS. The parties hereto irrevocably submit themselves to the jurisdiction of
any Texas state court or any United States court located in the State of Texas
(or any court having jurisdiction over appeals from any such court) in any
proceeding between or among them arising out of or in any way relating to this
Agreement or the Loan Documents whether arising in contract, tort or otherwise.
Any suit, action or proceeding may be brought in the courts of the State of
Texas, County of Midland, or in the United States District Court for the Western
District of Texas, Midland Division. All parties hereto irrevocably consent to
the service of process in any suit, action or proceeding in said court by the
mailing thereof, by registered or certified mail, postage prepaid, to its
address for notices set forth in this Agreement. Service shall be deemed
effective five (5) days after such mailing. If requested to do so by any party,
each party hereto agrees to waive service of process and to execute any and all
documents necessary to implement such waiver in accordance with the Texas Rules
of Civil Procedure. All parties hereto irrevocably waive any objections which
any may now or hereafter have (including any based on the grounds of forum non
conveniens) to the laying of venue of any suit, action or proceeding arising out
of or relating to this Agreement or the Loan Documents brought in the courts
located in Midland County, Texas. Nothing herein impairs the right to bring
proceedings in the courts of any other jurisdiction or to effect service of
process in any other manner permitted.
(b) The parties recognize that courts outside of Midland County, Texas,
may also have jurisdiction over suits, actions or proceedings arising out of
this Agreement and the Loan Documents. Except for proceedings brought by Lender
in those jurisdictions where the Mortgaged Properties are located, in the event
any party shall institute a proceeding involving this Agreement or the Loan
Documents in a jurisdiction outside Midland County, Texas, the party instituting
such litigation shall indemnify the other parties for any losses and expenses
that may result from the breach of the foregoing covenant to institute such
proceeding only in a state or federal court in Midland County, Texas, including,
without limitation any additional expenses incurred as the result of litigating
in another jurisdiction; such expenses and reasonable fees of local counsel and
travel and lodging expenses of the indemnified parties, its witnesses, experts
and support personnel.
9.5 - Waiver of Jury Trial. EACH BORROWER HEREBY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
9.6 - Usury Savings Clause. It is the intention of the parties hereto
that Lender shall conform strictly to usury laws applicable to it. Accordingly,
if the transactions contemplated hereby would be usurious as to Lender under
laws applicable to it (including the laws of the United States of America and
the State of Texas or any other jurisdiction whose laws may be mandatorily
applicable to Lender notwithstanding the other provisions hereof), then, in that
event, notwithstanding anything to the contrary in the Note, this Agreement or
any other Loan Document or other agreement entered into in connection with or as
security for the Note, it is agreed as follows: (i) the aggregate of all
consideration which is contracted for, taken, reserved, charged or received by
Lender under the Note, this Agreement or any other Loan Document or agreement
entered into in connection with or as security for the Note shall under no
circumstances exceed the maximum amount allowed by such applicable law, and any
excess shall be credited by Lender on the principal amount of the Obligation to
Lender (or, to the extent that the principal amount of the Obligation shall have
been or would thereby be paid in full, refunded by Lender to the Borrowers); and
(ii) in the event that the maturity of the Note is accelerated by reason of an
Event of Default under this Agreement or otherwise, or in the event of any
prepayment, then such consideration that constitutes interest under law
applicable to Lender may never include more than the maximum amount allowed by
such applicable law, and excess interest, if any, provided for in the Note, this
Agreement or otherwise shall be canceled automatically by Lender as of the date
of such acceleration of prepayment and, if theretofore paid, shall be credited
by Lender on the principal amount of the Obligation (or, to the extent that the
principal amount of such Obligation shall have been or would thereby be paid in
full, refunded by Lender to the Borrowers).
To the extent that Article 5069-1.04 of the Texas Revised Civil
Statutes is relevant to Lender for the purpose of determining the Highest Lawful
Rate, Lender hereby elects to determine the applicable rate ceiling under such
Article by the indicated (weekly) rate ceiling from time to time in effect,
subject to Lender's right subsequently to change such method in accordance with
applicable law.
9.7 - Severability. If one or more of the provisions contained herein
or in the Note or any of the other Loan Documents shall, for any reason, be held
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement, the
Note or any of the other Loan Documents.
9.8 - Non-Waiver. No Advance hereunder shall constitute a waiver of the
representations, warranties, conditions or agreements of any Borrower or of any
of the conditions of Lender's obligations to make further Advances. If any
Borrower is unable to satisfy any such representation, warranty, condition or
agreement, no such Advance shall have the effect of precluding Lender from
thereafter declaring such inability to be an Event of Default as hereinabove
provided.
9.9 - Counterparts. This Agreement may be executed by one or more of
the parties to this Agreement on any number of separate counterparts, each of
which shall be deemed to be an original, but all of which taken together shall
constitute one and the same instrument.
9.10 - Amendments and Waivers. Neither this Agreement, the Note nor any
of the other Loan Documents may be amended or waived orally, but only by an
instrument in writing signed by Borrowers and Lender (and any other person who
is a party to the Loan Document being amended or waived).
9.11 - Terms and Headings. Terms used herein but not defined shall have
the meanings accorded them under tax basis accounting principles, or the Texas
Uniform Commercial Code, as appropriate. All headings used herein are for
convenience and reference purposes only and shall not affect the substance of
this Agreement.
9.12 - Conflicts. If there is ever a conflict between any of the terms,
conditions, representations, warranties or covenants contained in this Agreement
and the terms, conditions, representations, warranties or covenants in any of
the other Loan Documents executed by Borrowers and Lender, the provisions of
this Agreement shall govern and control; provided, however, the fact that any
term, condition, representation, warranty or covenant contained in such other
Loan Document is not contained herein shall not be, or be deemed to be, a
conflict.
9.13 - Environmental Indemnity. Borrowers hereby agree to defend,
indemnify, pay and hold Lender and its officers, directors, employees and agents
(each, an "Indemnitee") harmless from and against, and shall reimburse each
Indemnitee for, any and all loss, claim, liability, damages, injunctive relief,
penalty, judgment, suit, obligation, injury to persons, property or natural
resources, cost, expense or disbursement of any kind or nature whatsoever
including, without limitation, attorneys' fees and costs attributable to any
action or cause of action (whether or not each Indemnitee shall be designated a
party thereto), arising, directly or indirectly, in whole or in part, out of the
release or presence, or alleged release or alleged presence, or any Hazardous
Substance, at, on, or under, surrounding or in connection with any of the
Mortgaged Property, or any portion thereof, whether foreseeable or
unforeseeable, regardless of the source of such release and regardless of when
such release occurred or such presence is discovered. The foregoing indemnity
includes, without limitation, all cost in law or in equity of removal,
remediation of any kind and disposal of any such Hazardous Substance, all costs
of determining whether the Mortgaged Properties are in compliance, and causing
the Mortgaged Properties to be in compliance, with all applicable laws relating
to Hazardous Substances, all costs associated with claims for damages to
persons, property or natural resources, and each Indemnitee's consultants' fees
(including attorneys' fees and costs) and court costs. The obligations of
Borrowers under this indemnity shall survive the repayment of the Note and shall
be independent of the obligations of Borrowers to the Indemnitees in connection
with the Note. The rights of each Indemnitee under this indemnity shall be in
addition to any other rights and remedies of such Indemnitee under any guaranty
or any document or instrument now or hereafter executed in connection with this
Agreement, the Note, the Loan Documents or at law or in equity.
9.14 - Renewal, Extension or Rearrangement. All provisions of this
Agreement and any of the other Loan Documents relating to the Note or any other
Obligation shall apply with equal force and effect to each and all promissory
notes hereafter executed which in whole or in part represent a renewal,
extension for any period, increase or rearrangement of any part of the
Obligation originally represented by the Note or any part of such other
Obligation.
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE ENTIRE
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
{The remainder of this page is intentionally left
blank. Signature page follows.}
EXECUTED EFFECTIVE as of the date first above written.
BORROWERS:
CHANCELLOR GROUP, INC.
By: /s/ Alan M. Wright
---------------------------------
Name: Alan M. Wright
Title: EVP, CFO, SECTY, TREAS.
GRYPHON PRODUCTION COMPANY, LLC
By: /s/ Alan M. Wright
---------------------------------
Name: Alan M. Wright
Title: EVP, CFO, SECTY, TREAS.
GRYPHON FIELD SERVICES, LLC
By: /s/ Alan M. Wright
---------------------------------
Name: Alan M. Wright
Title: EVP, CFO, SECTY, TREAS.
LENDER:
WESTERN NATIONAL BANK
By: /s/ Marshall N. Vicknair
------------------------
MARSHALL N. VICKNAIR
Senior Vice President