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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14334
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Venus Exploration, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3299127
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1250 N.E. Loop 410, Suite 1000, San Antonio, Texas 78209
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(Address of principal executive offices) (Zip code)
(210) 930-4900
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 13, 1999
----- ------------------------------
Common Stock $.01 par value 11,029,383 shares
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VENUS EXPLORATION, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements (Unaudited)
(a) Consolidated Balance Sheets as of 3
June 30, 1999 and December 31, 1998
(b) Consolidated Statements of Operations for 4
the three-month periods ended June 30,
1999 and 1998
(c) Consolidated Statements of Operations for 5
the six-month periods ended June 30, 1999
and 1998
(d) Consolidated Statements of Cash Flows 6
for the six month periods ended
June 30, 1999 and 1998
(e) Notes to Consolidated Financial Statements 7
Item 2. - Management's Discussion and Analysis of Financial 16
Condition and Results of Operations
Item 3. - Quantitative and Qualitative Disclosures About 23
Market Risk
PART II. - OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds 24
Item 5. - Other Information 24
Item 6. - Exhibits and Reports on Form 8-K 24
Signatures 25
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Unaudited) 1998
----------- ------------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 438 $ 126
Trade accounts receivable and other 847 492
--------- --------
TOTAL CURRENT ASSETS 1,285 618
OIL AND GAS PROPERTIES AND EQUIPMENT,
net (successful efforts method), at cost 18,414 6,399
OTHER PROPERTY AND EQUIPMENT, net 185 238
DEFERRED FINANCING COSTS, at cost less
accumulated amortization 58 19
OTHER ASSETS, at cost less accumulated amortization 99 122
--------- --------
TOTAL ASSETS $ 20,041 $ 7,396
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 1,383 $ 1,269
Other liabilities 298 433
Revolving credit agreement 3,736 5,540
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TOTAL CURRENT LIABILITIES 5,417 7,242
LONG-TERM DEBT 15,000 -
OTHER LONG-TERM LIABILITIES 78 23
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TOTAL LIABILITIES 20,495 7,265
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SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, par value of $0.01;
5,000,000 shares authorized; none issued - -
Common stock, par value of $0.01;
30,000,000 shares authorized; 10,982,365 and 10,971,325 shares
issued and outstanding as of June 30, 1999
and December 31,1998, respectively 110 110
Additional paid-in capital 17,235 17,209
Retained earnings (deficit) (17,612) (16,944)
Unearned compensation - restricted stock (187) (244)
--------- --------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (454) 131
--------- --------
$ 20,041 $ 7,396
========= ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------
1999 1998
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(In thousands,
except per share data)
<S> <C> <C>
OIL AND GAS REVENUES $ 434 $ 723
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EXPENSES
Production expense 183 396
Exploration expense, including dry holes 122 675
Impairment of oil and gas properties - 1,200
Depreciation, depletion and amortization 114 281
General and administrative 462 787
-------- --------
Total expenses 881 3,339
-------- --------
Operating profit (loss) (447) (2,616)
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OTHER INCOME (EXPENSE)
Interest expense (115) (145)
Gain on sale of assets 10 10
Interest and other income (expense), net (5) 9
-------- --------
(110) (126)
-------- --------
Net earnings (loss) $ (557) $ (2,742)
======== ========
Earnings (loss) per share,
Basic and diluted $ ( 0.05) $ (0.28)
======== ========
Common shares and equivalents outstanding,
Basic and diluted 10,982 9,848
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1999 1998
-------- --------
(In thousands,
except per share data)
<S> <C> <C>
OIL AND GAS REVENUES $ 819 $ 1,664
-------- --------
EXPENSES
Production expense 413 837
Exploration expense, including dry holes 361 815
Impairment of oil and gas properties - 1,915
Depreciation, depletion and amortization 236 622
General and administrative 1,069 1,488
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Total expenses 2,079 5,677
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Operating profit (loss) (1,260) (4,013)
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OTHER INCOME (EXPENSE)
Interest expense (220) (227)
Gain (loss) on sale of assets 804 10
Interest and other income 8 22
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592 (195)
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Net earnings (loss) $ (668) $ (4,208)
======== ========
Earnings (loss) per share, Basic and diluted $ (0.06) $ (0.43)
======== ========
Common shares and equivalents outstanding,
Basic and diluted 10,982 9,810
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
1999 1998
-------- ---------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ (668) $ (4,208)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization 323 732
Impairments, abandoned leases and dry hole costs 19 2,424
Gain on sale of property and equipment (804) -
Compensation expense for restricted stock,
Stock options and stock granted 82 85
Change in operating assets and liabilities:
Decrease (increase) in trade accounts
receivable and other (355) 671
Increase (decrease) in trade accounts payable 114 (717)
Increase in advances from interest
owners - 213
Decrease in other liabilities (76) (212)
-------- ---------
Net cash (used in) operating activities (1,365) (1,012)
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INVESTING ACTIVITIES
Capital expenditures, principally investment in
Jackson Parish Properties in 1999 (14,057) (2,278)
Net proceeds from sales of property and equipment 2,597 11
-------- ---------
Net cash (used in) investing activities (11,460) (2,267)
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FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt
and revolving credit agreement 15,025 3,286
Principal payments on long-term debt (1,831) (56)
Deferred financing costs (57) (26)
-------- ---------
Net cash provided by financing activities 13,137 3,204
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INCREASE (DECREASE) IN CASH AND EQUIVALENTS 312 (75)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 126 682
-------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $ 438 $ 607
======== =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
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VENUS EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months And Six Months Ended June 30, 1999 and 1998
1. Organization
Venus Exploration, Inc. (the "Company") is primarily engaged in the
business of exploring for, acquiring, developing and operating on-shore oil and
gas properties in the United States. The Company presently has oil and gas
properties and production in nine states.
2. Basis of Presentation
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The consolidated financial statements presented
should be read in connection with the audited financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of the
Company as of June 30, 1999 and the results of its operations for the three and
six months ended June 30, 1999 and 1998. The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going
concern. As discussed in note 10 to the unaudited consolidated financial
statements, the Company has suffered recurring losses from operations and has an
accumulated deficit that raises substantial doubt about its ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The results of operations for the three and six month periods ended June
30, 1999 are not necessarily indicative of the results to be expected for the
full year.
3. Summary of Significant Accounting Policies
For a description of the accounting policies followed by the Company, refer
to the notes to the 1998 consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. The
Company includes in its accounts its 50% proportionate interest of the assets,
liabilities, revenues, and expenses of the Jackson Parish Properties (see
note 4).
4. Jackson Parish Properties Acquisition
On June 30, 1999, EXUS Energy, LLC, a Delaware limited liability company
("EXUS"), owned 50% by the Company and 50% by EXCO Resources, Inc.
7
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("EXCO") completed the acquisition from Apache Corporation of oil and natural
gas properties located in Jackson Parish, Louisiana (the "Jackson Parish
Properties"). EXCO is a publicly-held oil and gas company based in Dallas,
Texas. The Jackson Parish Properties include 17 gross (14.25 net) producing
wells. EXCO is the named operator of the Jackson Parish Properties and assumed
operations of all 17 wells acquired in the transaction. The Jackson Parish
Properties include 6,411 gross (5,672 net) developed acres and 1,532 gross
(1,148 net) undeveloped acres. As of April 1, 1999, the Jackson Parish
Properties were estimated to contain proved reserves of 2,815 barrels of oil
("Bbls") and 66.5 billion cubic feet ("Bcf") of gas. The purchase price, before
closing adjustments, was $28.5 million, and after adjustments (the adjustments
principally reflect production since March 1, 1999, the effective date of the
acquisition), was $27.6 million cash. The purchase price was funded with $14
million drawn under a new credit facility established by EXUS and $14 million of
EXUS equity capital. Of the initial $14 million of EXUS equity capital, $7
million was provided by EXCO from its cash on hand, and $7 million was provided
by Venus from borrowed funds. On June 30, 1999, Venus borrowed $7 million from
EXCO under the terms of an $8 million Convertible Promissory Note (see note 6).
The following table reflects the pro forma results of operations as though
the acquisition of the Jackson Parish Properties (described in the Company's
Form 8-K dated June 30, 1999) and the related borrowings (see note 6) had
occurred on January 1, 1998.
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDED
June 30,
--------------------------
1999 1998
---- ----
(In thousands, except
per share data)
(Unaudited)
<S> <C> <C>
Revenues $ 1,900 $ 3,206
Net Loss $ (822) $ (4,040)
Basic and diluted loss per share $ (.07) $ (.41)
</TABLE>
5. Earnings (loss) Per Share
Basic net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding. Diluted loss per share is
computed by assuming the issuance of common shares for all dilutive potential
common shares outstanding.
Loss per share for the three month periods ended June 30, 1999 and 1998 are
calculated based on 10,982,365 and 9,848,322 weighted average shares
outstanding, respectively, and the six month periods ended June 30, 1999 and
1998 are calculated based on 10,981,694 and 9,810,004 shares outstanding,
respectively.
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6. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- -----------
(In thousands)
<S> <C> <C>
Wells Fargo Bank-Revolving Credit
Due June 30, 2000 $ 3,736 $ 5,540
Nations Bank, N.A.,-Revolving Credit
Due on June 30, 2002 7,000 -
Exco Resources, Inc. Convertible Note
Due on July 1, 2004 7,000 -
7% Convertible Subordinated Notes
Due March through June 2004 1,000 -
-------- --------
18,736 5,540
Less: Current maturities of long-term debt 3,736 $ 5,540
-------- --------
Long-term debt excluding current installments $ 15,000 -
======== ========
</TABLE>
Wells Fargo Bank Revolving Credit
In 1997, the Company entered into a loan agreement establishing a
$20,000,000 revolving line of credit. In December 1997 this agreement was
restated and amended to increase the credit facility to $50,000,000 subject to a
borrowing base determined every six months (April 1 and October 1) by the bank
based on the Company's oil and gas reserves which are pledged as collateral for
the loan. On August 19, 1998, the credit facility was amended resulting in the
applicable interest rate becoming the bank's prime lending rate plus one
percent. For balances outstanding at June 30, 1999, the interest rate was 8.75
percent.
A commitment fee of 3/8 of one percent of the undrawn balance is payable
quarterly. Interest is payable monthly, and principal payments are required only
when the balance outstanding exceeds or is projected to exceed, prior to the
next borrowing base redetermination date, the borrowing base. As of June 30,
1999, the borrowing base was $3,870,000 and the amount drawn by the Company was
$3,736,000 resulting in an unused borrowing base of $134,000.
Among other matters, the credit facility contains covenants, which limit
the Company's ability to incur additional indebtedness and restrict payments of
dividends. Under the terms of the credit facility, the Company is required to
maintain a current ratio of 1:1 and tangible net worth of at least $5,250,000.
At June 30, 1999, the Company was not in compliance with these covenants.
Its current ratio was .84 to 1, and its tangible net worth was a deficit
$454,000. The Company has obtained waivers of these events of noncompliance from
the lender through September 30, 1999; however, because of uncertainty regarding
the Company's ability to be in compliance with the covenants after September 30,
1999, or to obtain additional waivers, the outstanding balance has been
classified as a current liability in the accompanying consolidated balance
sheet. If the lender elects, subsequent to the period waived, to declare all
amounts borrowed under the credit agreement to be due and payable, the Company's
assets could be adversely affected.
7% Convertible Subordinated Promissory Notes
In the second quarter of 1999 the Company completed the private placement
to six investors(including one director of the Company and one person who
9
<PAGE> 10
was later appointed a director of the Company) of six unsecured convertible
subordinated promissory notes (the "Subordinated Notes") totaling $1,000,000.
The net proceeds to the Company were $975,000 after legal fees associated with
the transaction. The Company used the proceeds to fund working capital. The
Company's obligations to the noteholders are unsecured and subordinated to the
rights of the Company's bank and other lenders unless those lenders agree
otherwise. Interest payments under the Subordinated Notes may be paid, at the
Company's election, with its common stock. The convertibility feature may be
invoked by the noteholders at any time and by the Company under circumstances
described below.
The Subordinated Notes bear interest at a rate of 7% per annum, or 10% in
the event of default. If interest is paid in common stock, the number of shares
to be issued is determined by dividing the interest payment due by the market
price of one share of the Company's common stock on the last trading day
preceding the interest payment date. Interest is payable quarterly beginning on
June 30, 1999. The interest due on June 30, 1999 was paid with 7,984 shares of
the Company's common stock in July 1999.
The Subordinated Notes mature in 2004, at which time all of the unpaid
principal is due and payable. The noteholders can convert the debt to the
Company's common stock at any time, at a conversion of $1.15 per share, the
market value of the common stock on the date the terms were agreed to. The
conversion price will be adjusted proportionately in cases where the number of
the outstanding shares of common stock is changed on a pro rata basis; e.g.,
stock dividends and stock splits. In addition, the conversion price will be
reduced if the Company issues common stock, or securities convertible into
common stock, at a price lower that the $1.15 conversion price, as adjusted. In
such a case the conversion price will be reduced to the conversion price of the
convertible security or the price of the common stock sold.
If the Company issues other subordinated notes or other similar securities
with superior terms to the new noteholders, the holders of the Subordinated
Notes also have the right to receive replacement notes that include those
superior terms, at least with regard to a higher stated interest rate, a higher
premium upon early redemption by the Company, a lower per-share conversion
price, or a longer period before the Company can cause a mandatory redemption.
The Company has a conditional option of converting the outstanding balance
of each Subordinated Note to shares of its common stock. That option does not
mature until thirty-six months after the original issuance of the Subordinated
Notes, and the condition to the Company's option to convert is that the closing
market price for the shares of the Company's common stock must have exceeded
$3.60 per share for at least 25 out of the preceding 30 trading days. The
conversion is based on the same $1.15 price per share.
The Subordinated Notes allow the Company to redeem them for cash and the
payment of a redemption premium. That right begins on the second anniversary of
the original issuance. The redemption premium begins at 18% and decreases 1% per
month after that, and there is a credit against the premium for all accrued
interest on the Subordinated Notes to the date of the redemption. The Company
also has a preferential right to buy the notes if the holders decide to sell
them.
If an event of default occurs, the noteholders may demand immediate
repayment of the principal amount and any accrued but unpaid interest. They will
also have all other rights generally allowed by contract and applicable law.
Events of default include, among other conditions, a default under other
indebtedness or securities.
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<PAGE> 11
The Subordinated Notes were issued in a private placement exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933. Common
stock issued on conversion or in lieu of cash interest payments under the
Subordinated Notes has been and will be issued in the same manner. As a result,
the transfers of such securities are restricted.
Concurrently with the execution of the Subordinated Notes, the Company
entered into a registration rights agreement with each noteholder that gives
that noteholder the option to register for resale under the Securities Act of
1933 any of their shares of the Company's common stock on a registration
statement otherwise being filed by the Company for sales on its own behalf. The
Company also agreed not to grant any new registration rights to third parties if
those rights would adversely impact the rights of the holders.
Exco Resources, Inc. Convertible Note
On June 30, 1999, the Company borrowed $7 million from EXCO under the terms
of an $8 million convertible promissory note (the "EXCO Note") in conjunction
with the purchase of the Jackson Parish Properties (see note 4). The EXCO Note
provides for borrowings up to $8 million subject to restrictions on the use of
proceeds. The Company drew $7 million under the EXCO Note to fund its capital
contribution to EXUS. The EXCO Note provides for additional draws beginning
after January 1, 2000 not to exceed $1 million which may be used solely to fund
additional capital contributions to EXUS and/or to fund the expenses of one
equity issuance. The Company is not permitted to draw any of the $1 million
until it has obtained stockholder approval for the issuance of the EXCO Note.
All borrowings under the EXCO Note are secured by a first priority lien
providing a security interest in the membership interest of the Company in EXUS
along with distribution and income rights. The EXCO Note provides that advances
will bear interest, which can be paid in cash or, at the Company's election, the
Company's common stock, at a rate of 10% from June 30, 1999 through June 30,
2000, with interest increasing 1% per year through June 30, 2004. Advances will
bear interest at a rate of 15% after in an event of default. If interest is paid
in the Company's common stock, the number of shares to be issued shall be
determined by dividing the interest payment due by the average market price of
one share of the Company's common stock for the twenty trading days immediately
preceding the interest payment date. Interest is payable semi-annually
commencing on January 1, 2000. The EXCO Note matures on July 1, 2004 at which
time all of the unpaid principal is due and payable.
Beginning on July 1, 2000 and continuing until the payment in full of the
EXCO Note, EXCO, at its option, may convert all or any portion of the
outstanding principal balance and accrued interest into shares of the Company's
common stock for $1.50 per share, subject to adjustment in certain events. On or
before December 15, 1999, the Company is required to obtain approval of its
stockholders (as required by the rules of the Nasdaq SmallCap Market) of the
issuance of the Company's common stock which may be issued upon the conversion
of principal or accrued interest under the terms of the EXCO Note. In the event
the Company is unable to obtain such stockholder approval, the Company would be
required to prepay $3 million of the EXCO Note plus accrued interest thereon.
(The Company is currently authorized to issue shares of its common stock upon
conversion of up to $4 million of the principal of the EXCO Note without such
stockholder approval; accordingly the $3 million mandatory prepayment equates to
the principal amount EXCO would not be able to convert to the Company's common
stock if stockholder approval was not obtained.) Alternatively, the Company may
elect to transfer membership interests in EXUS held by the Company equal to
21.43% of the aggregate outstanding interests of EXUS (this approximates 3/7 of
the Company's equity interest in EXUS) in exchange for a cancellation of $3
million of principal owed under the EXCO Note.
11
<PAGE> 12
The EXCO Note also requires a mandatory prepayment of principal equal to
50% of the net proceeds of each equity issuance by the Company on or after June
30, 1999 (excluding the first $5 million of aggregate net proceeds of all equity
issuances after June 30, 1999). The Company may also voluntarily prepay any or
all of the EXCO Note (subject to a prepayment penalty of 3.57% of the principal
prepaid for any prepayment occurring on or prior to July 1, 2000).
The EXCO Note contains other customary terms including certain
representations, affirmative covenants (such as conduct of the Company business,
reports to EXCO, compliance with laws), negative covenants (including no
purchase or redemption of the Company's common stock and no sale, transfer,
mortgage or pledge of the collateral securing the EXCO Note), and events of
default (including failure to pay principal or interest as required, violation
of covenants in the EXCO Note, bankruptcy, change of control of the Company or
default under the Company's secured credit facility). An event of default would
also occur if the Company is unable to obtain stockholder approval, and if the
Company is in default under its revolving credit agreement. As discussed above
under Wells Fargo Bank Revolving Credit, the Company is not in compliance with
two financial covenants under the revolving credit agreement but has received a
waiver to September 30, 1999. If the Company fails to be in compliance by
September 30, 1999, or fails to obtain an extension of the waiver, it would
constitute an event of default under the EXCO note.
The shares which may be issued under the terms of the EXCO Note are subject
to a Registration Rights Agreement dated June 30, 1999. The Registration Rights
Agreement requires the Company to register with the Securities Exchange
Commission 10,133,333 shares of the Company's common stock that may be issuable
to EXCO under the EXCO Note for resale by EXCO from time to time. The 10,133,333
shares represent (i) 5,333,333 shares that would be issued if EXCO were to
convert $8 million of principal under the EXCO Note at $1.50 per share and (ii)
4,800,000 shares assuming the Company were to elect to pay all interest accruing
on $8 million principal of the EXCO Note at an assumed market price of $1.00 per
share. The Registration Rights Agreement provides that a registration statement
must be filed with the SEC by September 28, 1999 and effective on or prior to
the 120th day following the first issuance of any shares under the EXCO Note
(which 120 day period may be extended to 210 days if the Company has timely
complied with its covenants under the Registration Rights Agreement, but the
registration statement is still under review by the Securities and Exchange
Commission). The Registration Rights Agreement contains other customary terms
and provisions including indemnification for certain liabilities under
applicable securities laws. A breach of the agreement would constitute an event
of default under the EXCO Note.
The EXCO Note was issued in a private placement exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933. Common stock issued on
conversion or in lieu of cash interest payments under the Subordinated Notes has
been and will be issued in the same manner. As a result, the transfers of such
securities are restricted.
NationsBank, N.A. Credit Facility
On June 30, 1999, EXUS entered into a credit facility with NationsBank,
N.A. as administrative agent and lender. The credit facility, which matures on
June 30, 2002, provides for borrowings up to $50 million, subject to borrowing
base limitations. The bank has sole discretion to determine the borrowing base
based on its valuation of EXUS' reserves, which are to be valued semi-annually.
The credit facility consists of a regular revolver, which on July 15, 1999,
had a borrowing base of $19.5 million. At July 15, 1999, EXUS had approximately
$5.5 million available for borrowing under the credit facility. A portion of the
borrowing base is available for the issuance of letters of credit. The next
borrowing base redetermination is scheduled for January 1,
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2000, and on or about each April 30 and October 31, thereafter. All borrowings
under the credit facility are secured by a first lien mortgage providing a
security interest in substantially all assets owned by EXUS, including all
mineral interests.
The credit facility provides that if the aggregate outstanding indebtedness
of EXUS is less than 75% of the borrowing base, then advances will bear interest
at 1.5% over LIBOR. If the borrowing base usage equals or exceeds 75%, then
advances will bear interest at 1.75% over LIBOR.
Under the terms of the credit facility, EXUS must not permit the ratio of
its consolidated current assets to its consolidated current liabilities to be
less than 1.0 to 1.0 at any time. Furthermore, EXUS must not incur or pay
general and administrative expenses in an aggregate amount exceeding $100,000
during the period from June 30, 1999 through December 31, 1999, or $200,000
during any fiscal year thereafter. On July 15, 1999, EXUS was in compliance with
both the current ratio covenant and the general and administrative expense
covenant. The Company and EXCO have each fully guaranteed the credit facility.
The Company's guarantee is subordinate to its obligations under the Wells Fargo
Bank revolving credit agreement.
Commencing on September 25, 1999 and continuing each month thereafter until
maturity, EXUS shall make mandatory payments on the credit facility in an amount
equal to 50% of EXUS' net revenues (as defined in the credit facility) for the
immediately preceding calendar month. Each such payment shall be applied first
to accrued but unpaid interest and then to principal.
7. Shareholders' Equity
Effective March 1, 1998 the Company awarded, under its existing incentive
plan, qualified stock options and restricted stock grants that vest over a
three-year period. The qualified stock options were issued to all employees. The
restricted stock grants (100,000 shares) were issued at no charge to two key
employees who are not officers of the Company. The Company is recognizing
compensation expense of $9,375 per month for the value of the restricted stock
grants over the vesting period.
Effective March 1, 1999, the Compensation Committee of the Board of
Directors of the Company approved the issuance of stock options to all employees
and certain consultants to offset the impact of mandatory temporary salary
reductions which took effect on that date. The Company has granted 250,000 stock
options at fair market value exercise price to offset the salary reductions
through August 1, 1999. The stock options vest ratably over the period March 15,
1999 through August 1, 1999. Employees and consultants have vested in 248,262
options through August 1, 1999. The terms of these stock options are the same as
the terms of the stock options granted on March 1, 1998, except for the exercise
price, which is equal to the fair value of the Company's stock on date of grant.
During the six month period ended June 30, 1999, the Company expensed $5,000
related to stock options granted constultants.
With certain exceptions, the exercise price for the options is $1.1191, and
the term of the options is ten years. The exceptions apply to 91,888 options
granted to E. L. Ames, Jr., John Y. Ames, and Eugene L. Ames III, and the
exercise price for their options is $1.231, and their term is five years.
13
<PAGE> 14
8. Accounting for Income Taxes
No provision for income taxes has been recorded for the periods ended June
30, 1999 and 1998 due to the losses recorded by the Company.
9. Commitments and Contingencies
The Company is not involved in any claims or legal proceedings.
10. Liquidity
The Company has incurred significant losses over the past three years. In
addition, the Company has incurred significant indebtedness, and at June 30,
1999, was not in compliance with the tangible net worth and current ratio
requirements of the revolving credit agreement (see "Wells Fargo Bank Revolving
Credit" under note 6). Those requirements have been waived by the lender through
September 30, 1999. If those events of non-compliance are not cured, the lender
could elect, subsequent to the period waived, to declare all amounts borrowed
under the credit agreement, together with accrued interest, to be due and
payable. The lender could then proceed to foreclose against any collateral
securing the payment of the debt. This collateral represents a significant
portion, if not all, of the Company's assets(excluding the Company's equity
interest in EXUS, which interest secures the EXCO note; the Company's undivided
50% interest in EXUS' assets secure EXUS' credit facility. Given the Company's
diminished cash resources, lack of borrowing capacity under its credit
agreement, losses incurred over the past three years, and non-compliance with
the financial covenants of the revolving credit agreement, there is doubt about
the Company's ability to continue as a going concern. The Company's independent
auditors report dated April 7, 1999, on the Company's year-end financial
statements for 1998 indicated that there was substantial doubt about the
Company's ability to continue as a going concern; however, the accompanying
financial statements have been prepared assuming the Company will continue as a
going concern. The financial statements do not include adjustments that might
result from the outcome of this uncertainty.
The Company's assets, whether owned directly or indirectly, are
predominately real property rights and intellectual information that the
Company has developed regarding those properties and other geographical areas
that the Company is studying for oil and gas exploration and development. The
market for those types of properties fluctuates and can be very small.
Therefore, the Company's assets can be very illiquid and not easily converted
to cash. Even if a sale can be arranged, the price may be significantly less
than what the Company believes the properties are worth. That lack of liquidity
can have materially adverse effects on strategic plans, normal operations and
credit facilities. In addition, issuance of indebtedness or preferred stock
could be costly and dilutive to stockholders.
For the medium and longer terms, the Company is working on a number of
alternatives that it believes will address its credit agreement requirements and
future liquidity and financing needs if it successfully completes various
combinations of those alternatives. The alternatives include merger, sales of
assets, farmouts or other partnering arrangements on selected properties, and
issuance of indebtedness or equity capital. There can be no assurance that the
Company will be successful in its efforts.
The Company has made some progress in pursuing these alternatives. During
the first quarter of 1999 the Company sold non-core properties for $2,597,000
in cash which allowed the Company to repay debt of $1,670,000. As discussed in
note 4, on June 30, 1999 the Company acquired an interest in the Jackson Parish
Properties. The Company expects that as a result of the acquisition, revenues
will increase by over 100% beginning in July 1999. While the Company expects to
have operating losses until development wells are drilled and successfully
14
<PAGE> 15
completed, it does expect to generate positive operating cash flow, after
required debt service, beginning with July 1999 operations. However, cash flows
generated by the Jackson Parish Properties may not be immediately available to
the Company. As discussed in note 6, during the quarter ending June 30, 1999,
the Company issued Subordinated Notes in the principal amount of $1,000,000 for
net proceeds of $975,000 and the EXCO Note. Finally, increases in oil and gas
prices subsequent to June 30, 1999, and cost reduction measures (see "Results of
Operations" below), which are discussed in the Company's Annual Report on Form
10-K for the year ended December 31, 1998, are expected to improve the Company's
cash flow after June 30, 1999.
15
<PAGE> 16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and the related notes thereto included
elsewhere and with Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998. Certain statements contained herein are
"Forward Looking Statements" and are thus prospective. As discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, such
forward-looking statements are subject to risks, uncertainties and other factors
that could cause actual results to differ materially from future results
expressed or implied by such forward-looking statements.
Overview
The Company explores for oil and gas reserves in horizons that have no
history of production, and uses advanced geoscience technology to do so. The
Company participates in such high-risk projects because they provide
opportunities for the discovery of new and substantial oil and gas reserves and
rapid growth in asset values. Because of the inherent uncertainty and high
financial risk associated with the outcome of individual drilling prospects, the
Company attempts to maintain an inventory of many exploratory prospect leads
from which drilling prospects are confirmed and generated. The Company obtains
financing for a large portion of the exploration costs through sale to oil and
gas industry co-venturers of working interest in prospects originated by the
Company.
Because of the decline in oil prices in 1998 and the reduction of capital
available for exploration budgets, both for the oil and gas industry in general
and for the Company specifically, the Company has reduced exploration activity
and will work only selected prospects believed to have extraordinary merit
(lower degree of geological and engineering risk relative to the net expected
value) during this period of low availability of exploration capital.
In addition to exploring for new oil and gas reserves in previously
undiscovered fields, the Company also uses advanced geoscience technology to
exploit and to develop oil and gas reserves in currently producing fields. The
fields being exploited or developed consist of fields discovered by the Company
or fields discovered by others but that the Company believes are not fully
developed. The Company conducts active exploitation and development activities
in 10 different fields in Texas and Oklahoma. The Company's working interest in
those fields varies in size from 2.5% to 100%, and the Company operates the
wells in 9 of the 10 active fields. During this period of reduced availability
of capital, the Company will concentrate its drilling budget on drilling field
exploitation wells.
The Company continues to seek strategic producing property acquisitions
that offer near-term production and longer-term development and exploration
opportunities that can be investigated through the application of advanced
technology by the Company's exploration team. The Company seeks to accomplish
strategic acquisitions of producing assets with development and exploratory
potential through strategic alliances with other oil and gas companies. An
example of such an alliance is the Company's origination and participation in
16
<PAGE> 17
the recent acquisition of the properties in Jackson Parish, Louisiana "Jackson
Parish Properties". Those properties were purchased by a joint venture with EXCO
Resources, Inc., which arranged for 100% of the financing for the acquisition.
The Company may also sell non-strategic properties as a part of its effort to
concentrate on its focus areas.
Liquidity and Capital Resources
(a) Liquidity
At June 30, 1999, the Company had a working capital deficit of $4,132,000
compared with a deficit of $6,624,000 at December 31, 1998, an increase in
working capital of $2,492,000. This increase is primarily attributable to the
$1,670,000 repayment of current debt with proceeds from the sale of long term
assets during the six-month period ended June 30, 1999. Net proceeds of $975,000
from the issuance of the Subordinated Notes also contributed to the increase in
working capital.
Net cash used in operating activities during the six months ended June 30,
1999, was $1,365,000, whereas $1,012,000 was used in operating activities for
the same six-month period in 1998. Of the $353,000 increase in net cash used in
operating activities, $272,000 is due to routine net changes in operating assets
and liabilities. The remaining $81,000 is due to a $421,000 reduction in
revenue net of production expense, net increase in other income and expenses of
$79,000 which were offset by reductions in general and administrative expense of
$419,000 (see "Results of Operations" below). During the first six months of
1999, the Company realized a net loss of $668,000. This compares with a net loss
of $4,208,000 for the first six months of 1998. These losses include non-cash
expenses (impairments, depreciation, depletion and amortization, and
compensation expense for restricted stock and stock options) totaling $424,000
in 1999 and $3,241,000 in 1998. The 1999 loss reflects a gain of $804,000 from
the sale of long term assets.
During the first six months of 1999 the Company incurred capital
expenditures on oil and gas properties of $14,057,000 and received proceeds from
the sale of property and equipment of $2,597,000. During the same period in
1998, the Company had capital expenditures of $2,278,000 and received proceeds
of $11,000 from the sale of property and equipment. Capital expenditures in 1999
include $13,824,000 attributable to the acquisition of the Jackson Parish
Properties.
For the six months ended June 30, 1999, $13,137,000 was provided by
financing activities consisting of $15,025,000 from issuance of long-term debt
less $1,888,000 of repayments and deferred financing costs. This compares with
$3,204,000 provided by financing activities for the six-month period ended June
30, 1998 from the issuance of $3,286,000 in long-term debt offset by repayments
and deferred financing costs of $82,000. Debt issuance related to the
acquisition of the Jackson Parish Properties totaled $14,000,000 in 1999.
The Company has incurred significant losses over the past three years. In
addition, the Company has incurred significant indebtedness, and at June 30,
1999, was not in compliance with the tangible net worth and current ratio
requirements of the revolving credit agreement (see "Wells Fargo Bank Revolving
Credit" in note 6 to Item 1). Those requirements have been waived by the lender
through September 30, 1999. If the Company is unable to cure the waived defaults
by that time, the lender could elect, subsequent to the period waived, to
declare all amounts borrowed under the revolving credit agreement, together with
accrued interest, to be due and payable. The lender could then proceed to
foreclose against any collateral securing the payment of the debt. This
collateral represents a significant portion, if not all, of the Company's assets
(excluding the Company's equity interest in Exus, which interest secures the
EXCO Note; the Company's undivided 50% interest in EXUS' assets secure EXUS'
credit facility. Given the Company's diminished cash resources, lack
17
<PAGE> 18
of borrowing capacity under its credit agreement, losses incurred over the past
three years, and non-compliance with the financial covenants of the credit
agreement, there is doubt about the Company's ability to continue as a going
concern. The Company's independent auditors' report dated April 7, 1999, on the
Company's year-end financial statements for 1998 indicated that there was
substantial doubt about the Company's ability to continue as a going concern;
however, the accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The financial statements do not
include adjustments that might result from the outcome of this uncertainty.
The Company's assets, whether owned directly or indirectly, are
predominately real property rights and intellectual information that the Company
has developed regarding those properties and other geographical areas that the
Company is studying for oil and gas exploration and development. The market for
those types of properties fluctuates and can be very small. Therefore, the
Company's assets can be very illiquid and not easily converted to cash. Even if
a sale can be arranged, the price may be significantly less than what the
Company believes the properties are worth. That lack of liquidity can have
materially adverse effects on strategic plans, normal operations and credit
facilities. In addition, issuance of indebtedness or preferred stock could be
costly and dilutive to stockholders.
For the medium and longer terms, the Company is working on a number of
alternatives that it believes will address its credit agreement requirements and
future liquidity and financing needs if it successfully completes various
combinations of those alternatives. The alternatives include merger, sales of
assets, farmouts or other partnering arrangements on selected properties, and
issuance of indebtedness or equity capital. There can be no assurance that the
Company will be successful in its efforts.
The Company has made some progress in pursuing these alternatives. During
the first quarter of 1999 the Company sold non-core properties for $2,586,000 in
cash, which allowed the Company to repay debt of $1,670,000. As discussed in the
overview of this Item 2, on June 30, 1999 the Company acquired an interest in
the Jackson Parish Properties. The Company expects that as a result of the
acquisition, revenues will increase by over 100% beginning in July 1999. While
the Company expects to have operating losses until development wells are drilled
and successfully completed, it does expect to generate positive operating cash
flow, after required debt service, beginning with July 1999 operations. However,
cash flows generated by Exus may not be immediately available to the Company.
During the quarter ended June 30, 1999, the Company issued 7% convertible
subordinated notes in the principal amount of $1,000,000 for net proceeds of
$975,000. Finally, increases in oil and gas prices subsequent to June 30, 1999,
and cost reduction measures (see "Results of Operations" below), which are
discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, are expected to improve the Company's cash flow after June
30, 1999.
(b) Capital Resources
The Company's capital expenditure budget is continually reviewed and
revised as necessary, based on perceived opportunities and business conditions.
Capital expenditures for the remainder of 1999 are budgeted at approximately
$2.2 million. Funding is not currently available for the 1999 budget, and as a
result, the Company may elect to reduce its interest through sales, farmouts or
other transactions in certain wells or seismic projects or to include those
wells or projects in a joint venture with industry participants, in which event
the Company's capital investment and upside potential would be lower.
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<PAGE> 19
The Company's credit facility, among other matters, contains covenants
which limit the Company's ability to incur additional indebtedness and restrict
payments of dividends. Under the terms of the credit facility, the Company is
required to maintain specified levels of current ratio and tangible net worth,
and as mentioned above, as of June 30, 1999, the Company was not in compliance
with these two covenants. The Company has obtained a waiver through September
30, 1999. The Company's ability to obtain future waivers will depend on progress
on its plans to raise additional capital through a placement of convertible debt
or issuance of equity securities. During the quarter ended June 30, 1999, the
Company issued 7% Convertible Subordinated Promissory Notes in the principal
amount of $1,000,000 for net proceeds of $975,000. The notes bear interest at 7
percent per annum and are convertible into the Company's common stock at a rate
of $1.15 per share (870 shares of common stock for each $1,000 principal
amount). For a more detailed description of the Promissory Notes see note 6 to
the accompanying financial statements.
The EXCO Note and the EXUS credit facility, both discussed in note 6 to
Item 1, also provide direct and indirect capital resources.
(c) Results of Operations
Revenues and expenses were lower during 1999 due to the sale of properties,
lower oil and gas prices and various cost cutting measures. The variances are
addressed in the following paragraphs by significant operating caption.
As reflected in the following table, oil and gas volumes and average prices
decreased in 1999, compared with 1998. The lower prices, the divestiture of
properties and decline in production from existing wells significantly impacted
the 1999 periods.
<TABLE>
<CAPTION>
1999 1998
---- ----
Sales Average Sales Average
Volume Prices Volume Prices
------- ------- ------- -------
<S> <C> <C> <C> <C>
Six Months Ended June 30,
Gas (Mcf) 158,994 $ 1.81 285,553 $ 2.25
Oil (Bbls) 40,429 $13.09 67,405 $14.80
Three Months Ended June 30,
Gas (Mcf) 71,133 $ 1.88 140,973 $ 2.10
Oil (Bbls) 19,266 $15.50 30,244 $13.88
</TABLE>
For 1998 average oil and gas prices reflect the effect of price hedging.
The Company only hedged oil and gas volumes as required under a term loan
agreement, which is no longer in effect. Volumes for the six month period ended
June 30, 1999 include 21,400 Mcf attributable to the properties sold during the
same period.
Three Months Ended June 30, 1999 and 1998
The Company reported a net loss of $557,000 for the quarter ended June 30,
1999, compared to a net loss of $2,742,000 in the same quarter in 1998. The
decrease in the loss is due to decreases in production expense ($213,000),
exploration expense ($553,000), oil and gas impairments ($1,200,000),
depreciation, depletion, and amortization (DDA) ($167,000), general and
administrative expenses ($325,000), and interest expense
19
<PAGE> 20
($30,000). These decreases in expenses were slightly offset by decreases in oil
and gas revenues ($289,000).
For the second quarter of 1999, oil and gas revenues decreased by $289,000.
The decrease is due to the sale of properties which resulted in a decrease in
revenue of $88,000, and a decline in production rates in the remaining
properties resulted in a decrease of $217,000. Improvement in oil prices had a
$16,000 positive impact on revenues. The decline in production rates was caused
by normal depletion and falling production on marginal wells as maintenance and
repair operations were deferred.
Production expense decreased by $213,000 due to the sale of properties
($34,000) and reduced operating costs ($179,000) as a result of reduced
maintenance and repair operations on marginal wells and lower workover
operations (plugging back wells in an attempt to establish production in a
shallower zone, stimulating formations, and repairing down hole equipment).
Production expense averaged $0.98 per mcfe during the three month period ended
June 30, 1999, compared to $1.23 per mcfe for the same period in 1998.
Exploration expense decreased by $553,000. A decrease in dry holes
expenses accounted for $494,000 of the decrease, employee costs decreased by
$43,000 due to terminated employees, and the balance of the decrease is due to
reduced exploration activities.
Impairment of oil and gas properties decreased by $1,200,000. The decline
is a result of rising product prices during the current quarter as opposed to
falling prices during the 1998 period.
Depreciation, depletion and amortization decreased by $167,000 due to the
sale of properties ($17,600), the decline in production rates ($101,100), and
the lower cost basis in the properties due to the impairments recorded in 1998
($48,300).
General and administrative expense decreased by $325,000. The reduction of
office personnel in the fourth quarter of 1998 and the first quarter of 1999,
along with mandatory temporary salary reductions that were in force during the
quarter, contributed $145,000 to the decrease. Accounting services decreased by
$58,000 due to the accounting function being performed entirely in-house whereas
a portion had been outsourced in the prior year. Other expense reductions
resulted from the cost reductions instituted in the first quarter.
Interest expense decreased by $30,000 due to a lower average loan balance
outstanding of $4,238,100 during the second quarter of 1999, as compared to
$4,617,971 during the second quarter of 1998 which resulted in a savings of
$11,000. In addition, deferred loan costs decreased by $19,000 during the
current quarter as a result of the early extinguishment of debt during the
fourth quarter of 1998.
Six Months Ended June 30, 1999 and 1998
The Company reported a net loss of $668,000 for the six months ended June
30, 1999, compared to last year's net loss of $4,208,000. The $3,540,000
decrease is attributable to the gain from the sale of properties ($794,000),
decreases in production expense ($424,000), exploration expense ($454,000), oil
and gas impairments ($1,915,000), DDA ($386,000), general and administrative
expenses ($419,000), interest expense ($7,000). These decreases in expenses were
offset by a reduction in interest and other income ($14,000) and oil and gas
revenues ($845,000).
For the first six months of 1999, oil and gas revenues decreased by
$845,000. The decrease is due to the following: the decline in product prices
resulted in a decrease in revenue of $139,000, while the sale of properties
resulted in a decrease in revenue of $144,000 and a decline in production rates
resulted in a decrease in revenue of $562,000. The decline in production rates
was caused by normal depletion and falling production on marginal wells as
maintenance and repair operations were deferred.
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<PAGE> 21
Production expense decreased by $424,000 due to the sale of properties
($59,000) and reduced operating costs ($365,000) as a result of reduced
maintenance and repair operations on marginal wells and lower workover
operations (plugging back wells in an attempt to establish production in a
shallower zone, stimulating formations, and repairing down hole equipment).
Production expense averaged $1.03 per mcfe during the six month period ended
June 30, 1999, compared to $1.21 per mcfe for the same period in 1998.
Exploration expense decreased by $454,000. Dry holes expenses accounted for
$494,000 of the decrease offset by the acquisition of 3-D seismic data of
$37,500.
Impairment of oil and gas properties decreased by $1,915,000. The decline
is a result of rising product prices during the current quarter as opposed to
falling prices during the comparable 1998 period.
Depreciation, depletion and amortization decreased by $386,000 due to the
sale of properties ($27,600), the decline in production rates ($232,600), and
the lower cost basis in the properties due to the impairments recorded in 1998
($125,800).
General and administrative expense decreased by $419,000. The reduction of
office personnel in the fourth quarter of 1998 and the first quarter of 1999,
along with mandatory temporary salary reductions that were in force during the
quarter, contributed $242,000 to the decrease. Accounting services decreased by
$71,000 due to the accounting function being performed entirely in-house. Other
expense reductions resulted from the cost reductions instituted in the first
quarter.
Interest expense decreased by $7,000 due to a decrease in deferred loan
costs of $39,000 as the result of the early extinguishment of debt during the
fourth quarter of 1998. This was offset by an increase in interest expense of
$32,000 as a result of a higher average loan balance outstanding of $4,319,000
during the first six months of 1999, as compared to $3,965,000 during the same
period of 1998.
YEAR 2000 COMPLIANCE
The following information on Year 2000 compliance contains forward-looking
statements and should be read in conjunction with the Company's disclosures
under the heading "Forward-Looking Statements." The disclosures also constitute
a "Year 2000 Readiness Disclosure" and "Year 2000 Statement" within the meaning
of the Year 2000 Information and Readiness Disclosure Act of 1998.
The "Year 2000 problem" arises because some computer systems and programs
were designed to handle only a two-digit year, not a four-digit year. When the
year 2000 begins, these computers may interpret "00" as the year 1900 (e.g.,
1998 is seen as "98") and either stop processing date-related computations or
will process them incorrectly.
The potential issues include:
(1) Hardware -- An outside computer consultant has certified computers at
the Company's headquarters as being Y2K complaint.
(2) Software -- An internal survey has been conducted of the Company's
software and information systems critical to the Company's operations. Based on
certifications by its software information vendors, the Company believes that
the Year 2000 issues directly related to computers, software and information
systems will not have a material impact on the Company's business or financial
position.
(3) Third parties -- With respect to its major vendors, purchasers of
products, customers and service providers, the Company mailed more than 500
21
<PAGE> 22
questionnaires to assist in an assessment of whether they will be Year 2000
compliant. The Company has evaluated those questionnaires, and that evaluation
indicates the third parties are, or will be, compliant by the end of the year.
(4) Field Operations -- As an operator of oil and gas properties, the
Company is conducting an analysis of the operational issues and costs that would
result from a failure caused by a Year 2000 event. A contingency plan has not
been developed for dealing with the worst case scenario. The Company plans to
complete such analysis and contingency planning by September 30, 1999.
The Company is expensing as incurred all costs related to the assessment
and remediation of the Year 2000 issue. These costs are being funded through
operating cash flow and are not expected to exceed $25,000 and are not material
to the Company's consolidated financial condition or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes standards of accounting
and reporting for derivative instruments and for hedging activities. It requires
that all derivatives be recognized as either assets or liabilities in the
statement of financial position and measures these instruments at fair value.
This statement is effective for financial statements for periods beginning after
June 15, 2000. The Company believes that SFAS No. 133 will not have a material
impact on its financial statements and disclosures.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
The information contained in this Form 10-Q includes certain
forward-looking statements. When used in this document, such words as "expect",
"believes", "potential", and similar expressions are intended to identify
forward-looking statements. Although the Company believes that its expectations
are based on reasonable assumptions, it is important to note that actual results
could differ materially from those projected by such forward-looking statements.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements include, but are not limited to, the
timing and extent of changes in commodity prices for oil and gas, the need to
develop and replace reserves, environmental risk, the substantial capital
expenditures required to fund its operations, drilling and operating risks,
risks related to exploration and development, uncertainties about the estimates
of reserves, competition, government regulation and the ability of the Company
to implement its business strategy and to raise the necessary capital for such
implementation. Also see "FORWARD-LOOKING STATEMENTS" under "Item 1. BUSINESS"
of the Company's Annual Report on Form 10-K for the year ended December 31,
1998.
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<PAGE> 23
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information regarding the Company's quantitative and qualitative
disclosures about market risk is contained in "Item 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT THE MARKET RISK" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 and reference is made to the
information contained there. Since December 31, 1998, as discussed in notes 4
and 6 in the accompanying unaudited financial statements, debt subject to
floating market interest rates has increased significantly.
23
<PAGE> 24
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
For discussion of the sale of promissory notes that are convertible into
the Company's common stock see note 6 to the unaudited consolidated financial
statements.
Item 5. OTHER INFORMATION
(a) NASDAQ Market Listing
The Company was notified that it is not in compliance with NASDAQ SmallCap
Market listing requirements because the Company's tangible net assets are below
the $2 million minimum. Failure to achieve compliance would result in the
Company's common stock being delisted and no longer eligible to trade on that
market. The Company is currently in discussions with NASDAQ about its plans to
achieve compliance, and the Company is taking actions that, if successful, the
Company believes will bring it into compliance before an actual delisting
occurs.
(b) Delay In Annual Meeting
We expect the 1999 Annual Meeting of Shareholders to be held in November of
this year. Since that will be later in the year than the 1998 annual shareholder
meeting was held, we will allow shareholder proposals for inclusion into the
proxy statement for the 1999 annual meeting to be submitted through August 27,
1999. Proposals submitted after that date will be considered to be untimely.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Form of Salary Reduction Stock Option Agreement
10.1 Seventh Amendment to Second Amended and Restate Loan Agreement
dated June 30, 1999 by and between Venus Exploration, Inc. and
Wells Fargo Bank (Texas), N.A.
10.2 Subordination Agreement June 30, 1999, between Wells Fargo
Bank (Texas), N.A. and EXCO Resources, Inc.
10.3 Intercreditor and Subordination Agreement dated June 30, 1999,
between NationsBank, N.A. and Wells Fargo Bank (Texas), N.A.
10.4 Form of 7% Convertible Subordinated Note and List of
Purchasers.
10.5 Form of Registration Rights Agreement executed in conjunction
with 7% Convertible Subordinated Notes
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K dated June 30, regarding the acquisition of the Jackson
Parish Properties.
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<PAGE> 25
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENUS EXPLORATION, INC.
Dated: August 23, 1999 BY: /S/ EUGENE L. AMES, JR.
---------------------------------
Eugene L. Ames, Jr.
(Chief Executive Officer)
Dated: August 23, 1999 BY: /S/ PATRICK A. GARCIA
---------------------------------
Patrick A. Garcia
(Principal Accounting Officer)
25
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
4.1 Form of Salary Reduction Stock Option Agreement
10.1 Seventh Amendment to Second Amended and Restate Loan Agreement
dated June 30, 1999 by and between Venus Exploration, Inc. and
Wells Fargo Bank (Texas), N.A.
10.2 Subordination Agreement June 30, 1999, between Wells Fargo
Bank (Texas), N.A. and EXCO Resources, Inc.
10.3 Intercreditor and Subordination Agreement dated June 30, 1999,
between NationsBank, N.A. and Wells Fargo Bank (Texas), N.A.
10.4 Form of 7% Convertible Subordinated Note and List of
Purchasers.
10.5 Form of Registration Rights Agreement executed in conjunction
with 7% Convertible Subordinated Notes
27.1 Financial Data Schedule
</TABLE>
26
<PAGE> 1
EXHIBIT 4.1
1999 EMPLOYEE AWARD AGREEMENT
INCENTIVE STOCK OPTION
1. Grant of Option. Pursuant to the 1997 Incentive Plan of Venus
Exploration, Inc. (the "Plan") for key management employees, directors and
independent contractors of Venus Exploration, Inc., a Delaware corporation (the
"Company") and its Subsidiaries, the Company grants to
---------------
(the "Participant")
an option to purchase from the Company a total of ________ full shares
("Optioned Shares") of Common Stock of the Company at $______ per share (being
the Fair Market Value per share of the Common Stock on the Date of Grant of
this option, as provided in Code Section 422), in the amounts, during the
periods, and upon the terms and conditions set forth in this Agreement. The
Date of Grant of this Stock Option is _________, 1999. This is an Incentive
Stock Option.
2. Subject to Plan. This Stock Option and its exercise are subject to
the terms and conditions of the Plan, but the terms of the Plan shall not be
considered an enlargement of any benefits under this Agreement. The capitalized
terms used herein that are defined in the Plan shall have the same meanings
assigned to them in the Plan. This Stock Option is subject to any rules
promulgated pursuant to the Plan by the Board or the Committee and communicated
to the Participant in writing.
3. Vesting; Time of Exercise. Except as specifically provided in
this Agreement and subject to certain restrictions and conditions set forth in
the Plan, this Stock Option is exercisable in semi-monthly installments of
________ shares. The first installment shall vest on __________ 1, 1999, the
next installment shall vest on __________ 15, 1999, and the subsequent
installments shall vest on the 1st and 15th of each following calendar month
until __________ 15, 1999, which installment shall be the last one to vest
under this Employee Award Agreement.
4. Term; Forfeiture. This Stock Option, and all unexercised Optioned
Shares granted to the Participant hereunder, will terminate and be forfeited at
the first of the following to occur:
(a) 5 p.m. on (first business day immediately preceding tenth
anniversary of date of grant);
<PAGE> 2
(b) 5 p.m. on the date which is twelve (12) months following
the Participant's termination of employment with the Company and all
its Subsidiaries ("Termination of Service") due to death or Total and
Permanent Disability;
(c) 5 p.m. on the date which is three (3) months following
the Participant's Termination of Service due to retirement (in
accordance with Company retirement policies); or
(d) 5 p.m. on the 30th day after the day of any other
Termination of Service.
5. Who May Exercise. Subject to the terms and conditions set forth
in Sections 3 and 4 above, during the lifetime of the Participant, this Stock
Option may be exercised only by the Participant or by the Participant's
guardian. If the Participant's employment terminates as a result of death or
Total and Permanent Disability prior to the termination date specified in
Section 4(a) hereof and the Participant has not exercised this Stock Option as
to the maximum percentage of Optioned Shares set forth in Section 3 hereof as
of the date of death or Total and Permanent Disability, the following persons
may exercise the exercisable portion of this Stock Option on behalf of the
Participant at any time prior to the earlier of the dates specified in Sections
4(a) or (b) hereof: (i) if the Participant is disabled, the guardian of the
Participant; or (ii) if the Participant dies, the personal representative of
his estate, or the person who acquired the right to exercise this Stock Option
by bequest or inheritance or by reason of the death of the Participant;
provided that this Stock Option shall remain subject to the other terms of this
Agreement, the Plan, and applicable laws, rules, and regulations.
6. Restrictions. This Stock Option may be exercised only with respect
to full shares, and no fractional share of stock shall be issued.
7. Manner of Exercise. Subject to such administrative regulations as
the Committee may from time to time adopt, this Stock Option may be exercised
by the delivery of written notice to the Committee setting forth the number of
shares of Common Stock with respect to which the Stock Option is to be
exercised and the date of exercise thereof (the "Exercise Date"), which shall
be at least three (3) days after giving such notice unless an earlier time
shall have been mutually agreed upon. On the Exercise Date, the Participant
shall deliver to the Company consideration with a value equal to the total
Option Price of the shares to be purchased, payable as follows: (a) cash,
certified check, bank draft, or money order payable to the order of the
Company, (b) Common Stock (including Restricted Stock), valued at its Fair
Market Value on the Exercise Date, and/or (c) any other form of payment which
is acceptable to the Committee. In the event that shares of Restricted Stock
are tendered as consideration
2
<PAGE> 3
for the exercise of a Stock Option, a number of shares of Common Stock issued
upon the exercise of the Stock Option, equal to the number of shares of
Restricted Stock used as consideration therefor, shall be subject to the same
restrictions as the Restricted Stock so submitted. Provided that, if Common
Stock which is tendered was acquired by the Participant pursuant to an Employee
Award or an Independent Contractor Award under the Plan, such shares may only
be tendered if they have been held by the Participant for at least six (6)
months.
Upon payment of all amounts due from the Participant, the Company
shall cause certificates for the Optioned Shares then being purchased to be
delivered to the Participant (or the person exercising the Participant's Stock
Option in the event of his death) at its principal business office within ten
(10) business days after the Exercise Date. The obligation of the Company to
deliver shares of Common Stock shall, however, be subject to the condition that
if at any time the Committee shall determine in its discretion that the
listing, registration or qualification of the Stock Option or the Optioned
Shares upon any securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the Stock Option or the
issuance or purchase of shares of Common Stock thereunder, then the Stock
Option may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Committee.
If the Participant fails to pay for any of the Optioned Shares
specified in such notice or fails to accept delivery thereof, then the
Participant's right to purchase such Optioned Shares may be terminated by the
Company.
8. Disqualifying Disposition. In the event that Common Stock
acquired upon exercise of this Stock Option is disposed of by the Participant
prior to the expiration of either two years from the Date of Grant of such
Stock Option or one year from the transfer of shares to the Participant
pursuant to the exercise of such Stock Option, such Participant shall notify
the Company in writing within thirty (30) days after such disposition of the
date and terms of such disposition.
9. Non-Assignability. This Stock Option is not assignable or
transferable by the Participant except by will or by the laws of descent and
distribution.
10. Rights as Stockholder. The Participant will have no rights as a
stockholder with respect to any shares covered by this Stock Option until the
issuance of a certificate or certificates to the Participant for the shares.
Except as otherwise provided in Section 11 hereof, no adjustment shall be made
for dividends or other rights for which the record date is prior to the
issuance of such certificate or certificates.
3
<PAGE> 4
11. Adjustment of Number of Shares and Related Matters. The number of
shares of Common Stock covered by this Stock Option, and the Option Price
thereof, shall be subject to adjustment in accordance with Paragraph 15 of the
Plan.
12. Participant's Representations. Notwithstanding any of the
provisions hereof, the Participant hereby agrees that he or she will not
exercise the Stock Option granted hereby, and that the Company will not be
obligated to issue any shares to the Participant hereunder, if the exercise
thereof or the issuance of such shares shall constitute a violation by the
Participant or the Company of any provision of any law or regulation of any
governmental authority. Any determination in this connection by the Committee
shall be final, binding and conclusive. The obligations of the Company and the
rights of the Participant are subject to all applicable laws, rules and
regulations.
13. Investment Representation. Unless the Common Stock is issued to
him or her in a transaction registered under applicable federal and state
securities laws, by his or her execution hereof, the Participant represents and
warrants to the Company that all Common Stock that may be purchased hereunder
will be acquired by the Participant for investment purposes for his or her own
account and not with any intent for resale or distribution in violation of
federal or state securities laws. Unless the Common Stock is issued to him or
her in a transaction registered under the applicable federal and state
securities laws, all certificates issued with respect to the Common Stock shall
bear an appropriate restrictive investment legend.
14. Participant's Acknowledgments. The Participant acknowledges
receipt of a copy of the Plan and represents that he or she is familiar with
the terms and provisions thereof. The Participant hereby accepts this Option
subject to all the terms and provisions thereof. The Participant hereby agrees
to accept as binding, conclusive and final all decisions or interpretations of
the Committee, as that term is defined in the Plan, upon any questions arising
under the Plan or this Agreement.
15. Law Governing. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Texas (excluding any
conflict of laws rule or principle of Texas law that might refer the
governance, construction or interpretation of this agreement to the laws of
another state).
16. No Right to Continue Employment. Nothing herein shall be
construed to confer upon the Participant the right to continue in the
employment of the Company or any Subsidiary or interfere with or restrict in
any way the right of the Company or any Subsidiary to discharge the Participant
at any time (subject to any contract rights of the Participant).
4
<PAGE> 5
17. Legal Construction. In the event that any one or more of the
terms, provisions or agreements that are contained in this Agreement shall be
held by a Court of competent jurisdiction to be invalid, illegal or
unenforceable in any respect for any reason, the invalid, illegal or
unenforceable term, provision or agreement shall not affect any other term,
provision or agreement that is contained in this Agreement, and this Agreement
shall be construed in all respects as if the invalid, illegal or unenforceable
term, provision, or agreement had never been contained herein.
18. Covenants and Agreements as Independent Agreements. Each of the
covenants and agreements that is set forth in this Agreement shall be construed
as a covenant and agreement independent of any other provision of this
Agreement. The existence of any claim or cause of action of the Participant
against the Company, whether predicated on this Agreement or otherwise, shall
not constitute a defense to the enforcement by the Company of the covenants and
agreements that are set forth in this Agreement.
19. Entire Agreement. This Agreement together with the Plan supersede
any and all other prior understandings and agreements, either oral or in
writing, between the parties with respect to the subject matter hereof and
constitute the sole and only agreements between the parties with respect to the
said subject matter. All prior negotiations and agreements between the parties
with respect to the subject matter hereof are merged into this Agreement. Each
party to this Agreement acknowledges that no representations, inducements,
promises or agreements, oral or otherwise, have been made by any party or by
anyone acting on behalf of any party that are not embodied in this Agreement or
the Plan and that any agreement, statement or promise that is not contained in
this Agreement or the Plan shall not be valid or binding or of any force or
effect.
20. Parties Bound. The terms, provisions, representations,
warranties, covenants and agreements that are contained in this Agreement shall
apply to, be binding upon, and inure to the benefit of the parties and their
respective heirs, executors, administrators, legal representatives, and
permitted successors and assigns.
21. Modification. No change or modification of this Agreement shall
be valid or binding upon the parties unless the change or modification is in
writing and signed by the parties. Notwithstanding the preceding sentence, the
Company may amend the Plan or revoke this Stock Option to the extent permitted
in the Plan.
22. Headings. The headings that are used in this Agreement are used
for reference and convenience purposes only and do not constitute substantive
matters to be considered in construing the terms and provisions of this
Agreement.
5
<PAGE> 6
23. Gender and Number. Words of any gender used in this Agreement
shall be held and construed to include any other gender, and words in the
singular number shall be held to include the plural, and vice versa, unless the
context requires otherwise.
24. Notice. Any notice required or permitted to be delivered
hereunder shall be deemed to be delivered only when actually received by the
Company or by the Participant, as the case may be, at the addresses set forth
below, or at such other addresses as they have theretofore specified by written
notice delivered in accordance herewith:
(A) Notice to the Company shall be addressed and delivered as
follows:
VENUS EXPLORATION, INC.
1250 N.E. Loop 410, Suite 1000
SAN ANTONIO, TEXAS 78209
ATTENTION: John Y. Ames, President
(B) Notice to the Participant shall be addressed and
delivered as follows:
---------------
---------------
---------------
IN WITNESS WHEREOF, the Committee has caused this Agreement to be
executed by its duly authorized officer, and the Participant, to evidence his
or her consent and approval of all the terms hereof, has duly executed this
Agreement, as of the date specified in Section 1 hereof.
VENUS EXPLORATION, INC.
By:
---------------------------------
Title:
-------------------------------
PARTICIPANT:
--------------------------------------
6
<PAGE> 1
EXHIBIT 10.1
SEVENTH AMENDMENT TO SECOND
AMENDED AND RESTATED LOAN AGREEMENT
This SEVENTH AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
(the "Seventh Amendment") dated June 30, 1999, is by and between VENUS
EXPLORATION, INC., a Delaware corporation, formerly known as XPLOR CORPORATION,
a Delaware corporation (the "Borrower"), and WELLS FARGO BANK (TEXAS), N.A., a
national banking association (the "Bank").
W I T N E S S E T H:
WHEREAS, Bank and Borrower entered into that certain Second Amended
and Restated Loan Agreement dated December 22, 1997 (as the same has been
previously amended through the date hereof is herein called the "Loan
Agreement"), pursuant to which Borrower obtained a credit facility in the
amount of up to the lesser of the Borrowing Base (as defined in the Loan
Agreement) or the Commitment (as defined in the Loan Agreement); and
WHEREAS, Borrower has agreed to acquire certain oil and gas producing
properties from Apache Corporation for an amount not to exceed $28,500,000 (the
"Apache Acquisition"); and
WHEREAS, Borrower has agreed to assign its rights, duties and
obligations with respect to the Apache Acquisition to EXUS Energy, LLC
("EXUS"), a Delaware limited liability company which will be jointly owned by
Borrower with EXCO Resources, Inc., a Texas corporation ("EXCO"), and EXUS will
acquire the assets contemplated by the Apache Acquisition; and
WHEREAS, Borrower proposes to obtain certain non-recourse loans from
EXCO in an amount not to exceed $8,000,000 in order to make its' capital
contribution in EXUS; and
WHEREAS, EXUS proposes to enter into a Credit Agreement with the
Nationsbank, N. A. (the "Subordinate Creditor") pursuant to which the
Subordinate Creditor and other financial institutions will make loans to EXUS
in an amount not to exceed $50,000,000 (the "EXUS Credit Agreement"); and
WHEREAS, the forgoing are currently prohibited by the Loan Agreement
and Borrower has requested that Bank consent and approve such transactions; and
WHEREAS, Bank and Borrower now desire to further amend that Loan
Agreement as herein set forth.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
<PAGE> 2
1. Amendments to the Loan Agreement. The Loan Agreement is, effective
the date hereof, and subject to the satisfaction of the conditions precedent
set forth in Section 6 hereof, hereby amended as follows:
(a) Except as provided below, unless the context hereof
indicates otherwise, all capitalized terms used herein shall
have the same meaning as set forth in the Loan Agreement. The
definitions contained in Section 1.1 of the Loan Agreement
shall be and are hereby amended or supplemented as follows:
(i) A new definition of "Apache Acquisition" is
hereby added to read as follows:
"Apache Acquisition shall mean the acquisition by an
affiliate of Borrower of oil and gas producing
properties located in the State of Louisiana from
Apache Corporation pursuant to a Purchase and Sale
Agreement dated May 13, 1999."
(ii) A new definition of "EXCO" is hereby added to
read as follows:
"EXCO shall mean EXCO Resources, Inc., a Texas
corporation whose address is 5735 Pineland Dr.,
Suite 235, Dallas, Texas 75231."
(iii) A new definition of "EXCO Note" is hereby
added to read as follows:
"EXCO Note shall mean that certain Convertible
Promissory Note executed by Borrower payable to the
order of EXCO dated June 30, 1999 in the original
principal amount of $8,000,000."
(iv) A new definition of "EXCO Pledge Agreement" is
hereby added to read as follows:
"EXCO Pledge Agreement shall mean that certain
Pledge Agreement executed by Borrower in favor of
EXCO dated June 30, 1999 pursuant to which Borrower
pledges as collateral security for the EXCO Note all
of its membership interests in EXUS."
(v) A new definition of "EXUS" is hereby added to
read as follows:
"EXUS shall mean EXUS Energy, LLC, a Delaware
limited liability company, as such limited liability
company exists or may hereinafter be restated,
amended, or restructured, and any limited liability
company, partnership, joint venture, or corporation
formed as a result of the restructure,
reorganization, or amendment of any such limited
liability company."
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<PAGE> 3
(vi) A new definition of "EXUS Credit Facility" is
hereby added to read as follows:
"EXUS Credit Facility shall mean that certain Credit
Agreement dated June 30, 1999 among EXUS,
Subordinated Creditor, individually and as
administrative agent thereunder, and the financial
institutions who may from time to time become a
party thereto."
(vii) A new definition of "Subordinated Creditor" is
hereby added to read as follows:
"Subordinated Creditor shall mean Nationsbank, N.A.
or any other bank or financial institution who from
time to time becomes a party to the EXUS Credit
Agreement."
(viii) A new definition of "Subordinated Guaranty
Agreement" is hereby added to read as follows:
"Subordinated Guaranty Agreement shall mean that
certain Guaranty Agreement executed by Borrower in
favor of the Subordinate Creditor dated June 30,
1999 pursuant to which Borrower guarantees the
obligations of EXUS under the EXUS Credit
Agreement."
(b) Section 6.9, Debt, to the Loan Agreement is hereby
deleted in its entirety and the following substituted therefor:
"6.9 Debt. Borrower shall not, directly or indirectly,
create, incur or suffer to exist any direct, indirect, fixed
or contingent liability for any Debt, other than (a) the
Obligation; (b) current accounts payable incurred in the
ordinary course of business; (c) such other Debt as set forth
on Schedule 6.9; (d) purchase money Debt of Borrower not to
exceed $500,000;and (e) the EXCO Notes, the EXCO Pledge
Agreement and the Subordinated Guaranty Agreement.
(c) Section 6.11, Liens to the Loan Agreement is hereby
deleted in its entirety and the following substituted therefor:
"6.11 Liens. Borrower or any Subsidiary shall not, directly
or indirectly, create, incur, suffer or permit to be created
or incurred or to exist, any lien upon any of its assets,
except (i) Permitted Liens; and (ii) the Liens arising under
the EXCO Pledge Agreement.
(d) Section 6.34, Transaction, to the Loan Agreement is
hereby deleted in its entirety and the following substituted therefor:
-3-
<PAGE> 4
"6.34 Transaction. On or before September 30, 1999, Borrower
shall have consummated a Transaction in form and substance
acceptable to Bank."
(e) Section 7.1, Events of Default, to the Loan Agreement is
hereby amended by adding the following:
"(l) A default or event of default occurs under the EXUS
Credit Agreement.
(m) The breach of any representation, warranty or covenant by
Borrower under the EXCO Note, the EXCO Pledge Agreement or
the Subordinated Guaranty Agreement, or Borrower enters into
any amendment of the EXCO Note, the EXCO Pledge Agreement or
the Subordinated Guaranty Agreement, without the express
prior written approval of Bank, which approval may be
withheld by Bank in its sole discretion.
(n) The payment by Borrower to Subordinate Creditor of any
amounts under the Subordinated Guaranty Agreement in
contravention of the Intercreditor and Subordination
Agreement among Borrower, Bank and Subordinate Creditor dated
June 30, 1999."
2. Consent and Waiver. At the special request of Borrower without
waiving any other rights or remedies in favor of Bank and subject to the
fulfillment of the conditions precedent contained in this Seventh Amendment,
Bank hereby consents to (i) the investment by Borrower in EXUS; (ii) the
execution, delivery and performance of the EXCO Note and the EXCO Pledge
Agreement; and (iii) the execution, delivery and performance of the
Subordinated Guaranty Agreement, subject to the limitations set forth in the
Intercreditor and Subordination Agreement among Borrower, Bank and Subordinate
Creditor as described in Paragraph 7(iv) below. As an inducement to Bank to
make the foregoing consents and waivers, Borrower hereby represents and
warrants to Bank that the closing of the Apache Acquisition, the formation of
EXUS, the execution and delivery by Borrower of the EXCO Note, the EXCO Pledge
Agreement and the Subordinated Guaranty Agreement, and the other transactions
contemplated thereby has or will occur simultaneously with the execution and
delivery of this Seventh Amendment. A true and complete copy of the documents
and instruments evidencing the Apache Acquisition, the EXCO Note, the EXCO
Pledge Agreement and the Subordinated Guaranty Agreement (including all
exhibits, schedules and amendments thereto) has been delivered to Bank.
Borrower represents and warrants that it is not in default under any such
documents or under any instrument or document to be delivered in connection
therewith. The representations and warranties made in such documents by
Borrower will be true and correct in all material respects (except for changes
expressly provided for therein or herein) on and as of the date hereof as
though made on and as of such date. The foregoing consent and waiver is
specifically limited to a waiver of the covenants, agreements and defaults
contained in the Loan Agreement prohibiting such transactions. This waiver
shall not constitute a waiver of either (i) any further violation of the
covenants and agreements contained in the Loan Agreement; or (ii) any
violations of covenants and agreements contained in the Loan Agreement which
exists prior to the date hereof; or (iii) any violation of any other provision
of the Loan Agreement, or any Potential Default or Event of Default thereunder,
whether now existing or
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<PAGE> 5
occurring after the date of this Seventh Amendment. Bank hereby specifically
reserves all of the rights and remedies it may have under the Loan Agreement or
otherwise as the result of any such violation, Potential Default or Event of
Default.
3. Ratifications. The terms and provisions as set forth in this
Seventh Amendment shall modify and supersede all inconsistent terms and
provisions set forth in the Loan Agreement, and except as expressly modified
and superseded by this Seventh Amendment, the terms of the Note and any and all
other Loan Documents executed in connection therewith or hereunto are hereby
ratified and confirmed and shall continue in full force and effect. Borrower
and Bank agree that the Loan Agreement, as amended hereby, the Note and the
other Loan Documents shall continue to be the legal, valid and binding
obligations of Borrower, enforceable against Borrower in accordance with their
respective terms.
4. Representations and Warranties. Borrower hereby represents and
warrants to Bank that (i) the execution, delivery and performance of this
Seventh Amendment, and the other documents to be executed and delivered as
required hereby have been duly authorized by all requisite action on the part
of Borrower; (ii) after giving effect to this Seventh Amendment, the
representations and warranties contained in the Loan Agreement, as amended
hereby, and any other Loan Document executed in connection herewith or
therewith are true, correct and complete on and as of the date hereof as though
made on and as of the date hereof; and (iii) after giving effect to this
Seventh Amendment, no Event of Default or Potential Default has occurred and is
continuing.
5. Financial Covenant Deviation and Waiver. Without giving effect to
this Seventh Amendment, Borrower would have failed to observe or maintain
compliance with the Current Ratio covenant set forth in Section 6.16 of the
Loan Agreement and the Tangible Net Worth covenant set forth in Section 6.17 of
the Loan Agreement. Borrower has requested, and Bank has approved, a deviation
from such compliance with respect to the aforementioned covenants for a period
from the date hereof through September 30, 1999, at which time Borrower must be
in compliance therewith. It is understood and agreed that Bank's consent to
such deviation shall in no way act as a waiver of any covenants, restrictions,
rights or remedies with respect to the Loan Agreement, but that such deviation
shall apply only to the specific matter and instance set forth herein above.
6. Status of Claims. Borrower hereby represents and warrants to Bank
that no facts, events, status or conditions presently exist which, either now
or with the passage of time or the giving of notice or both, presently
constitute or will constitute a basis for any claim or cause of action against
Bank, or any defense to the payment of any of the Obligations. Borrower hereby
releases, relinquishes and forever discharges Bank, its successors, assigns,
agents, officers, directors, employees and representatives, of and from any and
all claims, demands, actions and causes of action of any and every kind or
character, whether known or unknown, present or future, which Borrower may have
against Bank, its successors, assigns, agents, officers, directors, employees
and representatives, arising out of or with respect to any and all transactions
relating to the Loan Agreement, this Seventh Amendment, or any Loan Document,
including any loss, cost or damage, of any kind or character, arising out of or
in any way connected with or in any way resulting from the acts, actions or
omissions of Bank, its successors, assigns, agents, officers, directors,
employees or representatives.
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<PAGE> 6
7. Conditions Precedent to Effectiveness of Seventh Amendment. This
Seventh Amendment shall become effective and be deemed effective upon receipt
by Bank of the following:
(i) counterparts of this Seventh Amendment duly executed by
Borrower and Bank;
(ii) there shall not have been, in the sole judgment of Bank,
any material adverse change in the financial condition, business or
operations of Borrower;
(iii) payment by Borrower to Bank of a $10,000.00 waiver
extension fee;
(iv) payment by Borrower of the fees and expenses of counsel
to Bank in connection with the preparation and negotiation of this
Seventh Amendment and all documents and instruments contemplated
hereby;
(v) delivery by Borrower to Bank of true and correct copies
of the documents and instruments contemplated in Paragraph 2 of this
Seventh Amendment;
(vi) the execution and delivery by Borrower and Subordinate
Creditor of an Intercreditor and Subordination Agreement in form and
substance satisfactory to Bank, in its sole discretion; and
(vii) the execution and delivery by Borrower of such
additional documents and instruments that Bank and its counsel may
deem necessary to effectuate this Seventh Amendment or any document
executed and delivered to Bank in connection herewith or therewith.
8. Execution Counterparts. This Seventh Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which when taken together shall constitute but one
and the same instrument.
9. Governing Law. This Seventh Amendment shall be governed by and
construed in accordance with the internal laws of the State of Texas.
10. Successors and Assigns. This Seventh Amendment is binding upon and
shall inure to the benefit of Borrower and Bank and its respective successors
and assigns; provided, however, Borrower may not assign or transfer any of
their rights or obligations hereunder without the prior written consent of
Bank.
11. Headings. The headings, captions and arrangements used in this
Seventh Amendment are for convenience only and shall not effect the
interpretation of this Seventh Amendment.
12. NO ORAL AGREEMENTS. THIS SEVENTH AMENDMENT, TAKEN TOGETHER WITH
THE OTHER LOAN DOCUMENTS AND ALL SCHEDULES AND EXHIBITS THERETO, REPRESENTS THE
FINAL AGREEMENT OF THE PARTIES
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<PAGE> 7
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
13. AGREEMENT FOR BINDING ARBITRATION. THE PARTIES AGREE TO BE BOUND
BY THE TERMS AND PROVISIONS OF THE CURRENT ARBITRATION PROGRAM OF WELLS FARGO
BANK (TEXAS), N.A., WHICH IS INCORPORATED BY REFERENCE HEREIN AND IS
ACKNOWLEDGED AS RECEIVED BY THE PARTIES, PURSUANT TO WHICH ANY AND ALL DISPUTES
SHALL BE RESOLVED BY MANDATORY BINDING ARBITRATION UPON THE REQUEST OF EITHER
PARTY.
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<PAGE> 8
"BORROWER"
VENUS EXPLORATION, INC.
By: /s/ JOHN Y. AMES
----------------------------------
Name: John Y. Ames
--------------------------------
Title: President
-------------------------------
"BANK"
WELLS FARGO BANK (TEXAS) N.A.
By: /s/ ANDREW A. MOY
-----------------------------------
Andrew A. Moy, Vice President
-8-
<PAGE> 1
EXHIBIT 10.2
SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT (herein so called) is executed as of June
30, 1999, by WELLS FARGO BANK (TEXAS), N.A., a national banking association
(collectively, "WELLS FARGO"), and EXCO RESOURCES, INC., a Texas corporation
("EXCO").
R E C I T A L S:
A. Wells Fargo and Venus Exploration, Inc., a Delaware corporation,
formerly known as XPLOR Corporation, a Delaware corporation ("BORROWER") have
entered into that certain Second Amended and Restated Loan Agreement dated
December 22, 1997 (as modified, amended, renewed, extended, and/or restated
from time to time, the "CREDIT AGREEMENT").
B. Pursuant to that certain Convertible Promissory Note dated as of
June 30, 1999, executed by Borrower and payable to the order of Secured Party
in the original principal amount of $8,000,000.00, (together with all
modifications, amendments, renewals, extensions, and restatements, if any, from
time to time thereafter thereto, the "EXCO NOTE"), EXCO has made certain loans
to Borrower.
C. As a condition precedent to the making of advances and other
extensions of credit under the EXCO Note, Borrower has executed that certain
Pledge Agreement dated of even date herewith (together with all modifications,
amendments, renewals, extensions, and restatements, if any, from time to time
thereafter thereto, the "EXCO PLEDGE AGREEMENT ") covering, among other
collateral, all of membership interests in EXUS Energy, LLC, a Delaware limited
liability company (as such limited liability company exists or may hereinafter
be restated, amended, or restructured, and any limited liability company,
partnership, joint venture, or corporation formed as a result of the
restructure, reorganization, or amendment of any of such limited liability
company, the "COMPANY") now owned or hereafter acquired by Borrower.
D. Wells Fargo has consented to the execution, delivery, and
performance of the EXCO Note and the EXCO Pledge Agreement.
E. As a condition precedent to the making of advances and other
extensions of credit under the EXCO Note, EXCO has required that Wells Fargo
subordinate its liens and security interests, if any, in all or any portion of
the Collateral (as defined in the Pledge Agreement) securing the obligations of
Borrower under the Credit Agreement and the other loan documents executed in
connection therewith (the "WELLS FARGO SECURITY INTERESTS") to the liens and
security interests in the Collateral created under the Pledge Agreement (the
"EXCO SECURITY INTERESTS").
NOW, THEREFORE, for good and valuable consideration, the receipt and
legal sufficiency of which are hereby acknowledged, Wells Fargo and EXCO agree
as follows:
1. SUBORDINATION. Wells Fargo hereby subordinates the Wells Fargo
Security Interests to the EXCO Security Interests.
2. NO AMENDMENT TO COLLATERAL. EXCO agrees that it will not agree to
any amendment to the definition of "Collateral" in the EXCO Pledge Agreement
without the prior written consent of Wells Fargo.
3. LIMITED SUBORDINATION BY EXCO. EXCO agrees that the recourse
obligations of Borrower under the EXCO Note for (a) any and all damages, costs,
and expenses suffered or incurred by EXCO as a result of, in connection with or
relating to any representation or warranty made by Borrower to EXCO which
<PAGE> 2
shall prove to be untrue or inaccurate in any material respects, and (b) the
costs, expenses, and fees, including but not limited to, court costs and
reasonable attorneys' fees, arising in connection with the collection of the
EXCO Note (the "RECOURSE OBLIGATIONS") shall be subordinate and junior in right
of payment to the prior payment in full of all obligations of Borrower to Wells
Fargo under the Credit Agreement and EXCO agrees that is will not take any
action to collect the Recourse Obligations from Borrower until the payment in
full of all obligations of Borrower to Wells Fargo under the Credit Agreement;
provided that the foregoing subordination shall not prohibit or restrict EXCO
from exercising its rights and remedies in the Collateral to enforce payment of
the EXCO Note or the Recourse Obligations.
4. FURTHER ASSURANCES. Wells Fargo, upon the reasonable request of
EXCO, shall execute, acknowledge, deliver, and record such further instruments
(including UCC-3 Amendments to any Financing Statements) and do such further
acts as may be reasonably necessary to evidence the agreements of Wells Fargo
contained in this Subordination Agreement.
5. SUCCESSOR AND ASSIGNS. This Subordination Agreement, and the terms,
covenants, and conditions hereof, shall be binding upon and inure to the
benefit of the parties hereto, and their respective heirs, personal
representatives, successors, and assigns.
6. GOVERNING LAW. THIS SUBORDINATION AGREEMENT WILL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
7. MISCELLANEOUS. Unless stated otherwise (a) the singular number
includes the plural and vice versa and words of any gender include each other
gender, in each case, as appropriate, (b) headings and captions may not be
construed in interpreting provisions, (c) if any part of this Subordination
Agreement is for any reason found to be unenforceable, all other portions of it
nevertheless remain enforceable, and (d) this Subordination Agreement may be
executed in any number of counterparts with the same effect as if all
signatories had signed the same document, and all of those counterparts must be
construed together to constitute the same document.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES TO FOLLOW]
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<PAGE> 3
SIGNATURE PAGE TO SUBORDINATION AGREEMENT
EXCO RESOURCES, INC.,
a Texas corporation
By: /s/ T. W. EUBANK
--------------------------------
Name: T. W. Eubank
------------------------------
Title: President
-----------------------------
WELLS FARGO BANK (TEXAS), N.A.,
a national banking association
By: /s/ ANDREW A. MOY
--------------------------------
Name: Andrew A. Moy
------------------------------
Title: Vice President
-----------------------------
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<PAGE> 1
EXHIBIT 10.3
INTERCREDITOR AND SUBORDINATION AGREEMENT
THIS INTERCREDITOR AND SUBORDINATION AGREEMENT is made as of June 30,
1999, between NATIONSBANK, N.A., (the "Subordinate Creditor"), and WELLS FARGO
BANK (TEXAS), N.A. (the "Senior Creditor").
RECITALS
WHEREAS, Venus Exploration, Inc., a Delaware corporation (the
"Borrower") and Senior Creditor entered into that certain Second Amendment and
Restated Loan Agreement (as amended from time to time, the "Loan Agreement")
dated December 22, 1997, pursuant to which Senior Creditor agreed to make loans
to Borrower subject to the terms of the Loan Agreement;
WHEREAS, Borrower has agreed to acquire certain oil and gas producing
properties from Apache Corporation for an amount not to exceed $28,500,000 (the
"Apache Acquisition"); and
WHEREAS, Borrower has agreed to assign its rights, duties and
obligations with respect to the Apache Acquisition to EXUS Energy, LLC ("EXUS"),
a Delaware limited liability company which will be jointly owned by Borrower
with EXCO Resources, Inc., a Texas corporation ("EXCO"), and EXUS will acquire
the assets contemplated by the Apache Acquisition; and
WHEREAS, EXUS proposes to enter into a Credit Agreement with the
Subordinate Creditor pursuant to which the Subordinate Creditor and other
financial institutions will make loans to EXUS in an amount not to exceed
$50,000,000 (the "EXUS Credit Agreement"); and
WHEREAS, it is a condition precedent to the consummation of the EXUS
Credit Agreement that Borrower execute and deliver an unconditional guaranty of
the obligations of EXUS under the EXUS Credit Agreement pursuant to a Guaranty
Agreement dated June 30, 1999 (the "Guaranty Agreement"); and
WHEREAS, pursuant to the Loan Agreement the consent of Senior Creditor
is required for the execution and delivery of the Guaranty Agreement by
Borrower, and Senior Creditor has required, as a condition to granting such
consent, the execution and delivery of this Intercreditor and Subordination
Agreement (the "Subordination Agreement"), and to facilitate such requirement,
Subordinate Creditor has agreed to enter into this Subordination Agreement; and
WHEREAS, (i) in order to comply with the terms and conditions of the
Loan Agreement; (ii) to induce the Senior Creditor to consent to the proposed
transaction by Borrower, (iii) at the special insistence and request of the
Senior Creditor, and (iv) for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Subordinate Creditor hereby
agrees as follows:
<PAGE> 2
ARTICLE I
DEFINITIONS
Section 1.01 Terms Defined Above and in Loan Agreement. As used in this
Subordination Agreement, the terms defined above shall have the meanings
respectively assigned to them. Unless otherwise defined herein, all terms
beginning with a capital letter which are defined in the Loan Agreement shall
have the meanings herein as assigned therein, unless the context hereof requires
otherwise.
Section 1.02 Certain Definitions. As used in this Subordination
Agreement the following terms shall have the following meanings, unless the
context otherwise requires:
"Subordinated Debt" shall mean any and all indebtedness, liabilities
and obligations of Borrower to the Subordinate Creditor arising out of or
related to the Guaranty Agreement.
"Superior Indebtedness" shall mean any and all indebtedness,
liabilities and obligations of Borrower under the Loan Agreement and other loan
documents related thereto, whether owed individually or jointly, to the Senior
Creditor, absolute or contingent, direct or indirect, joint, several or
independent, now outstanding or owing or which may hereafter be existing or
incurred, arising by operation of law or otherwise, due or to become due, or
held or to be held by the Senior Creditor.
ARTICLE II
SUBORDINATION
Section 2.01 Agreement to Subordinate. The payment of any and all
Subordinated Debt is expressly subordinated to the Superior Indebtedness to the
extent and in the manner set forth in Sections 2.02 through 2.06 hereof.
Section 2.02 Payment Subordination upon Default. If for any reason any
of the Superior Indebtedness is not paid when due or is not paid on or before
the maturity thereof, or if there shall occur and be continuing any event which
with the giving of notice or lapse of time or both would constitute an Event of
Default under the Loan Agreement or any Security Instrument, then, unless and
until such Event of Default shall have been cured to the satisfaction of the
Senior Creditor, in its sole discretion, or unless and until the Superior
Indebtedness shall be paid in full, the Subordinate Creditor will not take,
receive or accept from Borrower, by set-off or in any other manner, any payment
or distribution on account of the Subordinated Debt.
Section 2.03 Payments Received in Violation of Subordination Agreement.
In the event the Subordinate Creditor shall receive any payment or distribution
on account of the -Subordinated Debt (whether by offset, direct or indirect
payment or in any other manner) which Subordinate Creditor is not entitled to
receive under the provisions of this Subordination Agreement, Subordinate
Creditor will hold any amount so received in trust for the Senior Creditor and
will
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<PAGE> 3
forthwith turn over such payment to the Senior Creditor in the form received by
Subordinate Creditor (together with any necessary endorsement) to be applied on
the Superior Indebtedness.
Section 2.04 Liens Subordinate. Except as otherwise expressly provided
herein, Subordinate Creditor agrees that any liens upon Borrower's assets
securing payment of the Subordinated Debt shall be and remain inferior and
subordinate to any liens securing payment of the Superior Indebtedness
regardless of whether such encumbrances in favor of Subordinate Creditor or the
Senior Creditor presently exist or are hereafter created or attach. Without the
prior written consent of the Senior Creditor, the Subordinate Creditor shall not
foreclose, repossess, sequester or otherwise take steps or institute any action
or proceeding judicial or otherwise, including without limitation the
commencement of or joinder in any liquidation, bankruptcy, rearrangement,
debtor's relief or insolvency proceeding) to enforce any lien on Borrower's
assets held by Subordinate Creditor.
Section 2.05 Agreement Not to Pursue Actions.
(a) The Subordinate Creditor will not commence any action or proceeding
against Borrower to recover all or any part of the Subordinated Debt or join
with any other creditor in commencing any such action, unless (i) Senior
Creditor shall have accelerated the maturity of the Superior Indebtedness; (ii)
the Senior Creditor shall also join in bringing, or shall have separately
commenced, any proceedings against Borrower to recover all or any part of the
Superior Indebtedness or under any bankruptcy, reorganization, readjustment of
debt, arrangement of debt, receivership, liquidation or insolvency law or
statute of the federal or any state government unless and until all Superior
Indebtedness shall have been paid in full; or (iii) the expiration of at least
one hundred and eighty days from the date Senior Creditor receives written
notice of a default under the Subordinated Debt and that Subordinate Creditor
intends to pursue its rights and remedies against Borrower.
(b) In the event of any receivership, insolvency, bankruptcy,
assignment for the benefit of creditors, reorganization or arrangement with
creditors, adjustment of debt, whether or not pursuant to the Federal Bankruptcy
Code, the sale of all or substantially all of the assets, dissolution,
liquidation, or any other marshaling of the assets and liabilities of Borrower,
the Subordinate Creditor will hold in trust for the Senior Creditor and pay over
to the Senior Creditor, in the form received (together with any necessary
endorsement), to be applied on the Superior Indebtedness, any and all monies,
dividends, distributions or other assets received in any such proceedings on
account of the Subordinated Debt unless and until the Superior Indebtedness
shall be paid in full. In the event that the Subordinate Creditor shall fail to
file any proof of claim or take any other action in respect of the Subordinated
Debt necessary to preserve the claim of the Subordinated Debt on or before the
tenth (10th) day prior to the bar date applicable thereto, the Senior Creditor,
may, take such action on behalf of the Subordinate Creditor, and the Subordinate
Creditor hereby authorizes Senior Creditor to file such proof of claim or take
such other action; and the Subordinate Creditor will execute and deliver to the
Senior Creditor such other instruments as the Senior Creditor may request in
order to accomplish the foregoing.
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<PAGE> 4
Section 2.06 Rights of Senior Creditor. The Senior Creditor may, at any
time, and from time to time, without the consent of or notice to the Subordinate
Creditor, without incurring responsibility to the Subordinate Creditor, without
impairing or releasing any of the Senior Creditor's rights or any of the
obligations of the Subordinate Creditor under this Subordination Agreement:
(a) Change the amount, manner, place or terms of payment, or change or
extend for any period the time of payment of, or renew or otherwise alter the
Superior Indebtedness or any instrument or agreement now or hereafter executed
evidencing, in connection with, as security for or providing for the issuance of
any of the Superior Indebtedness in any manner, or enter into or amend in any
manner any other agreement relating to the Superior Indebtedness (including
provisions restricting or further restricting payments of the Subordinated
Debt).
(b) Sell, exchange, release or otherwise deal with all or any part of
any Property by whomsoever at any time pledged or mortgaged to secure, howsoever
securing, the Superior Indebtedness;
(c) Release any Person liable in any manner for payment or collection
of the Superior Indebtedness;
(d) Exercise or refrain from exercising any rights against Borrower or
others, including the Subordinate Creditor; and
(e) Apply any sums received by the Senior Creditor, paid by any Person
and however realized, to payment of the Superior Indebtedness in such a manner
as the Senior Creditor, in its sole discretion, may deem appropriate.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.01 Representations of Subordinate Creditor. The Subordinate
Creditor represents and warrants that: (a) it has all requisite authority to
execute, deliver and perform its obligations under this Subordination Agreement;
and (b) Subordinate Creditor is the only creditor under the EXUS Credit
Agreement and is entitled to one hundred per cent of the benefits under the
Guaranty Agreement, as limited by this Subordination Agreement.
Section 3.02 Covenants. The Subordinate Creditor covenants that so long
as any of the Superior Indebtedness remains outstanding, the Subordinate
Creditor will: (a) cause all Subordinated Debt to be evidenced by the Guaranty
Agreement; (b) cause a statement or legend to be entered thereon to the effect
that Guaranty Agreement is subordinated to the Superior Indebtedness in favor of
the Senior Creditor in the manner and to the extent set forth in this
Subordination Agreement; (c) execute any and all other instruments reasonably
necessary as required by the Senior Creditor to subordinate the Subordinated
Debt to the Superior Indebtedness as herein provided; (d) not assign or transfer
to others any portion of the Subordinated Debt or any claim the Subordinate
Creditor has or may have against Borrower as long as any of the Superior
Indebtedness remains outstanding, unless such assignment or transfer is
expressly made subject to this Subordination Agreement; (e)
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<PAGE> 5
not amend, supplement or otherwise modify the terms of the Guaranty Agreement
without the express written consent of the Senior Creditor, which consent will
not be unreasonably withheld; (f) not ask for, take, demand, receive or accept
any property as collateral security for the Subordinated Debt granted by
Borrower; and (g) promptly upon either receipt or delivery, forward to the
Senior Creditor a true and complete copy of any demand for payment delivered to
Borrower under the Guaranty Agreement.
ARTICLE IV
MISCELLANEOUS
Section 4.01 Acceptance by Senior Creditor. Notice of acceptance of
this Subordination Agreement is waived, acceptance on the part of the Senior
Creditor being conclusively presumed by its request for this Subordination
Agreement and delivery of the same to it.
Section 4.02 Assignment by Senior Creditor. This Subordination
Agreement may be assigned by the Senior Creditor in connection with any
assignment or transfer of the Superior Indebtedness.
Section 4.03 Notices. Any notice required or permitted to be given
under or in connection with this Subordination Agreement shall be given as
specified in the Loan Agreement.
Section 4.04 Amendments and Waivers. The Senior Creditor's acceptance
of partial or delinquent payments or any forbearance, failure or delay by the
Senior Creditor in exercising any right, power or remedy hereunder shall not be
deemed a waiver of any obligation of Borrower or the Subordinate Creditor, or of
any right, power or remedy of the Senior Creditor; and no partial exercise of
any right, power or remedy shall preclude any other or further exercise thereof.
The Senior Creditor may remedy any Event of Default hereunder or in connection
with the Superior Indebtedness without waiving the Event of Default so remedied.
Subordinate Creditor hereby agrees that if the Senior Creditor agrees to a
waiver of any provision hereunder, or an exchange of or release of the
Collateral, or the addition or release of any Person, any such action shall not
constitute a waiver of any of the Senior Creditor's other rights or of
Subordinate Creditor's obligations hereunder. This Subordination Agreement may
be amended only by an instrument in writing executed jointly by Subordinate
Creditor and the Senior Creditor and may be supplemented only by documents
delivered or to be delivered in accordance with the express terms hereof.
Section 4.05 Governing Law; Submission to Jurisdiction.
(a) THIS SUBORDINATION AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
SUBORDINATION AGREEMENT MAY BE BROUGHT IN THE COURT'S OF THE STATE OF TEXAS OR
OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, AND, BY
EXECUTION AND DELIVERY OF THIS SUBORDINATION
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<PAGE> 6
AGREEMENT, THE SUBORDINATE CREDITOR HEREBY ACCEPTS AND (TO THE EXTENT PERMITTED
BY LAW) IN RESPECT OF THE PROPERTY OF THE SUBORDINATE CREDITOR, WHETHER HELD
JOINTLY OR OTHERWISE, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE
AFORESAID COURTS. THE SUBORDINATE CREDITOR HEREBY IRREVOCABLY WAIVES ANY
OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH MAY NOW OR HEREAFTER BE
HAD TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE
JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS NONEXCLUSIVE AND DOES NOT
PRECLUDE THE SENIOR CREDITOR FROM OBTAINING JURISDICTION OVER THE SUBORDINATE
CREDITOR IN ANY COURT OTHERWISE HAVING JURISDICTION.
(c) Nothing herein shall affect the right of the Senior
Creditor or any holder of the Note to serve process in any other manner
permitted by law or to commence legal proceedings or otherwise proceed against
the Subordinate Creditor in any other jurisdiction.
Section 4.06 Counterparts. This Subordination Agreement may be signed
in any number of counterparts, each of which shall be construed as an original,
but all of which together shall constitute one and the same instrument.
SECTION 4.07 ENTIRE AGREEMENT. THIS WRITTEN SUBORDINATION AGREEMENT
EMBODIES THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE SENIOR CREDITOR AND
THE SUBORDINATE CREDITOR AND SUPERSEDES ALL OTHER AGREEMENTS AND UNDERSTANDINGS
BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. THIS
WRITTEN SUBORDINATION AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENT'S OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
SECTION 4.08 LIMITATIONS ON SUBORDINATION. SENIOR CREDITOR HEREBY
AGREES THAT THE AGREEMENTS OF SUBORDINATE CREDITOR UNDER THIS AGREEMENT ARE
LIMITED SOLELY TO SUBORDINATE CREDITOR'S RIGHTS AGAINST BORROWER UNDER THE
SUBORDINATE GUARANTY. SUBORDINATE CREDITOR HAS NOT, IN ANY WAY, SUBORDINATED, OR
OTHERWISE LIMITED, ITS RIGHTS WITH RESPECT TO EXUS, EXCO OR ANY OTHER PARTY
(OTHER THAN BORROWER) OR ANY ASSETS OF ANY SUCH PERSON, ARISING UNDER THE EXUS
CREDIT AGREEMENT OR ANY DOCUMENT, INSTRUMENT OR AGREEMENT EVIDENCING, SECURING
OR OTHERWISE PERTAINING TO THE EXUS CREDIT AGREEMENT IN ANY WAY.
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<PAGE> 7
WITNESS THE EXECUTION HEREOF, as of the day and year written above.
SUBORDINATE CREDITOR:
NATIONSBANK, N.A.,
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
Address for Subordinate Creditor:
901 Main Street, 64th Floor
Dallas, Texas 75202
SENIOR CREDITOR:
WELLS FARGO BANK (TEXAS), N.A.
By: /s/ ANDREW A. MOY
---------------------------------
Andrew A. Moy, Vice President
Address for Senior Creditor:
1000 Louisiana, 4th Floor
Houston, Texas 77002
Borrower hereby executes this document for the purpose of acknowledging the
terms hereof and agrees to cooperate in the implementation thereof.
BORROWER:
VENUS EXPLORATION, INC.
By: /s/ E. L. AMES, JR.
---------------------------------
Name: E. L. Ames, Jr.
-------------------------------
Title: Chief Executive Officer
------------------------------
Address for Borrower:
1250 N.E. Loop 410, Suite 1000
San Antonio, Texas 78209
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<PAGE> 1
EXHIBIT 10.4
NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION OF THIS NOTE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE, (THE
"ACT") AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR TRANSFERRED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE EFFECT THAT AN
EXEMPTION FROM REGISTRATION THEREUNDER IS AVAILABLE.
7.0% CONVERTIBLE SUBORDINATED NOTE
(the "NOTE")
__________, 1999 $_______________
FOR VALUE RECEIVED, Venus Exploration, Inc., a Delaware corporation
(the "COMPANY"), hereby promises to pay to the order of _____________or his
successor or assigns (the "NOTE HOLDER") at _______________________________the
principal amount of $___________, together with interest thereon calculated from
the date hereof (the "ORIGINAL ISSUE DATE"), in accordance with the provisions
of this Note.
This Note is issued in conjunction with a Piggyback Registration
Agreement dated as of _____________, 1999 among the Company and the Note Holder
(the "PIGGYBACK REGISTRATION AGREEMENT"). Unless otherwise indicated herein,
capitalized terms used in this Note have the same meanings as set forth in the
Piggyback Registration Agreement.
1. Payment of Interest.
(a) Interest will accrue at the rate of seven percent (7.0%) per
annum on the unpaid principal amount of this Note outstanding from time to time.
Interest will accrue at a rate of ten percent (10%) per annum on any interest
not paid on the date on which it is due and payable. Any accrued interest which
for any reason has not theretofore been paid will be paid in full on the date on
which the final principal payment under this Note is paid. Interest will accrue
on any principal payment outstanding from time to time under this Note, until
such time as payment thereof is actually delivered to the Note Holder. Interest
shall be payable at the Company's option in the form of either (i) cash or (ii)
common stock of the Company ("COMMON STOCK"). The number of shares to be issued
for the applicable period will be the whole number resulting from the division
of (i) the amount payable for that period to the Note Holder, by (ii) the
applicable Current Market Value. No fractional shares will be issued, and with
respect to any fraction of a share payable upon any dividend payment in kind,
the Company shall pay to the Note Holder an amount in cash equal to such
fraction multiplied by
<PAGE> 2
the same Current Market Value of a share used to determine the interest payment.
The "CURRENT MARKET PRICE" means, with respect to a security, the last price or
closing price of such security on the principal securities exchange or trading
market located in the United States where such security is listed or traded as
reported by Bloomberg Financial Markets or, if Bloomberg Financial Markets
("BLOOMBERG") is not then reporting last or closing prices of such security, as
reported by Nasdaq, or if neither Bloomberg nor Nasdaq is reporting such prices,
as reported by a reporting service of national reputation comparable to
Bloomberg selected by the Company and reasonably acceptable to the holder of the
Note (an "ALTERNATIVE REPORTING SERVICE"), or if none of the foregoing apply,
the last reported price of such security in the U.S. over-the-counter market on
the electronic bulletin board for such security as reported by Bloomberg or an
Alternative Reporting Service or, if no price is reported for such security by
Bloomberg or an Alternative Reporting Service, the average of the prices of all
market makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. If the Current Market Price cannot be calculated for such
security on any of the foregoing bases, the Current Market Price of such
security shall be the fair market value as reasonably determined by an
investment banking firm selected by the Note Holder and reasonably acceptable to
the Company, with the costs of such appraisal to be borne by the Company. If any
payment is due on a day on which banks in Texas are not open for banking
business (a "BUSINESS DAY"), the Company shall be entitled to delay such payment
until the next Business Day, but interest shall continue to accrue until the
payment is in fact made. Each payment or prepayment hereunder must be paid at
the office of Note Holder at the address set forth herein.
(b) On March 31, 1999 and on each subsequent June 30, September 30,
December 31 and March 31 (all of which dates, together with the dates specified
in Part 2(a) hereof, are "PAYMENT DATES"), all interest which has accrued on the
unpaid principal amount of this Note or on any past due interest on this Note
will become due and payable.
(c) The Company hereby acknowledges that this Note is issued in
conjunction with a series of unsecured convertible subordinated notes of even
date, aggregating a principal balance of $2,000,000, containing identical terms
and conditions, executed by the Company with other persons as the holders and
payees. Such other notes are referred to herein as the "OTHER NOTES" and the
holders thereof as the "OTHER NOTE HOLDERS." It is the intention of the Company
and the Note Holder that, except as otherwise expressly provided herein, this
Note and each of the Other Notes be treated pari passu in all respects involving
the payment of interest due under this Note and each of the Other Notes.
Accordingly, all interest payments made on this Note or on any of the Other
Notes will be paid pro rata based upon the outstanding principal amount of all
such notes.
(d) All agreements and transactions between the Company and the Note
Holder, whether now existing or hereafter arising, whether contained herein or
in any other instrument, and whether written or oral, are hereby expressly
limited so that in no contingency or event whatsoever, whether by reason of
acceleration of the maturity hereof, prepayment, demand for prepayment or
otherwise, shall the amount contracted for, charged or received by
2
<PAGE> 3
the Note Holder from the Company for the use, forbearance or detention of the
principal indebtedness or interest hereof, which remains unpaid from time to
time, exceed the maximum amount permissible under applicable law, it
particularly being the intention of the parties hereto to conform strictly to
the applicable law of usury. Any interest payable hereunder or under any other
instrument relating to the indebtedness evidenced hereby that is in excess of
the legal maximum, shall, in the event of acceleration of maturity, prepayment,
demand for prepayment or otherwise, be automatically, as of the date of such
acceleration, prepayment, demand or otherwise, applied to a reduction of the
principal indebtedness hereof and not to the payment of interest, or if such
excessive interest exceeds the unpaid balance of such principal, such excess
shall be refunded to the Company. To the extent not prohibited by law,
determination of the legal maximum rate of interest shall at all times be made
by amortizing, prorating, allocating and spreading in equal parts during the
period of the full stated term of the indebtedness, all interest at any time
contracted for, charged or received from the Company in connection with the
indebtedness, so that the actual rate of interest on account of such
indebtedness is uniform throughout the term hereof.
2. Payment of Principal on Note.
(a) The unpaid principal amount hereof shall be due and payable in
one lump sum payment, together with any remaining accrued but unpaid interest,
on the Maturity Date of this Note. The term "MATURITY DATE" shall be defined as
____________, 2004; provided, however, upon (i) the occurrence of an event
described in Part 5(e); (ii) the acceleration of any Senior Indebtedness (as
herein defined); (iii) any action by the Company causing it to cease to be
subject to the reporting requirements of Sections 12 or 15(d) of the Securities
Exchange Act of 1934; or (iv) incurring any Senior Indebtedness except in
conformity with the requirements of Part 10, the Note Holder, in any such event,
may by written notice to the Company, declare that the Maturity Date shall be
the date of the consummation or closing or occurrence of such transaction or
event; provided, further, an Other Note Holder who does not so declare, shall be
deemed solely with respect to such accelerated Maturity Date to have waived the
rights and benefits provided in Parts 1(c) and 2(c).
(b) It is the intention of the Company and the Note Holder
that, except as otherwise expressly provided herein, this Note and each of the
Other Notes be treated pari passu in all respects involving the payment of
principal due under this Note and each of the Other Notes. Accordingly, all
principal payments made on this Note or on any of the Other Notes will be paid
pro rata based upon the outstanding principal amount of all such notes.
3. Security and Subordination.
(a) This Note shall be unsecured.
(b) The Company irrevocably covenants and agrees, and the Note
Holder, by his, her or its acceptance thereof, likewise irrevocably
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<PAGE> 4
covenants and agrees, that the payment of the principal of and interest on this
Note is hereby expressly subordinated, to the extent and in the manner
hereinafter set forth, to the prior indefeasible payment and/or cancellation (as
shall be appropriate) in full of all Senior Indebtedness (as hereinafter
defined). The provisions of this Part Three are made for the benefit of the
holders of Senior Indebtedness, and such holders shall, at any time, be entitled
to enforce such provisions against the Company or Note Holder. No holder of any
Senior Indebtedness shall be deemed to owe any fiduciary duty or any other
obligation to any holder of this Note now or at any time hereafter.
(c) No payment on account of principal, premium, if any, or interest
on this Note shall be made if, at the time of such payment or immediately after
giving effect thereto, (i) there shall exist a default in the payment of
principal, premium, if any, or interest with respect to any Senior Indebtedness
or (ii) there shall have occurred an event of default (other than a default in
the payment of principal, premium, if any, or interest) with respect to any
Senior Indebtedness or in the instrument under which the same is outstanding,
permitting the holders thereof to accelerate the maturity thereof, and such
event of default shall not have been cured or waived or shall not have ceased to
exist within the terms of any such Senior Indebtedness. Notwithstanding the
immediately preceding sentence, at such time as any event of default therein
described shall have been cured or waived, all payments due under this Note that
were held in abeyance by reason of such sentence shall be paid within five
business days thereafter, and all future payments called for under other
applicable provisions of this Note shall be payable in accordance with their
terms.
(d)(i) In the event of:
(a) any acceleration of the payment amount due on this Note;
(b) any payment or distribution of assets of the Company of
any kind or character, whether in cash, property or securities of the Company
upon any insolvency, bankruptcy, receivership, liquidation, reorganization,
readjustment, composition or other similar proceeding relative to the Company or
its creditors or its property;
(c) any proceeding for voluntary liquidation, dissolution or
other winding up of the Company whether or not involving insolvency or
bankruptcy proceedings; or
(d) any assignment for the benefit of creditors or any
marshaling of the assets of the Company, then and in any such event,
(A) all Senior Indebtedness (including interest accruing
on such Senior Indebtedness after the date of filing a petition or other
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<PAGE> 5
action commencing any such proceeding) shall first be paid in full, or have
provision made for payment and/or cancellation (as shall be appropriate) in full
to the reasonable satisfaction of the holder of any Senior Indebtedness, before
the holder of this Note is entitled to receive any payment on account of the
principal of or premium, if any, or interest on the indebtedness evidenced by
this Note, and
(B) any payment or distribution of assets of the Company
of any kind or character, whether in cash, property or securities (other than
securities of the Company or any other corporation provided for by a plan of
reorganization or readjustment, provided the rights of the holders of Senior
Indebtedness are not altered by such reorganization or readjustment, the payment
of which is subordinate, at least to the extent provided in this Article Three
with respect to this Note, to the payment of all Senior Indebtedness at the time
outstanding and to the payment of all securities issued in exchange therefor to
the holders of Senior Indebtedness at the time outstanding), to which the holder
of this Note would be entitled except for the provisions of this Part 3, shall
be paid by the liquidating trustee or agent or other person making such payment
or distribution, whether a trustee in bankruptcy, a receiver or liquidating
trustee or other trustee or agent, directly to the holders of Senior
Indebtedness or their representative or representatives or to the trustee or
trustees under any indenture under which any instruments evidencing any of such
Senior Indebtedness may have been issued, ratably according to the aggregate
amounts remaining unpaid on account of the principal of and premium, if any, and
interest on, the Senior Indebtedness held or represented by each, to the extent
necessary to make payment of and/or to cancel (as may be appropriate) in full
all Senior Indebtedness remaining unpaid and/or outstanding (as the case may
be), after giving effect to any concurrent payment or distribution, or provision
therefor, to the holders of such Senior Indebtedness.
(ii) No payments on account of principal of or interest on
this Note shall be made unless full payment of amounts then due for principal of
(including any sinking fund payment), premium, if any, and interest on all
Senior Indebtedness has been made and/or canceled (as may be appropriate) or
otherwise duly provided for to the reasonable satisfaction of each holder of any
Senior Indebtedness.
(iii) In the event and during the continuation of any default
or event of default in respect of any Senior Indebtedness or under any agreement
under which any Senior Indebtedness was issued continuing beyond the period of
grace, if any, specified in such agreement, then, unless
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<PAGE> 6
and until such default shall have been cured or waived or shall have ceased to
exist, no payment shall be made by the Company and no application of funds shall
be made with respect to the principal of or interest on this Note.
(iv) In the event that, notwithstanding the foregoing, any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities (other than securities of the Company or
any other corporation provided for by a plan of reorganization or readjustment,
provided that the rights of the holders of Senior Indebtedness are not altered
by such reorganization or readjustment, the payment of which is subordinate, at
least to the extent provided in this Part 3 with respect to this Note, to the
payment of all Senior Indebtedness at the time outstanding and to the payment of
all securities issued in exchange therefor to the holders of Senior Indebtedness
at the time outstanding), shall be received by the Note Holder during the
continuance of any event specified in this Part 3(c) prohibiting such payment
and before all Senior Indebtedness is paid in full and/or canceled (as may be
appropriate), or provision made for its payment to the reasonable satisfaction
of each holder of any Senior Indebtedness, such payment or distribution (subject
to Part 3(c) shall be immediately paid by the holder hereof over to the holders
of Senior Indebtedness (or their representative or representatives or to the
trustee or trustees under any indenture under which any instruments evidencing
any of such Senior Indebtedness may have been issued), upon their written
request remaining unpaid or unprovided for as provided in the foregoing
provisions of this Part 3(c), for application to the payment of such Senior
Indebtedness until all such Senior Indebtedness shall have been paid in full,
after giving effect to any concurrent payment or distribution, or provision
therefor, to the holders of such Senior Indebtedness.
(v) Subject to the payment in full and/or cancellation (as
may be appropriate) of all Senior Indebtedness and the irrevocable and complete
termination of all commitments and obligations to issue or fund any Senior
Indebtedness (and not before such time), the Note Holder shall be subrogated
equally and ratably with the holders of all Pari Passu Debt to all rights of the
holders of Senior Indebtedness to receive payments or distributions of cash,
property or securities of the Company applicable to the Senior Indebtedness
until the principal of and interest on this Note shall be paid in full; and, for
purposes of such subrogation, no payments or distributions to the holders of
Senior Indebtedness of cash, property or securities distributable or paid over
to the holders of Senior Indebtedness under the provisions hereof to which the
Note Holder or a holder of Pari Passu Debt, or any trustee of Pari Passu Debt,
would be entitled except for the provisions of this Part Three shall, as between
the Company, its creditors other
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<PAGE> 7
than the holders of Senior Indebtedness, and the Note Holder or a holder of Pari
Passu Debt, be deemed to be a payment by the Company to or on account of the
Senior Indebtedness, it being understood that the provisions of this Part Three
are and are intended solely for the purpose of defining the relative rights of
the Note Holder, the holders of Pari Passu Debt and the holders of the Senior
Indebtedness.
(vi) Nothing contained in this Part 3 or elsewhere in this
Note is intended to or shall impair, as between the Company, its creditors other
than the holders of Senior Indebtedness (and the persons and entities committed
or obligated to issue or fund any Senior Indebtedness), and the Note Holder, the
obligation of the Company, which is absolute and unconditional, to pay to the
Note Holder hereof the principal of and premium, if any, and interest hereon, as
and when the same shall become due and payable in accordance with the terms
hereof, or is intended to or shall affect the relative rights of the Note Holder
hereof and other creditors of the Company other than the holders of the Senior
Indebtedness (and the persons and entities committed or obligated to issue or
fund any Senior Indebtedness), nor shall anything in this Note prevent the Note
Holder from exercising all remedies otherwise permitted by applicable law upon
the happening of any Event of Default under this Note, subject to the rights, if
any, under this Part 3 of the holders of Senior Indebtedness (and the persons
and entities committed or obligated to issue or fund any Senior Indebtedness) in
respect of cash, property or securities of the Company received upon the
exercise of any such remedy.
(vii) The Company shall give prompt written notice to the
Note Holder of any event of default under any Senior Indebtedness or any
insolvency, bankruptcy, liquidation, reorganization, readjustment, composition,
dissolution, assignment, marshaling of assets or similar proceedings of the
Company within the meaning of this Part 3(c). Upon any payment or distribution
of assets of the Company referred to in this Part 3, the Note Holder shall be
entitled to rely upon any order or decree made by any court of competent
jurisdiction in which such dissolution, winding up, liquidation or
reorganization proceedings are pending or a certificate of the liquidating
trustee or agent or other person making any distribution to the holder of this
Note for the purpose of ascertaining the persons entitled to participate in such
distribution, the holders of the Senior Indebtedness and other indebtedness of
the Company, the amount thereof or payable thereon, the amount or amounts paid
or distributed thereon and all other facts pertinent thereto or to this Article
Three. If the Note Holder Note determines, in its sole discretion, that further
evidence is required with respect to the right of any person as a holder of
Senior Indebtedness to participate in any payment or distribution pursuant
7
<PAGE> 8
to this Part 3(c), such Note Holder may request such person to furnish evidence
to the reasonable satisfaction of such Note Holder as to the amount of Senior
Indebtedness held by such person, as to the extent to which such person is
entitled to participate in such payment or distribution, and as to other facts
pertinent to the rights of such person under this Part 3, and if such evidence
is not furnished, such Note Holder may defer any payment to such person pending
judicial determination as to the right of such person to receive such payment.
Such Note Holder shall be entitled to rely on the delivery to it of a written
notice by a person representing himself, herself or itself, to be a holder of
Senior Indebtedness (or a trustee on behalf of such holder) to establish that
notice has been given by a holder of Senior Indebtedness or a trustee on behalf
of any such holder. With respect to the holders of Senior Indebtedness, the Note
Holder undertakes to perform or to observe only such of its covenants and
obligations as are set forth in this Part 3, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Note against the Note Holder. The Note Holder shall not be deemed to
owe any fiduciary duty to the holders of Senior Indebtedness and in the absence
of receipt of written request as provided for herein shall not be liable to any
such holder if it shall retain or pay over to any other person, money or assets
to which any holder of Senior Indebtedness shall be entitled pursuant to this
Part 3 or otherwise.
(viii) Without notice to or the consent of the Note Holder,
the holders of the Senior Indebtedness or the persons or entities committed or
obligated to issue or fund any Senior Indebtedness may at any time and from time
to time, without impairing or releasing the subordination herein made, change
the manner, place or terms of payment, or change or extend the time of payment
of or renew or alter the Senior Indebtedness or the commitment or obligation to
issue or fund any Senior Indebtedness, or amend or supplement in any manner any
instrument evidencing the Senior Indebtedness or the commitment or obligation to
issue or fund any Senior Indebtedness, any agreement pursuant to which the
Senior Indebtedness was issued or incurred or any instrument securing or
relating to the Senior Indebtedness or the commitment or obligation to issue or
fund any Senior Indebtedness; release any person liable in any manner for the
payment or collection of the Senior Indebtedness; exercise or refrain from
exercising any rights in respect of the Senior Indebtedness against the Company
or any other person, apply any money or other property paid by any person or
released in any manner to the Senior Indebtedness; accept or release any
security for the Senior Indebtedness; sell, exchange, release or otherwise deal
with any property pledged, mortgaged or otherwise securing Senior Indebtedness;
or exercise or refrain from exercising any rights against the Company or any
other person; all without thereby impairing in any respect the rights of such
holders of Senior Indebtedness as provided in this Part 3.
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<PAGE> 9
(e) In the event that, notwithstanding the provisions of this
Part 3, any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, shall be received by the
Note Holder, which payment or distribution the Note Holder is not entitled to
receive pursuant to this Part 3, such payment or distribution shall be held in
trust for the benefit of, and shall be paid over or delivered to, the holders of
such Senior Indebtedness or their representative or representatives, or to the
trustee or trustees under any indenture pursuant to which any instruments
evidencing any of such Senior Indebtedness may have been issued, as their
respective interests may appear, for application to the payment of all Senior
Indebtedness remaining unpaid to the extent necessary to pay all Senior
Indebtedness in full in accordance with its terms, after giving effect to any
prior or concurrent payment on or distribution to or for the holder of such
Senior Indebtedness.
(f) No right of any present or future holder of any Senior
Indebtedness of the Company to enforce subordination, as herein provided, shall
at any time in any way be prejudiced or impaired by any act or failure to act on
the part of the Company or by any act or failure to act, in good faith, by any
such holder, or by any noncompliance by the Company with the terms, provisions
and covenants of this Note, regardless of any knowledge thereof any such holder
may have or be otherwise charged with.
(g) Subject to the payment in full of all Senior Indebtedness
after an event of default with respect to Senior Indebtedness, the Note Holder
(together with the holders of any other indebtedness of the Company which is not
subordinate in right of payment to this Note and by its terms grants such right
of subrogation to the holders thereof) shall be subrogated to the rights of the
holders of Senior Indebtedness to receive payments or distribution of assets of
the Company made on the Senior Indebtedness until the principal, premium, if
any, and interest on this Note shall be paid in full; and for the purposes of
such subrogation, no payments or distributions to the holders of Senior
Indebtedness of any cash, property or securities to which the Note Holder would
be entitled except for these provisions shall, as between the Company, its
creditors other than the holders of Senior Indebtedness, and the Note Holder, be
deemed to be a payment by the Company to or on account of Senior Indebtedness,
it being understood that these provisions are intended solely for the purpose of
defining the relative rights of the Note Holder, on the one hand, and the
holders of Senior Indebtedness, on the other hand.
(h) Nothing contained in these provisions is intended to or
shall impair as between the Company, its creditors other than the holders of
Senior Indebtedness, and the Note Holder, the obligation of the Company, which
shall be absolute and unconditional, to pay to the Note Holder the principal,
premium, if any, and interest on this Note, as and when the same shall become
due and payable in accordance with its terms, or to affect the relative rights
of the Note Holder and creditors of the Company other than the holders of Senior
Indebtedness, nor shall anything herein or therein prevent the Note Holder from
exercising all
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<PAGE> 10
remedies otherwise permitted by applicable law, upon default, subject to the
rights, if any, under these provisions of the holders of Senior Indebtedness in
respect of cash, property or securities of the Company received upon the
exercise of any such remedy.
(i) Nothing contained in this Part 3 or elsewhere in this
Note, shall, however, affect the obligation of the Company to make, or prevent
the Company from making, at any time, except as provided in this Part 3,
payments of principal of or premium, if any, or interest on this Note.
(j) The Note Holder by his acceptance hereof irrevocably
authorizes and directs the Company on his behalf to take such action as may be
necessary or appropriate to effectuate the subordination provided in this Part 3
and appoints the Company his attorney-in-fact for such purpose.
(k) Notwithstanding anything herein contained to the contrary,
all the provisions of this Note shall, except as otherwise provided herein, be
subject to the provisions of this Part 3, so far as the same may be applicable
thereto.
(l) (i) The term "PARI PASSU DEBT" shall mean any indebtedness
of the Company heretofore or hereafter created which, by the terms of the
instrument by which such indebtedness is created or evidenced, ranks pari passu
in right of payment with this Note and is entitled to like rights of
subrogation.
(ii) The term "SENIOR INDEBTEDNESS" shall mean the
following, whether outstanding on the date hereof or hereafter created,
incurred, assumed or guaranteed, (a) the principal of, premium if any, and
interest on (i) indebtedness of the Company for money borrowed (other than this
Note, but including any indebtedness owed to the Senior Bank Lenders), (ii)
indebtedness of the Company evidenced by bonds, notes, debentures or similar
obligations (other than this Note and any other unsecured note issued in
connection with the acquisition of substantially all of the assets or stock of
an ongoing business by the Company to the sellers of such assets or stock),
(iii) capitalized lease obligations, (iv) indebtedness or obligations incurred,
assumed or guaranteed by the Company in connection with the acquisition or
improvement of any property or asset or the acquisition by it or by a Subsidiary
or any business, (v) indebtedness of others of the kinds described in the
clauses (i), (ii), (iii), and (iv) above, assumed or guaranteed by the Company
or in effect guaranteed by the Company through an agreement to purchase or
otherwise, (vi) obligations which would be classified as liabilities on the
balance sheet of the Company in accordance with generally accepted accounting
principles, evidencing the purchase price for the acquisition of assets of any
kind, tangible or intangible, by the Company, except in the ordinary course of
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<PAGE> 11
business; unless in each case referred to in clauses (i), (ii), (iii), (iv), (v)
and (vi) above, by the terms of the instrument creating or evidencing the
indebtedness or obligation it is expressly provided that such indebtedness is
Pari Passu Debt or Junior Indebtedness under this Note, (b) any other
indebtedness, liability or obligation, contingent or otherwise other than that
arising pursuant to this Note, of the Company (any such indebtedness, liability
or obligation being hereinafter in this definition referred to as an
"Obligation"), and any guaranty, endorsement or other contingent obligation in
respect of any Obligation of another, which is created, assumed or incurred by
the Company after the date of this Note and which, when created, assumed or
incurred, is specifically designated by the Company as Senior Indebtedness for
the purposes hereof in the instrument creating or evidencing the Company's
liability with respect to the Obligations of another and (c) any increases,
refundings, renewals, rearrangements or extensions of and amendments,
modifications and supplements to any indebtedness, liability or obligation
described in clauses (a) or (b) above.
(iii) The term "SENIOR BANK LENDERS" means any commercial
lending institution or group of commercial lending institutions that are or
become parties to the Company's principal working capital, acquisition financing
or long-term debt credit facilities.
(iv) "JUNIOR INDEBTEDNESS" means any indebtedness
expressly subordinated to this Note.
4. Conversion.
(a) The Note Holder shall have the right, at its option, at any time
to convert the then outstanding principal amount of this Note or any portion
thereof into shares of fully paid and nonassessable Common Stock ((calculated as
to each conversion to the nearest 1/100th of a share) at the conversion price of
$1.15 per share, subject to adjustment from time to time as provided in Part 5
of this Note (which price, as most recently so adjusted, is herein called the
"CONVERSION PRICE"). The number of shares of Common Stock to be delivered by the
Company pursuant to a conversion shall be determined by dividing the principal
amount of the Note plus accrued but unpaid interest being converted by the
Conversion Price in effect on the applicable conversion date.
(b) Beginning on the date thirty-six (36) months from the Original
Issue Date, the Company shall have the right, at its option, to convert the
entire outstanding principal balance of the Note into fully paid and
nonassessable shares of Common Stock at the Conversion Price then in effect if,
and only if, the Current Market Price for the Common Stock is a per-share price
(appropriately adjusted for subdivisions and combinations of shares of Common
Stock as provided for in Parts 5(a) and (b) of this Note) equal to or greater
than
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$3.60 per share at the close of twenty-five (25) out of the preceding thirty
(30) consecutive trading days. The Company shall exercise this option by
providing written notice to the Note Holder within five (5) calendar days after
the end of the thirty (30) day consecutive trading day period. Upon the exercise
of such option by the Company, this Note shall be converted automatically
without any further action on behalf of the Note Holder, whether or not this
Note is surrendered to the Company; provided, however, the Company shall not be
obligated to issue certificates evidencing the shares of Common Stock issuable
upon such conversion unless this Note is surrendered to the Company as provided
in Part 4(f).
(c) If at any time during the term of this Note, the Company
issues a Preferred Term Security (as that term is defined in Part 4(d) below),
the Company shall promptly notify the Note Holder thereof and the Note Holder
shall have the right, at his option, exercisable within 10 days of notice of
such issuance, to exchange this Note for a new note representing all unpaid
principal and accrued but unpaid interest under this Note, but having such other
terms and conditions as are at least as favorable to the Note Holder as those
set forth in the Preferred Term Security.
(d) A "PREFERRED TERM SECURITY" shall be defined as a
convertible subordinated note or other similar security bearing any of the
following terms and conditions when compared with this Note: (i) a higher stated
interest rate; (ii) a higher premium upon early redemption by the Company; (iii)
a lower per-share conversion price; or (iv) a longer period before which the
Company can cause a mandatory conversion.
(e) In order to convert this Note or any portion thereof, the
Note Holder shall surrender this Note at the principal office of the Company
accompanied by written notice to the Company at such office stating (i) in the
case of conversion pursuant to Part 4(a) hereof, that the holder elects to
convert this Note or, if less than the entire principal amount of this Note is
to be converted, the portion thereof to be converted and (ii) the name or names
(with address) in which the certificate or certificates for shares of Common
Stock issuable on such conversion shall be issued. This Note shall be
accompanied by proper assignment thereof to the Company or in blank for transfer
if the Common Stock is to be issued in a name other than that on the face of
this Note. In the event this Note is converted in part only, upon such
conversion the Company shall execute and deliver to the Note Holder, at the
expense of the Company, a new Note in principal amount equal to the unconverted
portion of such Note.
(f) As promptly as practicable, and in any event within ten
days, after the receipt of such notice and the surrender of this Note, the
Company shall issue, at its expense, and shall deliver to the Note Holder, or on
his written order, at the principal office of the Company (i) a certificate or
certificates for the number of shares of Common Stock issuable upon the
conversion of this Note (or specified portion thereof), and (ii) cash in lieu of
scrip as provided herein. Such conversion shall be deemed to have been effected
immediately prior to the close of business on the date (the "CONVERSION DATE")
on which the Company shall have received both such notice and the surrendered
Note, in the case of conversion pursuant to Part 4(a) hereof, and at such time
the rights of the Note Holder with respect to the portion of this
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<PAGE> 13
Note as shall have been converted shall cease, and the person or persons in
whose name or names any certificate or certificates for shares of Common Stock
shall be issuable upon such conversion shall be deemed to have become the holder
or holders of record of the shares represented thereby.
(g) Upon conversion of this Note, all unpaid accrued interest
to the Conversion Date shall be paid to the Note Holder with respect to the
portion of the Note converted. No payment or adjustment shall be made by or on
behalf of the Company on account of any dividends on the Common Stock issued
upon such conversion which were declared for payment to holders of Common Stock
of record as of a date prior to the Conversion Date.
(h) No fractional shares of Common Stock shall be issued upon
any conversion of this Note. In lieu of any fraction of a share of Common Stock
to which any Note Holder would otherwise be entitled upon conversion of this
Note or any portion hereof, the Company shall pay a cash adjustment for such
fraction in an amount equal to the same fraction of the Conversion Price per
share of Common Stock at the close of business on the Conversion Date. Common
Stock delivered to the Note Holder shall contain a restrictive legend under the
Securities Act of 1933 ("SECURITIES ACT") unless at the time of issuance: (i)
the sale or transfer of such Common Stock is covered by an effective
Registration Statement and the Note Holder or other person holding or entitled
to receive such Common Stock has represented to the Company, in the related
Conversion Notice or otherwise in writing, that such Note Holder has resold or
transferred such Common Stock in accordance with the terms of the Prospectus
relating to such Registration Statement, (ii) such Common Stock can and has been
sold pursuant to Rule 144 ("RULE 144") under the Securities Act, and a
registered broker-dealer provides to the Company a customary broker's Rule 144
letter and such Note Holder delivers to the Company a customary seller's
representation letter and a copy of any Form 144 that may have been required to
be filed by such Note Holder pursuant to Rule 144, or (iii) such Common Stock is
eligible for resale under Rule 144(k) or any successor rule or provision.
5. Adjustments to Conversion Price.
(a) If at any time or from time to time after the Original Issue
Date, the Company shall effect a subdivision of the outstanding Common Stock,
the Conversion Price then in effect shall be proportionately decreased, and
conversely, if the Company shall at any time or from time to time after the
Original Issue Date combine the outstanding shares of Common Stock, the
Conversion Price then in effect shall be proportionately increased. Any
adjustment under this Part 5(a) shall become effective at the close of business
on the date the subdivision or combination becomes effective.
(b) In the event the Company at any time or from time to time after
the Original Issue Date shall make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in additional shares of Common Stock, then and in
each such event the Conversion Price then in effect shall be
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<PAGE> 14
decreased as of the time of such issuance or, in the event such a record date
shall have been fixed, as of the close of business on such record date, by
multiplying the Conversion Price then in effect by a fraction, the numerator of
which shall be the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date, and the denominator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date plus the number of shares
of Common Stock issuable in payment of such dividend or distribution; provided,
however, if such record date shall have been fixed and such dividend is not
fully paid or if such distribution is not fully made on the date fixed therefor,
the Conversion Price shall be recomputed accordingly as of the close of business
on such record date and thereafter the Conversion Price shall be adjusted
pursuant to this Part 5(b) as of the time of actual payment of such dividends or
distributions.
(c) In the event the Company at any time or from time to time after
the Original Issue Date shall make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities of the Company other than shares of
Common Stock, then and in each such event provision shall be made so that the
Note Holder shall receive upon conversion hereof, in addition to the number of
shares of Common Stock receivable thereupon, the amount of securities of the
Company that it would have received had it converted this Note into Common Stock
on the date of such event and had thereafter, during the period from the date of
such event to and including the Conversion Date, retained such securities,
giving application to all adjustments called for during such period under this
Part 5.
(d) If the Common Stock issuable upon the conversion of this Note
shall be changed into the same or a different number of shares of any class or
classes of stock, whether by reorganization, reclassification or otherwise
(other than a subdivision, combination, stock dividend or a reorganization,
merger, consolidation or sale of assets provided for elsewhere in this Part 5),
then and in each such event the Note Holder shall have the right thereafter to
convert this Note into the kind and amount of shares of stock and other
securities and property receivable upon such reorganization, reclassification or
other change, by holders of the number of shares of Common Stock into which this
Note might have been converted immediately prior to such reorganization,
reclassification or change, all subject to further adjustment as provided
herein.
(e) If at any time or from time to time there shall be a
reorganization of the Company (other than a subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this Part 5) or
a merger or consolidation of the Company with or into another corporation or
entity, or the sale of all or substantially all of the Company's properties and
assets to any other person, then, as a part of such reorganization, merger,
consolidation or sale, provision shall be made so that the Note Holder shall
thereafter be entitled to receive upon conversion of this Note, the number of
shares of stock or other securities or property of the Company, or of the
successor entity resulting from such merger of consolidation or sale, to which a
holder of Common Stock issuable upon conversion would
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<PAGE> 15
have been entitled on such reorganization, merger, consolidation or sale. In any
such case, appropriate adjustment shall be made in the application of the
provisions of this Part 5 with respect to the rights of the Note Holder after
the reorganization, merger, consolidation or sale to the end that the provisions
of this Part 5 (including adjustment of the Conversion Price then in effect and
the number of shares issuable upon conversion of this Note) shall be applicable
after that event as nearly equivalent as may be practicable.
(f) If at any time or from time to time after the Original Issue
Date, the Company shall issue or sell any shares of Common Stock, securities
convertible into Common Stock, or rights to acquire Common Stock (other than:
(i) as a dividend or other distribution as provided in Part 5(b); (ii) upon a
subdivision or combination as provided in Part 5(a); (iii) pursuant to the
Company's 1997 Incentive Plan providing for an aggregate maximum of 1,500,000
shares of Common Stock; or (iv) pursuant to warrants, rights or options to
purchase Common Stock outstanding as of the Original Issue Date) for a
consideration per share for such Common Stock less than the Conversion Price in
effect immediately prior to such issue or sale, then upon such issue or sale the
Conversion Price shall be reduced to a price equal to the consideration per
share for which such shares of Common Stock or other securities or rights are
sold, such price being determined in accordance with Part 5(g)(1), below, to the
extent applicable. No adjustment of the Conversion Price, however, shall be made
in an amount less than one cent per share, but any lesser adjustment shall be
carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustments so carried forward,
shall amount to one cent per share or more.
(g) For the purpose of making any adjustment in the Conversion Price
pursuant to this Part 5:
(1) In the event at any time after the Original Issue Date the
Company shall grant any rights to subscribe for, or any rights or options
to purchase, Common Stock or any stock or other securities convertible
into or exchangeable for Common Stock (such convertible or exchangeable
stock or securities being herein called "CONVERTIBLE SECURITIES"), whether
or not such rights or options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such rights
or options or upon conversion or exchange of such Convertible Securities
(determined by dividing (X) the total amount, if any, received or
receivable by the Company as consideration for the granting of such rights
or options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of such rights or options, plus,
in the case of any such rights or options which relate to such Convertible
Securities, the minimum aggregate amount of additional consideration, if
any, payable upon the issue or sale of such Convertible Securities and
upon the conversion or exchange thereof, by (Y) the total maximum number
of shares of Common Stock issuable upon the exercise of such rights or
options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such rights or options) shall be
less than the Conversion Price in effect immediately
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<PAGE> 16
prior to the time of the granting of such rights and options, then the
total maximum number of shares of Common Stock issuable upon the exercise
of such rights or options or upon conversion or exchange of the total
maximum amount of such Convertible Securities issuable upon the exercise
of such rights or options shall (as of the date of granting of such rights
or options) be deemed to be outstanding and to have been issued for such
price per share. Except as provided in Part 5(h) no further adjustments of
the Conversion Price shall be made upon the actual issue of such Common
Stock or of such Convertible Securities upon exercise of such rights or
options or upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities.
(2) In case at any time after the Original Issue Date the
Company shall issue or sell any Convertible Securities, whether or not the
rights to exchange or convert thereunder are immediately exercisable, and
the price per share for which Common Stock is issuable upon such
conversion or exchange (determined by dividing (X) the total amount
received or receivable by the Company as consideration for the issue or
sale of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the
conversion or exchange thereof, by (Y) the total maximum number of shares
of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the Conversion Price in effect
immediately prior to the time of such issue or sale, then the total
maximum number of shares of Common Stock issuable upon conversion or
exchange of all such Convertible Securities shall (as of the date of the
issue or sale of such Convertible Securities) be deemed to be outstanding
and to have been issued for such price per share, provided that no further
adjustments of the Conversion Price shall be made upon the actual issue of
such Common Stock upon conversion or exchange of such Convertible
Securities, and if any such issue or sale of such Convertible Securities
is made upon exercise of any rights to subscribe for or to purchase or any
rights to subscribe for or to purchase or any option to purchase any such
Convertible Securities for which adjustments of the Conversion Price have
been or are to be made pursuant to other provisions of this Part 5(g)(2),
no further adjustment of the Conversion Price shall be made by reason of
such issue or sale.
(3) In case at any time any shares of Common Stock or
Convertible Securities or any rights or options to purchase any such
Common Stock or Convertible Securities shall be issued or sold for cash,
the consideration received therefor shall be deemed to be the amount
received by the Company therefor, after deduction therefrom of any
finder's fees incurred or any underwriting commissions or concessions or
discounts paid or allowed by the Company in connection therewith. In case
any shares of Common Stock or Convertible Securities or any rights or
options to purchase any such Common Stock or Convertible Securities shall
be issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company shall be deemed to
be the fair value of such consideration as determined by the board of
directors of the Company, after deduction therefrom of any finder's fees
incurred or any underwriting commissions or concessions or discounts paid
16
<PAGE> 17
or allowed by the Company in connection therewith. In case any shares of
Common Stock or Convertible Securities or any rights or options to
purchase any such Common Stock or Convertible Securities shall be issued
in connection with any merger of another corporation into the Company, the
amount of consideration therefor shall be deemed to be the fair value of
the assets of such merged corporation as determined by the board of
directors of the Company after deducting therefrom all cash and other
consideration (if any) paid by the Company in connection with such merger.
(4) The number of shares of Common Stock outstanding at any
given time shall not include shares owned or held by or for the account of
the Company, and the disposition of any such shares shall be considered an
issue or sale of Common Stock for the purposes of Part 5(g).
(h) If the purchase price provided for in any right or option
referred to in Part 5(g)(1) or the rate at which any Convertible Securities
referred to in Parts 5(g)(1) or (2) are convertible into or exchangeable for
Common Stock, shall change or a different purchase price or rate shall become
effective at any time or from time to time (other than under or by reason of
provisions designed to protect against dilution), then, upon such change
becoming effective, the Conversion Price then in effect shall be decreased, if
applicable, to such Conversion Price as would have obtained had the adjustments
made upon the granting or issuance of such rights or options or Convertible
Securities been made upon the basis of (A) the issuance of the number of shares
of Common Stock theretofore actually delivered upon the exercise of such options
or rights or upon the conversion or exchange of such Convertible Securities and
the total consideration received therefor, and (B) the granting or issuance at
the time of such change of any such options, rights or Convertible Securities
then still outstanding for the consideration, if any, received by the Company
therefor and to be received on the basis of such changed price. If the purchase
price provided for in any such right or option, or the rate at which any such
Convertible Securities are convertible into or exchangeable for Common Stock,
shall change at any time under or by reason or provisions with respect thereto
designed to protect against dilution, then in case of the delivery of Common
Stock upon the exercise of any such right or option or upon conversion or
exchange of any such Convertible Security, the Conversion Price then in effect
hereunder shall forthwith be decreased, if applicable, to such Conversion Price
as would have obtained had the adjustments made upon the issuance of such right
or option or Convertible Security been made upon the basis of the issuance of
(and the total consideration received for) the shares of Common Stock delivered
as aforesaid.
(i) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock or shares of its Common Stock then
owned or held by or for the account of the Company, solely for the purpose of
delivery upon conversion of this Note as herein provided, such number of shares
of Common Stock as shall then be deliverable upon the conversion of this Note.
All shares of Common Stock which shall be so deliverable shall be duly and
validly issued and fully paid and nonassessable.
(j) Before taking any action which would cause an adjustment
reducing the
17
<PAGE> 18
Conversion Price at any time in effect below the then par value of the shares of
Common Stock issuable upon conversion of this Note, the Company shall take any
corporate action which may be necessary in order that the Company may validly
and legally issue fully paid and nonassessable shares of such Common Stock at
such Conversion Price as so adjusted.
(k) Whenever the Conversion Price is adjusted, as herein provided,
the Company shall send to the Note Holder a certificate of the Chief Financial
Officer of the Company setting forth the Conversion Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment. Such
certificate shall be presumptive or rebuttable evidence of the correctness of
such adjustment only if such calculations are confirmed at the Company's expense
by a firm of independent public accountants (who may be the accountants
regularly employed by the Company).
(l) In case: (i) the Company shall declare a dividend (or any other
distribution) on its Common Stock, (ii) the Company shall authorize the granting
to holders of Common Stock of rights to subscribe for or purchase any shares of
capital stock of any class or of any other rights, (iii) of any capital
reorganization or reclassification of the capital stock of the Company or of any
consolidation or merger of the Company with another corporation, or of the sale
of all or substantially all of its assets to another entity which is to be
effected in such a way that holders of Common Stock shall be entitled to receive
stock, securities or other assets with respect to or in exchange for Common
Stock, (iv) of the voluntary or involuntary dissolution, liquidation or winding
up of the Company, then the Company shall promptly send to the holder or this
Note at least 14 days prior to the applicable record date hereinafter specified,
a notice stating (A) the date on which a record is to be taken for the purpose
of such dividend or distribution of rights, or, if a record is not to be taken,
the date as of which the holders of Common Stock of record would be entitled to
such dividend or distribution of rights, or (B) the date on which such capital
reorganization, reclassification, consolidation, merger, sale dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that the holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other assets
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up.
6. Redemption by Company.
(a) Beginning on the second anniversary of the Original Issue Date,
the Company shall have the right, at its option, to redeem this Note for cash.
The redemption price shall be the principal amount of this Note outstanding upon
redemption, plus accrued but unpaid interest, plus a redemption premium
calculated during the twenty-fifth month of the term hereof as an amount
initially equal to eighteen percent (18%) per annum, compounded annually from
the Original Issue Date to the date of redemption (such 18% or lesser percent to
include, however, all accrued interest at the stated rate of 7% per annum to the
date of redemption, whether or not paid); provided, however, such 18% initial
amount shall be reduced by one
18
<PAGE> 19
percent (1%) per month commencing at the twenty-sixth month and continuing with
a like reduction of one percent (1%) per month at the beginning of each
successive month thereafter.
(b) Redemption shall be effective under this Part 6 thirty (30) days
following the date the Company provides written notice to the Note Holder of its
election to redeem the Note; provided, however, the Note Holder shall be
entitled to convert the Note in accordance with other applicable terms hereof at
any time during such thirty (30) day period beginning upon the Note Holder's
receipt of written notice of redemption from the Company, and any adjustments to
the Conversion Price provided by Part 5 hereof shall be given effect, up to and
including the date on which the Note Holder converts.
(c) If the Company redeems this Note as herein provided, it shall
also offer to redeem each of the Other Notes, except to the extent any of the
Other Note Holders decline.
7. Use of Proceeds. The Company hereby covenants that the proceeds of
this Note will not be used for purposes other than general corporate purposes.
8. Right of First Offer.
(a) Except as authorized by Part 8(c) below, whenever the Note
Holder desires to sell the Note, the Note Holder shall first give written notice
(the "ROFO NOTICE") to the Company to such effect, specifying that the Note
Holder wishes to sell the Note and the terms (including the consideration) upon
which the Note Holder proposes to agree to sell the Note. Upon receipt of the
ROFO Notice, the Company (pursuant to the vote of a majority of the
disinterested members of the Board of Directors) shall have the first right and
option to purchase the Note for cash at the price specified in the ROFO Notice,
exercisable for 15 business days after receipt of the ROFO Notice. Failure of
the Company to respond to the ROFO Notice within such 15-day period shall be
deemed to constitute a notification to the Note Holder of the Company's decision
not to exercise its right and option to purchase the Note under this Part 8(a).
If the Company elects not to purchase the Note, the Note Holder may sell the
Note within 90 days to any person on substantially the same terms and for the
same or greater consideration as the Note Holder offered the Company in the ROFO
Notice. The right of first offer provisions of this Part 8 do not apply to any
shares of Common Stock issued upon conversion of the Note.
(b) If the consideration for the sale of the Note includes non-cash
consideration, the dollar value of such non-cash consideration shall be its Fair
Market Value as determined by a majority of the disinterested members of the
Board of Directors of the Company (the "FAIR MARKET VALUE"). For the purpose of
determining the Fair Market Value, the Company and the Note Holder shall each
select a qualified appraiser as soon as possible after the end of the 30-day
period to appraise the Fair Market Value. Each of the two appraisers shall, as
soon as reasonably possible thereafter select a third appraiser and the average
of the two appraised values closest in value shall be the Fair Market Value. All
costs of the appraisal shall be paid by the Company.
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<PAGE> 20
(c) Notwithstanding the preceding provisions of this Part 8, the
Note Holder may transfer the Note free of any restrictions and requirements of
this Part 8 to his parents, spouse or children, or to a trust, partnership or
other business entity for the exclusive benefit of the Note Holder or the Note
Holder's parents, spouse or children; provided, however, that the provisions of
this Part 8 shall remain in full effect in respect of any disposition by such
successor Note Holder.
9. Events of Default.
For purposes of this Note, an Event of Default will be deemed to
have occurred if:
(a) the Company fails to pay when due the full amount of any
principal or interest on the Note at maturity or by acceleration or otherwise
and such failure continues for more than three business days;
(b) the Company fails to perform or observe any other material
covenant or agreement set forth herein;
(c) the Company fails to make any payment when due on any other
indebtedness or security or any event shall occur or any condition shall exist
in respect of any such indebtedness or security, or under any agreement securing
or relating to any such indebtedness or security, the affect of which is to
cause any holder of such indebtedness or security or a trustee to cause the
acceleration of any such indebtedness or security. As used herein, the term
"SECURITY" as the meaning given such term under the Securities Act;
(d) any representation or warranty contained in this Note, or any
information contained in filings made as of the Original Issue Date by the
Company with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, are false or misleading in any material respect on the
date made or furnished;
(e) the Company makes an assignment for the benefit of creditors or
admits in writing its inability to pay its debts generally as they become due;
or an order, judgment or decree is entered adjudicating the Company bankrupt or
insolvent; or the Company petitions or applies to any tribunal for the
appointment of a trustee, receiver or liquidator of the Company or of any
substantial part of the assets of the Company, or commences any proceeding under
any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction; or any such petition or
application is filed, or any such proceeding is commenced against the Company
and either (X) the Company takes any action indicating its approval thereof,
consent thereto, or acquiescence therein or (Y) such petition, application or
proceeding is not dismissed within 45 days;
(f) a judgment not covered by insurance, which, with other
outstanding
20
<PAGE> 21
judgments undischarged against the Company, exceeds in the aggregate $25,000, is
rendered against the Company and, within ten days after entry thereof, such
judgment is not discharged or satisfied or execution thereof stayed pending
appeal, or within ten days after the expiration of any such stay, such judgment
is not discharged or satisfied; or
If an Event of Default of the type described in Part 9(b) above has
occurred and continues for a period of 15 days, or if any other Event of Default
has occurred, the Note Holder may demand (by written notice delivered to the
Company) immediate repayment of all or any portion of the principal amount
hereof and payment of all accrued and unpaid interest hereon. If any Event of
Default exists, the Note Holder will also have any other rights which such
holder may have been afforded under any contract or agreement at any time and
any other rights which such holder may have pursuant to applicable law.
10. Indebtedness. The Company warrants and represents to the Note
Holder that as of the Original Issue Date, the Company is not in default under
any indebtedness, including without limitation any Senior Indebtedness. Without
the prior written consent of the Note Holder, the Company agrees after the
Original Issue Date and continuing until this Note is paid or converted in full
not to incur any Senior Indebtedness other than indebtedness incurred from time
to time under the Company's senior secured credit facility with Wells Fargo Bank
(Texas), N.A. or any successor facility thereto; provided, however, any such
successor facility shall not provide for maximum draws in excess of the maximum
amount provided as of the Original Issue Date under the Wells Fargo Bank
(Texas), N.A. facility.
11. Note Holder's Representations and Warranties.
(a) Investment Purpose. Note Holder is acquiring the Note to be
issued and the Common Stock issuable to it hereunder (collectively, the
"Securities") for its own account for investment only and not with a view
towards, or for resale in connection with, the public sale or distribution
thereof, except pursuant to sales registered or exempted under the Act;
provided, however, that by making the representations herein, such Note Holder
does not agree to hold any of the Securities for any minimum or other specific
term and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption under
the Act.
(b) Accredited Investor Status. Note Holder is an "accredited
investor" as that term is defined in Rule 501(a) of Regulation D promulgated
under the Act.
(c) Reliance on Exemptions. Note Holder understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of, and
Note Holder's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of Note Holder set forth herein in order to
determine the availability of such exemptions and the eligibility of Note Holder
to acquire the Securities.
21
<PAGE> 22
(d) Information. Note Holder and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by Note Holder. Note Holder and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by Note Holder or
its advisors, if any, or its representatives shall modify, amend or affect Note
Holder's right to rely on the completeness and accuracy of the materials
provided to Note Holder by or on behalf of the Company with respect to the
transactions contemplated hereby or on the Company's representations and
warranties contained in this Agreement. Note Holder understands that its
investment in the Securities involves a high degree of risk. Note Holder has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its acquisition of the
Securities.
(e) No Governmental Review. Note Holder understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
(f) Transfer or Resale. Note Holder understands that, except as
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the Act or any state securities laws, and may
not be offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) Note Holder shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect that the
Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, (C) Note Holder
provides the Company with reasonable assurance that the Securities can be sold,
assigned or transferred pursuant to Rule 144 promulgated under the Act (or a
successor rule thereto) ("RULE 144"); (ii) any sale of the Securities made in
reliance on Rule 144 may be made only in accordance with the terms of Rule 144
and further, if Rule 144 is not applicable, any resale of the Securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the Act) may
require compliance with some other exemption under the Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register such Securities under the Act or any
state securities laws or to comply with the terms and conditions of any
exemption thereunder, or (D) such transferee or assignee is an affiliate
controlled by Note Holder.
(g) Residency. Note Holder is a resident of Texas.
12. Amendment. This Note may be amended by the Company only if the
Company has obtained the written consent of the Note Holder.
13. Cancellation. After all principal and accrued interest at any time
owed on this
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<PAGE> 23
Note has been paid in full, this Note will be surrendered to the
Company for cancellation and will not be reissued.
14. Waiver of Notice, etc. The Company hereby waives presentment,
demand, notice, protest and all other demands and notice in connection with the
delivery, acceptance, performance and enforcement of this Note, and assents to
extension of the time of payment or forbearance or other indulgence without
notice.
15. Collection Costs. In addition to and not in limitation of the
foregoing, the Company further agrees, subject only to any limitation imposed by
applicable law, to pay all reasonable expenses, including reasonable attorneys'
fees and legal expenses, incurred by the Note Holder upon the collection of this
Note and any amounts payable hereunder which are not paid when due.
16. Governing Law; Venue. All questions concerning the construction,
validity and interpretations of this Note will be governed by the internal laws,
and not the law of conflicts, of the State of Texas. It is the intention of the
parties that proper venue for any action, suite or proceeding arising pursuant
to this Agreement or any exhibit hereto or in connection with the transactions
contemplated herein or therein shall be in Bexar County, Texas. Each party
agrees that any such action, suit or proceeding shall be brought before a state
or federal court sitting in the City of San Antonio, Bexar County, Texas and
waives any objection to venue in such court. Each party waives the right to
demand a jury in any action, suit or proceeding arising pursuant to this
Agreement or any exhibit hereto or in connection with the transactions
contemplated herein or therein.
IN WITNESS WHEREOF, the Company has executed and delivered this Note on
__________ ___, 1999.
VENUS EXPLORATION, INC.
By:
Eugene L. Ames, Jr.
Title: Chairman & Chief Executive Officer
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<PAGE> 24
7% Convertible Subordinated Noteholders
<TABLE>
<CAPTION>
Noteholder Principal Amount of Note
- ---------- ------------------------
<S> <C>
Betty Kelso $100,000
Robert A. Buschman $ 50,000
James Gorman $100,000
Tanager Investments LLC $200,000
Michael Little $250,000
L. Lowry Mays $300,000
</TABLE>
<PAGE> 1
EXHIBIT 10.5
PIGGYBACK REGISTRATION AGREEMENT
Venus Exploration, Inc., a Delaware corporation (the "COMPANY"),
and_____________, an individual residing in ___________ County, Texas, (the
"NOTE HOLDER"), hereby mutually agree and covenant to be bound in accordance
with the provisions of this Piggyback Registration Agreement (the "PIGGYBACK
REGISTRATION AGREEMENT").
This Agreement is executed in conjunction with a 7.0% Convertible
Subordinated Note dated as of ____________, 1999 among the Company and the Note
Holder (the "NOTE"), and this is the Piggyback Registration Agreement referred
to in the Note. Unless otherwise indicated herein, capitalized terms used in
this Piggyback Registration Agreement have the same meanings as set forth in the
Note; provided, however, the term "NOTE HOLDER" as used herein shall include the
original Note Holder, any person who subsequently becomes a Note Holder, and any
person holding shares of Common Stock issuable upon conversion of the Note.
1. Piggyback Registration Rights.
(a) If at any time the Company proposes to register any shares
of Common Stock on any form for the registration of securities under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), whether or not for
its own account (other than a registration form solely relating to: (i) a
registration of a stock option, stock purchase or compensation or incentive plan
or of stock issued or issuable pursuant to any such plan, or a dividend
investment plan; (ii) a registration of securities proposed to be issued in
exchange for securities or assets of, or in connection with a merger or
consolidation with another corporation, or (iii) a registration of securities
proposed to be issued in exchange for the other securities of the Company), in a
manner which would permit registration of shares of the Company?s Common Stock
owned by the Note Holder (the "REGISTRABLE SECURITIES") for sale to the public
under the Securities Act (a "PIGGYBACK REGISTRATION"), it will at such time give
prompt written notice to the Note Holder of its intention to do so and of the
Note Holder's rights under this Part 1. Upon the written request of the Note
Holder made within 20 days after the giving of any such notice (which request
shall specify the Registrable Securities intended to be disposed of by the Note
Holder and the intended method of disposition thereof), the Company will include
in the Registration Statement the Registrable Securities which the Company has
been so requested to register by the Note Holder.
(b) If, at any time after giving written notice of its
intention to register any securities but prior to the effective date of the
related Registration Statement filed in connection with such registration, the
Company shall determine for any reason not to register such securities the
Company may, at its election, give written notice of such determination to the
Note Holder and thereupon, shall be relieved of its obligation to register any
Registrable Securities in connection with such registration.
<PAGE> 2
(c) If a Piggyback Registration requested pursuant to this
Part 1 involves an underwritten offering and the Note Holder requests to have
Registrable Securities included in the Company's registration, then: (i) the
Note Holder must sell his Registrable Securities to the underwriters selected by
the Company on the same terms and conditions as apply to other selling
shareholders; and (ii) not later than the time of final pricing of any firm
commitment, underwritten offering or, for any other offering, not later than
three Business Days prior to the effectiveness of the Registration Statement
filed in connection with such registration, the Note Holder may elect in writing
not to have his Registrable Securities included in connection with such
registration.
(d) The Company will pay all registration expenses in
connection with each registration of Registrable Securities requested pursuant
to this Part 1, except for the fees and disbursements of separate counsel, if
any, retained by the Note Holder and underwriting fees, discounts and
commissions and transfer taxes, if any, relating to the Registrable Securities
being registered by the Note Holder.
(e) If a registration pursuant to this Part 1 involves an
underwritten offering and the managing underwriter advises the Company in
writing that, in its opinion, the number of shares which the Holders of
Registrable Securities and any other persons participating in such registration
intend to include in such offering (the "SELLING SHAREHOLDERS") would have an
adverse effect on such offering, including a decrease in the price at which such
securities can be sold, then the securities to be included in the offering will
include (i) first the securities that the Company proposes to register for its
own account, and (ii) second, to the extent that additional securities can be
registered, in the opinion of the underwriter, the Registrable Securities that
the Note Holder and the Other Note Holders propose to register and the
securities any Selling Shareholders propose to register, reduced pro rata among
the Note Holder, the Other Note Holders and the other Selling Shareholders to
the extent necessary to reduce the total amount of securities to be included in
such offering to the amount recommended by such managing underwriter.
2. Future Grants of Registration Rights. The Company shall not grant
any new registration rights, the effect of which would be to adversely impact
the rights of the Note Holders under this Agreement, including the rights of the
Note Holders under Section 1(e).
3. Duration of Piggyback Registration Rights. The registration rights
granted to the Note Holder by Part 2 shall survive the conversion of the Note
into shares of Company Common Stock.
4. Registration Procedures. If and whenever the Company is required to
cause the registration of any Registrable Securities under the Securities Act as
provided herein, the Company will as expeditiously as practicable:
(a) prepare and file with the SEC a Registration Statement or
Registration Statements relating to the registration of the Registrable
Securities on an appropriate form under
2
<PAGE> 3
the Securities Act, and use its best efforts to cause such Registration
Statements to become effective; provided that before filing a Registration
Statement or prospectus or any amendment or supplement thereto, including,
without limitation, documents incorporated therein by reference after the
initial filing of any Registration Statement, the Company will furnish to the
Note Holder and the underwriters, if any, copies of all such documents proposed
to be filed, which documents will be subject to the review of the Note Holder
and the underwriters;
(b) prepare and file with the SEC such amendments and
post-effective amendments to a Registration Statement as may be necessary to
keep such Registration Statement effective for the period necessary to effect
the distribution of the Registrable Securities being registered, but in no event
shall such period exceed 90 days; cause the related Prospectus to be
supplemented by any required Prospectus supplement, and as so supplemented to be
filed pursuant to Rule 424 under the Securities Act or any successor provision
thereto; and comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such Registration Statement during
such period in accordance with the intended plan of distribution by the sellers
thereof set forth in such Registration Statement or amendment or supplement to
such Prospectus;
(c) notify the selling Note Holder and the managing
underwriters, if any, promptly, and (if requested by any such Person) confirm
such notification in writing: (i) when a Prospectus or any Prospectus supplement
or post-effective amendment has been filed, and, with respect to a Registration
Statement or any post-effective amendment, when the same has become effective;
(ii) of any request by the SEC for the Company to file amendments or supplements
to a Registration Statement or related Prospectus or for additional information;
(iii) of the issuance by the SEC of any order suspending the effectiveness of a
Registration Statement or the initiation of any proceedings for that purpose;
(iv) if at any time the representations and warranties of the Company
contemplated by Part 3(n) below cease to be true and correct; (v) of the receipt
by the Company of any notification with respect to the suspension of the
qualification of any of the Registrable Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose; and (vi) of
the happening of any event that makes any statement made in the Registration
Statement, the Prospectus or any exhibit thereto or document incorporated
therein by reference untrue or which requires the making of any change in the
Registration Statement or Prospectus so that they will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(d) use its best efforts to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement at the earliest
possible moment;
(e) if reasonably requested by the managing underwriters,
immediately incorporate in a Prospectus supplement or post-effective amendment
to a Registration Statement such information as the managing underwriters
believe (on advice of counsel), should be included therein as required by
applicable law relating to such sale of Registrable Securities, including,
without limitation, information with respect to the purchase price being paid
for the Registrable Securities by such underwriters and with respect to any
other terms of the offering;
3
<PAGE> 4
and make all required filings of such Prospectus supplement or post-effective
amendment as soon as notified of the matters to be incorporated in such
Prospectus supplement or post-effective amendment;
(f) furnish to the Note Holder and each managing underwriter,
without charge, at least one signed copy or reproduced counterpart of the
Registration Statement and any post-effective amendment thereto including,
without limitation, financial statements and schedules, all documents
incorporated therein by reference and all exhibits (including those incorporated
by reference);
(g) deliver to the Note Holder and the underwriters, if any,
without charge, as many copies of the Prospectus or Prospectuses (including each
preliminary prospectus) and any amendment or supplement thereto as such Persons
may request. The Company consents to the use of such Prospectus or any
supplement thereto by the Note Holder and the underwriters, if any, in
connection with the offering and sale of the Registrable Securities covered by
such Prospectus or any supplement thereto;
(h) prior to any public offering of Registrable Securities,
cooperate with the selling Note Holder, the underwriters, if any, and their
respective counsel in connection with the registration or qualification of such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions as any seller or underwriter requests in writing, keep
each such registration or qualification effective during the period such
Registration Statement is required to be kept effective and do any and all other
acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by the applicable
Registration Statement; provided that the Company will not be required to
qualify generally to do business in any jurisdiction where it is not then so
qualified or to take any action which would subject the Company to general
service of process or general taxation in any jurisdiction where it is not at
the time so subject;
(i) cooperate with the selling Note Holder and the
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold, which certificates
shall not bear any restrictive legends; and enable such Registrable Securities
to be in such denominations and registered in such names as the managing
underwriters may request at least two (2) Business Days prior to any sale of
Registrable Securities to the underwriters;
(j) use reasonable efforts to cause the Registration Statement
covering the Registrable Securities to be registered with or approved by such
other governmental agencies or authorities within the United States as may be
necessary to enable the seller or the underwriters, if any, to consummate the
disposition of such Registrable Securities;
(k) upon the occurrence of any event contemplated by Part
3(c)(vi) above, prepare a post-effective amendment or supplement to the
applicable Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required
4
<PAGE> 5
document so that, as thereafter delivered to the purchasers of the Registrable
Securities being sold thereunder, such Prospectus will not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statement therein, in light of the
circumstances under which they were made, not misleading;
(l) with respect to each issue or class of Registrable
Securities, use its best efforts to cause all Registrable Securities covered by
the Registration Statement to be listed on each securities exchange, if any, on
which similar securities issued by the Company are then listed;
(m) provide a CUSIP number for all Registrable Securities, not
later than the effective date of the applicable Registration Statement;
(n) in connection with an underwritten offering only, enter
into such agreements (including an underwriting agreement) and take all such
other actions reasonably required in connection therewith in order to expedite
or facilitate the disposition of such Registrable Securities and in such
connection: (i) make such representations and warranties to the underwriters in
form, substance and scope as are customarily made by issuers to underwriters in
underwritten offerings and confirm the same if and when requested; (ii) obtain
opinions of counsel to the Company and updates thereof, which counsel and
opinions must be satisfactory in form, substance and scope to the underwriters
covering the matters customarily covered in opinions requested in underwritten
offerings and such other matters as may be reasonably requested by the Note
Holder and underwriters; (iii) obtain "cold comfort" letters and updates thereof
from the Company's independent certified public accountants addressed to the
Note Holder and the underwriters, if any, such letters to be in customary form
and covering matters of the type customarily covered in "cold comfort" letters
by independent certified public accountants in connection with underwritten
offerings; (iv) the underwriting agreement shall set forth in full the
indemnification provisions and procedures of Part 3 hereof with respect to all
parties to be indemnified pursuant to said Part 3; and (v) the Company shall
deliver such documents and certificates as may be reasonably requested by the
Note Holder and the managing underwriters, if any, to evidence compliance with
clause (i) above and with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company; the above shall be
done at each closing under such underwriting or similar agreement or as and to
the extent required thereunder;
(o) make available to a representative of the Note Holder, any
underwriter participating in any disposition pursuant to such registration, and
any attorney or accountant retained by the selling Note Holder or underwriter,
all financial and other records, pertinent corporate documents and properties of
the Company reasonably requested, and cause the Company's officers, directors
and employees to supply all information reasonably requested by any such
representative, underwriter, attorney or accountant in connection such person?s
due diligence regarding such registration; provided, that any records,
information or documents that are designated by the Company in writing as
confidential shall be kept confidential by such Persons unless disclosure of
such records, information or documents is requested by court or administrative
order or is required by law;
5
<PAGE> 6
(p) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC, and make generally available to its
security holders an earnings statement, covering a period of not less than 12
months satisfying the provisions of Section 11(a) of the Securities Act and of
Rule 158 of the Securities Act not later than the last day of the 15th month
after the first day of the month following the effective date of the applicable
Registration Statement; and
(q) except as otherwise provided in this Piggyback
Registration Agreement, the Company shall have sole control in connection with
the preparation, filing, withdrawal, amendment or supplementing of each
Registration Statement, the selection of underwriters, and the distribution of
any preliminary prospectus included in the Registration Statements and may
include within the coverage thereof additional shares of Common Stock or other
securities for its own account or for the account of one or more of its other
security holders.
Expenses incurred in connection with this Part 3 shall be borne as set
forth in Part 1(d) of this Piggyback Registration Agreement.
The Company may require the Note Holder to furnish to the Company such
information regarding the distribution of such securities and such other
information as may otherwise be required to be included in such Registration
Statement, as the Company may from time to time reasonably request in writing.
The Note Holder agrees by acquisition of such Registrable Securities
that, upon receipt of any notice from the Company of the happening of any event
of the kind described in Part 3(c) hereof, the Note Holder will forthwith
discontinue disposition of such Registrable Securities covered by such
Registration Statement or Prospectus until the receipt by the Note Holder of the
copies of the supplemented or amended Prospectus contemplated by Part 3(k)
hereof, or until it is advised in writing by the Company that the use of the
applicable Prospectus may be resumed, and it has received copies of any
additional or supplemental filings which are incorporated by reference in such
Prospectus, and, if so directed by the Company, the Note Holder will deliver to
the Company (at the Company's expense) all copies, other than permanent file
copies then in the Note Holder's possession, of the Prospectus covering such
Registrable Securities current at the time of receipt of such notice.
5. Indemnification.
(a) The Company agrees to indemnify and hold harmless, to the
fullest extent permitted by law, the Note Holder and his agents against all
losses, claims, damages, liabilities and expenses (including fees and
disbursements of counsel) arising out of or based upon any untrue or alleged
untrue statement of a material fact contained in any Registration Statement,
Prospectus or preliminary prospectus or in any amendments or supplements
thereto, or any
6
<PAGE> 7
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of
circumstances under which they are made, not misleading; provided however, that
the Company shall not be liable for such indemnification amounts to the extent,
but only to the extent, that any such loss, claim, damage, liability or expense
arises out of an untrue statement or omission made in reliance upon and in
conformity with information furnished in writing to the Company by the Note
Holder expressly for use in any Registration Statement, Prospectus or
preliminary prospectus. If for any reason the foregoing indemnification is
unavailable to the Note Holder or his agents or is insufficient to hold them
harmless, then the Company shall contribute to the amount paid or payable by the
Note Holder or his agents as a result of such loss, claim, damage or liability
in such proportion as is appropriate to reflect not only the relative benefits
received by the Company and its stockholders on the one hand and the indemnified
party on the other hand but also the relative fault of the Company and the
indemnified party, as well as any relevant equitable considerations. The Company
will also indemnify the underwriters, selling brokers, dealer managers, and
similar securities industry professionals participating in the distribution,
their officers, directors and partners and each Person who controls such Persons
(within the meaning of the Securities Act) to the same extent as provided above
with respect to the indemnification of the Note Holder.
(b) In connection with any registration, the Note Holder
agrees to indemnify, to the same extent as the indemnification provided by the
Company in Part 4(a), the Company, its directors and officers and each Person
who controls the Company (within the meaning of the Securities Act) against any
losses, claims, damages, liabilities and expenses (including fees and
disbursements of counsel) arising out of or based upon any untrue statement of a
material fact in any Registration Statement, Prospectus or preliminary
prospectus or any omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, to
the extent, but only to the extent, that such untrue statement or omission is
contained in such document in reliance upon and in conformity with written
information furnished by the Note Holder to the Company expressly for inclusion
in such Registration Statement, Prospectus or preliminary prospectus. In no
event shall the liability of the Note Holder hereunder be greater in amount than
the dollar amount of the net proceeds received by the Note Holder upon the sale
of the Registrable Securities giving rise to such indemnification obligation.
(c) Any party entitled to indemnification hereunder will (i)
give prompt notice to the indemnifying party of any claim with respect to which
it seeks indemnification and (ii) permit such indemnifying party to assume the
defense of such claim. However, any person entitled to indemnification hereunder
shall have the right to employ separate counsel and to participate in the
defense of such claim, but the fees and expenses of such counsel shall be at the
expense of such person unless: (i) the indemnifying party has agreed to pay such
fees or expenses; (ii) the indemnifying party shall have failed to assume the
defense of such claim and employ counsel reasonably satisfactory to such persons
within a reasonable time after notice of the assertion of such claim; or (iii)
counsel for such person shall have concluded that there may be defenses
available to such person which are different from or additional to those
available to the indemnifying party and in such counsel's opinion, counsel for
the indemnifying party would have
7
<PAGE> 8
a conflict of interest in asserting such additional or different defenses (in
which case the indemnifying party shall not have the right to assume the defense
of such claim on behalf of such person) in any of which events such fees and
expenses shall be borne by the indemnifying party. If such defense is not
assumed by the indemnifying party, the indemnifying party will not be subject to
any liability for any settlement made without its consent (but such consent will
not be unreasonably withheld or delayed). No indemnifying party will consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff with respect
to such indemnified party of a release from all liability in respect to such
claim or litigation. An indemnifying party who is not entitled to, or elects not
to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party, a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim, in which event the indemnifying party shall be obligated to pay the fees
and expenses of such additional counsel or counsels. Delay in giving notice
pursuant to this Part 4 shall not impair the rights of a party to
indemnification hereunder unless the indemnifying party is prejudiced by such
delay.
This Piggyback Registration Agreement is executed as of this the ___
day of _______________, 1999.
NOTE HOLDER:
COMPANY:
VENUS EXPLORATION, INC.
By:
_____________________, President
8
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