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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 March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---- ----
Commission file number 0-14334
Venus Exploration, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3299127
- -------------------------------- ------------------
(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
------------------------------------------------------------
(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 May 12, 2000
----- ----------------------------
Common Stock $.01 par value 11,124,548 shares
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VENUS EXPLORATION, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements (Unaudited)
(a) Consolidated Balance Sheets as of 3
March 31, 2000 and December 31, 1999
(b) Consolidated Statements of Operations for 4
the three-month periods ended March 31,
2000 and 1999
(c) Consolidated Statements of Cash Flows 5
for the three-month periods ended
March 31, 2000 and 1999
(e) Notes to Consolidated Financial Statements 6
Item 2. - Management's Discussion and Analysis of Financial 14
Condition and Results of Operations
Item 3. - Quantitative and Qualitative Disclosures About 20
Market Risk
PART II. - OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds 20
Item 5. - Other Information 21
Item 6. - Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
2000 December 31,
(Unaudited) 1999
------------- -------------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 1,324 $ 236
Trade accounts receivable 254 718
Funds due from escrow agent 530 17,303
Assets held for sale -- 1,236
Prepaid expenses and other 62 90
------------- -------------
Total current assets 2,170 19,583
Oil and gas properties and equipment, at cost
under the successful efforts method, net 4,119 4,301
Other property and equipment, net 115 136
Deferred financing costs, at cost less accumulated amortization 23 20
Other assets, at cost less accumulated amortization 50 424
------------- -------------
$ 6,477 $ 24,464
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,841 $ 1,448
Other liabilities 678 1,139
Current notes payable -- 17,919
------------- -------------
Total current liabilities $ 2,519 $ 20,506
Long-term debt 1,750 1,750
Other long-term liabilities 17 18
------------- -------------
Total liabilities 4,286 22,274
Shareholders' equity:
Preferred stock; par value of $0.01; 5,000,000 shares
authorized; none issued and outstanding -- --
Common stock; par value of $.01; 30,000,000 shares
authorized; 11,086,682 and 11,055,285 shares issued
and outstanding in 2000 and 1999, respectively 111 110
Additional paid-in capital 17,383 17,336
Accumulated deficit (15,200) (15,194)
Accumulated other comprehensive income - net unrealized appreciation
on investment securities -- 69
Unearned compensation (103) (131)
------------- -------------
Total shareholders' equity 2,191 2,190
------------- -------------
Commitments and contingencies $ 6,477 $ 24,464
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
(in thousands except per share data)
-------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Oil and gas revenues $ 934 $ 385
--------------- ---------------
Costs of operations:
Production expense 331 230
Exploration expenses, including dry holes 289 239
Depreciation, depletion and amortization 178 141
General and administrative 517 607
--------------- ---------------
Total expenses 1,315 1,217
--------------- ---------------
Operating loss (381) (832)
--------------- ---------------
Other income (expense):
Interest expense (1) (105)
Gain on sale of assets 620 794
Interest and other income 7 13
--------------- ---------------
626 702
--------------- ---------------
Income (loss) before income taxes and extraordinary item 245 (130)
Income tax expense -- --
--------------- ---------------
Income (loss) before extraordinary item 245 (130)
Extraordinary loss on early extinguishment of debt 250 --
--------------- ---------------
Net income (loss) $ (5) $ (130)
=============== ===============
Basic and diluted earnings (loss) per share:
Earnings (loss) before extraordinary item $ 0.02 $ (0.01)
Extraordinary loss on early extinguishment of debt (0.02) --
--------------- ---------------
Earnings (loss) $ -- $ (0.01)
=============== ===============
Common shares and equivalents outstanding:
Basic 11,084 10,981
=============== ===============
Diluted 11,975 10,981
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
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VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31
(in thousands)
----------------- -----------------
2000 1999
----------------- -----------------
<S> <C> <C>
Operating Activities:
Net earnings (loss) $ (5) $ (130)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion and amortization of oil and gas properties 178 191
Other depreciation and amortization 24 --
Dry hole costs 52 --
Gain on sale of property and equipment (421) (794)
Gain on sale of securities (199) --
Extraordinary loss on early extinguishment of debt 250 --
Compensation expense for stock and stock options 58 54
Interest expense paid with common stock 18 --
Deferred interest expense on EXCO note (72) --
Changes in operating assets and liabilities:
Trade accounts receivable 464 (23)
Prepaid expenses and other 28 --
Trade accounts payable 393 82
Other liabilities (389) (191)
--------------- ---------------
Net cash provided by (used in) operating activities 379 (811)
--------------- ---------------
Investing Activities:
Capital expenditures (94) (100)
Distributions from EXUS 250 --
Proceeds from sale of securities 254 --
Proceeds from sales of property and equipment 18,475 2,586
--------------- ---------------
Net cash used in investing activities 18,885 2,486
--------------- ---------------
Financing Activities:
Net proceeds from issuance of long-term debt and notes payable -- 16
Principal payments on long-term debt and notes payable (17,921) (1,746)
Deferred financing costs (5) --
Prepayment penalty on early extinguishment of debt (250) --
--------------- ---------------
Net cash provided by financing activities (18,176) (1,730)
--------------- ---------------
Increase (decrease) in cash and equivalents 1,088 (55)
Cash and equivalents, beginning of period 236 126
--------------- ---------------
Cash and equivalents, end of period $ 1,324 $ 71
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
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VENUS EXPLORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended March 31, 2000 and 1999
1. Organization
Venus Exploration, Inc. (the "Company") is a Delaware Corporation 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 eight 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, 1999.
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 March 31, 2000 and the results of its operations for the three
months ended March 31, 2000 and 1999.
The results of operations for the three month period ended March 31, 2000
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 1999 consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
4. Investment in EXUS Energy, LLC
On June 30, 1999, EXUS Energy, LLC, (EXUS) a Delaware limited liability
company owned 50% by EXCO Resources, Inc. (EXCO) and 50% by the Company,
completed the acquisition of oil and natural gas properties located in Jackson
Parish, Louisiana. The properties included 17 producing wells on 8,000 acres, of
which about 80% was developed.
The net purchase price was $27.6 million. EXUS funded the purchase with $14
million of equity capital and the balance from its bank credit facility.
Of the initial $14 million of EXUS equity capital, EXCO provided $7 million from
its cash on hand, and Venus provided $7 million from funds borrowed from EXCO
under the terms of an $8 million convertible promissory note. All borrowings
under the note were secured by a first priority lien providing a security
interest in the Company's membership interest in EXUS and in distribution and
income rights in EXUS.
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On June 30, 1999, EXUS entered into a credit facility with NationsBank, N.A. as
administrative agent and lender. The credit facility provided for borrowings up
to $50 million. All borrowings under the credit facility were secured by a first
lien mortgage providing a security interest in substantially all assets owned by
EXUS, including all mineral interests.
On December 31, 1999, the Company sold its interest in the EXUS properties
as did EXCO. The gross purchase price for the Company's interest was $18.9
million, and the Company recorded a pre-tax gain of $4.3 million in 1999, and
0.4 million in the quarter ended March 31, 2000, when contingencies related to
part of the properties sold were cleared.
To effect the sale, EXUS distributed the properties to EXCO and the
Company, as the owners of EXUS, in equal portions. EXCO and the Company then
sold their undivided interests effective December 31, 1999. The instruments of
conveyance were executed and delivered into escrow on December 31, 1999, and the
cash consideration was delivered to the escrow agent on January 6, 2000. The
delay in the payment was due to concerns about the potential for a Y2K
disruption to the banking system.
On January 6, 2000, the Company used $7.1 million of the net proceeds to
repay the Company's share of the EXUS Energy bank debt under the NationsBank
credit facility, $7 million to repay the convertible note to EXCO Resources,
$250,000 to satisfy a prepayment penalty under the EXCO convertible note, and
$3.7 million to reduce the Company's bank debt. The balance of the Company's
bank debt, $152,000 was paid on March 30, 2000.
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5. Earnings (loss) Per Share
Basic net loss per common share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding. Diluted income
(loss) per share is computed by assuming the issuance of common shares for all
dilutive potential common shares outstanding.
Income (loss) per share for the three month period ended March 31, 2000 and
1999 are calculated based on 11,084,440 and 10,981,016 weighted average shares
outstanding, respectively. In 1999 the Company reported a net loss; therefore,
diluted earnings per share is not presented. For the three months ended March
31, 2000, basic and diluted earnings per share were calculated as follows.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
2000
(in thousands except
for per share data)
--------------------
<S> <C>
Basic earnings per share:
Income before extraordinary item (numerator) $ 245
Weighted average common shares outstanding (denominator) 11,084
--------------------
Earnings per share $ 0.02
====================
Income (loss) (numerator) $ (5)
Weighted average common shares outstanding (denominator) 11,084
--------------------
Earnings per share $ --
====================
Diluted earnings per share:
Income before extraordinary item (numerator) $ 245
Interest paid to convertible note holders 17
--------------------
Income before extraordinary item plus assumed conversions (numerator) $ 262
Weighted average common shares outstanding (denominator) 11,975
--------------------
Earnings per share $ 0.02
====================
Income (loss) (numerator) $ (5)
Interest paid to convertible note holders 17
--------------------
Income plus assumed conversions (numerator) $ 12
Weighted average common shares outstanding (denominator) 11,975
--------------------
Earnings per share $ --
====================
Weighted average common shares outstanding 11,084
Effect of dilutive securities:
Conversion of convertible subordinated notes 870
Assumed exercise of dilutive stock options and warrants 36
Less common shares issued to pay interest (15)
--------------------
Weighted average common shares outstanding plus assumed conversions (denominator) 11,975
====================
</TABLE>
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6. Long-Term Debt
Long-term debt consists of the following at March 31, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
------------------ ------------------
<S> <C> <C>
7% Convertible subordinated promissory notes $ 1,000,000 $ 1,000,000
Subordinated debenture 750,000 750,000
------------------ ------------------
$ 1,750,000 $ 1,750,000
================== ==================
</TABLE>
Notes payable consists of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
------------------ ------------------
<S> <C> <C>
Revolving credit $ -- $ 3,819,716
EXCO Convertible Note -- 7,000,000
NationsBank, N. A. Credit Facility -- 7,100,000
------------------ ------------------
$ -- $ 17,919,716
================== ==================
</TABLE>
At December 31, 1999, Notes payable have been classified as current because
they are required to be repaid from funds due from escrow agent and assets held
for sale, both of which have been classified as current assets and relate to the
sale of the EXUS Properties. The entire balance of notes payable was repaid
during the first quarter 2000.
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 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. Under the terms of the Subordinated Note agreements, interest
payments under the Subordinated Notes may be paid, at the Company's election,
with its common stock. Under the terms of the Company's new bank loan agreement
(see note 10), the Company is prohibited from paying cash interest during the
term of the bank loan agreement. 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. During 1999 the Company paid interest for the quarters ended June
30, 1999, and September 30, 1999, with 21,424 shares of the Company's common
stock. In January 2000 the Company issued 15,731 shares in payment of the
interest due for the quarter ended December 31, 1999, and in April 2000 the
Company issued 17,963 in payment of the interest due for the quarter ended March
31, 2000.
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 rate of $1.15 per share,
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<PAGE> 10
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.
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.
Subordinated Debenture
During October 1999, the chief executive officer of the Company advanced
the Company $750,000 in exchange for a Subordinated Debenture (the "Debenture")
issued by the Company. The net proceeds to the Company were approximately
$730,000 after legal and other costs associated with the
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transaction. The Company used the proceeds to fund working capital. The
Company's obligation to the debenture holder is unsecured and subordinated to
the rights of the Company's bank and other lenders (except for the subordinated
note holders who have equal priority) unless those lenders agree otherwise.
Interest is payable monthly, in cash, at a rate equal to Frost National Bank
prime rate plus 1%. On March 31, 2000, the interest rate was 10%.
On May 12, 2000, the Debenture was repaid in full from proceeds drawn from
the new bank Credit Facility, described in Note 10, Liquidity and Subsequent
Financing.
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
borrowing base determined by the bank based on the Company's oil and gas
reserves which are used as security for the loan. On August 19, 1998 the credit
facility was amended resulting in the interest on related borrowings becoming
the bank's prime lending rate plus 1%.
On January 6, 2000, as part of the cash settlement from the sale of the
Company's interest in the EXUS Properties, $3,716,000 was used to reduce the
outstanding balance under the credit facility, resulting in a outstanding loan
balance of $152,000 as of January 6, 2000. At the same time the bank lowered the
borrowing base to $152,000. On March 30, 2000, the outstanding balance under the
credit facility was repaid. The Company obtained a new bank credit facility the
terms of which are discussed in Note 10, Liquidity and Subsequent Financing.
EXCO 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") due July 1, 2004.
The Company drew $7 million under the EXCO Note to fund its capital contribution
to EXUS and the entire amount was repaid on January 6, 2000, from proceeds from
the escrow account created on December 31, 1999, when the EXUS Energy properties
were sold. There was no conversion of any part of the EXCO Note into common
shares before its termination, and interest during the actual term outstanding
was 10%.
The EXCO Note contained a prepayment penalty provision of 3.57% of the
principal prepaid for any prepayment occurring on or before July 1, 2000. On
January 6, 2000, the Company paid a $250,000 prepayment penalty when it prepaid
the entire $7 million outstanding balance. During the quarter ended March 31,
2000, the Company recognized an extraordinary loss for the amount of the
prepayment penalty. In addition, the Company recorded a reversal of $70,000 in
accrued imputed interest that will not have to be paid because of the
prepayment.
NationsBank, N. A. Credit Facility
In connection with EXUS' acquisition of the properties in Jackson Parish,
Louisiana, on June 30, 1999, EXUS entered into a credit facility with
NationsBank, N. A. as administrative agent and lender. The credit facility was
due to mature on June 30, 2002. The borrowing base at December 31, 1999 totaled
$19.5 million, of which $14.2 million was outstanding. On December 31, 1999
EXUS distributed the credit facility and EXUS' oil and gas properties to Venus
and EXCO so that Venus and EXCO could sell the properties
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on December 31, 1999. Venus' share of the outstanding balance under the credit
facility at December 31, 1999, totaled $7.1 million and the entire balance was
repaid on January 6, 2000, from proceeds from the escrow account created on
December 31, 1999, when the oil and gas properties were sold.
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 two key employees are
geoscientists who are central to the Company's business of using advanced
geoscience technology to explore for oil and gas reserves. The Company believes
that these grants, issued during the first year it became publicly traded, is an
incentive that aligns the key employees' interest with that of the Company's
shareholders. The Company is recognizing compensation expense of $9,375 per
month for the value of the restricted stock grants over the vesting period.
The Company granted 257,457 options and there were 34,611 options expired
or surrendered in 1999. The options granted in 1999 were issued under a salary
reduction plan and vested each pay period that the effected employees did not
receive their full salary. All options granted in 1999 vested by December 31,
1999. The stock options granted in 1999 funded the salary reduction plan from
March 1, 1999, through August 1, 1999. The salary reduction plan ended on March
31, 2000. On March 1, 2000, the Compensation Committee granted approximately
358,000 stock options, subject to shareholder approval, to fund the salary
reduction plan from August 1, 1999, through March 31, 2000. Shareholder approval
is required because the issuance of the 358,000 stock options would bring the
total stock options issued under the plan over the maximum number allowed under
the incentive plan. The Company intends to fix the exercise price at the fair
market value on the date of grant. The date of grant will be the date
shareholders approve the grant.
8. Accounting for Income Taxes
No provision for income taxes has been recorded for the period ended March
31, 2000, due to net operating losses in prior periods, for which a valuation
allowance was fully provided. No provision for income taxes was recorded for the
period ended March 31, 1999 due to the loss recorded for that period.
9. Commitments and Contingencies
The Company is not involved in any claims or legal proceedings.
10. Liquidity and Subsequent Financing
The Company's assets are predominately real property rights and
intellectual information that it developed regarding those properties and other
geographical areas that the Company is studying for exploration and development.
The market for these 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.
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<PAGE> 13
That lack of liquidity can have materially adverse effects on the Company's
strategic plans, normal operations and credit facilities.
The cash flow generated by current operations is only sufficient to fund general
and administrative expenses. The Company relies on bank and other financing to
implement its business plan. On May 5, 2000, the Company entered into a loan
agreement with a bank establishing a $15,000,000 revolving line of credit
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 used as
security for the loan. The interest rate is the bank's base rate plus 1%. The
interest rate on May 5, 2000, was 10%.
The initial borrowing base is $2.45 million and it will decline at the rate of
$50,000 per month beginning June 1, 2000 and continue until the next borrowing
base redetermination on October 1, 2000. The Company may request interim
redeterminations. Changes in the borrowing base are solely at the discretion of
the lender based on the lender's then current engineering standards and are
subject to the lender's credit approval process. Mandatory prepayment is
required to the extent outstanding amounts under the credit facility exceed the
borrowing base.
A facility fee of 1% of the initial borrowing base was paid at closing. A 0.5%
facility fee will be due on all incremental increases in the borrowing base, and
a 3/8% per annum fee is due on the unused portion of the borrowing base. The
Company is also required to pay a $5,000 engineering fee for the initial
borrowing base determination and for each subsequent redetermination. The
facility is secured by all of the Company's oil and gas proved properties, and
contains usual and standard covenants such as: debt and lien restrictions;
dividend and distribution prohibitions; liquidity, leverage, net worth and debt
service coverage ratios; and financial statement reporting requirements.
The credit facility requires that the Company hedge at least 50% of its oil and
gas production for twelve months. On May 12, 2000, the Company entered into
hedge contracts for 125 barrels of oil per day for twelve months and 500 mmbtu
per day for twelve months. The hedge term is June 2000 through May 2001. The oil
hedge is a costless collar with a floor of $24.00 per barrel and a cap of $27.50
per barrel. The natural gas hedge is a costless collar with a floor of $2.90 per
mmbtu and a cap of $3.65 per mmbtu. The reference price for oil is the New York
Merchantile Exchange West Texas Intermediate future contract. For natural gas
the index price is the Houston Ship Channel index for large packages as quoted
by Inside Ferc.
Although the Company believes that the new credit facility is sufficient to fund
its business plan for 2000, future availability of credit will depend on the
success of the Company's development program and its ability to stay in
compliance with credit facility debt covenants.
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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, 1999. 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, 1999, 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 applies advanced geoscience technology to the exploration for
and exploitation of undiscovered onshore oil and gas reserves in the United
States. In addition, the Company's business plan includes the acquisition of
producing properties. The Company presently has oil and gas properties, acreage
and production in eight states. The Company's emphasis is on oil and gas
exploration and development projects and prospects in Texas, Louisiana, Oklahoma
and Utah, with a current primary focus being in the Expanded Yegua Trend of the
Upper Texas Gulf Coast and the Cotton Valley Trend of East Texas and Western
Louisiana. The Company's management team has been responsible for the discovery,
development and exploitation of relatively significant reserves of oil and gas
for privately held predecessor companies over the past 30 years.
The Company's strategy consists of:
o Exploration for oil and natural gas reserves in geographic areas where
we have expertise
o Exploitation and development drilling in existing oil and gas fields
o Strategic acquisitions of producing properties with upside potential
EXPLORATION - The Company conducts exploration programs for new oil and gas
reserves and undiscovered fields in geological trends that are considered to
contain an undiscovered resource base of oil and natural gas. The Company uses
advanced geoscience technology to conduct these programs. The Company
participates in high-risk exploration because it provides the opportunity to
participate in discovery of substantial oil and gas reserves and the resultant
rapid growth in asset values which can occur. 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 has used this strategy successfully in the past. The
Company typically attempts to reduce its financial risk and to obtain 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 it. 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 reduced exploration activity and continues to
work only selected prospects believed to have extraordinary merit during this
period of low availability of exploration capital. In order to add a greater
degree of certainty to the growth of the Company, exploration only represents
one of three avenues of potential
14
<PAGE> 15
growth. The other two important components of the Company's growth plans are
exploitation of existing oil and gas fields and acquisition of producing
properties with enhanced potential.
The exploration team currently concentrates on two primary geographical focus
areas: the Yegua Trend of the Texas and Louisiana Gulf Coast and the Cotton
Valley Trend of East Texas and North Louisiana. Secondary areas are the South
Midland Basin and select areas in the mid-continent. The Company has an
inventory of many exploration Prospects and Prospect Leads, and the Company is
reactivating exploratory drilling projects so that when, and if, industry
drilling budgets are restored for exploration, the Company will have drilling
projects available in which to offer participation to industry co-venturers. The
primary geoscience technologies the Company uses to evaluate prospects and
prospect leads are 2-D and 3-D seismic surveys and the subsurface geological
studies used to interpret the data gathered by these seismic surveys.
Considerable computer resources and geophysical expertise are required to
process and to interpret the 3-D survey and to transform it into a useable
product. Consequently, the Company's in-house technical capability is an
important ingredient in its current and continuing ability to conduct
comprehensive exploration programs and in exploitation of existing fields.
EXPLOITATION AND DEVELOPMENT OF PRODUCING FIELDS - 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 is conducting
active exploitation and development activities in 7 different fields in Texas,
Oklahoma and Utah. The Company's working interest in those fields varies in size
from 2.5% to 100%, and the Company operates in 4 of the 7 active fields. During
1999, due to the significant decline in oil and natural gas prices during 1998
and shortage of capital available to the Company, the Company emphasized
acquiring and expanding reserves in existing oil and gas fields rather than
exploring for new reserves in unestablished areas. In November 1999 the Company
successfully restimulated its #1 Westbury Farms well in the Constitution Field,
Jefferson County, Texas. As a result of this successful restimulation, proved
reserves in the field increased by 2.9 Bcfe. The Company commenced drilling its
second development well in the Constitution Field, the #1 Apache Unit operated
by the Company, which is projected to be drilled to a total depth of 15,000'.
The estimated cost for the Company's 15% working interest in the well is
$555,000 for a completed well, and the estimated time to reach total depth is
sixty five days.
ACQUISITIONS, STRATEGIC ALLIANCES AND DIVESTITURES OF SELECTED PROPERTIES - The
Company continues to seek strategic producing property acquisitions that offer
near-term production enhancement potential and longer-term development drilling
potential. These opportunities on properties the Company acquires can be
investigated through the application of advanced technology by the Company's
technical team. The Company also seeks to accomplish strategic acquisitions of
producing assets with development and exploratory potential through strategic
alliances with other oil and gas companies. The Company may also sell
non-strategic properties as a part of its effort to concentrate on its focus
areas. An example of the Company's execution of its acquisition strategy is the
Company's acquisition on June 30, 1999 of oil and natural gas producing
properties in Jackson Parish, Louisiana. This acquisition was a result of leads
generated by the Company's technical team. Through an alliance with another oil
and gas company, the Company was able to acquire a 50% interest in the
properties at virtually no cash outlay to the Company. Six months later, on
December 31, 1999, the Company sold its interest in the properties for an after
tax gain of approximately $4 million.
15
<PAGE> 16
Liquidity and Capital Resources
(a) Liquidity
At March 31, 2000, the Company had a working capital deficit of $349,000
compared with a deficit of $923,000 at December 31, 1999, an increase in working
capital of $574,000. This increase in working capital is primarily due to
proceeds from the sale of assets.
Net cash provided by operating activities during the three months ended
March 31, 2000, was $379,000, whereas $811,000 was used in operating activities
for the same three-month period in 1999. Net changes in operating assets and
liabilities accounted for $496,000 of the cash flow provided by operating
activities. During the first three months of 2000, the Company realized a net
loss of $5,000. This compares with a net loss of $130,000 for the first three
months of 1999. The 2000 loss reflects a gain of $620,000 ($442,000 after
including related early extinguishment of debt cost and reversal of imputed
interest) from the sale of long-term assets as compared to a gain of $794,000
reflected in the 1999 loss.
During the first three months of 2000 the Company incurred capital
expenditures on oil and gas properties of $94,000 and received proceeds from its
equity investment in EXUS of $250,000 and proceeds from the sale of securities,
property and equipment of $18.7 million. During the same period in 1999, the
Company had capital expenditures of $100,000 and received proceeds from the sale
of property and equipment of $2.6 million.
For the three months ended March 31, 2000, $18.2 million was used in
financing activities. This compares with $1.7 million used in financing
activities for the same period in 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 2000 are budgeted at approximately $1.7 million for
projects that include the drilling and completion of 5 development wells,
drilling 3 exploratory wells, a 3-D seismic acquisition for an exploration
project, and acreage acquisition. The Company's share of the 3 exploration wells
and the 3-D seismic totals $250,000. The actual timing of the drilling of the
wells is dependent upon many unpredictable factors and the availability of
capital, which could postpone expenditures because there are no contractual
commitments to incur any of the budgeted costs. In addition, depending on the
level of success of the development wells and exploitation wells, the Company
may drill additional wells during 2000 at an estimated cost of $0.8 million.
On May 5, 2000, the Company entered into a loan agreement establishing a
$15,000,000 revolving line of credit 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 used as security for the loan. The interest rate is
the bank's based rate plus 1%. The interest rate on May 5, 2000, was 10%.
The initial borrowing base is $2.45 million and it will decline at the rate of
$50,000 per month beginning June 1, 2000 and continue until the next borrowing
base redetermination on October 1, 2000. The Company may request interim
16
<PAGE> 17
redeterminations. Changes in the borrowing base are solely at the discretion of
the lender based on the lender's then current engineering standards and are
subject to the lender's credit approval process. Mandatory prepayment is
required to the extent outstanding amounts under the credit facility exceed the
borrowing base.
A facility fee of 1% of the initial borrowing base was paid at closing. A 0.5%
facility fee will be due on all incremental increases in the borrowing base, and
a 3/8% per annum fee is due on the unused portion of the borrowing base. The
Company is also be required to pay a $5,000 engineering fee for the initial
borrowing base determination and for each subsequent redetermination. The
facility is secured by all of the Company's oil and gas properties, and contains
the following financial covenants:
(1) Consolidated tangible new worth cannot be less than 85% of consolidated
tangible net worth reported as of December 31, 1999, plus the sum of 70% of
the Company's positive quarterly net income, and plus 100% of any increase
in shareholder's equity from the sale of stock in the Company subsequent to
December 31, 1999.
(2) Pay or incur, or otherwise become obligated to pay general and
administrative expenses which exceed $350,000 during any quarter beginning
September 30, 2000. Non-cash charges to general and administrative expense
are excluded.
(3) Maintain a current ratio of at least 1:1, with initial calculation of such
ratio to be made as of June 30, 2000. For purposes of computing the
current ratio, current maturities under the credit facility are excluded.
(4) Maintain a debt service coverage ratio of at least 1.2:1.0 with the initial
calculation of such ratio to be made as of September 30, 2000. Debt
service coverage ratio is defined as the ratio from dividing earnings
before interest, taxes, depreciation, depletion and amortization, and other
non-cash charges (EBITDA) for any quarter by debt service for such quarter.
The facility contains other usual and standard covenants such as: debt and lien
restrictions; dividend and distribution prohibitions; and financial statement
reporting requirements. The credit facility also requires that the Company hedge
at least 50% of its oil and gas production for twelve months. Although the
Company believes that the new credit facility is sufficient to fund its business
plan for 2000, future availability of credit will depend on the success of the
Company's development program and its ability to stay in compliance with credit
facility debt covenants.
(c) Results of Operations
Revenues were higher during 2000 due to increased oil and natural gas
prices and increased equivalent unit volumes. As shown below, oil volumes
increased by 27% while natural gas volumes decreased by 3%. The decrease in
natural gas volumes was mainly due to the sale of natural gas producing wells
during the prior period. The period ended March 31, 1999, includes 15,800 mcf of
natural gas production from properties that was sold during that period.
Excluding those volumes from the prior period results indicates an 18% increase
in natural gas production in the current period as compared to the same period
in 1999. The increase is mainly due to the successful restimulation of the #1
Westbury Farms (discussed above under "Overview") offset by normal depletion of
existing production.
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------------------
2000 1999
------------------------------ ------------------------------
Sales Average Sales Average
Volume Prices Volume Prices
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gas (MCF) 84,936 $ 2.71 87,862 $ 1.74
Oil (BBLS) 26,922 $ 26.16 21,160 $ 10.90
</TABLE>
Average daily production of oil was 296 barrels for the three month period
ended March 31, 2000, and 235 for the same period in 1999. Average daily
production of natural gas was 933 mcf for the three month period ended March 31,
2000, and 976 for the same period in 1999. There were no price hedges in place
during the three months ended March 31, 2000 and 1999. On May 12, 2000, the
Company entered into hedge contracts for 125 barrels of oil per day for twelve
months and 500 mmbtu per day for twelve months. The hedged volumes represent
approximately 42% of oil production and 54% of natural gas production during the
quarter ended March 31, 2000. The Company entered into the hedge contracts to
comply with the terms of its new bank credit facility which requires that the
Company hedge at least 50% of its estimated production over the next twelve
months (from the date of the agreement). The hedge term is June 2000 through May
2001. The oil hedge is a costless collar with a floor of $24.00 per barrel and a
cap of $27.50 per barrel. If the
17
<PAGE> 18
average NYMEX price is less than $24.00 for any month, the Company receives the
difference between $24.00 and the average NYMEX price for that particular month.
If the average NYMEX price is greater than $27.50 for any month, the Company
pays the difference between $27.50 and the average NYMEX price for that
particular month. The natural gas hedge is a costless collar with a floor of
$2.90 per mmbtu and a cap of $3.65 per mmbtu. If the indexed price of natural
gas is less than $2.90 per mmbtu for any month, the Company receives the
difference between $2.90 and the indexed price for that particular month. If the
indexed price of natural gas is greater than $3.65 per mmbtu for any month, the
Company pays the difference between $3.65 and the indexed price for that
particular month. The reference price for natural gas is the Houston Ship
Channel index for large packages as quoted by Inside Ferc.
Three Months Ended March 31, 2000 and 1999
The Company reported a net loss of $5,000 for the quarter ended March 31,
2000, compared to a net loss of $130,000 in the same quarter in 1999. The 2000
loss reflects a gain on the sale of assets of $620,000 as compared to a gain on
the sale of assets of $794,000 in the same period in 1999. The decrease in the
loss is due to an increase in oil and gas revenues of $549,000, and decreases in
general and administrative expense of $90,000 and interest expense of $104,000.
These were offset by increases in production expense ($101,000), exploration
expense ($50,000), depreciation, depletion, and amortization (DDA) ($37,000),
and an extraordinary loss ($250,000) as a result of early extinguishment of
debt.
Oil and gas revenues increased by $549,000 as compared to the same period
in 1999. Approximately 90% of this increase is due to the significant increase
in product prices, and the balance is due to higher production during the
current period.
Production expense increased by $101,000 as compared to the same period in
1999. Approximately 45% of the increase is due to higher severance taxes as a
result of increased prices and a higher average severance tax rate.
Approximately 25% of the increase is due to an increase in workover costs
primarily in the Company's wells in Utah where the Company is a non-operator.
The operator has been successfully restimulating as well as recompleting wells
in the field. Approximately 30% of the increase is the result of higher oil
volumes. Production expense average $1.34 per mcfe during the three month period
ended March 31, 2000, compared to $1.07 per mcfe for the same period in 1999.
This increase is due to the higher workover cost and severance taxes discussed
above.
Exploration expense increased by a net of $50,000. In 2000 the Company
recorded dry hole cost of $54,000 related to an exploratory dry hole and
approximately $131,000 in employee severance cost. These were offset by reduced
exploration activity during the three month period ended March 31, 2000, as
compared to the same period in 1999.
Depreciation, depletion and amortization increased by $37,000.
Approximately 62% of the increase is due to higher volumes and the balance of
the increase is due to a higher DDA rate for the three months ended March 31,
2000, of $0.72 per mcfe as compared to $0.66 per mcfe for the same period in
1999.
General and administrative expense decreased by $90,000 as a result of a
33% reduction in office personnel during 1999.
Interest expense decreased by $104,000, from $105,000 in 1999 to $1,000 in
2000. Most of the decrease is due to the reversal of $72,000 in accrued imputed
interest that will not have to be paid because of the prepayment of
18
<PAGE> 19
the related debt. In addition, as a result of the sale of the Company's interest
in the EXUS properties discussed in Note 4 to the accompanying financial
statements, the Company's interest bearing debt was significantly lower during
the three month period ended March 31, 2000 as compared to the same period in
1999. The average outstanding balance in 1999 was $4.4 million as compared to an
average outstanding balance of $2.1 million in the current period.
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 the Company's fiscal year beginning January 1,
2001. The Company is currently reviewing the effects this Statement will have on
the financial statements in relation to the Company's hedging position.
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,
1999.
19
<PAGE> 20
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, 1999 and reference is made to the
information contained there. On May 12, 2000 the Company entered into commodity
hedge contracts for 125 barrels of oil per day (approximately 11,250 barrels per
quarter) for 12 months and 500 mmbtu per day (approximately 45,000 mmbtu per
quarter) for 12 months, which is approximately at least 50% of estimated
production from existing wells for the 12 month period June 2000 through May
2001, and it represents approximately 46% of production for the three month
period ended March 31, 2000. The hedging arrangements have the effect of locking
in the effective prices the Company receives for the volumes hedged. For these
volumes the Company's exposure to a significant decline in product prices is
significantly reduced; however, they also limit the benefit the Company might
have received if prices increased above the cap. For every $1 the NYMEX average
for a month is above the $27.50 per barrel cap, the Company's net income would
decrease by approximately $4,000 for the month. For every $0.10 per mmbtu the
indexed price of natural gas is above $3.65 per mmbtu for a month, Company's net
income would decrease by approximately $2,000 for the month.
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On May 5, 2000, the Company entered into a loan agreement with a bank.
Under that loan agreement, the Company is not permitted to declare or to
pay any dividend on any of its shares or to make any distribution to its
stockholders. Under the terms of the Company's Subordinated Note
agreements, interest payments under the Subordinated Notes may be paid, at
the Company's election, in cash or with the Company's common stock. Under
the terms of the Company's new bank loan agreement (see Note 10 to the
accompanying financial statements), the Company is prohibited from paying
cash interest to the Subordinated Noteholders during the term of the bank
loan agreement.
(c) During 1999, the Company issued $1,000,000 original principal amount of
notes in a private placement. The notes are convertible into the Company's
common stock and interest on the notes is payable, at the Company's
election, in cash or shares of the Company's common stock. The Company
issued an aggregate of 37,107 shares of common stock in payment of the
interest due on the Notes due or accrued during 1999 (including 15,683
shares issued in January 2000 for interest due for the quarter ended
December 31, 1999). These shares were issued in lieu of cash interest
payments accrued of $44,471 through December 31, 1999. In April 2000, the
Company issued 17,963 shares of common stock for interest accrued during
the quarter ended March 31, 2000. These shares were issued in lieu of cash
interest payments accrued of $17,402. The shares were issued pursuant to
Sections 3(a)(9) and 4(2) of the Securities Act of 1933. As discussed in
Note 10 to the accompanying unaudited financial statements, on May 5, 2000,
the Company entered into a loan agreement with a bank. Under the terms of
the agreement, the
20
<PAGE> 21
Company is prohibited from paying cash interest on the notes for the term
of the loan agreement.
Item 5. OTHER INFORMATION
The proxy statement for the 1999 annual meeting stated that stockholders'
proposals for matters to be presented at the 2000 Annual Meeting of
Stockholders must be received by Venus Exploration at its principal
executive offices on or before January 15, 2000, to be eligible for
inclusion in its proxy statement and proxy relating to that meeting. That
was based on the anticipated date for the 2000 annual meeting being in June
2000. Management has now rescheduled that meeting for mid-December 2000.
Therefore, proposals of stockholders intended to be presented at the 2000
Annual Meeting of Stockholders, in accordance with Rule 14a-8 of the proxy
rules of the Securities and Exchange Commission, must be received by Venus
Exploration at its principal executive offices on or before June 16, 2000,
to be eligible for inclusion in its proxy statement and proxy relating to
that meeting. At the 2000 annual meeting, management proxies will have
discretionary authority to vote on stockholder proposals that are not
submitted for inclusion in the proxy statement unless received by Venus
Exploration before June 16, 2000, after which date such proposals will be
considered untimely.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Loan Agreement dated May 5, 2000, between Bank One, Texas, N.A. and
Venus Exploration, Inc.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The company filed a Current Report on Form 8-K dated December 31, 1999,
reporting information pursuant to Item 2, Item 5 and Item 7 (including pro
forma financial data reflecting the sale of the Jackson Parish properties).
21
<PAGE> 22
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: May 22, 2000 BY: /s/ EUGENE L. AMES, JR.
----------------------------------------
Eugene L. Ames, Jr.
(Chief Executive Officer)
Dated: May 22, 2000 BY: /s/ PATRICK A. GARCIA
----------------------------------------
Patrick A. Garcia
(Principal Accounting Officer)
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -----------
<S> <C>
10.1 Loan Agreement dated May 5, 2000, between Bank One, Texas,
N.A. and Venus Exploration, Inc.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
LOAN AGREEMENT
REVOLVING LINE OF CREDIT
OF UP TO $15,000,000.00
FROM
BANK ONE, TEXAS, N.A.
TO
VENUS EXPLORATION, INC.
May 5, 2000
<PAGE> 2
LOAN AGREEMENT
dated May 5, 2000
from
BANK ONE, TEXAS, N.A.
to
VENUS EXPLORATION, INC.
TABLE OF CONTENTS
<TABLE>
ARTICLE I.
<S> <C> <C>
DEFINITIONS.......................................................................................1
ARTICLE II.
THE LOAN.........................................................................................11
2.01 The Revolving Loan.........................................................................11
2.02 Advances and Payments of Principal Under the Revolving Note................................12
2.03 Payments of Interest under the Revolving Note..............................................12
2.04 General Provisions Relating to Interest....................................................12
2.05 Borrowing Base Determination...............................................................13
2.06 Mandatory Prepayment of the Note...........................................................14
2.07 Advances to Satisfy Obligations of the Borrower............................................15
2.08 Assignment of Production...................................................................15
2.09 Commitment Fee.............................................................................15
2.10 Facility Fee...............................................................................15
2.11 Addition/Deletion of Borrowing Base Oil & Gas Properties...................................15
2.12 Adjustment to Revolving Commitment Limit...................................................16
ARTICLE III.
CONDITIONS.......................................................................................16
3.01 Conditions to the Closing..................................................................16
3.02 Documents Required for Subsequent Disbursements............................................18
3.03 General Conditions to all Disbursements....................................................18
3.04 Legal Matters..............................................................................19
</TABLE>
i
<PAGE> 3
<TABLE>
ARTICLE IV.
<S> <C> <C>
REPRESENTATIONS AND WARRANTIES............................................................................19
4.01 Existence..................................................................................19
4.02 Due Authorization..........................................................................19
4.03 Valid and Binding Obligations..............................................................20
4.04 Scope and Accuracy of Financial Statements.................................................20
4.05 Title to Borrowing Base Oil and Gas Properties.............................................20
4.06 Oil and Gas Leases.........................................................................20
4.07 Interest in the Borrowing Base Oil and Gas Properties......................................20
4.08 Oil and Gas Contracts......................................................................21
4.09 Producing Wells............................................................................21
4.10 Purchasers of Production...................................................................21
4.11 Authorizations and Consents................................................................21
4.12 Environmental Laws.........................................................................21
4.13 Compliance with Laws, Rules, Regulations and Orders........................................22
4.14 Liabilities, Litigation and Restrictions...................................................22
4.15 Existing Indebtedness......................................................................23
4.16 Material Commitments.......................................................................23
4.17 Margin Stock...............................................................................23
4.18 Proper Filing of Tax Returns and Payment of Taxes Due......................................23
4.19 ERISA......................................................................................23
4.20 Investment Company Act Compliance..........................................................24
4.21 Public Utility Holding Company Act Compliance..............................................24
4.22 Insurance..................................................................................24
4.23 Material Misstatements and Omissions.......................................................24
ARTICLE V.
AFFIRMATIVE COVENANTS............................................................................24
5.01 Use of Funds...............................................................................24
5.02 Maintenance and Access to Records..........................................................25
5.03 Quarterly Unaudited Financial Statements...................................................25
5.04 Annual Audited Financial Statements........................................................25
5.05 Compliance Certificate.....................................................................25
5.06 Statement of Material Adverse Change in Condition..........................................25
5.07 Title Defects..............................................................................25
5.08 Additional Information.....................................................................25
5.09 Compliance with Laws and Payment of Assessments and Charges................................26
5.10 Maintenance of Existence and Good Standing.................................................26
5.11 Further Assurances.........................................................................26
5.12 Initial Expenses of the Bank...............................................................26
5.13 Subsequent Expenses of the Bank............................................................26
5.14 Maintenance of Tangible Property...........................................................27
5.15 Maintenance of Insurance...................................................................27
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
5.16 Inspection of Tangible Assets/Right of Audit...............................................27
5.17 Payment of Note and Performance of Obligations.............................................27
5.18 Borrowing Base.............................................................................27
5.19 Compliance with Environmental Laws.........................................................27
5.20 Hazardous Substances Indemnification.......................................................28
5.21 Properties Not Operated by the Borrower....................................................28
5.22 Transactions with Affiliates...............................................................28
5.23 Leases.....................................................................................29
5.24 Operation of Borrowing Base Oil and Gas Properties.........................................29
5.25 Assignments................................................................................29
5.26 Change of Purchasers of Production.........................................................29
5.27 Payment of Taxes, Etc......................................................................29
5.28 Notice of Litigation.......................................................................29
5.29 Notice of Events of Default................................................................30
5.30 Notice of Change of Principal Offices......................................................30
5.31 Employee Benefit Plans.....................................................................30
5.32 Production Reports.........................................................................30
5.33 Operating Accounts.........................................................................30
5.34 P&A Expenses...............................................................................30
5.35 Payment of Obligations.....................................................................30
5.36 Hedge Agreements...........................................................................31
5.37 Amendment of Wells Fargo Security Instruments..............................................31
ARTICLE VI.
NEGATIVE COVENANTS...............................................................................31
6.01 Other Indebtedness; Payments on Subordinated Debt..........................................31
6.02 Loans or Advances..........................................................................31
6.03 Mortgages or Pledges of Assets.............................................................31
6.04 Sales of Assets............................................................................31
6.05 Dividends..................................................................................31
6.06 Payment of Accounts Payable................................................................32
6.07 Cancellation of Insurance..................................................................32
6.08 Investments................................................................................32
6.09 Changes in Structure or Business...........................................................32
6.10 Limitation on Leases.......................................................................32
6.11 Pooling or Unitization.....................................................................32
6.12 Hedge Agreements...........................................................................32
6.13 Capital Stock of Borrower..................................................................32
6.14 Margin Stock...............................................................................33
6.15 General and Administrative Expenses........................................................33
6.16 Minimum Tangible Net Worth.................................................................33
6.17 Current Ratio..............................................................................33
6.18 Debt Service Coverage Ratio................................................................33
</TABLE>
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<PAGE> 5
<TABLE>
ARTICLE VII.
<S> <C> <C>
EVENTS OF DEFAULT................................................................................33
7.01 Enumeration of Events of Default...........................................................33
7.02 Rights Upon Unmatured Event of Default.....................................................35
7.03 Rights Upon Default........................................................................35
7.04 Remedies...................................................................................35
7.05 Right of Set-off...........................................................................36
ARTICLE VIII.
MISCELLANEOUS.....................................................................................37
8.01 Security Interests in Deposits and Right of Offset or the Banker's Lien....................37
8.02 Survival of Representations, Warranties and Covenants......................................37
8.03 Notices and Other Communications...........................................................37
8.04 Parties in Interest........................................................................37
8.05 Renewals and Extensions....................................................................38
8.06 No Waiver by the Bank......................................................................38
8.07 Waiver, Release, and Indemnification by the Borrower.......................................38
8.08 GOVERNING LAW..............................................................................39
8.09 Incorporation of Exhibits and Schedules....................................................39
8.10 Survival Upon Unenforceability.............................................................39
8.11 Rights of Third Parties....................................................................39
8.12 Amendments or Modifications................................................................39
8.13 Agreement Construed as an Entirety.........................................................39
8.14 Number and Gender..........................................................................39
8.15 AGREEMENT SUPERSEDES ALL PRIOR AGREEMENTS..................................................39
8.16 Controlling Provision Upon Conflict........................................................40
8.17 Time, Place and Method of Payments.........................................................40
8.18 Termination................................................................................40
8.19 Non-Application of Chapter 346 of Texas Finance Code.......................................40
8.20 Counterpart Execution......................................................................40
8.21 Amended and Restated Agreement.............................................................40
</TABLE>
iv
<PAGE> 6
EXHIBITS
EXHIBIT A Borrowing Base Oil and Gas Properties
EXHIBIT B Revolving Note
EXHIBIT C Compliance Certificate
EXHIBIT D Security Instruments
SCHEDULES
Schedule 1.01(a) Subordinated Debt
Schedule 4.01 Information Regarding the Borrower and its Subsidiaries
Schedule 4.10 List of Purchasers of Production
Schedule 4.15 Existing Indebtedness
Schedule 4.16 Material Commitments
Schedule 4.22 Insurance Certificate
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<PAGE> 7
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement"), dated effective May 5, 2000, is by
and between VENUS EXPLORATION, INC., a Delaware corporation, (the "Borrower")
and BANK ONE, TEXAS, N.A., a national banking association (the "Bank").
W I T N E S S E T H
WHEREAS, the Borrower desires to obtain a loan from the Bank in order
to satisfy certain working capital needs of the Borrower, including the
exploration, development and/or acquisition of oil and gas properties and for
general corporate purposes; and
WHEREAS, the Bank is willing to loan such funds to the Borrower in
accordance with the terms of this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the Bank and the Borrower agree as follows:
ARTICLE I.
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
indicated:
"Affiliate" means, as applied to any Person, any other Person,
directly or indirectly, controlling, controlled by, or under common control
with, that Person. For purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling", "controlled by", and "under
common control with"), as applied to any Person, means either: (a) the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of that Person, whether through the
ownership of voting securities, by contract, or otherwise, or (b) the legal or
beneficial ownership of or voting rights with respect to twenty-five percent
(25%) or more of the equity interest in such Person.
"Agreement" means this Loan Agreement, as the same may be amended or
supplemented from time to time.
"Assignment of Notes and Liens" means that certain Assignment of
Notes, Liens and Security Interests duly executed by Wells Fargo Bank (Texas),
N.A., pursuant to which the Wells Fargo Note, the Wells Fargo Loan Agreement,
and the Wells Fargo Security Instruments, and all rights associated therewith,
are assigned to Bank.
"Bank Parties" has the meaning given such term in Section 8.07(B).
<PAGE> 8
"Base Rate" means, at the time any determination thereof is to be
made, the fluctuating per annum rate of interest then most recently announced by
the Bank in Houston, Texas, as its Base Rate. The Base Rate is a rate set by the
Bank based upon various factors, including the Bank's costs and desired return,
general economic conditions and other factors, and is used as a reference point
for pricing some loans. The Bank may price loans at, above or below the Base
Rate. Any change in the Base Rate shall take effect hereunder as of and on the
opening of business on the date specified in the announcement of such change. A
certificate in writing by the Cashier or any Vice President of the Bank as to
the Base Rate as of any date or dates shall be prima facie evidence of such
fact.
"Borrowing Base" means the maximum loan amount with respect to the
Borrowing Base Oil and Gas Properties, as determined by the Bank from time to
time in accordance with Section 2.05 of this Agreement.
"Borrowing Base Oil and Gas Properties" means those Oil and Gas
Properties of the Borrower that are subject to the liens created by the Security
Instruments to secure the Obligations, including, but not limited to, the
indebtedness evidenced by the Note, which Borrowing Base Oil and Gas Properties
are described in Exhibit "A" attached hereto and made a part hereof.
"Business Day" means a day other than a Saturday, Sunday or legal
holiday for commercial banks under the laws applicable to national banking
associations and those applicable to Texas state chartered banks.
"Change of Control" means an event or series of events by which the
shareholders of the Borrower as of the date of this Agreement cannot alone elect
at least two-thirds (2/3rds) of the board of directors of the Borrower.
"Closing" has the meaning provided in Section 3.01.
"Compliance Certificate" means the certificate of the President or
Chief Executive Officer of the Borrower submitted to the Bank from time to time
pursuant to this Agreement and attesting to the financial covenants and stating,
to such officer's knowledge, whether or not an Event of Default or an Unmatured
Event of Default has occurred and is continuing and, if such an event has
occurred, the actions being taken by the Borrower, to remedy such situation and
that GAAP has been used in the preparation of the Financial Statements, which
certificate shall be in the form attached hereto as Exhibit "C".
"Consolidated Tangible Net Worth" means, as of any reporting period,
Stockholders' Equity plus not more than $1,000,000.00 of Subordinated Debt, less
the sum of:
(A) Goodwill, including any amounts, however designated on a
consolidated balance sheet of the Borrower and its Subsidiaries,
representing the excess of the purchase price paid for assets or stock
acquired over the value assigned thereto on the books of the Borrower;
(B) Patents, trademarks, trade names, and copyrights;
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<PAGE> 9
(C) Any amount at which shares of capital stock of the Borrower appear
as an asset on the Borrower's balance sheet;
(D) Loans and advances to stockholders, directors, officers, or
employees, to the extent they exceed Ten Thousand Dollars ($10,000) in
the aggregate; and
(E) Any other amount in respect of an intangible that should be
classified as an asset on a consolidated balance sheet of the Borrower
in accordance with GAAP.
"COPAS" means the Accounting Procedure Joint Operations Recommended by
the Council of Petroleum Accountants Society, with respect to onshore operations
(1985 version).
"Current Assets" means at any time, all assets, that should in
accordance with GAAP, be classified as current assets on a consolidated balance
sheet of Borrower and its Subsidiaries.
"Current Liabilities" means at any time, all liabilities that should
in accordance with GAAP, be classified as current liabilities on a consolidated
balance sheet of the Borrower and its Subsidiaries, minus the amount of Loans
under this Agreement which are deemed to be current in accordance with GAAP.
"Current Ratio" means the ratio derived from dividing Current Assets
by Current Liabilities.
"Debt Service" means, for any reporting period, one-sixteenth (1/16th)
of the Loans outstanding as of the end of each fiscal quarter plus interest
expense accrued on such Loans during such quarter.
"Debt Service Coverage Ratio" means the ratio derived from dividing
EBITDA for any quarter by Debt Service for such quarter.
"EBITDA" means, for any reporting period, Borrower's earnings for such
period, before deductions for interest, taxes, depreciation, depletion,
amortization and other non-cash charges.
"Environmental Laws" means (a) the following federal laws as they may
be cited, referenced and amended from time to time: the Clean Air Act, the Clean
Water Act, the Safe Drinking Water Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Endangered Species Act, the
Resource Conservation and Recovery Act, the Occupational Safety and Health Act,
the Hazardous Materials Transportation Act, the Superfund Amendments and
Reauthorization Act, the Toxic Substances Control Act, and the Oil Pollution Act
of 1990; (b) any and all environmental statutes of any state in which property
of the Borrower is situated, as they may be cited, referenced and amended from
time to time; (c) any rules or regulations promulgated under or adopted pursuant
to the above federal and state laws; and (d) any other federal, state or local
statute or any requirement, rule, regulation, code, ordinance or order adopted
pursuant thereto, including, without limitation, those relating to the
generation, transportation, treatment, storage, recycling, disposal, handling or
release of Hazardous Substances.
3
<PAGE> 10
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations and published interpretations
thereof.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) which together with the Borrower would be treated as a single
employer under Section 4001 of ERISA.
"Event of Default" means any of the events specified in Section 7.01 of
this Agreement.
"Financial Statements" means the statements of the financial condition
of the indicated Person, on a consolidated basis, as at the point in time and
for the period indicated and consisting of at least a balance sheet, income
statement and statement of changes in financial position, and, when the
foregoing are audited, accompanied by the certification of such Person's
independent certified public accountants and footnotes to any of the foregoing,
all of which shall be prepared in accordance with GAAP applied on a basis
consistent with that of the preceding year.
"Floating Rate" means a per annum interest rate equal to the Base Rate
in effect from time to time plus one percent (1.0%) in the absence of any Event
of Default, or plus five percent (5.0%) following and during the continuation of
any Event of Default.
"GAAP" means generally accepted accounting principles, applied on a
consistent basis, as set forth in Opinions of the Accounting Principles Board of
the American Institute of Certified Public Accountants and/or in statements of
the Financial Accounting Standards Board and/or their respective successors and
which are applicable in the circumstances as of the date in question. Accounting
principles are applied on a "consistent basis" when the accounting principles
observed in a current period are comparable in all material respects to those
accounting principles applied in a preceding period.
"General and Administrative Expenses" means total expenses of
Borrower, minus (A) lease operating expenses, (B) dry-hole costs and other
exploration expenses, (C) depreciation, depletion, and amortization, (D)
interest expense, (E) COPAS overhead, (F) severance and ad valorem taxes, (G)
state and federal income taxes, and (H) expenses satisfied by the issuance of
the Borrower's common stock or warrants to acquire such common stock.
"Hazardous Substances" means flammables, explosives, radioactive
materials, hazardous wastes, asbestos or any material containing asbestos,
polychlorinated biphenyls (PCBs), toxic substances or related materials,
petroleum and petroleum products and associated oil or natural gas exploration,
production and development wastes or any substances defined as "hazardous
substances", "hazardous materials", "hazardous wastes" or "toxic substances"
under the Comprehensive Environmental Response, Compensation and Liability Act,
as amended, the Super fund Amendments and Reauthorization Act, as amended, the
Hazardous Materials Transportation Act, as amended, the Resource Conservation
and Recovery Act, as amended, the Toxic Substances Control Act, as amended, or
any other Environmental Laws now or hereafter enacted or promulgated by any
regulatory authority or governmental body, but only to the extent any such law
is or becomes applicable to the Borrower or any of its property.
4
<PAGE> 11
"Hedge Agreement" means any swap agreement, cap, collar, floor,
exchange transaction, forward agreement or exchange or protection agreement
related to Hydrocarbons or any option with respect to such transaction, as more
specifically provided in those certain master swap agreements on International
Swap Dealers Association forms and the schedules thereto and any confirmations
thereunder entered into by Borrower with any other Person.
"Hydrocarbons" means crude oil, condensate, natural gas, natural gas
liquids and other hydrocarbons.
"Indebtedness" means, as to any Person, (a) all items of indebtedness
or liability (other than capital, surplus, deferred credits and reserves, as
such) which in accordance with GAAP would be included in determining total
liabilities as shown on the liability side of a balance sheet as at the date as
of which Indebtedness is to be determined, (b) indebtedness secured by (or for
which the holder of such indebtedness has a right, contingent or otherwise, to
be secured by) any mortgage, deed of trust, pledge, lien, security interest, or
other charge or encumbrance existing on or encumbering property owned by the
Person whose Indebtedness is being determined, whether or not the indebtedness
secured thereby shall have been assumed, (c) all indebtedness of others which
such Person has directly or indirectly guaranteed, endorsed (otherwise than for
collection or deposit in the ordinary course of business), discounted with
recourse, agreed (contingently or otherwise) to purchase or repurchase or
otherwise acquire, or in respect of which such Person has agreed to supply or
advance funds (whether by way of loan, purchase of securities or capital
contribution, through a commitment to pay for property or services regardless of
the nondelivery of such property or the nonfurnishing of such services or
otherwise), or in respect of which such Person has otherwise become directly or
indirectly liable, contingently or otherwise, whether now existing or hereafter
arising, and (d) all leases that, in accordance with GAAP, should not be
reflected on the Borrower's balance sheet.
"Investment" in any Person means any stock, bond, note or other
evidence of Indebtedness or any other security (other than current trade and
customer accounts) of, or loan to, such Person.
"Laws" means all ordinances, statutes, rules, regulations, orders,
injunctions, writs, or decrees of any government or political subdivision or
agency thereof, or any court or similar entity established by any thereof.
"Leases" means oil and gas leases and all oil, gas and mineral leases
constituting any part of the Borrowing Base Oil and Gas Properties.
"Limitation Period" means any period while any amount remains owing on
the Note when interest on such amount, calculated at the applicable rate
prescribed on the Note, plus any fees payable hereunder and deemed to be
interest under applicable Law, would exceed the Maximum Rate.
"Loan" means, singly, any advance by the Bank to the Borrower pursuant
to this Agreement and "Loans" means, cumulatively, the aggregate sum of all
money advanced by the Bank to the Borrower pursuant to this Agreement.
5
<PAGE> 12
"Loan Documents" means this Agreement, the Note, the Security
Instruments, and all other promissory notes, security agreements, and other
instruments, documents, and agreements executed and delivered pursuant to or in
connection with this Agreement, as such instruments, documents, and agreements
may be amended, modified, renewed, extended, or supplemented from time to time.
"Loan Excess" means, at any point in time, the amount, if any, by
which the outstanding balance on the Loans evidenced by the Note exceeds the
Revolving Commitment then in effect.
"Marketable Title" means good and defensible title, as set forth,
qualified and/or limited on Exhibit "A," free and clear of all mortgages, liens
and encumbrances, except for Permitted Encumbrances.
"Maximum Rate" means the maximum rate of non-usurious interest
permitted from day to day by applicable law, including as to Chapter 303 of the
Texas Finance Code (and as the same may be incorporated by reference in other
Texas statutes), but otherwise without limitation, that rate based upon the
"indicated weekly rate ceiling."
"Monthly Borrowing Base Reduction" means the amount of the automatic
monthly reduction to the Borrowing Base, as determined by the Bank from time to
time in accordance with Section 2.05 of this Agreement.
"Multi-employer Plan" means a plan described in Section 4001(a)(3) of
ERISA which covers employees of the Borrower or any ERISA Affiliate.
"Note" means the Revolving Note, and any extension, renewal, or
rearrangement of, or substitute for, such Note.
"Obligations" means all obligations, indebtedness, and liabilities of
the Borrower to the Bank, now existing or hereafter arising, whether direct,
indirect, related, unrelated, fixed, contingent, liquidated, unliquidated,
joint, several, or joint and several, including, without limitation, the
obligations, indebtedness, and liabilities of the Borrower under this Agreement
and the other Loan Documents, and all interest accruing thereon and all
attorneys' fees and other expenses incurred in the administration, enforcement
or collection thereof.
"Oil and Gas Properties" means fee, leasehold or other interests in or
under mineral estates or oil, gas and other liquid or gaseous hydrocarbon leases
with respect to properties situated in the United States, including, without
limitation, overriding royalty and royalty interests, leasehold estate
interests, net profits interests, production payment interests and mineral fee
interests, together with contracts executed in connection therewith and all
tenements, hereditaments, appurtenances and properties, real or personal,
appertaining, belonging, affixed or incidental thereto.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
6
<PAGE> 13
"Permitted Asset Sales" means sales, leases, assignments, transfers or
disposals of, in one or any series of related transactions, all or any portion
of Borrower's: (a) equipment, whether now owned or hereafter acquired, including
transfers to Subsidiaries, which, in the aggregate, do not exceed $50,000 in any
twelve month period, or (b) Oil and Gas Properties that neither are covered by
any of the Security Instruments nor contain any proved oil and gas reserves.
"Permitted Encumbrances" means:
(A) Liens for taxes, assessments, or similar charges, incurred in the
ordinary course of business that are not yet due and payable;
(B) Liens of mechanics, materialmen, warehousemen, carriers, or other
like liens, securing obligations incurred in the ordinary course of
business that are not yet due and payable;
(C) Pledges or deposits in connection with or to secure workmen's
compensation, unemployment insurance, pensions or other employee
benefits;
(D) Encumbrances consisting of covenants, zoning restrictions, rights,
easements, liens or other restrictions on the use of real property,
none of which materially impairs the use of such property by the
Borrower in the operation of its business, and none of which is
violated in any material respect by existing or proposed operations;
(E) Liens of operators and/or co-working interest owners under joint
operating agreements or similar contractual arrangements with respect
to the Borrower's proportionate share of the expense of exploration,
development and operation of oil, gas and mineral leasehold or fee
interests owned jointly with others, to the extent that same relate to
sums not yet due;
(F) Liens securing surety or other bonds required in the normal course
of business not to exceed $25,000.00 in the aggregate at any time in
effect;
(G) The following, if the validity or amount thereof is being
contested in good faith by appropriate and lawful proceedings, so long
as levy and execution thereon have been stayed and continue to be
stayed and they do not, in the aggregate, materially detract from the
value of the property of the Borrower or any Subsidiary, or materially
impair the use thereof in the operation of its business:
(1) Claims or liens for taxes, assessments, or charges due and
payable and subject to interest or penalty;
(2) Claims, liens, and encumbrances upon, and defects of title
to, real or personal property, including any attachment of
personal or real property or other legal process prior to
adjudication of a dispute on the merits;
7
<PAGE> 14
(3) Claims or liens of mechanics, materialmen, warehousemen,
carriers, or other like liens; and
(4) Adverse judgments on appeal.
(H) Liens securing payment and performance of the Obligations;
(I) Liens securing purchase money obligations included in the
definition of Permitted Indebtedness if such liens encumber only the
property for which such purchase money obligation was incurred; and
(K) Inchoate liens in respect of royalty or overriding royalty owners.
"Permitted Hedge Agreement" means any Hedge Agreement which Borrower
enters into with or through the Bank or any Affiliate thereof or with any other
Person reasonably acceptable to the Bank, and any other confirmations which
Borrower may hereafter enter into with or through the Bank or any Affiliate
thereof or any other Person reasonably acceptable to the Bank covering up to
seventy-five percent (75%) of the Proved Reserves attributable to Borrower's
interest in its Borrowing Base Oil and Gas Properties.
"Permitted Indebtedness" means:
(A) The Loans;
(B) Loans by the Bank under other credit arrangements;
(C) Unsecured current accounts payable incurred in the ordinary course
of business which are (i) not overdue, or (ii) being contested in good
faith by appropriate proceedings, or (iii) the subject of usual and
customary review and evaluation;
(D) Loans, advances or extensions of credit from suppliers,
contractors or other Persons who are not Affiliates of Borrower under
applicable contracts or agreements in connection with Borrower's oil
and gas exploration and development activities, which are not overdue
or are being contested in good faith by appropriate proceedings;
(E) Letters of credit or performance bonds required to be obtained by
the Borrower in the normal course of its business to assure the proper
plugging and abandonment of oil or gas drilling or production
locations or bonds required by any governmental agency or
instrumentality in the normal course of the Borrower's business;
(F) Purchase money obligations of the Borrower of up to $100,000 at
any time for the purchase of equipment so long as the purchase money
obligations do not exceed the fair market value of the equipment
purchased therewith; and
8
<PAGE> 15
(G) The Subordinated Debt, so long as: (i) no Event of Default has
occurred and is continuing as the result of any breaches by Borrower
or any holder of the Subordinated Debt of the terms of any
subordination agreement between Bank and the holder(s) of such
Subordinated Debt and/or the subordination provisions set forth in any
Subordinated Note, and (ii) no holder of the Subordinated Debt asserts
that Borrower's Indebtedness and Obligations to Bank hereunder do not
constitute "Senior Indebtedness," as defined in the Subordinated
Notes.
"Person" means an individual, company, corporation, partnership, joint
venture, limited liability company, trust, association, unincorporated
organization or a government or any agency or political subdivision thereof.
"Plan" means, at any time, any employee benefit plan which is covered
by ERISA and in respect of which the Borrower or any ERISA Affiliate is (or, if
such plan were terminated at such time, would under Section 4069 of ERISA be
deemed to be) an "employer" as defined in Section 3(5) of ERISA.
"Prohibited Transaction" means any transaction set forth in Section
406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended
from time to time.
"Proved Reserves" means the estimated quantities of crude oil,
condensate, natural gas liquids and natural gas which geological and engineering
data demonstrate with reasonable certainty to be recoverable by primary
producing mechanisms in future years from known reservoirs underlying lands or
interests therein constituting Oil and Gas Properties, under existing economic
and operating conditions. Reserves which can be produced economically through
application of improved recovery techniques (i.e., fluid injection) will be
included in Proved Reserves when successful testing by a pilot project or the
operation of an installed program in the reservoir provides support for the
engineering analysis on which the pilot project or installed program was based.
In general, the economic productivity of the estimated proved reserves is
supported by actual production or a conclusive formation test; however, in
certain instances proved reserves are assigned to reservoirs on the basis of a
combination of electrical and other type logs and core analyses which indicate
these reservoirs are analogous to similar reservoirs in the same field which are
producing or have demonstrated the ability to produce on a formation test.
"Reportable Event" means any of the events set forth in Section 4043
of ERISA.
"Request for Advance" means the written or verbal (confirmed in
writing within one (1) Business Day) request by the Borrower for an advance by
the Bank pursuant to this Agreement, which Request for Advance shall be signed
by an authorized officer of the Borrower and shall include a statement of the
amount requested to be advanced, the date of the requested advance and such
other information as the Bank in its reasonable discretion deems necessary.
"Revolving Commitment" means the obligation of the Bank, subject to
the provisions of this Agreement and existing only through the Revolving Loan
Termination Date, to advance to the
9
<PAGE> 16
Borrower funds in an amount not to exceed at any one time outstanding the lesser
of: (a) the Borrowing Base then in effect, or (b) the Revolving Commitment
Limit.
"Revolving Commitment Limit" means $2,500,000.00 as of the Closing,
but such amount may be increased by the Bank in its sole discretion from time to
time with the agreement of the Borrower should the Borrower contribute
additional Oil and Gas Properties of the Borrower to the Borrowing Base Oil and
Gas Properties in accordance with Section 2.11 hereof or should the Borrowing
Base, as determined in accordance with Section 2.05, ever exceed such amount.
"Revolving Loan" means the loan made pursuant to Section 2.01.
"Revolving Loan Termination Date" means May 8, 2001.
"Revolving Note" means the promissory note in the original face amount
of $15,000,000.00 dated of even date herewith made by the Borrower payable to
the order of the Bank, in substantially the form attached hereto as Exhibit "B,"
together with all deferrals, renewals, extensions, amendments, modifications or
rearrangements thereof, which promissory note shall evidence certain advances to
the Borrower by the Bank pursuant to Section 2.01 hereof.
"Security Instruments" means the security instruments described on
Exhibit "D," in form and substance satisfactory to the Bank, to be executed by
Borrower pursuant to Section 3.01, and any and all other instruments or
documents hereafter executed in connection with or as security for the payment
of the Note.
"Stockholders' Equity" means, at any time, the sum of the following
accounts set forth on a consolidated balance sheet of the Borrower, prepared in
accordance with GAAP: (A) the par or stated value of all outstanding capital
stock; (B) capital surplus; and (C) retained earnings.
"Subordinated Debt" means the Indebtedness of Borrower described on
Schedule 1.01(a) attached hereto.
"Subordinated Note(s)" means, individually, each promissory note
executed by Borrower evidencing the Subordinated Debt and, collectively, all of
such promissory notes.
"Subsidiary" means, as to any Person, any corporation in which such
Person, directly or indirectly through its Subsidiaries, owns more than fifty
percent (50%) of the stock of any class or classes having by the terms thereof
the ordinary voting power to elect a majority of the directors of such
corporation, and any partnership, association, joint venture, or other entity in
which such Person, directly or indirectly through its Subsidiaries, has more
than a fifty percent (50%) equity interest at the time.
"Transfer Order Letters" means the letters in lieu of division or
transfer orders, in form acceptable to the Bank.
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<PAGE> 17
"Unmatured Event of Default" means any event or occurrence which
solely with the lapse of time or the giving of notice or both will ripen into an
Event of Default.
"Wells Fargo Credit Agreement" means that certain Second Amended and
Restated Loan Agreement dated December 22, 1997, by and between Borrower and
Wells Fargo Bank (Texas), N.A., as amended.
"Wells Fargo Note" means that certain Promissory Note dated December
22, 1997, in the original principal sum of $50,000,000.00, executed by Borrower,
as maker, and payable to the order of Wells Fargo Bank (Texas), N.A., as payee,
as said note may have been renewed, extended, amended and/or replaced.
"Wells Fargo Security Instruments" means the "Security Instruments,"
as defined in the Wells Fargo Credit Agreement, together with all other
financing statements, mortgages, deeds of trust, security agreements, pledges
and other instruments creating liens or security interests executed by Borrower
or its predecessors, either prior to or after the date of the Wells Fargo Credit
Agreement, which secure any of the indebtedness and obligations owed by Borrower
to Wells Fargo Bank (Texas), N.A., in connection with the Wells Fargo Credit
Agreement and/or the Wells Fargo Note.
Undefined Terms. Undefined financial accounting terms used in this
Agreement shall be defined according to GAAP.
ARTICLE II.
THE LOAN
2.01 The Revolving Loan. Upon the terms and conditions (including,
without limitation, the right of the Bank to terminate the Revolving Commitment
hereunder upon an Event of Default or to suspend its obligation to make advances
under the Revolving Commitment upon an Unmatured Event of Default) and relying
on the representations and warranties contained in this Agreement, the Bank
agrees, for a period from and after the date hereof through the Revolving Loan
Termination Date, to make advances to the Borrower from time to time following
receipt of a Request for Advance at least two Business Days' prior to such
requested advance, in such amounts as the Borrower may request; provided,
however, each such advance shall be in an amount of not less than $100,000.00
and in an integral multiple of $10,000.00 and the aggregate principal amount of
all advances made pursuant to this Section 2.01 and at any one time outstanding
shall not exceed the Revolving Commitment.
Through the Revolving Loan Termination Date, the Borrower may use this
revolving credit by borrowing, prepaying and reborrowing, all in accordance with
the terms and conditions of this Agreement. The borrowings made by the Borrower
pursuant to the Revolving Commitment shall be made at the principal office of
the Bank and shall be evidenced by the Revolving Note. The entire principal
amount of the Revolving Note is due on the Revolving Loan Termination Date.
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2.02 Advances and Payments of Principal Under the Revolving Note. Each
time an advance is made against or payment is made on the Revolving Note, the
Bank is hereby irrevocably authorized by the Borrower to make appropriate
entries of such in its records in accordance with the usual and customary
practices of accounting for advances and payments on notes; provided, however,
the failure of the Bank to do so shall not relieve the Borrower of its correct
liability hereunder or under the Revolving Note.
The aggregate unpaid amount of advances reflected by the notations by
the Bank on its records or the ledger sheets affixed to the Revolving Note shall
be deemed rebuttably presumptive evidence of the principal amount owing on the
Revolving Note. The liability for payment of principal and interest evidenced by
the Revolving Note shall be limited to principal amounts actually advanced to
the Borrower and outstanding under this Agreement and interest on such amounts
calculated in accordance with this Agreement. Interest provided for in the
Revolving Note and herein shall be calculated on unpaid sums actually advanced
and outstanding under the Revolving Note pursuant to the terms of this Agreement
and only for the period from the date or dates of such advances until repayment.
2.03 Payments of Interest under the Revolving Note. Subject to the
terms and provisions of this Agreement, interest on the Revolving Loan,
calculated at the Floating Rate, shall be due and payable monthly as it accrues
beginning June 1, 2000, and continuing thereafter on the first day of each
succeeding calendar month while any amount remains owing on the Revolving Note
and at the Revolving Loan Termination Date, the interest payment in each
instance to be that which has been earned and remains unpaid. The rate of
interest charged on the Revolving Loan shall be adjusted, effective on the
effective date of each change in the Base Rate, and in the ordinary course of
business the Bank shall send written notice to the Borrower that a change in the
Base Rate has occurred.
2.04 General Provisions Relating to Interest. All Loans hereunder and
outstanding from time to time shall bear interest at the rate prescribed in the
Revolving Note, as applicable, calculated on the basis of a year of three
hundred sixty (360) days from the date of advance to, but not including, the
date of repayment.
It is the intention of the parties hereto to comply strictly with the
usury Laws of the State of Texas and the United States of America and, in this
connection, there shall never be collected, charged or received on any sums
advanced hereunder interest in excess of the Maximum Rate. For purposes of
Chapter 303 of the Texas Finance Code, as amended, the Borrower agrees that the
maximum rate to be charged shall be the "indicated (weekly) rate ceiling" as
defined in said Chapter, provided that the Bank may also rely to the extent
permitted by applicable Laws of the State of Texas or the United States of
America, on alternative maximum rates of interest under other applicable Laws of
the State of Texas or the United States of America applicable to the Bank, if
greater. Notwithstanding anything herein or in the Note to the contrary, during
any Limitation Period, the interest rate to be charged on amounts evidenced by
the Note shall be the Maximum Rate and the obligation of the Borrower for any
fees payable hereunder and deemed to be interest under applicable Law shall be
suspended. During any period or periods of time following a Limitation Period,
to the extent permitted by applicable Laws of the State of Texas or the United
States of America, the interest rate to be charged hereunder shall remain at the
Maximum Rate until such time as there has been paid
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to the Bank (a) the amount of interest in excess of the Maximum Rate that the
Bank would have received during the Limitation Period had the interest rate
remained at the relevant rates specified in the Note, and (b) all interest and
fees otherwise due to the Bank but for the effect of such Limitation Period.
If under any circumstances the aggregate amounts paid on the Note or
under this Agreement include amounts which by Law are deemed interest and which
would exceed the amount permitted if the Maximum Rate were in effect, the
Borrower stipulates that such payment and collection will have been and will be
deemed to have been, to the extent permitted by applicable Laws of the State of
Texas or the United States of America, the result of mathematical error on the
part of both the Borrower and the Bank, and the Bank shall promptly refund the
amount of such excess (to the extent only of such interest payments above the
Maximum Rate which could lawfully have been collected and retained) upon
discovery of such error by the Bank or notice thereof from the Borrower.
2.05 Borrowing Base Determination. The initial Borrowing Base is
hereby established at $2,450,000.00. Subject to the other provisions of this
Agreement, the Borrowing Base shall be automatically reduced commencing on June
1, 2000, by the Monthly Borrowing Base Reduction, which is initially established
at $50,000.00, and continuing on the first day of each successive month through
the next Borrowing Base determination as set forth in this Section 2.05. On or
before September 1, 2000, the Borrower shall furnish to the Bank information
sufficient to update to an effective date of July 1, 2000, the most recent
petroleum engineering reports provided to the Bank prior to Closing relative to
the Proved Reserves attributable to the Borrowing Base Oil and Gas Properties.
Upon receipt of such report, the Bank shall, in the normal course of business
make a determination of the Borrowing Base and the Monthly Borrowing Base
Reduction which shall become effective upon written notification from the Bank
to the Borrower, and which, subject to the other provisions of this Agreement,
shall be the basis on which the Borrowing Base shall thereafter be calculated
until the effective date of the next redetermination of the Borrowing Base and
the Monthly Borrowing Base Reduction as set forth in this Section. Thereafter,
on or before each March 1 and September 1 until the Revolving Loan Termination
Date, the Borrower shall furnish to the Bank a report, in form and substance
satisfactory to the Bank, which report shall set forth, as of each preceding
January 1 or July 1, as applicable, the Proved Reserves attributable to the
Borrowing Base Oil and Gas Properties. Each report to be provided on or before
each March 1 shall be a complete report relating to the Proved Reserves
attributable to the Borrowing Base Oil and Gas Properties prepared by an
independent petroleum engineer or firm of engineers reasonably satisfactory to
the Bank. Each report to be provided on or before each September 1 shall simply
update the previous complete report, and may be prepared by the Borrower's own
engineers and shall be certified by the President or Chief Executive Officer of
the Borrower. Upon receipt of each such report, the Bank shall, in the normal
course of business, make a determination of the Borrowing Base and the Monthly
Borrowing Base Reduction which shall become effective upon written notification
from the Bank to the Borrower, and which, subject to the other provisions of
this Agreement, shall be the basis on which the Borrowing Base shall thereafter
be calculated until the effective date of the next redetermination of the
Borrowing Base and the Monthly Borrowing Base Reduction as set forth in this
Section 2.05. The Bank may redetermine the Borrowing Base and the Monthly
Borrowing Base Reduction, at any time, and from time to time, which
redetermination shall become effective upon written notification from the Bank
to the Borrower and which, subject to the other provisions of this
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Agreement, shall be the basis on which the Borrowing Base shall thereafter be
calculated until the effective date of the next redetermination of the Borrowing
Base and the Monthly Borrowing Base Reduction, as set forth in this Section. The
Bank may require the Borrower to provide a report prepared by an independent
petroleum engineer or firm of engineers reasonably satisfactory to the Bank
regarding the Proved Reserves attributable to the Borrowing Base Oil and Gas
Properties at any time upon ninety (90) days advance notice to the Borrower.
Beginning with the receipt of the petroleum engineer's report due by
September 1, 2000, and continuing as and when the Borrower provides to the Bank
each semi-annual petroleum engineer's report, as required by the provisions of
this Section, the Borrower shall contemporaneously pay a fee of $5,000.00 to the
Bank for the Bank's analysis of such report and redetermination of the Borrowing
Base and the Monthly Borrowing Base Reduction. At any time engineering reviews
are requested by the Borrower in connection with a Borrowing Base
redetermination, other than the semi-annual reviews required by the Bank, an
additional fee of $5,000.00 shall be paid to the Bank for the Bank's analysis of
such report and redetermination of the Borrowing Base. Provided, however, if the
number of Borrowing Base Oil and Gas Properties expands beyond the current
number of Borrowing Base Oil and Gas Properties, the Bank may in its reasonable
discretion increase the amount of the fee required to be paid to the Bank by the
Borrower for the Bank's semi-annual analysis of such properties and
redetermination of the Borrowing Base.
The Borrowing Base shall represent the Bank's determination, in
accordance with its customary lending practices, of the maximum loan amount with
respect to the Borrowing Base Oil and Gas Properties and the Borrower
acknowledges, for purposes of this Agreement, such determination by the Bank as
being the maximum loan amount with respect to the Borrowing Base Oil and Gas
Properties. In making any redetermination of the Borrowing Base, the Bank shall
apply the parameters then generally being utilized by the Bank for Borrowing
Base redeterminations for other similarly situated borrowers. The Borrower and
the Bank acknowledge that (a) due to the uncertainties of the oil and gas
extraction process, the Borrowing Base Oil and Gas Properties are not subject to
evaluation with a high degree of accuracy and are subject to potential rapid
deterioration in value, and (b) for this reason and the difficulties and
expenses involved in liquidating and collecting against the Borrowing Base Oil
and Gas Properties, the Bank's determination of the maximum loan amount with
respect to the Borrowing Base Oil and Gas Properties contains an equity cushion,
which equity cushion is acknowledged by the Borrower as essential for the
adequate protection of the Bank.
2.06 Mandatory Prepayment of the Note. In the event that the Bank
determines that a Loan Excess exists, the Borrower shall immediately, but in no
event later than thirty (30) days following notice from the Bank of any such
scheduled or non-scheduled Borrowing Base determination, (i) prepay the
principal of the Revolving Note in an aggregate amount at least equal to such
Loan Excess or (ii) add to the Borrowing Base Oil and Gas Properties additional
Oil and Gas Properties of the Borrower sufficient in value, as determined by the
Bank in its sole discretion pursuant to Section 2.05, to increase the Borrowing
Base to equal the unpaid principal amount of the Revolving Note. Notwithstanding
the foregoing provisions of this section, the Borrower shall pay the amount of
any Loan Excess that would result from the application of each Monthly Borrowing
Base Reduction on or before the day that such Monthly Borrowing Base Reduction
becomes applicable.
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2.07 Advances to Satisfy Obligations of the Borrower. The Bank may,
but shall not be obligated to, make advances hereunder and apply same to the
satisfaction of any condition, warranty, representation or covenant of the
Borrower contained in this Agreement, and the funds so advanced and applied
shall be part of the Loan proceeds advanced under this Agreement and evidenced
by the Revolving Note.
2.08 Assignment of Production. Certain of the Security Instruments
covering the Borrowing Base Oil and Gas Properties contain an assignment unto
and in favor of the Bank of all oil, gas and other minerals produced and to be
produced from or attributable to the Borrowing Base Oil and Gas Properties
together with all of the revenues and proceeds attributable to such production,
and such Security Instruments further provide that all such revenues and
proceeds which may be so collected by the Bank pursuant to the assignment shall
be applied to the payment of the Note and the satisfaction of all other
Indebtedness to be secured by such Security Instruments. The Borrower hereby
appoints the Bank its agent and attorney-in-fact until this Agreement has been
terminated in accordance with Section 8.18 hereof for purposes of completing the
letter transfer orders delivered to the Bank pursuant to Section 3.01 hereof
which power is coupled with an interest and is not revocable.
2.09 Commitment Fee. As consideration for the commitment of the Bank
to make Loans to the Borrower through the Revolving Loan Termination Date
pursuant to this Agreement, the Borrower agrees to pay to the Bank within five
(5) Business Days of receipt of the Bank's statement as to quarterly periods
ending March 31, June 30, September 30 and December 31 of each year (except the
first period shall be for a period of time from the Closing to June 30, 2000)
during the period commencing on the date of this Agreement to and including the
Revolving Loan Termination Date and at the Revolving Loan Termination Date, a
fee equal three-eighths of one percent (3/8 of 1%) per annum (computed on the
basis of 360) multiplied by an amount equal to the daily average excess, if any,
of the Revolving Commitment over the aggregate principal amount outstanding on
the Note, throughout the period from the date of this Agreement or previous
calculation date provided above, whichever is later, to the relevant calculation
date or the Revolving Loan Termination Date, as the case may be.
2.10 Facility Fee. As consideration for the commitment of the Bank to
make Loans to the Borrower pursuant to this Agreement, the Borrower shall pay to
the Bank a facility fee
of $24,500.00 simultaneously with the Closing. Any time the Borrowing Base is
increased pursuant to Section 2.05, an additional facility fee shall be paid to
Bank by Borrower in the amount of one -half of one percent (0.5%) of any such
increase above the highest Borrowing Base that was in effect at any time prior
to such increase.
2.11 Addition/Deletion of Borrowing Base Oil & Gas Properties. The
Borrower may, from time to time upon fifteen (15) days prior written notice to
the Bank, propose to add Oil and Gas Properties of the Borrower to the Borrowing
Base Oil and Gas Properties. Any such proposal to add Oil and Gas Properties of
the Borrower to the Borrowing Base Oil and Gas Properties shall be accompanied
by an engineering report applicable to such properties that conforms to the
requirements of Section 2.05 and evidence sufficient to establish that the
Borrower has Marketable Title to such Oil and Gas Properties, and any such
addition shall become effective at such time as:(a)
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the Bank has made its determination of the amount by which the Borrowing
Base would be increased as the result of such addition and (b) the conditions
set forth in Article III hereof, to the extent they are applicable to such
additional Oil and Gas Properties of the Borrower, have been satisfied.
2.12 Adjustment to Revolving Commitment Limit. At any time that
Borrower proposes to increase the Borrowing Base by adding additional Oil and
Gas Properties to the Borrowing Base Oil and Gas Properties pursuant to Section
2.11, Borrower may also request that Bank increase the amount of the Revolving
Commitment Limit. At any time that Borrower makes such a request it shall
promptly provide Bank with such financial information as Bank may request to
assist the Bank in evaluating such request. Following the receipt of such
information from Borrower, the Bank shall, in the normal course of its business,
make a redetermination of the Revolving Commitment Limit, which shall become
effective upon written notification from the Bank to Borrower of the new
Revolving Commitment Limit. The Borrower may, on a quarterly basis, upon written
notice to the Bank, amend the definition of the Revolving Commitment Limit by
reducing the amount set forth in such definition. Upon such reduction, the Bank
shall not be obligated to extend Loans in excess of such reduced Revolving
Commitment Limit. If and when the Bank increases the Revolving Commitment Limit
at Borrower's request, the commitment fee, as determined pursuant to Section
2.09 of this Agreement, shall be calculated using such increased amount for all
of the calculation period in which such Revolving Commitment Limit was
increased.
ARTICLE III.
CONDITIONS
The obligation of the Bank to make the Loans is subject to the
following conditions precedent:
3.01 Conditions to the Closing. The Borrower shall have duly delivered
or caused to be delivered to the Bank, prior to the initial disbursement of the
Loans (the "Closing"), the following:
(A) The Revolving Note;
(B) Each of the Security Instruments;
(C) Transfer Order Letters applicable to the production of oil and gas
from the Borrowing Base Oil and Gas Properties;
(D) The results of a Uniform Commercial Code search showing all
financing statements and other documents or instruments on file
against the Borrower in the Offices of the Secretaries of State of the
State of Texas, the State of Delaware, the State of Louisiana and each
State in which any of the Borrowing Base Oil and Gas Properties are
located or deemed to be located, and the counties and/or parishes in
which the Borrower maintains its principal place of business and in
which any of the
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Borrowing Base Oil and Gas Properties are located, such search to be
as of a date no more than ten (10) days prior to the date of Closing.
(E) A certified (as of the date of the Closing) copy of resolutions of
the Borrower's Board of Directors or of the Executive Committee of
Borrower's Board of Directors authorizing the execution, delivery, and
performance of this Agreement, the Note, and each other document to be
delivered pursuant hereto, provided, however, that if such resolutions
provided are those of such Executive Committee, there shall be
included therewith a certified (as of the date of the Closing) copy of
the resolutions of Borrower's Board of Directors delegating to such
Executive Committee sufficiently broad powers clearly empowering the
Executive Committee to authorize the execution, delivery and
performance of this Agreement, the Note, and each other document to be
delivered pursuant hereto;
(F) A certificate (dated the date of the Closing) of the Borrower's
corporate secretary as to the incumbency and signatures of the
officers of the Borrower signing this Agreement, the Note, and each
other document to be delivered pursuant hereto;
(G) A copy, certified as of the most recent date practicable by the
Secretary of State of the state in which Borrower is incorporated, of
the Borrower's certificate of incorporation, together with a
certificate (dated the date of the Closing) of the Borrower's
corporate secretary to the effect that true and correct copies of the
articles of incorporation and bylaws of Borrower are attached thereto
and that such articles of incorporation and bylaws have not been
amended;
(H) Certificates, as of the most recent dates practicable, of the
aforesaid Secretaries of State, the Secretary of State of each state
in which the Borrower is qualified as a foreign corporation, and the
department of revenue or taxation of each of the foregoing states, as
to the good standing of the Borrower;
(I) A Compliance Certificate, dated the date of the Closing;
(J) Either: (i) a subordination agreement, in form and substance
acceptable to Bank in its sole discretion, pursuant to which the
holders of the Subordinated Indebtedness subordinate such Indebtedness
to Borrower's Obligations to Bank, or (ii) an opinion of counsel to
Borrower, in form and substance satisfactory to Bank, in its
discretion, in which such counsel expresses its opinion that upon the
assignment to Bank of the Wells Fargo Note, the Wells Fargo Security
Instruments and the Wells Fargo Credit Agreement, the Obligations
under this Agreement shall constitute the "Senior Indebtedness,"
referred to in each of the Subordinated Notes evidencing the
Subordinated Indebtedness, specifically including, but not limited to,
the reference to Senior Indebtedness contained in paragraph 10 of each
Subordinated Note;
(K) Payment of the facility fee pursuant to Section 2.10 hereof;
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(L) Payment of the Bank's attorneys' fees upon receipt of a reasonably
detailed invoice pursuant to Section 5.12 hereof;
(M) The duly executed Assignment of Notes and Liens; and
(N) A legal opinion of outside counsel to the Borrower in form and
substance reasonably satisfactory to the Bank confirming the legal
conclusions expressed in Borrower's representations set forth in
Sections 4.01 through 4.03, 4.11, 4.20 and 4.21.
3.02 Documents Required for Subsequent Disbursements. As of the time
of funding any additional advances to Borrower that have been approved by the
Bank pursuant to Section 2.01 and are made in conjunction with the addition of
Oil and Gas Properties owned by the Borrower to the Borrowing Base Oil and Gas
Properties, the Borrower shall have duly delivered to the Bank: (i) the Security
Instruments that are necessary or appropriate, in the reasonable opinion of the
Bank, relating to such additional Oil and Properties, and (ii) Transfer Order
Letters applicable to the production of oil and gas from the such additional
Borrowing Base Oil and Gas Properties.
3.03 General Conditions to all Disbursements. At the time of the
Closing and each subsequent disbursement:
(A) No Event of Default shall have occurred and be continuing, and no
Unmatured Event of Default shall have occurred;
(B) The representations and warranties contained in Article IV of this
Agreement shall be true and correct in all material respects as though
such representations and warranties had been made on such date, except
such as are expressly limited to a prior date, which shall have been
true and correct in all material respects as of such prior date;
(C) The Bank shall have been, and shall continue to be, satisfied, in
its sole good faith discretion, that the Borrower holds Marketable
Title to the Borrowing Base Oil and Gas Properties, and that such
ownership includes record title to an undivided net revenue interest
in the production from each such Borrowing Base Oil and Gas Property
that is not less than, as well as an undivided working interest in
each Borrowing Base Oil and Gas Property that is not greater than
(unless there is a corresponding increase in the net revenue interest
attributed to such party therein), the net revenue interest therein
and the working interest therein, respectively, attributed to the
Borrower on Exhibit "A," subject to the limitations and qualifications
on such exhibit (or attributed to Borrower in any Security Instrument
applicable to any Oil and Gas Property that is added to the Borrowing
Base Oil and Gas Properties in connection with any subsequent funding
after the Closing);
(D) No material adverse change shall have occurred in the Borrower's
financial condition since the date of the latest Financial Statements
provided to the Bank; and
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(E) All of the Security Instruments shall have remained in full force
and effect.
3.04 Legal Matters. At the time of the Closing and each subsequent
disbursement, all legal matters incidental thereto shall be reasonably
satisfactory to the Bank's designated legal counsel.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Agreement and to make the Loans
hereunder, Borrower represents and warrants to the Bank that:
4.01 Existence. The Borrower is a corporation, duly organized, legally
existing, and in good standing under the Laws of the State of Delaware; each
Subsidiary is a corporation duly organized, validly existing, and in good
standing under the Laws of its state of incorporation; the Borrower and its
Subsidiaries have the lawful power to own their properties and to engage in the
businesses they conduct, and each is duly qualified and in good standing as a
foreign corporation in the jurisdictions wherein the nature of the business
transacted by it or property owned by it makes such qualification necessary; the
states in which the Borrower and each Subsidiary are incorporated and qualified
to do business are set forth in Schedule 4.01; the addresses of all places of
business of the Borrower and its Subsidiaries are as set forth in Schedule 4.01;
neither the Borrower nor any Subsidiary has changed its name, been the surviving
corporation in a merger, acquired any business, or changed its principal
executive office within five (5) years and one (1) month prior to the date
hereof, except as disclosed on Schedule 4.01; the Borrower has no Subsidiaries
other than the Subsidiaries named in Schedule 4.01; and all of the authorized,
issued and outstanding shares of capital stock of each Subsidiary is owned by
the Borrower. Borrower is qualified under applicable Minerals Management Service
regulations to act as the operator of the Leases where required.
4.02 Due Authorization. Upon execution of the Loan Documents, the
execution and delivery by the Borrower of this Agreement and the borrowings
hereunder; the execution and delivery by the Borrower of the Note, the Security
Instruments, and the Transfer Order Letters; and the repayment by the Borrower
of the Indebtedness evidenced by the Note and interest and fees provided in the
Note and this Agreement are (a) within the corporate power of the Borrower; (b)
have been duly authorized by all necessary corporate action, and (c) do not and
will not (i) require the consent of any regulatory authority or governmental
body, (ii) contravene or conflict with any provision of Law or of the articles
or bylaws of the Borrower, (iii) contravene or conflict with any indenture,
instrument or other agreement to which the Borrower is a party or by which its
property may be presently bound or encumbered, or (iv) result in or require the
creation or imposition of any mortgage, lien, pledge, security interest, charge
or other encumbrance in, upon or of any of the properties or assets of the
Borrower under any such indenture, instrument or other agreement, other than
under any of the Security Instruments.
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4.03 Valid and Binding Obligations. This Agreement, the Note, and the
Security Instruments when duly executed and delivered, will be legal, valid and
binding obligations of and enforceable against the Borrower, in accordance with
their respective terms (subject to any applicable bankruptcy, insolvency or
other Laws of general application affecting creditors' rights, general equitable
principles, whether considered in a proceeding in equity or at law, and judicial
decisions interpreting any of the foregoing).
4.04 Scope and Accuracy of Financial Statements. All Financial
Statements submitted and to be submitted to the Bank hereunder are and will be
complete and correct in all material respects, are and will be prepared in
accordance with GAAP consistently applied, and do and will fairly reflect the
financial condition and the results of the operations of the Borrower in all
material respects as of the dates and for the period stated therein (subject
only to normal year-end audit adjustments with respect to such unaudited interim
statements of the Borrower) and no material adverse change has since occurred in
the condition, financial or otherwise, of the Borrower.
4.05 Title to Borrowing Base Oil and Gas Properties. The Borrower has
Marketable Title to the working and net revenue interests in the Borrowing Base
Oil and Gas Properties as set forth on Exhibit "A", free and clear of all
mortgages, liens and encumbrances, except for Permitted Encumbrances and any
other exceptions, limitations or qualifications expressly disclosed on Exhibit
"A."
4.06 Oil and Gas Leases. The Leases which constitute any part of the
Borrowing Base Oil and Gas Properties are in full force and effect as to those
portions within the Borrowing Base Oil and Gas Properties, are valid, subsisting
leases as to those portions within the Borrowing Base Oil and Gas Properties to
which they pertain and all rentals, royalties and other amounts due and payable
in accordance with the terms of the Leases as to those portions within the
Borrowing Base Oil and Gas Properties, overriding royalties, net profits or
other production burdens have been duly paid or provided for; the obligations to
be performed under the Leases as to those portions within the Borrowing Base Oil
and Gas Properties have been duly performed; and the Borrower is not aware of
any default by any third party under any of the Leases with respect to such
third party's obligations.
4.07 Interest in the Borrowing Base Oil and Gas Properties. Except as
otherwise set forth on Exhibit "A" hereto, with respect to each of the Borrowing
Base Oil and Gas Properties the ownership of the Borrower in such property will,
with respect to the wells, units and/or tracts of land described in Exhibit "A"
hereto in connection with such property, (i) entitle the Borrower to receive
(subject to the terms and provisions of this Agreement) a Net Revenue Interest
decimal share of the oil and gas produced from, or allocated to, such wells,
units and/or tracts equal to not less than the NRI decimal share set forth in
Exhibit "A" in connection with such wells, units and/or tracts, and (ii) cause
the Borrower to be obligated to bear a Working Interest decimal share of the
cost of exploration, development and operation of such wells, units and/or
tracts of land not greater than the W.I. decimal share set forth in Exhibit "A"
in connection with such wells, units and/or tracts, unless any increase in the
Borrower's share of costs is accompanied by a pro-rata increase in the
Borrower's share of revenue. Except as set forth in the instrument and
agreements, if any, more particularly described in Exhibit "A" hereto, all such
shares of production which the Borrower is entitled to receive, and shares of
expenses which the Borrower is obligated to bear, are not subject to change,
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except for changes attributable to future elections by the Borrower not to
participate in operations proposed pursuant to customary forms of applicable
joint operating agreements, and except for changes attributable to changes in
participating areas under any federal units wherein participating areas may be
formed, enlarged or contracted in accordance with the rules and regulations of
the applicable governmental authority.
4.08 Oil and Gas Contracts. The Borrower is not obligated, by virtue
of any prepayment under any contract providing for the sale by the Borrower of
hydrocarbons which contains a "take-or-pay" clause or under any similar
prepayment agreement or arrangement, including, without limitation, "gas
balancing agreements", to deliver a material amount of hydrocarbons produced
from the Borrowing Base Oil and Gas Properties at some future time without then
or thereafter receiving full payment therefor (i.e., in the case of oil, not in
excess of sixty (60) days, and in the case of gas, not in excess of ninety (90)
days). The Borrowing Base Oil and Gas Properties are not subject to any
contractual, or other arrangement for the sale of crude oil which cannot be
canceled on ninety (90) days' (or less) notice, unless the price provided for
therein is equal to or greater than the prevailing market price in the vicinity.
The Borrowing Base Oil and Gas Properties are not subject to any gas sales
contract that contains any material terms which are not customary in the
industry within the region in which the Borrowing Base Oil and Gas Properties
affected thereby are located. The Borrowing Base Oil and Gas Properties are not
subject to any regulatory refund obligation and no facts exist which might cause
the same to be imposed.
4.09 Producing Wells. All producing wells located on the Borrowing
Base Oil and Gas Properties have been, during all times that such were under the
direction or control of the Borrower and, to the knowledge of the Borrower, at
all other times, drilled, operated and produced in conformity with all
applicable Laws, rules, regulations and orders of all regulatory authorities
having jurisdiction, are subject to no penalties on account of past production,
and are bottomed under and are producing from, and the well bores are wholly
within, the Borrowing Base Oil and Gas Properties, or on Oil and Gas Properties
which have been pooled, unitized or communitized with the Borrowing Base Oil and
Gas Properties.
4.10 Purchasers of Production. The persons who are purchasing the
Borrower's interests in oil and gas produced from the Borrowing Base Oil and Gas
Properties as of the calendar month during which the initial Loans are made
hereunder are identified on Schedule 4.10 attached hereto.
4.11 Authorizations and Consents. No authorization, consent, approval,
exemption, franchise, permit or license of, or filing with, any governmental or
public authority or any third party is required to authorize, or is otherwise
required in connection with the valid execution and delivery by the Borrower of
this Agreement, the Note, and the Security Instruments, or any other instrument
contemplated hereby, the repayment by the Borrower of advances against the Note
and interest and fees provided in the Note and this Agreement, or the
performance by the Borrower of its obligations under any of the foregoing.
4.12 Environmental Laws. The Borrower (a) is and has in the past been
in compliance with all Environmental Laws and all permits, requests and
notifications relating to health,
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safety or the environment applicable to the Borrower or any of its properties,
assets, operations and businesses; (b) has obtained and adhered to and currently
possesses all necessary permits and other approvals, including interim status
under the Federal Resource Conservation and Recovery Act, necessary to store,
dispose of and otherwise handle Hazardous Substances and to operate its
properties, assets and businesses; (c) has reported, to the extent required by
all federal, state and local statutes, Laws, ordinances, regulations, rules,
permits, judgments, orders and decrees, all past and present sites owned and/or
operated by the Borrower where any Hazardous Substance has been released,
treated, stored or disposed of and (d) has not used, stored, or Released any
Hazardous Substance in excess of amounts allowed by Environmental Law. There is
(x) no location on any property currently or previously owned or operated by the
Borrower where Hazardous Substances are known to have entered or are likely to
enter into the soil or groundwater or such property, other than immaterial
releases of oil or natural gas in the ordinary course of business none of which
releases (i) either individually, or in the aggregate, has had or may be
expected to have material adverse effect on the Borrower's business or (ii) has
violated or may be expected to violate any Environmental Laws, and (y) no
on-site or off-site location to which the Borrower has released or transported
Hazardous Substances or arranged for the transportation or disposal of Hazardous
Substances, which is or is likely to be the subject of any federal, state, local
or foreign enforcement action or any investigation which could lead to any
material claims against any such entity for any clean-up cost, remedial work,
damage to natural resources, common law or legal liability, including, but not
limited to, claims under Comprehensive Environmental Response, Compensation, and
Liability Act. For the purposes of this Section, references to "the Borrower"
shall include all predecessors, successors-in-interest of the Borrower;
provided, that with respect to the Borrower's properties or assets, the
foregoing representations as to predecessors and successors-in-interest are
limited to the knowledge of the Borrower.
4.13 Compliance with Laws, Rules, Regulations and Orders. Except to
the extent that the failure to comply would not materially interfere with the
conduct of the business of the Borrower or any Subsidiary, the Borrower and its
Subsidiaries have each complied with all applicable Laws with respect to: (1)
the conduct of its business; and (2) the use, maintenance, and operation of the
Borrowing Base Oil and Gas Properties and personal properties owned or leased by
it in the conduct of its business; except as expressly set forth on Exhibit "A"
hereto, the Borrower and its Subsidiaries possess all licenses, approvals,
registrations, permits and other authorizations necessary to enable it to carry
on its business in all material respects as now conducted, and all such
licenses, approvals, registrations, permits and other authorizations are in full
force and effect; and the Borrower has no reason to believe that the Borrower or
any of its Subsidiaries will be unable to obtain the renewal of any such
licenses, approvals, registrations, permits and other authorizations.
4.14 Liabilities, Litigation and Restrictions. Except as disclosed in
the Financial Statements, the Borrower and its Subsidiaries do not have any
liabilities, direct or contingent, which may materially and adversely affect it,
its business or assets. There is no litigation or other action of any nature
pending before any court, governmental instrumentality, regulatory authority or
arbitral body or, to the actual knowledge of the Borrower threatened against or
affecting the Borrower or its Subsidiaries which might reasonably be expected to
result in any material, adverse change in the Borrower or its Subsidiaries, or
the business or assets of either. To the best of the Borrower's knowledge, no
unduly burdensome restriction, restraint or hazard exists by contract or Law
that would
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materially and adversely affect the Borrower or the pursuit of the business
activities conducted by the Borrower.
4.15 Existing Indebtedness. All existing Indebtedness of the Borrower
and any Subsidiary is described in Schedule 4.15; neither the Borrower nor any
Subsidiary is in default with respect to any of its existing Indebtedness; and
each item of existing Indebtedness described on Schedule 4.15 that also
constitutes Subordinated Debt described on Schedule 1.01(a) is evidenced by a
Subordinated Note in substantially the form of the Subordinated Note dated May
24, 1999, executed by Borrower and payable to the order of Michael E. Little
(with appropriate adjustments to reflect the date, amount and payee thereof), a
true and correct copy of which has been provided by Borrower to Bank.
4.16 Material Commitments. Except as described in Schedule 4.16
hereto, (a) neither the Borrower nor any Subsidiary has any material leases
(other than oil and gas leases), contracts or commitments of any kind
(including, without limitation, employment agreements; collective bargaining
agreements; powers of attorney; distribution arrangements; patent license
agreements; contracts for future purchase or delivery of goods or rendering of
services; bonuses, pension and retirement plans; or accrued vacation pay,
insurance and welfare agreements); (b) to the best of the Borrower's knowledge,
all parties to all such material leases, contracts, and other commitments to
which the Borrower or any Subsidiary is a party have complied with the
provisions of such leases, contracts, and other commitments; and (c) to the best
of the Borrower's knowledge, no party is in default under any thereof and no
event has occurred that but for the giving of notice or the passage of time, or
both, would constitute a default;
4.17 Margin Stock. The Borrower is not engaged principally, or as one
of its important activities, in the business of extending credit for the purpose
of purchasing or carrying margin stock (within the meaning of Regulations T, U,
or X of the Board of Governors of the Federal Reserve System), and no part of
the proceeds of any extension of credit under this Agreement will be used to
purchase or carry any such margin stock or to extend credit to others for the
purpose of purchasing or carrying margin stock. Neither the Borrower nor any
Person acting on its behalf has taken any action that might cause the
transactions contemplated by this Agreement or the Note to violate Regulations
T, U, or X or to violate the Securities Exchange Act of 1934, as amended.
4.18 Proper Filing of Tax Returns and Payment of Taxes Due. Except as
otherwise permitted herein, the Borrower has filed all federal, state, and local
tax returns and other reports required by any applicable Laws to have been filed
prior to the date hereof, has paid or caused to be paid all taxes, assessments,
and other governmental charges that are due and payable prior to the date
hereof, and has made adequate provision for the payment of such taxes,
assessments, or other charges accruing but not yet payable; the Borrower has no
knowledge of any material deficiency or additional assessment in connection with
any taxes, assessments, or charges not provided for on its books.
4.19 ERISA. The Borrower is in compliance in all material respects
with all applicable provisions of ERISA. Neither a Reportable Event nor a
Prohibited Transaction has occurred and is continuing with respect to any plan;
no notice of intent to terminate a plan has been filed, nor has any plan been
terminated; no circumstances exist which constitute grounds under Section
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4042 of ERISA entitling the PBGC to institute proceedings to terminate, or
appoint a trustee to administrate a plan, nor has the PBGC instituted any such
proceedings; neither the Borrower nor any ERISA Affiliate has completely or
partially withdrawn under Sections 4201 or 4204 of ERISA from a Multi-Employer
Plan; the Borrower and each ERISA Affiliate has met its minimum funding
requirements under ERISA with respect to all of its plans and the present value
of all vested benefits under each plan exceeds the fair market value of all plan
assets allocable to such benefits, as determined on the most recent valuation
date of the plan and in accordance with the provisions of ERISA and the
regulations thereunder for calculating the potential liability of the Borrower
or any ERISA Affiliate to the PBGC or the plan under Title IV of ERISA; and
neither the Borrower nor any ERISA Affiliate has incurred any liability to the
PBGC under ERISA.
4.20 Investment Company Act Compliance. Neither the Borrower nor any
Subsidiary is directly or indirectly controlled by, or acting on behalf of, any,
Person which is an "Investment Company," within the meaning of the Investment
Company Act of 1940, as amended.
4.21 Public Utility Holding Company Act Compliance. The Borrower is
not a "holding company", or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company", within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
4.22 Insurance. The Borrower maintains insurance with respect to the
properties and business of the Borrower providing coverage for such liabilities,
casualties, risks and contingencies and in such amounts as is customary in the
industry. The insurance coverage reflected on the Certificate of Insurance
attached hereto as Schedule 4.22 is in full force and effect, and all premiums
due thereon have been paid.
4.23 Material Misstatements and Omissions. No representation or
warranty by or with respect to the Borrower or any Subsidiary contained herein
or in any certificate or other document furnished by the Borrower or any
Subsidiary pursuant hereto contains any untrue statement of a material fact or
omits to state a material fact necessary to make such representation or warranty
not misleading in light of the circumstances under which it was made.
ARTICLE V.
AFFIRMATIVE COVENANTS
Borrower covenants so long as any Indebtedness of the Borrower to the
Bank remains unpaid under this Agreement, or any Obligations of the Borrower to
the Bank remain unsatisfied, or the Bank remains obligated to make advances
hereunder, to:
5.01 Use of Funds. Use the proceeds advanced under the Loan to fund
(i) acquisitions of Oil and Gas Properties, (ii) development drilling programs,
(iii) exploration projects approved by the Bank in its sole discretion, (iv)
working capital, (v) general operations, (vi)
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$750,000.00 due on subordinated debentures payable by Borrower to Eugene L.
Ames, Jr., and (vii) other general corporate purposes.
5.02 Maintenance and Access to Records. Keep adequate records in
accordance with good accounting practices, of all of the transactions of the
Borrower so that at any time, and from time to time, such records present fairly
the financial condition of the Borrower which may be readily determined and, at
the Bank's reasonable request, make all financial records and records relating
to the Borrowing Base Oil and Gas Properties available for the Bank's inspection
and permit the Bank to make and take away copies thereof.
5.03 Quarterly Unaudited Financial Statements. Deliver to the Bank, on
or before the forty-fifth (45th) day after the end of each calendar quarter,
unaudited Financial Statements of the Borrower, as at the end of such period and
from the beginning of such fiscal year to the end of the respective period, as
applicable, which Financial Statements shall be certified by the president or
chief financial officer of the Borrower, as being true and correct, subject to
changes resulting from year-end audit adjustments.
5.04 Annual Audited Financial Statements. Deliver to the Bank, on or
before the ninetieth (90th) day after the close of each fiscal year of the
Borrower a copy of annual audited Financial Statements of the Borrower, together
with the report and opinion thereon of KPMG LLP or such other firm of
independent certified public accountants acceptable to the Bank at its
reasonable discretion.
5.05 Compliance Certificate. At the time of Closing, and at the time
of delivery of the certified but unaudited Financial Statements pursuant to
Section 5.03 above, and the delivery of the annual audited Financial Statements
pursuant to Section 5.04 above, deliver to the Bank a Compliance Certificate.
5.06 Statement of Material Adverse Change in Condition. Deliver to the
Bank, promptly upon any officer of the Borrower having knowledge of any material
adverse change in the condition, financial or otherwise, of the Borrower (or any
event or circumstance that would result in any such material adverse change in
condition), a statement of the President, Chief Financial Officer, or the
Treasurer of the Borrower, setting forth the change in condition or event or
circumstance likely to result in any such change and the steps being taken by
the Borrower with respect to such change in condition or event or circumstance.
5.07 Title Defects. Cure any title defects to the Borrowing Base Oil
and Gas Properties material in value, in the sole opinion of the Bank, and, in
the event any title defects are not cured in a timely manner, pay all related
costs and fees incurred by the Bank to do so.
5.08 Additional Information. Furnish to the Bank all information, if
any, filed with the SEC by the Borrower and all information routinely provided
by the Borrower to its shareholders, generally. Furnish to the Bank, promptly
upon the Bank's reasonable request, such additional financial or other
information concerning the assets, liabilities, operations, and transactions of
the Borrower,
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including, without limitation, information concerning title to any of the
Borrowing Base Oil and Gas Properties.
5.09 Compliance with Laws and Payment of Assessments and Charges.
Materially comply with all applicable statutes and government regulations,
including, without limitation, ERISA, and pay all taxes, assessments,
governmental charges, claims for labor, supplies, rent and other obligations
which, if unpaid, might become a lien other than a Permitted Encumbrance against
its property, except any of the foregoing being contested in good faith and as
to which accruals satisfactory to the Bank, in its reasonable discretion, have
been provided.
5.10 Maintenance of Existence and Good Standing. Maintain the
Borrower's corporate existence and good standing in the jurisdiction of its
organization, and maintain the Borrower's qualification and good standing in all
other jurisdictions wherein the property now owned or hereafter acquired or
business now or hereafter conducted by Borrower necessitates same, other than
those jurisdictions wherein the failure to so qualify will not have a material
adverse effect on the Borrower.
5.11 Further Assurances. Promptly cure any defects in the execution
and delivery of this Agreement, the Note, the Security Instruments, the Transfer
Order Letters, or any other instrument referred to herein or executed in
connection with the Note, and upon the reasonable request of the Bank, promptly
execute and deliver to the Bank all such other and further instruments as may be
reasonably required or desired by the Bank from time to time in compliance with
the covenants and agreements made in this Agreement.
5.12 Initial Expenses of the Bank. Pay prior to or at Closing all
documented reasonable fees and expenses of Porter & Hedges, L.L.P., the special
legal counsel for the Bank incurred directly and solely in connection with the
preparation of this Agreement, the Note, the Security Instruments, the Transfer
Order Letters, and any other instrument referred to herein or executed directly
and solely in connection with the Note, the satisfaction of the conditions
precedent set forth in Article III of this Agreement and the consummation of the
transactions contemplated in this Agreement.
5.13 Subsequent Expenses of the Bank. Upon request, promptly reimburse
the Bank for all documented amounts reasonably expended, advanced or incurred by
the Bank to collect the Note or to enforce the rights of the Bank under this
Agreement, the Note, the Security Instruments, the Transfer Order Letters, or
any other instrument referred to herein or executed in connection with the Note,
which amounts shall be deemed compensatory in nature and liquidated as to amount
upon notice to the Borrower by the Bank and which amounts will include, but not
be limited to, (a) all court costs, (b) reasonable attorneys' fees, (c) fees of
auditors and accountants, (d) investigation expenses, (e) internal fees of the
Bank's in-house legal counsel, (f) fees and expenses incurred in connection with
the Bank's participation as a member of the creditors committee in a case
commenced under Title 11 of the United States Code or other similar Law of the
United States, the State of Texas or any other jurisdiction, (g) fees and
expenses incurred in connection with lifting the automatic stay prescribed in
Sections 362 Title 11 of the United States Code, and (h) fees and expenses
incurred in connection with any action pursuant to Sections 1129 Title 11 of the
United States Code, reasonably incurred by the Bank in
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connection with the collection of any sums due under this Agreement, together
with interest at the Floating Rate per annum, calculated on a basis of a year of
three hundred sixty (360) days on each such amount from the date of notification
to the Borrower that the same was expended, advanced or incurred by the Bank
until, but not including, the date it is repaid to the Bank, with the
obligations under this Section 5.13, surviving the non-assumption of this
Agreement in a case commenced under Title 11 of the United States Code or other
similar Law of the United States, the State of Texas or any other jurisdiction
and being binding upon the Borrower or a trustee, receiver or liquidator of any
such party appointed in any such case.
5.14 Maintenance of Tangible Property. Maintain all of its tangible
property relating to the Borrowing Base Oil and Gas Properties in good repair
and condition and make all necessary replacements thereof and operate such
property in a good and workmanlike manner in accordance with standard industry
practices, unless the failure to do so would not have a material adverse effect
on the Borrower or the value of any Borrowing Base Oil and Gas Property.
5.15 Maintenance of Insurance. Continue to maintain, or cause to be
maintained, insurance with respect to the properties and business of the
Borrower against such liabilities, casualties, risks and contingencies and in
such amounts as is customary in the industry and furnish to the Bank annually
after the execution of this Agreement certificates evidencing such insurance.
5.16 Inspection of Tangible Assets/Right of Audit. Permit any
authorized representative of the Bank to visit and inspect (at the risk of the
Bank and/or such representative) any tangible asset of the Borrower, and/or to
audit the books and records of the Borrower during normal business hours, at the
expense of the Bank and during normal business hours following reasonable
advance notice.
5.17 Payment of Note and Performance of Obligations. Pay the Note
according to the reading, tenor and effect thereof, as modified hereby, and do
and perform every act and discharge all of the Obligations provided to be
performed and discharged hereunder.
5.18 Borrowing Base. Maintain a Borrowing Base such that the amount of
the Borrower's outstanding Revolving Loan will not, at any time, exceed its
Borrowing Base.
5.19 Compliance with Environmental Laws. Comply in all material
respects with any and all requirements of Law, including, without limitation,
Environmental Laws, (a) applicable to any natural or environmental resource or
media located on, above, within, in the vicinity of, related to or affected by
any Borrowing Base Oil and Gas Properties or any other property of the Borrower,
or (b) applicable to the performance or conduct of is operations, including,
without limitation, all permits, licenses, registrations, approvals and
authorizations, and, in this regard, comply fully and in a timely manner with,
and cause all employees, crew members, agents, contractors and subcontractors
(pursuant to appropriate contractual provisions) and future lessees (pursuant to
appropriate lease provisions) of the Borrower while such Persons are acting
within the scope of their relationship with the Borrower, to so comply with, all
applicable requirements of Law, including, without limitation, applicable
Environmental Laws, and other applicable requirements with respect to the
property of the Borrower, as applicable, and the operation thereof necessary or
appropriate to enable the Borrower,
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as applicable, to fulfill its obligations under all applicable
requirements of Law, including, without limitation, Environmental Laws,
applicable to the use, generation, handling, storage, treatment, transport and
disposal of any Hazardous Substances now or hereafter located or present on or
under any such property.
5.20 Hazardous Substances Indemnification. Indemnify and hold the Bank
harmless from and against any and all claims, losses, damages, liabilities,
fines, penalties, charges, administrative and judicial proceedings and orders,
judgments, remedial actions, requirements and enforcement actions of any kind,
and all costs and expenses incurred in connection therewith (including, without
limitation, attorneys' fees and expenses), arising directly or indirectly, in
whole or in part, out of (a) the presence of any Hazardous Substances on, under
or from its property, whether prior to or during the term hereof, or (b) any
activity carried on or undertaken on or off its property, whether prior to or
during the term hereof, and whether by the Borrower, or any predecessor in title
or any employees, agents, contractors or subcontractors of the Borrower, or any
predecessor in title, or any third Persons at any time occupying or present on
such property, in connection with the handling, treatment, removal, storage,
decontamination, cleanup, transportation or disposal of any Hazardous Substances
at any time located or present on or under such property; with the foregoing
indemnity further applying to any residual contamination on or under the
property of the Borrower, or any property of any other Person, or affecting any
natural resources, and to any contamination of any property or natural resources
arising in connection with the generation, use, handling, storage,
transportation or disposal of any Hazardous Substances, irrespective of whether
any of such activities were or will be undertaken in accordance with applicable
requirements of Law, including, without limitation, Environmental Laws, and
surviving satisfaction of all Indebtedness of the Borrower to the Bank and the
termination of this Agreement, unless all such Indebtedness has been satisfied
wholly in cash from the Borrower and not by way of realization against any
property or the conveyance of any property of the Borrower in lieu thereof,
provided that the claims and other actions of any kind against the Bank which
give rise to such indemnity are not barred by the applicable statute of
limitations at the time such claims or actions are instituted and such indemnity
shall not extend to any act or omission by the Bank with respect to the relevant
property subsequent to the Bank becoming the owner of, taking possession of to
the exclusion of the Borrower or assuming operations of any property previously
owned by the Borrower and with respect to which property such claim, loss,
damage, liability, fine, penalty, charge, proceeding, order, judgment, action or
requirement arises subsequent to the acquisition of title thereto, taking
possession thereof or assumption of operations thereon by the Bank.
5.21 Properties Not Operated by the Borrower. With regard to all of
the Borrower's covenants in this Article V that relate to Oil and Gas
Properties, if any, for which Borrower is not the operator, to the extent that
the performance of such covenants can only be carried out through the operator,
the Borrower shall exercise reasonable diligence under the terms of the
applicable operating agreements to cause the operators to satisfy such
covenants, but shall not be directly responsible for doing so.
5.22 Transactions with Affiliates. Conduct all transactions with any
Affiliate of the Borrower on an arm's-length basis (provided that such
transactions are otherwise permitted by the terms of this Agreement).
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5.23 Leases. Keep and continue all Leases comprising the Borrowing
Base Oil and Gas Properties and related contracts and agreements relating
thereto in full force and effect in accordance with the terms thereof and not
permit the same to lapse or otherwise become impaired for failure to comply with
the obligations thereof, whether express or implied; provided, however, that
this provision shall not prevent the Borrower from abandoning and releasing any
such Leases upon their termination as the result of the failure of production in
paying quantities that did not result from the Borrower's failure to maintain
such production as a reasonably prudent operator.
5.24 Operation of Borrowing Base Oil and Gas Properties. Operate or,
to the extent that the right of operation is vested in others, exercise all
reasonable efforts to require the operator to operate the Borrowing Base Oil and
Gas Properties and all wells drilled thereon and that may hereafter be drilled
thereon, continuously and in a good and workmanlike manner as a prudent
operator, and in accordance with all Laws of the State in which the Borrowing
Base Oil and Gas Properties are situated and the United States of America, as
well as all rules, regulations, and Laws of any governmental agency having
jurisdiction to regulate the manner in which the operation of the Borrowing Base
Oil and Gas Properties shall be carried on, and comply with all terms and
conditions of the Leases it now holds, and any assignment or contract obligating
the Borrower in any way with respect to the Borrowing Base Oil and Gas
Properties; but nothing herein shall be construed to empower the Borrower to
bind the Bank to any contract obligation, or render the Bank in any way
responsible or liable for bills or obligations incurred by the Borrower.
5.25 Assignments. Upon request of the Bank, execute and deliver
written notices of assignments to any persons, corporations or other entities
owing or which may in the future owe to the Borrower monies or accounts arising
in connection with any of the following matters: (a) any oil, gas or mineral
production from the Borrowing Base Oil and Gas Properties; (b) any gas
contracts, processing contracts or other contracts relating to the Borrowing
Base Oil and Gas Properties; or (c) the operation of or production from any part
of the Borrowing Base Oil and Gas Properties.
5.26 Change of Purchasers of Production. On or before each anniversary
of the Closing, and at any other time that the Bank may so request in writing,
the Borrower shall notify the Bank in writing of the identity and address of
each then-current purchaser of production from the Borrowing Base Oil and Gas
Properties and, if requested by the Bank, shall provide the Bank with Transfer
Order Letters executed by the Borrower and addressed to such purchasers of
production.
5.27 Payment of Taxes, Etc. The Borrower and its Subsidiaries will
each pay or cause to be paid when due, all taxes, assessments, and charges or
levies imposed upon it or on any of its property or which it is required to
withhold and pay, except where contested in good faith by appropriate
proceedings with adequate reserves therefor having been set aside on its books,
provided, however, that the Borrower and its Subsidiaries shall each pay or
cause to be paid all such taxes, assessments, charges, or levies forthwith
whenever foreclosure on any lien that may have attached (or security therefor)
appears imminent.
5.28 Notice of Litigation. The Borrower and its Subsidiaries will each
give immediate notice to the Bank of: (1) any litigation or proceeding in which
it is a party if an adverse decision therein would require it to pay more than
$50,000.00 or deliver assets the value of which
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exceeds such sum (whether or not the claim is considered to be covered by
insurance); and (2) the institution of any other suit or proceeding involving
the Borrower that might materially and adversely affect its operations,
financial condition, property, or business prospects.
5.29 Notice of Events of Default. The Borrower and its Subsidiaries
will each notify the Bank immediately if it becomes aware of the occurrence of
any Event of Default or of any fact, condition, or event that only with the
giving of notice or passage of time or both, would become an Event of Default or
if it becomes aware of any material adverse change in the business prospects,
financial condition (including, without limitation, proceedings in bankruptcy,
insolvency, reorganization, or the appointment of a receiver or trustee), or
results of operations of the Borrower or any Subsidiary, or of the failure of
the Borrower to observe any of its undertakings hereunder or under the Security
Instruments.
5.30 Notice of Change of Principal Offices. The Borrower and its
Subsidiaries will each notify the Bank thirty (30) days in advance of any change
in the location of their principal offices.
5.31 Employee Benefit Plans. Fund its Plan(s) in accordance with no
less than the minimum funding standards of 29 U.S.C.A. Sections 1082 (Section
302 of ERISA); furnish the Bank, promptly after the filing or receiving of the
same, with copies of any reports or other statements filed with, or notices or
other communications received from, the United States Department of Labor, the
PBGC, or the Internal Revenue Service with respect to any such Plan; promptly
advise the Bank of the occurrence of any Reportable Event or Prohibited
Transaction with respect to any such Plan and the action the Borrower proposes
to take with respect thereto; and promptly advise the Bank when the Borrower
knows or has reason to believe that the PBGC or the Borrower has instituted or
will institute proceedings under Title IV of ERISA to terminate any such Plan
and the action the Borrower proposes to take with respect thereto.
5.32 Production Reports. On or before the thirtieth (30th) day after
the end of each month prior to the Revolving Loan Termination Date, the Borrower
shall prepare and submit to the Bank a report of Borrower's oil and gas
production during such month, on a field-by-field basis, including all material
details regarding the sale or other disposition of such production, in a form
reasonably acceptable to the Bank.
5.33 Operating Accounts. Maintain its primary operating accounts with
the Bank.
5.34 P&A Expenses. Develop and implement a plan reasonably
satisfactory to Lender for managing Borrower's expenses associated with well and
platform plugging and abandonment expenses.
5.35 Payment of Obligations. Promptly pay (or renew and extend) all of
its Indebtedness (subject to Section 6.01 in the case of Subordinated Debt), as
it becomes due (unless such Indebtedness is contested in good faith by
appropriate proceedings).
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5.36 Hedge Agreements. Within three (3) Business Days after Closing,
enter into Hedge Agreements that are satisfactory to Bank in its sole
discretion, which Hedge Agreements shall have a term of at least twelve (12)
months and shall cover at least fifty (50) percent of Borrower's monthly oil and
gas production for an average strike price acceptable to Bank.
5.37 Amendment of Wells Fargo Security Instruments. Within five
Business Days after receipt of written request therefor from Bank, Borrower
shall execute, acknowledge and deliver to Bank all such instruments as Bank may
reasonably request to amend each of the Wells Fargo Security Instruments to
redefine the lender, secured party, mortgagee and/or beneficiary identified
therein from Wells Fargo Bank (Texas), N.A., to Bank One, Texas, N.A., to change
all references that may be made therein to the Wells Fargo Credit Agreement to
instead refer to this Agreement, and to replace all references therein to the
Wells Fargo Note, as a part of the indebtedness secured thereby, to instead
refer to the Revolving Note executed by Borrower pursuant to this Agreement.
ARTICLE VI.
NEGATIVE COVENANTS
Without the prior written consent of the Bank and so long as any part
of the principal or interest on the Note shall remain unpaid or the Bank remains
obligated to make advances hereunder, Borrower covenants that it will not:
6.01 Other Indebtedness; Payments on Subordinated Debt. Incur, create,
assume or suffer to exist any Indebtedness, whether by way of loan or the
issuance or sale of securities except Permitted Indebtedness. The Borrower shall
not, under any circumstances, make any cash payments of principal or interest on
Subordinated Debt.
6.02 Loans or Advances. Make or agree to make or allow to remain
outstanding any loans or advances to any Person, except for loans or advances
that do not exceed Ten Thousand Dollars ($10,000.00) in the aggregate, and
except advances or extensions of credit in the form of accounts receivable
incurred in the ordinary course of business.
6.03 Mortgages or Pledges of Assets. Create, incur, assume or permit
to exist, any mortgage, pledge, security interest, lien or encumbrance on any of
its properties or assets (now owned or hereafter acquired), except for Permitted
Encumbrances.
6.04 Sales of Assets. Except for Permitted Asset Sales, sell, lease,
assign, transfer or otherwise dispose of, in one or any series of related
transactions, all or any portion of its Oil and Gas Properties or other material
assets, whether now owned or hereafter acquired, including transfers to
Subsidiaries, nor enter into any arrangement, directly or indirectly, with any
Person to sell and rent or lease back as lessee such property or any part
thereof which is intended to be used for substantially the same purpose or
purposes as the property sold or transferred.
6.05 Dividends. Declare or pay any distribution on, or purchase,
redeem or otherwise acquire for value, any interest in the Borrower.
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6.06 Payment of Accounts Payable. Allow any account payable to remain
unpaid more than sixty (60) days after due date, except such as are (i) being
contested in good faith and as to which adequate provision or accrual has been
made, or (ii) the subject of usual and customary review and evaluation.
6.07 Cancellation of Insurance. Allow any insurance policy required to
be carried hereunder to be terminated or lapse or expire without provision for
adequate renewal thereof.
6.08 Investments. Make Investments in or purchase or otherwise acquire
all or substantially all of the assets of any Person, or any shares of stock of,
or similar interest in, any other Person, if the result of such action would
impair the ability of the Borrower to perform any of its Obligations pursuant to
this Agreement, including, without limitation, the obligation to repay the
Indebtedness evidenced by the Note, except that the Borrower may invest in
instruments that are investment grade.
6.09 Changes in Structure or Business. Consolidate or merge with or
purchase (for cash or securities) all or a substantial part of the assets or
capital stock of any corporation, firm, association or enterprise, or allow any
such entity to be merged into the Borrower, or change the basic business
operations of the Borrower.
6.10 Limitation on Leases. Incur or otherwise become obligated to make
payments on operating and capital leases not incurred in the ordinary course of
business.
6.11 Pooling or Unitization. Voluntarily pool or unitize all or any
part of the Borrowing Base Oil and Gas Properties if such pooling or unitization
would not be done by a prudent operator or would result in the diminution of the
Borrower's net revenue interest in production from the pooled or unitized lands
that is greater than the proportionate reduction that would result from
allocating the pooled or unitized production from the pool or unit to each tract
included therein on a surface acreage basis, without the Bank's prior consent,
which will not be unreasonably withheld. Any unitization, pooling or
communitization or other action or instrument in violation of this Section 6.11
shall be of no force or effect against the Bank.
6.12 Hedge Agreements. Except for Permitted Hedge Agreements, enter
into or become obligated under any contract for sale for future delivery of
Hydrocarbons other than normal production contracts entered into in the
Borrower's normal course of business (whether or not the subject Hydrocarbons
are to be delivered), forward contract, Hedging Agreement, futures contract or
any other similar agreement, without the prior written consent of the Bank,
acting in its sole discretion.
6.13 Capital Stock of Borrower. Except in satisfaction of its
obligations relating to the Subordinated Debt, neither the Borrower nor any
Subsidiary will issue, redeem, purchase, or retire any of its capital stock or
grant or issue or purchase or retire for any consideration any warrant, right,
or option pertaining thereto or other security convertible into any of the
foregoing, or except for the issuance of the Borrower's capital stock which does
not result in a Change of Control or the performance of its obligations relating
to the Subordinated Debt, permit any transfer, sale, redemption,
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retirement, or other change in the ownership of the outstanding capital stock of
the Borrower or any Subsidiary, without the prior written consent of the Bank,
acting in its sole discretion.
6.14 Margin Stock. Neither the Borrower nor any Subsidiary will
directly or indirectly apply any part of the proceeds of the Loans to the
purchasing or carrying of any "margin stock" within the meaning of Regulation U
of the Board of Governors of the Federal Reserve System, or any regulations,
interpretations or rulings thereunder.
6.15 General and Administrative Expenses. Pay, incur, or otherwise
become obligated to pay General and Administrative Expenses which exceed
$350,000 during any fiscal quarter beginning with the fiscal quarter ending
September 30, 2000.
6.16 Minimum Tangible Net Worth. Permit Consolidated Tangible Net
Worth to be not less than 85% of the Consolidated Tangible Net Worth reported as
of the December 31, 1999 reporting period, plus 70% of Borrower's positive
quarterly net income, if any, calculated in accordance with GAAP as of the end
of each fiscal quarter of Borrower, without offset or reduction for net losses
incurred during any quarter, beginning with the quarter ending March 31, 2000,
and 100% of any increase in shareholder's equity resulting from the sale of
stock in Borrower subsequent to December 31, 1999.
6.17 Current Ratio. Permit as of the end of any fiscal quarter its
Current Ratio to be less than 1.00 to 1.00, with the initial calculation of such
ratio to be made as of June 30, 2000.
6.18 Debt Service Coverage Ratio. Permit as of the end of any fiscal
quarter its Debt Service Coverage Ratio to be less than 1.20 to 1.0, with the
initial calculation of such ratio to be made as of September 30, 2000.
ARTICLE VII.
EVENTS OF DEFAULT
7.01 Enumeration of Events of Default. Any of the following events
shall be considered an Event of Default as that term is used herein:
(a) Default shall be made by the Borrower in the payment within
two (2) days after such payment was due of any installment of
principal or interest (including, without limitation, any mandatory
prepayment payable pursuant to Section 2.06 of this Agreement) on the
Note or any other monetary obligation payable hereunder when due,
including, without limitation, any fee due to the Bank hereunder;
(b) Default shall be made by the Borrower in the due observance
or performance of any affirmative covenant required in this Agreement,
the Note or the Security Instruments and such default continues for
more than thirty (30) days after the earlier of: (i) Borrower having
knowledge thereof, or (ii) Borrower receiving written notice thereof
from the Bank;
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(c) Default shall be made by the Borrower in the due observance
or performance of any negative covenant required in this Agreement,
the Note or the Security Instruments;
(d) Any representation or warranty herein made by the Borrower
proves to have been untrue in any material respect, or any
representation, statement (including Financial Statements),
certificate or data furnished or made by the Borrower to the Bank in
connection herewith proves to have been untrue in any respect material
to the Borrower as of the date the facts therein set forth were stated
or certified;
(e) Default shall be made by the Borrower (as principal or other
surety) in payment or performance of any bond, debenture, note or
other evidence of Indebtedness for borrowed money, or under any credit
agreement, loan agreement, indenture, promissory note or similar
agreement or instrument executed in connection with any of the
foregoing; and such default shall remain unremedied for in excess of
the period of grace, if any, with respect thereto, with the effect of
accelerating the maturity of any such material Indebtedness;
(f) The Borrower discontinues its usual business or applies for
or consents to the appointment of a receiver, trustee or liquidator of
it or all or a substantial part of its assets, or (ii) files a
voluntary petition commencing a case under Title 11 of the United
States Code, seeking liquidation, reorganization or rearrangement or
taking advantage of any bankruptcy, insolvency, debtor's relief or
other similar Law of the United States the State of Texas or any other
jurisdiction, or (iii) makes a general assignment for the benefit of
creditors, or (iv) is unable, or admits in writing its inability to
pay its debts generally as they become due, or (v) files an answer
admitting the material allegations of a petition filed against it in
any case commenced under Title 11 of the United States Code or any
reorganization, insolvency, conservatorship or similar proceeding
under any bankruptcy, insolvency, debtor's relief or other similar Law
of the United States, the State of Texas or any other jurisdiction;
(g) An order, judgment or decree shall be entered against the
Borrower by any court of competent jurisdiction or by any other duly
authorized authority, on the petition of a creditor or otherwise,
granting relief under Title 11 of the United States Code or under any
bankruptcy, insolvency, debtor's relief or other similar Law of the
United States, the State of Texas or any other jurisdiction, approving
a petition seeking reorganization or an arrangement of its debts or
appointing a receiver, trustee, conservator, custodian or liquidator
of it or all or any substantial part of its assets, and the failure to
have such order, judgment or decree dismissed within ten (10) days of
its entry;
(h) the Borrower has concealed, removed, or permitted to be
concealed or removed, any part of its property, with intent to hinder,
delay or defraud its creditors or any of them; or has made or suffered
a transfer of any of its property which may be fraudulent under any
the Bankruptcy, fraudulent conveyance or similar Law; or has made any
transfer of its property to or for the benefit of a creditor at a time
when other creditors similarly situated have not been paid; or has
suffered or permitted, while insolvent, any creditor to obtain a lien
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upon any of its property through legal proceedings or distraint which
is not vacated within thirty (30) days from the date thereof; or
(i) the Liens under the Security Instruments cease to be
perfected or cease to be first priority Liens subject to only
Permitted Encumbrances.
7.02 Rights Upon Unmatured Event of Default. At any time that there
exists an Unmatured Event of Default, any obligation of the Bank hereunder to
make advances to or for the benefit of the Borrower shall be suspended unless
and until the Bank shall reinstate the same in writing, the Unmatured Event of
Default shall have been waived by the Bank or the relevant Unmatured Event of
Default shall have been remedied prior to ripening into an Event of Default.
7.03 Rights Upon Default. Upon the happening of an Event of Default
specified in Subsections 7.01 (f) or (g), the entire aggregate principal amount
of all Indebtedness then outstanding hereunder and the interest accrued thereon
shall automatically become immediately due and payable, and upon the happening
of any other Event of Default, the Bank may declare the entire aggregate
principal amount of all Indebtedness then outstanding hereunder and the interest
accrued thereon immediately due and payable. In either case, the entire
principal and interest shall thereupon become immediately due and payable,
without notice (including, without limitation, notice of intent to accelerate
maturity or notice of acceleration of maturity) and without presentment, demand,
protest, notice of protest or other notice of default or dishonor of any kind,
except as provided to the contrary elsewhere herein, all of which are hereby
expressly waived by the Borrower.
Upon the happening of any Event of Default, all obligations (if any)
of the Bank hereunder, including specifically, but without limitation, any
obligation to make Loans hereunder, shall immediately cease and terminate unless
and until the Bank shall reinstate the same in writing.
7.04 Remedies. After any acceleration, as provided for in Section
7.03, the Bank shall have, in addition to the rights and remedies given them by
this Agreement and the Security Instruments, all those allowed by all applicable
Laws, including, but without limitation, the Uniform Commercial Code as enacted
in any jurisdiction in which any Borrowing Base Oil and Gas Properties may be
located. Without limiting the generality of the foregoing, the Bank may
immediately, without demand of performance and without other notice (except as
specifically required by this Agreement or the Security Instruments) or demand
whatsoever to the Borrower, all of which are hereby expressly waived, and
without advertisement, sell at public or private sale or otherwise realize upon,
in Harris County, Texas, or in any other place where the Borrowing Base Oil and
Gas Properties may be located, or in such other place or places as the Bank may
designate, the whole or, from time to time, any part of the Borrowing Base Oil
and Gas Properties, or any interest which the Borrower may have therein. After
deducting from the proceeds of sale or other disposition of the Borrowing Base
Oil and Gas Properties all expenses (including all reasonable expenses for legal
services), the Bank shall apply such proceeds toward the satisfaction of the
Obligations. Any remainder of the proceeds after satisfaction in full of the
Obligations shall be distributed as required by applicable Laws. Notice of any
sale or other disposition shall be given to the Borrower at least five (5) days
before the time of any public sale or of the time after which any intended
private sale or other disposition of the Borrowing Base Oil and Gas Properties
is to be made, which the Borrower hereby agrees shall be
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reasonable notice of such sale or other disposition. The Borrower agrees to
assemble, or to cause to be assembled, at its own expense, documents evidencing
its ownership of the Borrowing Base Oil and Gas Properties and such other
documents or items as the Bank may reasonably request at such place or places as
the Bank shall designate. At any such sale or other disposition, the Bank may,
to the extent permissible under applicable Laws, purchase the whole or any part
of the Borrowing Base Oil and Gas Properties, free from any right of redemption
on the part of the Borrower, which right is hereby waived and released. Without
limiting the generality of any of the rights and remedies conferred upon the
Bank under this paragraph, the Bank may, to the full extent permitted by the
applicable Laws:
(A) Enter upon the premises of the Borrower (and, to the extent
necessary in the judgment of the Bank, exclude therefrom the Borrower
or any Affiliate thereof) and take immediate possession of the
Borrowing Base Oil and Gas Properties, either personally or by means
of a receiver appointed by a court of competent jurisdiction, using
all necessary force to do so;
(B) At the Bank's option, use, operate, manage, and control the
Borrowing Base Oil and Gas Properties in any lawful manner;
(C) Collect and receive all rents, income, revenue, earnings, issues,
and profits therefrom; and
(D) Maintain, repair, renovate, alter, or remove the Borrowing Base
Oil and Gas Properties as the Bank may determine in their discretion.
7.05 Right of Set-off. Upon the occurrence of any Event of Default,
the Bank may, and is hereby authorized by the Borrower, at any time and from
time to time, to the fullest extent permitted by applicable Laws, without
advance notice to the Borrower (any such notice being expressly waived by the
Borrower), set-off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and any other indebtedness at any
time owing by the Bank to or for the credit or the account of the Borrower
against any or all of the Obligations of the Borrower now or hereafter existing,
whether or not such Obligations have matured and irrespective of whether the
Bank may have exercised any other rights that they have or may have with respect
to such Obligations, including, without limitation, any acceleration rights. The
Bank agrees promptly to notify the Borrower after any such set-off and
application, provided that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of the Bank under this
Section 7.05 are in addition to the other rights and remedies (including,
without limitation, other rights of set-off) which the Bank may have.
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ARTICLE VIII.
MISCELLANEOUS
8.01 Security Interests in Deposits and Right of Offset or the
Banker's Lien. The Borrower hereby transfers, assigns and pledges to the Bank
and/or grants to the Bank a security interest (as security for the payment
and/or performance of the Obligations of the Borrower, with such interest of the
Bank to be retransferred, reassigned and/or released by the Bank at the expense
of the Borrower upon payment in full and/or complete performance by the Borrower
of all such Obligations) and the right, exercisable at such time as any
obligation hereunder shall mature, whether by acceleration of maturity or
otherwise, of offset or banker's lien against all funds or other property of the
Borrower now or hereafter or from time to time on deposit with or in the
possession of the Bank, including, without limitation, all certificates of
deposit and other depository accounts.
8.02 Survival of Representations, Warranties and Covenants. All
representations and warranties of the Borrower and all covenants and agreements
herein made shall survive the execution and delivery of the Note and this
Agreement and shall remain in force and effect so long as any debt is
outstanding under the Note, or any renewal or extension of this Agreement or the
Note, or the Bank remains obligated to make advances hereunder.
8.03 Notices and Other Communications. Notices, requests and
communications hereunder shall be in writing and shall be sufficient in all
respects if delivered to the relevant address indicated below (including
delivery by registered or certified United States mail, facsimile, telex,
telegram or hand):
(A) If to the
Borrower: VENUS EXPLORATION, INC.
1250 N.E. Loop 410
San Antonio, TX 78209
Attention: Mr. Eugene L. Ames, Jr. or
Mr. John Y. Ames
(B) If to the
Bank: BANK ONE, TEXAS, N.A.
910 Travis, 6th Floor
Houston, Texas 77002
Attention: Jonathan Gregory
Any party may, by proper written notice hereunder to the other, change
the individuals or addresses to which such notices to it shall thereafter be
sent.
8.04 Parties in Interest. All covenants and agreements herein
contained by or on behalf of the Borrower shall be binding upon the Borrower and
its successors and assigns and inure to the benefit of the Bank and its
successors and assigns.
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8.05 Renewals and Extensions. All provisions of this Agreement
relating to the Note shall apply with equal force and effect to each and all
promissory notes hereafter executed which in whole or in part represent a
renewal, extension, amendment, modification or rearrangement of any part of the
Indebtedness originally represented by the Note.
8.06 No Waiver by the Bank. No course of dealing on the part of the
Bank, its officers or employees, nor any failure or delay by the Bank with
respect to exercising any of its rights, powers or privileges under this
Agreement, the Note, the Security Instruments, or any other instrument referred
to herein or executed in connection with the Note shall operate as a waiver
thereof. The rights and remedies of the Bank under this Agreement, the Note, the
Security Instruments, or any other instrument referred to herein or executed in
connection with the Note shall be cumulative and the exercise or partial
exercise of any such right or remedy shall not preclude the exercise of any
other right or remedy.
No advance of Loan proceeds hereunder shall constitute a waiver of any
of the covenants or warranties of the Borrower contained herein or of any of the
conditions to the Bank's obligation to make further advances hereunder. In the
event that the Borrower is unable to satisfy any such covenant, warranty or
condition, no such advance of Loan proceeds shall have the effect of precluding
the Bank from thereafter declaring such inability to be an Event of Default as
hereinabove provided.
8.07 Waiver, Release, and Indemnification by the Borrower. To the
maximum extent permitted by applicable Laws, the Borrower:
(A) Waives (1) protest of all commercial paper at any time held by the
Bank on which the Borrower is in any way liable; (2) except as the
same may herein be specifically granted, notice of acceleration and
intention to accelerate; and (3) notice and opportunity to be heard,
after acceleration in the manner provided in Section 7.03, before
exercise by the Bank of the remedies of self-help, set-off, or of
other summary procedures permitted by any applicable Laws or by any
agreement with the Borrower, and, except where required hereby or by
any applicable Laws, notice of any other action taken by the Bank;
(B) Releases the Bank and its officers, employees, directors,
attorneys, and agents (collectively, the "Bank Parties") from all
claims for loss or damage caused by any act or omission on the part of
any of them except willful misconduct or gross negligence; and
(C) Agrees to indemnify and hold the Bank Parties harmless from and
against all claims, damages, liabilities and expenses, known or
unknown, accrued and unaccrued, unless attributable to the Bank
Parties' own gross negligence or willful misconduct, that may now or
hereafter be asserted against any of the Bank Parties in connection
with or arising out of any investigation, litigation or proceeding
directly or indirectly relating to or arising out of any of the
transactions contemplated by this Agreement.
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8.08 GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL BE DEEMED TO BE
CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF TEXAS.
8.09 Incorporation of Exhibits and Schedules. The Exhibits and
Schedules attached to this Agreement are incorporated herein for all purposes
and shall be considered a part of this Agreement.
8.10 Survival Upon Unenforceability. In the event any one or more of
the provisions contained in this Agreement, the Note, the Security Instruments,
or in any other instrument referred to herein or executed in connection with the
Note shall, for any reason, be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision hereof or of any other instrument referred to herein or
executed in connection herewith.
8.11 Rights of Third Parties. All provisions herein are imposed solely
and exclusively for the benefit of the Bank, the Borrower and no other Person
shall have standing to require satisfaction of such provisions in accordance
with their terms or be entitled to assume that the Bank will refuse to make
advances in the absence of strict compliance with any or all thereof and any or
all of such provisions may be freely waived in whole or in part by the Bank at
any time if in its sole discretion it deems it advisable to do so.
8.12 Amendments or Modifications. Neither this Agreement nor any
provision hereof may be changed, waived, discharged or terminated orally, but
only by an instrument in writing signed by the party against whom enforcement of
the change, waiver, discharge or termination is sought.
8.13 Agreement Construed as an Entirety. This Agreement, for
convenience only, has been divided into Articles and Sections and it is
understood that the rights, powers, privileges, duties and other legal relations
of the parties hereto shall be determined from this Agreement as an entirety and
without regard to the aforesaid division into Articles and Sections and without
regard to headings prefixed to said Articles or Sections.
8.14 Number and Gender. Whenever the context requires, reference
herein made to the single number shall be understood to include the plural and
likewise the plural shall be understood to include the singular. Words denoting
sex shall be construed to include the masculine, feminine, and neuter, when such
construction is appropriate, and specific enumeration shall not exclude the
general, but shall be construed as cumulative.
8.15 AGREEMENT SUPERSEDES ALL PRIOR AGREEMENTS. THIS AGREEMENT,
TOGETHER WITH THE NOTE, THE SECURITY INSTRUMENTS, AND ANY OTHER WRITTEN
INSTRUMENTS EXECUTED PURSUANT TO THIS AGREEMENT REPRESENT, COLLECTIVELY, THE
FINAL AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF
AND MAY NOT BE CONTRADICTED BY
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EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES
AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER
WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
8.16 Controlling Provision Upon Conflict. In the event of a conflict
between the provisions of this Agreement and those of the Note, the Security
Instruments or any other instrument referred to herein or executed in connection
with the Note, the provisions of this Agreement shall control; provided if any
of the Security Instruments contain any representations, warranties, or
covenants of the Borrower that are in addition to or are more restrictive on the
Borrower than those set forth in this Agreement, such additional or more
restrictive representations, warranties, and covenants shall control.
8.17 Time, Place and Method of Payments. All payments required
pursuant to this Agreement or the Note shall be made in immediately available
funds; shall be deemed received by the Bank on the next Business Day following
receipt if such receipt is after 2:00 p.m., on any Business Day, and shall be
made at the principal banking quarters of the Bank in Houston, Texas.
8.18 Termination. This Agreement and the Revolving Commitment may be
canceled by the Borrower without premium or penalty prior to the Revolving Loan
Termination Date upon at least thirty (30) days' prior written notice, provided,
that the Obligations are paid and performed in full to the sole satisfaction of
the Bank; provided, however that any such cancellation hereunder shall not
terminate any obligations, representations or warranties of the Borrower to the
Bank hereunder and under other Loan Documents that survive beyond the Revolving
Loan Termination Date. Upon the earlier to occur of the (i) the Revolving Loan
Termination Date, and (ii) cancellation of this Agreement and the Revolving
Commitment prior thereto in accordance with this Section 8.18 and upon payment
and performance in full of the Obligations to the sole satisfaction of the Bank,
the Bank agrees, at the Borrower's request and sole cost and expense, to execute
and deliver any such lien release documents and other documentation reasonably
requested by the Borrower to release or terminate the Bank's liens and security
interests hereunder and under the other Loan Documents.
8.19 Non-Application of Chapter 346 of Texas Finance Code. The
provisions of Chapter 346 of the Texas Finance Code are specifically declared by
the parties hereto not to be applicable to this Agreement or any of the other
Security Instruments or to the transactions contemplated hereby.
8.20 Counterpart Execution. This Agreement may be executed as one
instrument signed by all parties or in separate counterparts hereof, each of
which counterparts shall be considered an original and all of which shall be
deemed to be one instrument, and any signed counterpart shall be deemed
delivered by the party signing it if sent to any other party hereto by
electronic facsimile transmission.
8.21 Amended and Restated Agreement. This Agreement amends and
restates, in its entirety, the Wells Fargo Credit Agreement, effective
immediately upon the execution and delivery to Bank of the Assignment of Notes
and Liens, whereupon this Agreement is intended to be, and shall
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<PAGE> 47
constitute, a successor facility to the Wells Fargo Credit Agreement; and all
"Security Instruments," as defined in the Wells Fargo Credit Agreement, shall
continue in force and effect to secure the Obligations of Borrower pursuant to
this Agreement.
[the remainder of this page was intentionally left blank]
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<PAGE> 48
IN WITNESS WHEREOF, this Agreement is executed as of the date first
above written.
BORROWER
VENUS EXPLORATION, INC.
By:
------------------------------------
Eugene L. Ames, Jr.
Chairman and Chief Executive Officer
BANK
BANK ONE, TEXAS, N.A.
By:
------------------------------------
Jonathan Gregory
Vice President
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EXHIBIT "A"
BORROWING BASE
OIL AND GAS PROPERTIES
This Exhibit sets forth the description of the Borrowing Base
Oil & Gas Properties covered by the Agreement to which this Exhibit is attached.
All of the terms defined in the Agreement are used in this Exhibit with the same
meanings given therein.
This Exhibit and the Agreement cover and include the
following:
(a) All of Borrower's right, title and interest in and to the oil, gas
and mineral leases described herein and/or lands described in and
subject to such oil, gas and mineral leases (regardless, as to such
leases and/or lands, of any surface acreage and/or depth limitations
set forth in any description of any of such oil, gas and mineral
leases), and all of Borrower's right, title and interest in and to any
of the oil, gas and minerals in, on or under the lands, if any,
described on this Exhibit, including, without limitation, all
contractual rights, fee interests, leasehold interests, overriding
royalty interests, non-participating royalty interests, mineral
interests, production payments, net profits interests, or any other
interest measured by or payable out of production of oil, gas or other
minerals from the oil, gas and mineral leases and/or lands described
herein; and
(b) All of the foregoing interests of the Borrower as such interests
may be enlarged by the discharge of any payments out of production or
by the removal of any charges or encumbrances together with the
Borrower's interests in, to and under or derived from all renewals and
extensions of any oil, gas and mineral leases described herein, it
being specifically intended hereby that any new oil and gas lease (i)
in which an interest is acquired by the Borrower after the termination
or expiration of any oil and gas lease, the interests of the Borrower
in, to and under or derived from which are subject to the lien and
security interest hereof, and (ii) that covers all or any part of the
property described in and covered by such terminated or expired leases,
shall, to the extent, and only to the extent such new oil and gas lease
may cover such property, be considered a renewal or extension of such
terminated or expired lease; and
(c) All right, title and interest of Borrower in, to and under or
derived from any operating, farmout, and bidding agreements,
assignments and subleases, whether or not described in this Exhibit, to
the extent, and only to the extent, that such agreements, assignments
and subleases (i) cover or include any of the Borrower's present right,
title and interest in and to the leases and/or lands described in this
Exhibit, or (ii) cover or include any other undivided interests now or
hereafter held by the Borrower in, to and under the described leases
and/or lands, including, without limitation, any future operating,
farmout and bidding agreements, assignments, subleases and pooling,
unitization and communitization agreements and the units
created thereby (including, without limitation all units formed under
orders, regulations, rules or other official
1
<PAGE> 50
acts of any governmental body or agency having jurisdiction) to the
extent and only to the extent that such agreements, assignments,
subleases, or units cover or include the described leases and/or lands;
and
(d) All right, title, and interest of the Borrower in, to and under or
derived from all presently existing and future advance payment
agreements, oil, casinghead gas and gas sales, exchange, and processing
contracts and agreements including, without limitation, those contracts
and agreements that are described on this Exhibit to the extent, and
only to the extent, those contracts and agreements cover or include the
described leases and/or lands herein; and
(e) All right, title and interest of the Borrower in, to and under or
derived from all existing and future permits, licenses, easements and
similar rights and privileges that relate to or are appurtenant to any
of the described leases and/or lands.
Notwithstanding the intention of this Agreement to cover all
of the right, title and interest of Borrower in and to the described leases
and/or lands, except as expressly set forth herein Borrower hereby specifically
warrants and represents that the interests covered by this Exhibit are not
greater than the working interest nor less than the net revenue interest,
overriding royalty interest, net profit interest, production payment interest or
other interest payable out of or measured by production set forth in connection
with each oil and gas well described in this Exhibit. In the event the Borrower
owns any other or greater interest, such additional interest shall also be
covered by and included in this Agreement. The designation "Working Interest" or
"W.I." means an interest owned in an oil, gas, and mineral lease that determines
the cost bearing percentage of the owner of such interest. The designation "Net
Revenue Interest" or "NRI" means net revenue interest, or that portion of the
production attributable to the owner of a working interest after deduction for
all royalty burdens, overriding royalty burdens, or other burdens on production,
except severance, production, windfall profits and other similar taxes. The
designation "Overriding Royalty Interest" or "ORRI" means an interest in
production which is free of any obligation for the expense of exploration,
development and production, bearing only its pro rata share of severance,
production, windfall profits and other similar taxes.
2
<PAGE> 51
EXHIBIT "B"
REVOLVING NOTE
$15,000,000.00 Houston, Texas May 5, 2000
On the dates hereinafter prescribed, for value received, VENUS
EXPLORATION, INC., a Delaware corporation (herein called "Borrower"), having an
address at 1250 N.E. Loop 410, San Antonio, Texas 78209, promises to pay to the
order of BANK ONE, TEXAS, N.A. (herein called "Bank"), at its principal offices
at 910 Travis Street, Houston, Harris County, Texas 77002, (i) the principal
amount of FIFTEEN MILLION AND NO/100 DOLLARS ($15,000,000.00) or the principal
amount advanced pursuant to the terms of the Loan Agreement (defined herein) as
of the date of maturity hereof, whether by acceleration or otherwise, whichever
may be the lesser, and (ii) interest on the principal balance from time to time
advanced and remaining unpaid from the date of the advance until maturity at a
rate of interest equal to lesser of (a) the "Floating Rate" (as defined in the
Loan Agreement) calculated on the basis of a year of 360 days and for the actual
number of days elapsed (including the first day but excluding the last day), or
(b) the Maximum Rate (as defined in the Loan Agreement). Any increase or
decrease in interest rate resulting from a change in the Maximum Rate shall be
effective immediately when such change becomes effective, without notice to the
Borrower, unless Applicable Law (as defined below) requires that such increase
or decrease not be effective until a later time, in which event such increase or
decrease shall be effective at the earliest time permitted under the provisions
of such law.
Notwithstanding the foregoing, if during any period the Floating Rate
exceeds the applicable Maximum Rate, the rate of interest in effect on this Note
shall be limited to the Maximum Rate during each such period, but at all times
thereafter the rate of interest in effect on this Note shall be the Maximum Rate
until the total amount of interest accrued on this Note equals the total amount
of interest which would have accrued hereon if the Floating Rate had at all
times been in effect.
All payments on this Note shall be applied first to accrued interest
and the balance, if any, to principal.
"Applicable Law" means that law in effect from time to time and
applicable to this Note which lawfully permits the charging and collection of
the highest permissible lawful, non-usurious rate of interest on this Note,
including laws of the State of Texas and laws of the United States of America.
It is intended that Chapter 303 of the Texas Finance Code shall be included in
the laws of the State of Texas in determining Applicable Law; and for the
purpose of applying said Chapter 303 to this Note, the interest ceiling
applicable to this Note under said Chapter 303 shall be the indicated weekly
rate ceiling from time to time in effect. The Borrower and the Bank hereby agree
that Chapter 346 of the Texas Finance Code, shall not apply to this Note or the
loan transaction evidenced by, and referenced in, the Loan Agreement
(hereinafter defined) in any manner, including without limitation, to any
account or arrangement evidenced or created by, or provided for in, this Note.
-------------------
Borrower's Initials
1
<PAGE> 52
This Note is a revolving credit note and it is contemplated that by
reason of prepayments hereon there may be times when no indebtedness is owing
hereunder; but notwithstanding such occurrence, this Note shall remain valid and
in full force and effect as to each principal advance made hereunder subsequent
to each such occurrence. Each principal advance and each payment hereof made
pursuant to this Note shall be reflected by the Bank's records and the aggregate
unpaid amounts reflected by such records shall constitute rebuttably presumptive
evidence of the principal and unpaid, accrued interest remaining outstanding on
this Note.
The principal sum of this Note, after giving credit for unadvanced
principal, if any, remaining at final maturity, shall be due and payable on or
before May 8, 2001; interest to accrue upon the principal sum from time to time
owing and unpaid hereunder shall be due and payable in monthly installments, as
it accrues, with the first such monthly installment of interest hereon being due
and payable on the first day of June 1, 2000, and with such subsequent
installments of interest being due and payable on the first day of each
succeeding month thereafter; provided, however, the final installment of
interest hereunder shall be due and payable not later than the maturity of the
principal sum hereof, howsoever such maturity may be brought about.
When the first (1st) day of a calendar month falls upon a Saturday,
Sunday or legal holiday, the payment of interest and principal, if any, due upon
such date shall be due and payable upon the next succeeding Business Day.
In no event shall the aggregate of the interest on this Note, plus any
other amounts paid in connection with the loan evidenced by this Note which
would under Applicable Law be deemed "interest," ever exceed the maximum amount
of interest which, under Applicable Law, could be lawfully charged on this Note.
The Bank and the Borrower specifically intend and agree to limit contractually
the interest payable on this Note to not more than an amount determined at the
Maximum Rate. Therefore, none of the terms of this Note or any other instruments
pertaining to or securing this Note shall ever be construed to create a contract
to pay interest at a rate in excess of the Maximum Rate, and neither the
Borrower nor any other party liable herefor shall ever be liable for interest in
excess of that determined at the Maximum Rate, and the provisions of this
paragraph shall control over all provisions of this Note or of any other
instruments pertaining to or securing this Note. If any amount of interest taken
or received by the Bank shall be in excess of the maximum amount of interest
which, under Applicable Law, could lawfully have been collected on this Note,
then the excess shall be deemed to have been the result of a mathematical error
by the parties hereto and shall be refunded promptly to the Borrower. All
amounts paid or agreed to be paid in connection with the indebtedness evidenced
by this Note which would under Applicable Law be deemed "Interest" shall, to the
extent permitted by Applicable Law, be amortized, prorated, allocated and spread
throughout the full term of this Note.
This Note is secured by all security agreements, collateral
assignments, mortgages and lien instruments executed by the Borrower (or by any
other party) in favor of Bank, including those executed simultaneously herewith,
those executed heretofore and those hereafter executed, and including
specifically and without limitation the Security Instruments described and
defined in that
-------------------
Borrower's Initials
2
<PAGE> 53
certain Loan Agreement of even date herewith between Borrower and the Bank (the
"Loan Agreement").
This Note is the Revolving Note issued pursuant to the Loan Agreement.
Reference is hereby made to the Loan Agreement for a statement of the rights and
obligations of the holder of this Note and the duties and obligations of the
Borrower in relation thereto; but neither this reference to the Loan Agreement
nor any provisions thereof shall affect or impair the absolute and unconditional
obligation of the Borrower to pay any outstanding and unpaid principal of and
interest on this Note when due, in accordance with the terms of the Loan
Agreement. Each advance and each payment made pursuant to this Note shall be
reflected by notations made by the Bank on its records and the aggregate unpaid
amounts reflected by the notations on the records of the Bank shall be deemed
rebuttably presumptive evidence of the principal amount owing under this Note.
In the event of default in the payment when due of any of the principal
of or any interest on this Note, or in the event of default under the terms of
the Loan Agreement or any of the Security Instruments, or if any event occurs or
condition exists which authorizes the acceleration of the maturity of this Note
under any agreement made by the Borrower, the Bank (or other holder of this
Note) may, at its option, without presentment or demand or any notice to the
Borrower or any other person liable herefor, declare the unpaid principal
balance of and accrued interest on this Note to be immediately due and payable.
If this Note is collected by suit or through the Probate or Bankruptcy
Court, or any judicial proceeding, or if this Note is not paid at maturity,
however such maturity may be brought about, and is placed in the hands of an
attorney for collection, then the Borrower agrees to pay reasonable and
documented attorneys' fees, not to exceed 10% of the full amount of principal
and interest owing hereon at the time this Note is placed in the hands of an
attorney.
The Borrower agrees that the obligations of each are joint and several.
The Borrower and all sureties, endorsers and guarantors of this Note waive
demand, presentment for payment, notice of nonpayment, protest, notice of
protest, notice of intent to accelerate maturity, notice of acceleration of
maturity, and all other notices, filing of suit and diligence in collecting this
Note or enforcing any of the security herefor, and agree to any substitution,
exchange or release of any such security or the release of any party primarily
or secondarily liable hereon and further agrees that it will not be necessary
for the Bank, in order to enforce payment of this Note by them, to first
institute suit or exhaust its remedies against any Borrower or others liable
herefor, or to enforce its rights against any security herefor, and consent to
any one or more extensions or postponements of time of payment of this Note on
any terms or any other indulgences with respect hereto, without notice thereof
to any of them. The Bank may transfer this Note, and the rights and privileges
of the Bank under this Note shall inure to the benefit of the Bank's
representatives, successors or assigns.
This Note amends, restates, rearranges and renews that certain
promissory note dated December 22, 1997, in the original face amount of
$50,000,000.00, executed by Borrower and payable to the order of Wells Fargo
Bank (Texas), N.A. (the "Wells Fargo Note"), effective upon
-------------------
Borrower's Initials
3
<PAGE> 54
the execution and delivery by Wells Fargo Bank (Texas), N.A., of an assignment
to Bank of said Wells Fargo Note and/or the endorsement of delivery of said
Wells Fargo Note from Wells Fargo Bank (Texas), N.A. to Bank, whereupon all of
the liens and security interests previously granted by Borrower or its
predecessors to Wells Fargo Bank (Texas), N.A. to secure payment of the Wells
Fargo Note shall continue to secure the indebtedness owed to Bank pursuant to
this Note.
Executed this 5th day of May, 2000.
VENUS EXPLORATION, INC.
Attest:
By:
- --------------------------- --------------------------------
Secretary
4
<PAGE> 55
EXHIBIT "C"
Compliance Certificate
I, the Chairman and Chief Executive Officer of VENUS
EXPLORATION, INC. (the "Company"), pursuant to Section 5.05 of the Loan
Agreement dated as of May 5, 2000, by and among BANK ONE, TEXAS, N.A. ("Bank")
and the Company (the "Agreement") do hereby certify, as of the date hereof, that
to my knowledge:
1. No Event of Default (as defined in the Agreement) has occurred
and is continuing, and no Unmatured Event of Default (as
defined in the Agreement) has occurred and is continuing
except for the following events (include actions taken to cure
such situations):
-------------------------------------------------------------
-------------------------------------------------------------
-------------------------------------------------------------
-------------------------------------------------------------
-------------------------------------------------------------
-------------------------------------------------------------;
2. No material adverse change has occurred in the business,
prospects, financial condition, or the results of operations
of the Company since the date of the previous Financial
Statements (as defined in the Agreement) provided to Bank;
3. Except as otherwise stated in the Schedule, if any, attached
hereto, each of the representations and warranties of the
Company contained in Article IV of the Agreement is true and
correct in all respects; and
1
<PAGE> 56
4. The Company's financial condition for the month ending
__________ is as follows:
<TABLE>
<CAPTION>
Date or Required Actual
Time Ratio or Ratio or
Financial Covenant Period Amount Amount
------------------ ------- -------- ---------
<S> <C> <C> <C> <C>
(a) Consolidated Tangible Term of Loan not < 85% of the Consolidated
Net Worth Tangible Net Worth as of -------
December 31, 1999, and
thereafter plus the sum of
70% of Borrower's positive
quarterly net income, if any,
calculated in accordance with
GAAP as of the end of each
fiscal quarter beginning with
the quarter ending March 31,
2000, and 100% of any
increase in shareholder's
equity from the sale of stock
in Borrower subsequent to
December 31, 1999
(b) Current Ratio for any Term of Loan not < 1.00 to 1.00
fiscal quarter -------
(c) Debt Service Coverage Term of Loan not < 1.20 to 1.00
Ratio for any fiscal -------
quarter
(d) General and Term of Loan Not > $350,000 per fiscal
Administrative quarter -------
Expenses
</TABLE>
This certificate is executed this _____ day of_________,_____.
VENUS EXPLORATION, INC.
By:
--------------------------------
2
<PAGE> 57
EXHIBIT "D"
SECURITY INSTRUMENTS
The Security Instruments securing the Borrower's Obligations and
Indebtedness to the Bank shall include the following, each in form and substance
satisfactory to the Bank:
1. ACT OF MORTGAGE, SECURITY AGREEMENT, FIXTURE FILING AND ASSIGNMENT OF
PRODUCTION covering Borrower's Oil and Gas Properties.
2. SECURITY AGREEMENT granting the Bank a first priority security interest in
all of the Borrower's accounts, equipment, machinery, fixtures, inventory,
chattel paper, documents, instruments and general intangibles relating to or
arising out of the Borrowing Base Oil and Gas Properties and the business of the
Borrower, whether now owned or hereafter acquired, and all products and proceeds
thereof.
3. FINANCING STATEMENTS in connection with the Security Instruments described in
the preceding paragraphs, in form and number satisfactory to the Bank as the
Bank, from to time, may specify (including additional or supplemental financing
statements, amendments thereto, and continuation statements thereof).
4. OTHER SECURITY INSTRUMENTS. Such other instruments as are necessary or
appropriate from time to time, in the good faith opinion of the Bank, to perfect
to the satisfaction of the Bank the Bank's liens, security interests, and other
rights in the Borrowing Base Oil and Gas Properties and in any and all other
collateral covered by or described in (or, as evidenced by the Agreement,
intended to have been covered by) any of the other Security Instruments
described above.
POWER OF ATTORNEY. To the fullest extent permitted by Law and until this
Agreement is terminated in accordance with Section 8.18 therein, the Borrower
hereby appoints the Bank as its attorney-in-fact (without requiring the Bank to
act as such) to execute any Security Instrument in the name of the Borrower, and
to perform all other acts that the Bank deem appropriate to perfect and continue
its liens, security interests, and other rights in, and to protect and preserve,
the Borrowing Base Oil and Gas Properties and other collateral covered by or
described in (or, as evidenced by the Agreement, intended to have been covered
by) any of the Security Instruments described above, but only to the extent
required of Borrower under the terms of this Agreement.
1
<PAGE> 58
SCHEDULE 1.01(a)
SUBORDINATED DEBT
1
<PAGE> 59
SCHEDULE 4.01
INFORMATION REGARDING THE BORROWER AND ITS SUBSIDIARIES
1
<PAGE> 60
SCHEDULE 4.10
LIST OF PURCHASERS OF PRODUCTION
1
<PAGE> 61
SCHEDULE 4.15
EXISTING INDEBTEDNESS
1
<PAGE> 62
SCHEDULE 4.16
MATERIAL COMMITMENTS
1
<PAGE> 63
SCHEDULE 4.22
INSURANCE CERTIFICATE
1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,324
<SECURITIES> 0
<RECEIVABLES> 784
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,170
<PP&E> 8,399
<DEPRECIATION> 4,165
<TOTAL-ASSETS> 6,477
<CURRENT-LIABILITIES> 2,519
<BONDS> 1,767
0
0
<COMMON> 111
<OTHER-SE> 2,080
<TOTAL-LIABILITY-AND-EQUITY> 6,477
<SALES> 934
<TOTAL-REVENUES> 934
<CGS> 0
<TOTAL-COSTS> 1,314
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1)
<INCOME-PRETAX> 245
<INCOME-TAX> 0
<INCOME-CONTINUING> 245
<DISCONTINUED> 0
<EXTRAORDINARY> (250)
<CHANGES> 0
<NET-INCOME> (5)
<EPS-BASIC> (0.0)
<EPS-DILUTED> (0.0)
</TABLE>
