SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: February 8, 2005
Date of Earliest Event Reported: February 2, 2005
NATURAL GAS SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
Nevada
(State or Other Jurisdiction of Incorporation)
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0-27862 |
80-0028196 |
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(Commission File Number) |
(I.R.S. Employer Identification No.) |
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820 Gessner, Suite 1340, Houston, Texas |
77024 |
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(Address of Principal Executive Offices) |
(Zip Code) |
(713) 935-0122
(Registrant's Telephone Number, Including Area Code)
(Former Name or Former Address, if Changed Since Last Report)
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TABLE OF CONTENTS
Item 1.01 Entry into a Material Definitive Agreement
Item 2.01 Completion of Acquisition or Disposition of Assets
Item 3.02. Unregistered Sales of Equity Securities
Item 9.01 Financial Statements and Exhibits
Signatures
Item 1.01. Entry into a Material Definitive Agreement
Loan Agreement with Prospect Energy Corporation
On February 2, 2005, Natural Gas Systems, Inc. (“NGS” or the “Company”) entered into a senior secured loan agreement (the “Loan Agreement”) with Prospect Energy Corporation (“Prospect”) providing for borrowings by the Company of up to $4.8 million (the “Secured Loan”). The Loan Agreement was finalized and first fundings made on February 3, 2005. The proceeds of the Secured Loan may be used solely for the acquisition and development of oil and gas properties, general working capital and the repayment of specified indebtedness, provided that the Company is prohibited from using any of the proceeds for exploratory drilling or the acquisition of oil and gas properties without the consent of Prospect. As previously reported, Laird Q. Cagan, the Company’s
Chairman of the Board, previously loaned the Company approximately $920,000 plus accrued interest to fund the purchase of working interests from Atkins Production in the Tullos Urania, Colgrade and Crossroads Fields and to provide additional working capital. Once the hedging program described below is implemented, the Company will be permitted to repay Mr. Cagan in full from the proceeds of the Secured Loan, which the Company intends to do.
On February 3, 2005, the Company borrowed $3.0 million under the Loan Agreement to fund the purchase of the Chadco properties in the Tullos Urania and Colgrade Fields in LaSalle and Winn Parishes of Louisiana (as described below), and to fund working capital (including the repayment of past due accounts payable). The Company has until May 4, 2005 to borrow the remaining $1.8 million available under the Loan Agreement. The Secured Loan bears interest at an annual rate equal to the greater of (a) 14% and (b) the Treasury Rate plus 9%, with interest payable in arrears on the last day of each month. The Secured Loan is due in full on February 2, 2010.
Pursuant to the terms of the Loan Agreement, the Company was required to (i) pay Prospect a $96,000 cash fee, (ii) reimburse Prospect for its legal fees incurred in connection with the transaction, and (iii) issue Prospect five-year warrants to purchase up to 450,000 shares of NGS stock at an exercise price of $0.75 per share, and “revocable warrants” to purchase up to an additional 300,000 shares of common stock at an exercise price of $0.75 per share. The revocable warrants are subject to cancellation by the Company prior to their exercise if the Company meets and maintains certain operating cash flow targets. In the event the Company borrows the remaining $1.8 million available under the Loan Agreement, the Company will be required to issue additional warrants and “revocable
warrants” to Prospect (to purchase up to 270,000 shares and 180,000 shares, respectively). In connection with the Secured Loan, the Company is also obligated to pay a third-party consultant a $30,000 cash fee and to issue such party warrants to acquire up to 50,000 shares of NGS common stock at an exercise price of $2.00 per share.
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The shares of common stock issuable upon exercise of the warrants held by Prospect are subject to a registration rights agreement, pursuant to which the Company has agreed to register sales by Prospect and its transferees of such shares under the Securities Act of 1933, as amended. Subject to limitations specified in this agreement, these registration rights include an unlimited number of piggyback registration rights that require NGS to register sales of a holder's shares when NGS undertakes a public offering and certain other types of offerings, subject to the discretion of the managing underwriter of the offering, if any, to decrease the amount that holders may register.
The Secured Loan is secured by a Mortgage, Collateral Assignment, Security Agreement and Financing Statement executed by NGS Sub, Inc., a wholly owned subsidiary of NGS (“NGS Sub”), granting Prospect a first-priority security interest in substantially all of NGS Sub’s assets, as well as by pledges of the stock of NGS’s direct and indirect subsidiaries. The Secured Loan is also guaranteed by NGS’s direct and indirect subsidiaries.
Among other conditions, the Loan Agreement requires that the Company (i) maintain a debt service reserve account in an initial amount equal to 7.5% (or, after October 1, 2005, 5%) of the outstanding borrowings at any time (provided that the required percentage shall be increased to 14% in the event certain earnings tests are not met), (ii) enter into a hedging agreement for the production and sale of the Company’s hydrocarbons no later than February 28, 2005, and (iii) subject to certain conditions, obtain a $1.5 million key-man life insurance policy on Robert S. Herlin, the Company’s President and Chief Executive Officer.
Among other restrictions and subject to certain exceptions, the Loan Agreement prohibits the Company and each of its restricted subsidiaries from creating liens, entering into certain types of mergers or consolidations, incurring additional indebtedness, changing the character of its business, or engaging in certain types of transactions. The Loan Agreement also requires NGS to maintain specified financial ratios. In order to satisfy certain of these ratios, the Company will need to significantly increase its earnings.
The Loan Agreement provides that the Company will be in default under the Secured Loan if Mr. Herlin shall cease for any reason to be actively employed full time as President of NGS, unless NGS replaces Mr. Herlin within 90 days following such event, and his replacement is reasonably satisfactory to Prospect.
The foregoing descriptions are qualified by reference to Exhibits 10.1 through 10.13 to this Current Report on Form 8-K, which Exhibits are incorporated herein by reference.
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Asset Purchase Agreement with Chadco, Inc.
On February 3, 2005, NGS Sub entered into a Definitive Asset Purchase Agreement (the “Purchase Agreement”) to acquire a 100% working interest in certain leases and wells in the Tullos Urania Field in LaSalle Parish and the Colgrade Field in Winn Parish, from Chadco, Inc. and its owners, for total consideration of $812,733. The purchase price will be reduced by the net income from the purchased properties for the months of December 2004 and January 2005. This acquisition was completed concurrently with the funding of the Prospect loan. The purchase includes 65 producing oil wells, 56 shut-in oil wells and nine salt water injection wells with gross production of up to 70 barrels per day.
As is common with the purchase of producing oil and gas properties, the Company assumed an asset retirement obligation in connection with this acquisition. In accordance with FAS 143, management is making an assessment as to the amount of liability to be recorded in the Company’s financial statements as a result of the Company’s assumption of this obligation. Due to the current high price for steel tubular goods and wellhead equipment installed on the wells, the Company believes the retirement obligation, net of salvage, will not be significant and will not materially impact the Company’s balance sheet or income statement, prospectively or in the future.
The foregoing description is qualified by reference to Exhibit 10.12 to this Current Report on Form 8-K, which Exhibit is incorporated herein by reference
Item 2.01 Completion of Acquisition or Disposition of Assets
See Item 1.01 above.
Item 3.02. Unregistered Sales of Equity Securities.
See Item 1.01 above.
Private Placement
Since October 1, 2004, NGS has sold a total of 111,275 Units, each Unit being comprised of one share of common stock of NGS (“Common Stock”) and warrants to acquire up to one-third of one share of Common Stock at an exercise price of $0.01 per share (“Warrants”). The Units were sold in private transactions to a total of eleven accredited investors. The consideration paid for the Units was $2.00 per Unit, resulting in aggregate gross proceeds to NGS of $278,800. All of the Warrants were immediately exercised, resulting in the issuance by NGS of an additional 54,800 shares of Common Stock for total additional consideration to NGS of $548.
Pursuant to a registration rights agreement entered into in connection with these transactions, NGS granted to the investors certain registration rights, including an unlimited number of piggyback registration rights that require NGS to register sales of an investor’s shares when NGS undertakes a public offering and certain other types of offerings, subject to customary limitations.
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A commission of $17,000 was paid to Chadbourn Securities, Inc., an NASD broker dealer, and Laird Q. Cagan, Chairman of Board of NGS and a registered representative of Chadbourn Securities, Inc. (collectively, the “Placement Agent”) in connection with this private placement. As additional consideration, the Placement Agent was issued seven-year warrants to purchase up to 12,536 shares of common stock of NGS at an exercise price of $1.50 per share.
NGS issued and sold the foregoing securities pursuant to certain exemptions from registration provided by Rule 506 of Regulation D and Section 4(2) and Section 4(6) of the Securities Act of 1933, as amended.
Item 9.01 Financial Statements and Exhibits
(c) Exhibits.
The following exhibits are filed as exhibits to this Current Report on Form 8-K:
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Exhibit No. |
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Description
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10.1 |
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Loan Agreement, dated as of February 2, 2005, between Natural Gas Systems, Inc., a Nevada corporation (“NGS”) and Prospect Energy Corporation (“Prospect”)
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10.2 |
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Mortgage, Collateral Assignment, Security Agreement and Financing Statement by NGS Sub. Corp., dated as of February 2, 2005
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10.3 |
NGS Promissory Note in favor of Prospect
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10.4 |
Security Agreement, dated as of February 2, 2005, between NGS Sub. Corp. and Prospect
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10.5 |
Security Agreement, dated as of February 2, 2005, between Natural Gas Systems, Inc., a Delaware corporation, and Prospect
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10.6 |
Guaranty Agreement, dated as of February 2, 2005, by Natural Gas Systems, Inc., a Delaware corporation, NGS Sub. Corp., Arkla Petroleum, L.L.C. and Four Star Development Corporation, in favor of Prospect
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10.7 |
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Warrant Agreement, dated as of February 2, 2005, between NGS and Prospect.
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10.8 |
NGS Common Stock Purchase Warrant in favor of Prospect, dated as of February 2, 2005
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10.9 |
Revocable Warrant Agreement, dated as of February 2, 2005, between NGS and Prospect
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10.10 |
NGS Revocable Common Stock Purchase Warrant in favor of Prospect, dated as of February 2, 2005
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10.11 |
Registration Rights Agreement, dated as of February 2, 2005, between NGS and Prospect
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10.12 |
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Definitive Asset Purchase Agreement, dated as of February 2, 2005, by and between Chadco, Inc., Alan Chadwick McCartney, Sonya Lynn McCarty McCartney and NGS Sub. Corp.
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10.13 |
Press Release, dated February, 2, 2005
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10.14 |
Press Release, dated February 8, 2005
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SIGNATURES
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 hereunto duly authorized.
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NATURAL GAS SYSTEMS, INC. | |
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Date: February 8, 2005 |
By: /s/ Robert Herlin
Robert Herlin, Chief Executive Officer |
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NGS/Prospect
Loan Agreement - DRAFT 2/1/2005
LOAN
AGREEMENT
THIS LOAN
AGREEMENT (“Agreement”), dated as of February , 2005,
is made between NATURAL GAS SYSTEMS, INC., a Nevada corporation (“Borrower”),
and PROSPECT ENERGY CORPORATION, a Maryland corporation (“Lender”), who agree as
follows:
ARTICLE
1
GENERAL
TERMS
Section
1.1
Terms
Defined Above. As used
in this Agreement, the terms “Agreement”, “Borrower”, and “Lender”, shall have
the meanings indicated above.
Section
1.2
Certain
Definitions. As used
in this Agreement, the following terms shall have the meanings indicated (and as
provided in Section
9.14), unless
the context otherwise requires:
“Advances”
shall mean the borrowings on the Closing Date under the Loan and all or any
portion of such borrowings and other or subsequent borrowings under the Loan so
long as same remain outstanding and unpaid.
“Affiliate”
shall mean, as to any Person, any Person controlling, controlled by or under,
control with such Person, and “Control” as used herein means the possession,
direct or indirect, of the power to direct or cause the direction of the
management or policies of the controlled Person.
“Amount”
shall mean the total amount drawn down by Borrower up to four million eight
hundred thousand ($4,800,000.00) dollars.
“Arkla”
shall mean Arkla Petroleum, L.L.C., a Louisiana limited liability company, a
wholly owned Subsidiary of NGS Sub and an indirect wholly owned Subsidiary of
the Borrower.
“Asset
Sale” shall mean the sale (in any single transaction or related series of
transactions) by Borrower or any of its Restricted Subsidiaries of fifty (50%)
percent or more of the assets of Borrower and its Restricted Subsidiaries, taken
as a whole. Notwithstanding the foregoing, Asset Sale does not include sales of
assets between the Borrower and any Restricted Subsidiary or between any
Restricted Subsidiaries.
“Base
Rate” shall mean, for any day, an interest rate per annum equal to the greater
of (a) fourteen (14%) percent, or (b) the Treasury Rate in effect on the last
day of the preceding calendar month plus nine (9%) percent (except that the Base
Rate in effect on the Closing Date shall be 14%).
NGS/Prospect
Loan Agreement
“Borrowing
Base” shall mean, at any time, the dollar amount calculated as the discounted
present value of the future Net Cash Flows of Proved Developed Reserves that
constitute Collateral based upon the future production, capital expenditures and
operating expenses utilized in the Borrower’s most recent independent
engineering report prepared for filing with the SEC each year, as determined by
the Lender. This calculation shall be made by the Lender using a discount rate
of ten (10%) percent, and based upon pricing for 2005 of $35.00 / bbl for oil
and $5.00 / Mcf for gas, and during subsequent years calculated as a ten percent
discount to the average price of New York Mercentile Exchange Henry Hub Crude
Oil and Natural Gas Futures for the forward twelve months as of the date of any
future reserve report, all as adjusted by the inclusion of any hedging
arrangements in place. Any good faith determination by the Lender of the
Borrowing Base shall be final and conclusive. The Borrowing Base will be revised
by Lender after receipt of each annual independent engineering report delivered
to the Lender by the Borrower pursuant to this Agreement. The Lender shall
notify the Borrower of the result of each annual Borrowing Base redetermination
by the Lender which shall become effective upon such notice. Each annual
determination of the Borrowing Base shall be effective until redetermined by the
Lender in accordance with this Agreement. Without limiting the foregoing, the
Lender may exclude, in its sole and absolute discretion, any property or portion
of production therefrom from the Borrowing Base, at any time, because title
information on, or the status of title to, such property is not reasonably
satisfactory to Lender, such property is not Collateral, the Lender’s Lien
therein is not first and prior to all others (other than the holder of any
Future Senior Debt), such property is subject to contractual agreements or
commitments not reasonably satisfactory to Lender, or such property is not
assignable. The Borrower acknowledges that the Lender’s determination of the
Borrowing Base contains an equity cushion (market value in excess of loan
value), which is acknowledged by the Borrower to be essential for the adequate
protection of the Lender.
“Business
Day” shall mean a day other than a Saturday, Sunday or legal holiday for
commercial banks in New York, New York.
“Change
of Control” shall mean the occurrence of either of the following: (a) the
consummation of any transaction which results in any “person” or “group” (as
such terms are used for purposes of Section 13(d) of the Securities Exchange Act
of 1934) other than the Permitted Holders becoming the beneficial owner of more
than 50% of the total voting power of all classes of the Borrower’s voting
securities then outstanding; or (b) the first day on which a majority of the
members of the Board of Directors of the Borrower shall cease to be Continuing
Directors.
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NGS/Prospect
Loan Agreement
“Closing
Date” shall mean the date on which the Note is executed and delivered by the
Borrower to the Lender.
“Code”
shall mean the Internal Revenue Code of 1986, as amended.
“Collateral”
shall mean the properties and property rights described in the Collateral
Documents described in Section 3.1 as security for the Indebtedness.
“Collateral
Documents” shall mean collectively the documents from time to time required by
the Lender to obtain the security interest in the Collateral in accordance with
the terms of the Agreement, or otherwise guarantee or secure the Indebtedness,
or otherwise pertaining to this Agreement, such documents which exist on the
Closing Date being described in Article 3 hereof, as all such documents are
amended, restated or renewed from time to time.
“Commitment
Limit” shall mean, at any particular date, the lesser of (x)
the Amount or (b) the Borrowing Base as then in effect.
“Companies”
shall mean collectively, on the Closing Date, the Borrower, NGS Delaware, NGS
Sub, Arkla and Four Star, and “Company” shall mean any one of the
Companies.
“Continuing
Directors” of a Person shall mean any member of such Person’s Board of Directors
who: (x) was a member of such Person’s Board of Directors on the Closing Date;
or (y) was nominated for election or elected with the approval of a majority of
the Continuing Directors who were then members of such Person’s Board of
Directors (but excluding any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest or other
actual or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Continuing Directors).
“Contracts”
shall mean those agreements, contracts and other instruments to which the
interests in the oil, gas and mineral leases comprising the Collateral are
subject.
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NGS/Prospect
Loan Agreement
“Debt”
shall mean any and all amounts and/or liabilities owing from time to time by a
Company to any Person, including the Lender, direct or indirect, liquidated or
contingent, now existing or hereafter arising, including without limitation (i)
indebtedness for borrowed money or the deferred purchase price of property; (ii)
the amounts of all standby and commercial letters of credit and bankers
acceptances, matured or unmatured, issued on behalf of such Company, and
(without duplication) all drafts drawn thereon; (iii) guaranties of the
obligations of any other Person, whether direct or indirect, whether by
agreement to purchase the indebtedness of any other Person or by agreement for
the furnishing of funds to any other Person through the purchase or lease of
goods, supplies or services (or by way of stock purchase, capital contribution,
advance or loan) for the purpose of paying or discharging the indebtedness of
any other Person, or otherwise; (iv) loans or obligations of the types described
above secured by any Lien on any property owned by such Company, to the extent
attributable to such Company’s interest in such property, even though such
Company has not assumed or become liable for the payment thereof personally; (v)
the present value of all obligations for the payment of rent or hire of property
of any kind (real or personal) under leases or lease agreements required to be
capitalized under generally accepted accounting principles (“GAAP”); (vi)
obligations of such Company owing in respect of redeemable preferred stock; or
(vii) obligations of such Company owing in connection with any volumetric
production payments. Notwithstanding the foregoing, Debt shall not include trade
payables incurred in the ordinary course of business.
“Default”
shall mean the occurrence of any of the events specified in Article 8 hereof,
whether or not any requirement for notice or lapse of time or other condition
precedent has been satisfied.
“Default
Rate” shall mean, on any particular date, the Base Rate plus five
(5%) percent per annum.
“Delhi”
means the working interests owned by NGS Sub in the Delhi field located
primarily in Richland Parish, Louisiana, acquired by NGS Sub in September,
2003.
“DSR
Account” shall mean the senior debt service reserve account established pursuant
to Section
5.16 to meet
potential shortfalls in interest or principal payments on the Loan.
“EBITDA”
shall mean, for the period in question, the sum of the Borrower’s and its
Restricted Subsidiaries’ (i) net income for that period on a consolidated basis
in accordance with GAAP, plus (ii) any extraordinary loss and other expenses not
considered to be operating in nature reflected in such net income, minus (iii)
any extraordinary gain, interest income and other income not considered
operating in nature reflected in such net income, plus (iv)
depreciation, depletion, amortization and all other non-cash expenses for that
period, plus (v) all
interest, fees, charges and related expenses paid or payable (without
duplication) for that period that are considered “interest expense” under
generally accepted accounting principles, together with the portion of rent paid
or payable (without duplication) for that period under capital lease obligations
that should be treated as interest in accordance with Financial Accounting
Standards Board Statement No. 13, plus (vi) the
aggregate amount of federal, state and local taxes on or measured by income for
that period (whether or not payable during that period) (but, for the avoidance
of doubt, net of severance and other taxes on or measured by production volumes
for that period). Notwithstanding the foregoing, for purposes of calculating
EBITDA, singular, annual event type expenses, as determined by the Borrower but
subject to the Lender’s approval, not to be unreasonably withheld, as to any
such expenses which would not be considered recurring under generally accepted
accounting principles (including but not limited to third party costs of the
annual audit, engineering report, annual audit, 10K and proxy, annual bonuses
and costs of preparing a filing registration statements with the SEC) shall be
allocated to net income monthly over the prospective one year period.
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NGS/Prospect
Loan Agreement
“ERISA”
shall mean the Employee Retirement Income Security Act of 1974, as amended.
“Event of
Default” shall mean the occurrence of any of the events specified in Article 8
hereof, provided that any requirement for notice or lapse of time or any other
condition precedent has been satisfied.
“Excluded
Sale” shall have the meaning set forth in Section
2.5(b).
“Four
Star” shall mean Four Star Development Corporation, a Louisiana corporation, a
wholly owned Subsidiary of NGS Sub and an indirect wholly owned Subsidiary of
the Borrower.
“Future
Senior Debt” shall have the meaning set forth in Section
2.12.
“Hedge
Agreement” shall mean any agreement or arrangement providing for payments which
are related to, or the value of which is dependent upon, fluctuations of
interest rates, currency exchange rates or forward rates, or fluctuations of
commodity prices, including without limitation any swap agreement, cap, collar,
floor, exchange transaction, forward agreement or exchange or protection
agreement or similar futures contract or swap or other derivative agreement
related to interest rates, currency exchange rates or hydrocarbons or other
commodities, or any option with respect to such transaction.
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NGS/Prospect
Loan Agreement
“Hedging
Obligations” of a Person shall mean any and all obligations of such Person,
whether absolute or contingent and howsoever and whensoever created, arising or
evidenced (including all renewals, extensions and modifications thereof and
substitutions therefore), under any and all Hedge Agreements and any and all
cancellations, buybacks, reversals, terminations or assignments of any Hedge
Agreement, net of any offsets or corresponding physical prices.
“Hedging
Program” shall have the meaning set forth in Section
5.18.
“Herlin”
shall mean Robert S. Herlin.
“Indebtedness”
shall mean any and all amounts, liabilities or obligations owing from time to
time by the Borrower to the Lender (or any transferee of the Note), including
without limitation any such amounts, liabilities or obligations pursuant to this
Agreement, the Note and the Collateral Documents (including reasonable
attorneys’ fees incurred in connection with the execution, enforcement or
collection of the Borrower’s obligations hereunder or thereunder or any part
thereof) or any Hedging Obligations owing to the Lender, and whether such
amounts, liabilities or obligations be liquidated or unliquidated, now existing
or hereafter arising.
“Interest
Expense” shall mean, for each period, the sum of all interest, fees, charges and
related expenses payable (without duplication) for that period to a lender in
connection with borrowed money or the deferred purchase price of assets that are
considered “interest expense” under generally accepted accounting principles,
plus the portion of rent paid or payable (without duplication) for that period
under capital lease obligations that should be treated as interest in accordance
with Financial Accounting Standards Board Statement No. 13.
“Lien”
shall mean any interest in property securing an obligation owed to, or a claim
by, a Person other than the owner of the property, whether such interest is
based on jurisprudence, statute or contract, and including but not limited to
the lien or security interest arising from a mortgage, encumbrance, pledge,
security agreement, production payment, conditional sale, bond for deed or trust
receipt or a lease, consignment or bailment for security purposes. The term
“Lien” shall include reservations, exceptions, encroachments, easements,
servitudes, usufructs, rights-of-way, covenants, conditions, restrictions,
leases, and other title exceptions and encumbrances affecting property. For the
purposes of this Agreement, the Borrower shall be deemed to be the owner of any
property which it has accrued or holds subject to a conditional sale agreement,
financing lease or other arrangement pursuant to which title to the property has
been retained by or vested in some other Person for security purposes.
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NGS/Prospect
Loan Agreement
“Loan”
shall mean the line of credit as described in Article 2 hereof.
“Loan
Excess” shall mean, at any point in time, the amount, if any, by which the
outstanding principal balance of the Advances exceeds the Commitment Limit then
in effect.
“Mandatory
Prepayment Event” shall have the meaning set forth in Section
2.5.
“Material
Adverse Effect” means a material adverse change in, or a material adverse effect
upon, the operations, business, assets, properties, liabilities, contractual
obligations or condition (financial or otherwise), of the Borrower and its
Restricted Subsidiaries, when taken as a whole.
“Maturity
Date” shall mean the fifth anniversary of the Closing Date, or such earlier date
on which the Loan is accelerated pursuant to Section
8.2
hereof.
“Net Cash
Flows” shall mean the revenue less royalty interests, production taxes, direct
operating expenses, and net investment, of Borrower and its Restricted
Subsidiaries, calculated in accordance with GAAP.
“Net
Production” shall mean the amount of crude oil, condensate, natural gas liquids
and natural gas being produced by the assets in which NGS or its Subsidiaries
maintains a working interest, multiplied by that percentage net revenue
interest.
“NGS
Delaware” shall mean Natural Gas Systems, Inc., a Delaware corporation and
wholly owned subsidiary of the Borrower.
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NGS/Prospect
Loan Agreement
“NGS Sub”
shall mean NGS Sub. Corp., a Delaware corporation, a wholly owned subsidiary of
NGS Delaware and an indirect wholly owned Subsidiary of the
Borrower.
“Note”
shall mean the note described in Article 2 hereof, together with any
replacements, renewals, modifications, amendments or extensions
thereof.
“Patriot
Act” shall have the meaning set forth in Section
4.22.
“Permitted
Hedge Agreement” shall mean any Hedge Agreement related to either (i) a
Company’s production and sale of its hydrocarbons or (ii) interest rates
pertaining to the Loan, in each case which a Company enters into (x) in the
ordinary course of business as part of its normal business operations with the
purpose and effect of fixing prices or hedging variable interest rates as a
risk-management strategy, and not for purposes of speculation and not intended
primarily as a borrowing of funds, and (y) with any Person as counterparty
reasonably acceptable to the Lender.
“Permitted
Holders” means Laird Q. Cagan, Eric M. McAfee and Robert S. Herlin, and their
respective estates, spouses, heirs, ancestors, lineal descendants (including
adopted children and their lineal descendants), legatees, and legal
representatives, the trustee of any bona fide trust of which one or more of the
foregoing are the sole beneficiaries or the grantors thereof and any Person in
which any of the foregoing. individually or collectively, beneficially own all
of the outstanding equity interest or which was established for the exclusive
benefit of, or the estate of, any of the foregoing or their
spouses.
“Person”
shall mean any individual, corporation, limited liability company, partnership,
joint venture, association, joint stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof, or any
other form of entity.
“Plan”
shall mean any plan subject to Title IV of ERISA and maintained by the Borrower,
or any such plan to which the Borrower is required to contribute on behalf of
its employees.
“Prepayment
Premium” shall have the meaning set forth in Section
2.4.
“Proved
Developed Reserves” shall mean, at any particular time, 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 in
future years from known reservoirs attributable to the Borrower’s or a
Subsidiary’s Collateral included in the Borrowing Base under then existing
economic and operating conditions (i.e., prices and costs as of the date the
estimate is made and prices set forth herein), by established operating
practices and under current government regulations, where such reserves are
expected to be recovered from existing wells and installed facilities or, if
facilities have not been installed, that would involve a relatively low
expenditure (when compared to the cost of drilling a well) to put the reserves
on production. Such Reserves may include both producing and non-producing wells.
Reserves which can be produced economically through application of improved
recovery techniques (such as 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 in the given well or a nearby well in the same
reservoir.
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“Restricted
Subsidiary” means any Subsidiary of the Borrower which at the time of
determination is not an Unrestricted Subsidiary.
“Revocable
Warrants” shall mean the detachable revocable warrants delivered to the Lender
as described in Section
3.3.
“Subsidiary”
shall mean each corporation or limited liability company of which the Borrower
owns, directly or indirectly, a controlling interest (more than fifty percent)
of the outstanding capital stock or membership interests. Working interests
partnerships shall not be deemed to be Subsidiaries.
“Total
Debt” shall mean, at any time, the sum of (a) the outstanding principal balance
on the Loan plus (b) the principal balance of all Debt of the Borrower and its
Restricted Subsidiaries for borrowed money and capitalized leases (whether short
or long term) that is pari passu with the Loan or has priority over the Loan in
right of payment. However, any Debt described in Subsections
6.1(k) or
6.1(l) shall
not be included in Total Debt.
“Treasury
Rate” shall mean the rate offered on five-year (5) U.S. Treasury securities
trading nearest to par as reported in The Wall Street Journal.
“Tullos
I” shall mean the portion of the Tullos Urania Field in LaSalle Parish,
Louisiana, acquired by NGS Sub by that certain Act of Sale and Assignment
executed September 2, 2004, by Atkins Production Inc., and Monty and Margaret
Atkins.
“Tullos
II” shall mean the interests in the Tullos Urania and Colgrade Fields, LaSalle
and Winn Parishes, Louisiana, currently intended to be acquired by the Borrower
or a Restricted Subsidiary from Chadco Inc.
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“Unrestricted
Subsidiary” means any Subsidiary of the Borrower which at the time of
determination is an Unrestricted Subsidiary (as designated by the Borrower’s
Board of Directors) and any Subsidiary of an Unrestricted Subsidiary. The
Borrower’s Board of Directors may designate any Subsidiary of the Borrower
(including any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary, unless such Subsidiary owns any capital stock of, or owns or holds a
Lien on any property of, any other Subsidiary of the Borrower which is not a
Subsidiary of the Subsidiary to be so designated; and provided
further that,
notwithstanding the foregoing, the Borrower may not designate as an Unrestricted
Subsidiary NGS Delaware, NGS Sub, Arkla or Four Start.
“Warrants”
shall mean the detachable warrants delivered to the Lender as described in
Section
3.2.
Section
1.3
Accounting
Terms. Unless
otherwise specified herein, all accounting terms used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
accordance with generally accepted accounting principles as in effect from time
to time on a basis consistent (except for changes in accounting principles or
practice approved by independent public accountants for the Borrower) with the
most recent financial statements of the Borrower.
ARTICLE
2
THE CREDIT
THE CREDIT
Section
2.1
Loan.
(a)
Loan. Subject
to and upon the terms and conditions contained in this Agreement, and relying on
the representations and warranties contained in this Agreement, on the Closing
Date the Lender agrees to loan to Borrower, in the form of one or more Advances,
a maximum aggregate principal amount equal to the Commitment Limit. The Loan
shall be represented by one or more promissory notes not to exceed a combined
amount of four million eight hundred thousand ($4,800,000.00) dollars, payable
to the order of the Lender. Principal, all accrued and unpaid interest, fees and
Prepayment Premiums, if any, on the Loan shall be payable in full on the
Maturity Date. During the continuance of an Event of Default, overdue payments
with respect to the Loan may be debited from the Borrower’s DSR Account as
provided in this Agreement or other written agreement between Borrower and
Lender.
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(b)
Interest. Subject
to Section
2.11 the
interest rate applicable to each Loan Advance beginning on the date such Advance
is made shall be the Base Rate then in effect, adjusted monthly. Interest on the
Loan shall be payable at the Base Rate monthly in arrears on the last day of
each month, commencing January 31, 2005, and the last day of each calendar month
thereafter. Interest on Advances and all fees and other Indebtedness shall be
calculated on the basis of a 365 (or in a leap year 366) day year and the actual
number of days elapsed.
(c)
Draw
Requests. In
accordance with the provisions in this Section, the Lender will make Advances to
the Borrower from time to time on any Business Day within and expiring ninety
(90) after the Closing Date in such amounts as the Borrower may request in
increments of at least $100,000.00 or a multiple of $100,000.00 up to a total
not to exceed the Commitment Limit. Borrower shall draw a minimum aggregate
amount of $3,000,000.00 on the Closing Date and may draw additional amounts up
to the Commitment Limit within the subsequent ninety (90) days. Requests for
Advances must be made by written notice from the Borrower and sent to the Lender
by mail, courier or facsimile in accordance with Section
9.1 or in
accordance with Section
2.10
specifying the amount of the Advance. A request shall be authorized by the
Borrower if made by any one of the Persons designated by the Borrower in the
Note or otherwise as an authorized person in accordance with resolutions of the
Board of Directors of the Borrower certified to the Lender. The Lender may rely
fully and completely upon the authority of the signatory of such request or
confirmation unless such authority is terminated by written notice to the
Lender, and any such termination shall be effective only prospectively. The
request for any Advance by the Borrower shall constitute a certification by the
Borrower that all of the representations and warranties contained in Article 4
(other than those representations and warranties, if any, that are by their
specific terms limited in application to a specific date) are true and correct
in all material respects when taken as a whole as of the date of such request
and also as of the date of the Advance.
(d)
Timing After
the Lender’s receipt of an authorized request for Advance, the Lender will make
such Advance for the benefit of the Borrower in same day funds as provided below
upon fulfillment of the applicable conditions set forth in this Agreement.
Requests for Advances shall be made on written notice from the Borrower to the
Lender, received by the Lender no later than 11:00 a.m. (Eastern Time) on the
first Business Day before such Advance specifying the amount thereof. Each such
written notice by the Borrower shall be irrevocable by the Borrower. Not later
than 3:00 p.m. (Eastern Time) on the date properly and timely requested for the
Advance and upon fulfillment of the applicable conditions set forth in Article 7
of this Agreement, the Lender will make such Advance available to the Borrower
in same day funds. The Borrower irrevocably agrees in favor of the Lender that
the deposit of the proceeds of any Advance in any account of Borrower designated
by Borrower shall be deemed prima facie evidence of the Borrower’s Indebtedness
to the Lender under the Loan.
Section
2.2
Business
Days. If the
date for any payment, prepayment, or fee payment hereunder falls on a day which
is not a Business Day, then for all purposes of this Agreement (unless otherwise
provided herein) the same shall be deemed to have fallen on the next following
Business Day, and such extension of time shall in such case be included in the
computation of payments of interest.
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Section
2.3
Payments. The
Borrower shall make each payment hereunder and under the Note and any Collateral
Documents in lawful money of the United States of America in same day funds to
the Lender at its main office in New York, New York, not later than 11:00 a.m.
(Eastern Time) on the day when due, or such other place in the United States as
designated in writing by the Lender. The Borrower hereby authorizes the Lender
to charge from time to time against the Borrower’s DSR Account any amount which
is past due, after taking into account any applicable grace
periods.
Section
2.4
Voluntary
Prepayment. The
Borrower may prepay the Loan in full or in part but only on and subject to the
terms set forth below. It is agreed that (i) the Borrower shall give the Lender
notice of each such prepayment of all or any portion of an Advance no less than
five (5) Business Days prior to prepayment, (ii) the Borrower shall pay all
accrued and unpaid interest on the amounts prepaid, and (iii) no such prepayment
shall serve to postpone the repayment when due of any other Indebtedness. Each
voluntary prepayment shall be in an aggregate principal amount of (x)
$100,000.00 or a multiple of $100,000.00 in excess thereof or (y) if the
outstanding principal balance of the Loan is less than the minimum amount set
forth in the preceding clause (x) of this sentence, then such lesser outstanding
principal balance, as the case may be. Any optional prepayment in full shall be
accompanied by all fees, expenses, accrued interest, and the Prepayment Premium
set forth in the following sentences. When making any optional prepayment on the
Loan, whether partial or in full, the Borrower must pay to the Lender as
additional consideration (the “Prepayment
Premium”) on the
date of such prepayment an amount equal to a percentage, varying depending upon
the Loan quarter in which the prepayment occurs, of the principal amount being
prepaid. If the prepayment is received during the first quarter of the Loan (the
period commencing on the Closing Date and ending three months later), the
Prepayment Premium shall be ten (10.0%) percent of the portion of the principal
amount of the Loan being prepaid. Thereafter, for each successive three month
period the Prepayment Premium shall reduce one-half (0.5%) percent, to reach
zero at five (5) years from the Closing Date. (If the Closing Date occurs on a
day of an initial calendar month for which there is no numerical corresponding
day in the third calendar month succeeding such initial calendar month, such
quarter shall end on the last day of such third succeeding calendar month).
Section
2.5
Mandatory
Prepayment.
(a)
Upon the
occurrence of a Mandatory Prepayment Event defined below, the Borrower shall
immediately prepay the Loan as described herein, accompanied by payment of all
fees, expenses, and accrued interest thereon. Any of the following events shall
be considered a “Mandatory
Prepayment Event” as that
term is used herein: (i) a Change of Control of the Borrower; (ii) an Asset
Sale; or (iii) an Event of Default.
(b)
No later
than the first Business Day following the day of receipt by the Borrower or any
of its Restricted Subsidiaries of Net Asset Sale Proceeds (as defined below) in
respect of any sale of any assets (whether tangible or intangible) consisting of
lesser amounts of assets than an Asset Sale, except for an Excluded Sale, the
Borrower shall either, at its option, (i) prepay the Loan in an aggregate amount
equal to 100% of the amount of such Net Asset Sale Proceeds, and the Commitment
Limit shall be permanently reduced by that amount or (ii) redeem, prepay or
retire any outstanding Debt that is senior in right of payment to the
Indebtedness or that is secured by the assets sold. For the avoidance of doubt,
the sale of assets covered by this Section
2.5 includes
the sale (in any single transaction or related series of transactions) by the
Borrower or any of its Restricted Subsidiaries of any tangible or intangible
assets, except an Excluded Sale. The proceeds of any Excluded Sale may be used
by the Borrower or its Restricted Subsidiary for any purpose not prohibited by
this Agreement. “Excluded
Sale” shall
mean (x) sales of production in the ordinary course of business, (y) sales of
items of equipment in the ordinary course of business which are obsolete or
otherwise no longer useful for such Person’s operations, and (z) sales of assets
in an amount, when added to the total amount of all sales of assets made by the
Borrower and its Restricted Subsidiaries during the immediately preceding six
month period pursuant to this clause (z) shall not exceed twenty (20%) percent
of the assets of the Borrower and its Restricted Subsidiaries as of the first
day of such six month period. “Net
Asset Sale Proceeds” shall
mean the cash payments (including any cash received by way of deferred payment
pursuant to, or by monetization of, a note receivable or otherwise, but only as
and when so received) received from such asset sale, net of any bona fide direct
costs reasonably incurred in connection with such asset sale such as any
reasonable brokerage fees, commissions and other similar expenses relating to
such asset sale.
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(c)
The
Lender shall notify the Borrower of the result of each annual Borrowing Base
redetermination by the Lender. If at any time the Lender determines that a Loan
Excess exists, then within sixty (60) days of receipt by the Borrower of written
notice of such Loan Excess the Borrower shall (x) prepay the Advances (together
with accrued interest on the amount
to be repaid to the date of payment but without Prepayment Penalty) in an amount
sufficient to reduce the Advances to the then Commitment Limit, or (y) execute,
deliver and record or cause to be executed and delivered such additional
Collateral Documents pursuant to Section
3.1,
sufficient to induce the Lender to make a permanent increase in the Borrowing
Base to an amount not less than the outstanding principal balance of the
Advances. Notwithstanding anything to the contrary, such redeterminations of the
Borrowing Base shall occur only once per twelve month period. The Borrower
specifically acknowledges that no additional grace period (beyond the period
stated in this section) is applicable under this Agreement to any failure to
make such mandatory prepayment before such failure is an Event of Default
hereunder.
Section
2.6
Fees.
(a)
The
Borrower shall pay the Lender an up front commitment fee in the amount equal to
$96,000.00 (being 2.00% of $4,800,000) on the Closing Date.
Section
2.7
Use of
Proceeds.
(a)
The
Borrower shall use the proceeds of the Loan in connection with the acquisition
and development of oil and gas properties as well as general working capital
purposes and the repayment of Debt permitted by the terms of this Agreement, all
as set out on Schedule
2.7.
The
Borrower shall not use the proceeds of any Advances under the Loan for
exploratory drilling or acquisitions of additional oil and gas properties
outside of Delhi, Tullos I or Tullos II without the Lender’s prior written
consent, which shall not be unreasonably withheld. The Borrower shall not use
any portion of the Advances under the Loan to pay any outstanding debt owing to
Laird Cagan except as permitted by Section
6.16.
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(b)
No part
of the proceeds of the Loan will be used, directly or indirectly, (i) to fund,
make or advance a personal loan to or for the benefit of a director or executive
officer of a Borrower or any Subsidiary (except for advances of approved
business expenses), or (ii) to fund acquisitions of fixed long-term assets of
the Borrower or any Subsidiary, except for assets acquired by the Borrower or a
Restricted Subsidiary in the ordinary course of business as an exploration and
production company engaged in acquiring and exploring oil and gas properties and
on which a Lien is granted to Lender.
Section
2.8
Default
Rate.
Anything in the Note or in any other agreement, document or instrument to the
contrary notwithstanding, effective upon an Event of Default or after the
Maturity Date the Lender shall have the right to prospectively increase the
interest rate under the Note to the Default Rate until no Event of Default is
continuing or the Note is paid in full. Upon the acceleration of the principal
amount of the Indebtedness represented by the Note, the accelerated principal
balance of the Indebtedness shall bear interest from the date of acceleration up
to the actual payment (as well after as before judgment) at the Default Rate.
All such interest at the Default Rate shall be payable upon demand.
Section
2.9
[Omitted]
Section
2.10
Electronic
Notice to Lender. The
Borrower may transmit notices of borrowing or the like by electronic
communication, if arrangements for doing so have been approved by the
Lender.
Section
2.11
Change
in Interest Rate. The
Lender agrees that upon any new financing entered into between the Borrower and
the Lender after the Closing Date, the interest rate on this Loan, for the
remaining future life of this Loan at such time, will be revised downward to the
interest rate of such new financing.
Section
2.12
Future
Senior Debt.
The
Lender agrees that the Borrower may incur Debt senior to this Loan and
subject
its assets to Liens securing such senior Debt senior to the Liens in favor
of
the Lender (“Future
Senior Debt”)
provided that (i) Borrower is in compliance with Section
5.15
at closing of such additional
financing and (ii) Borrower is projected to comply with Section
5.15
for the remaining term of the Loan as determined by financial projections
approved by the Lender in writing at the time of such incremental borrowing,
where such approval may not be unreasonably withheld. The terms of any
Future Senior Debt (i) shall be reasonable and typical for a senior secured debt
facility and (ii) shall not include the issuance of warrants or the payment of
PIK interest (except that the issuance of up to 10% warrant coverage and the
issuance of PIK interest in the form of shares of common stock shall be
permitted). The
Lender agrees
to enter into (i) subordination
terms with the holder of such Future Senior Debt and (ii) amendments to this
Agreement to provide for such Future Senior Debt and senior Liens,
in each
case as
reasonably requested by the holder of
such Debt.
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ARTICLE
3
SECURITY
FOR THE OBLIGATIONS
Section
3.1
Security. The
Loan shall be secured by the following:
(i)
Mortgage,
Collateral Assignment, Security Agreement and Financing Statement executed by
NGS Sub granting a first priority mortgage, security interest and assignment of
production in NGS Sub’s interests in Delhi, Tullos I and Tullos II in the State
of Louisiana and contracts, intangibles and other collateral relating thereto,
together with a UCC financing statement pertaining thereto.
(ii)
If and
when issued in accordance with Section
5.17, life
insurance in the amount of $1,500,000.00 insuring the life of Herlin, pledged to
the Lender by the Borrower to the extent of the outstanding Loan.
(iii)
Guaranty
Agreement executed by NGS Delaware, NGS Sub, Arkla and Four Star. The Borrower
acknowledges that the Lender shall have the right to require that any newly
acquired or created Restricted Subsidiary become an additional guarantor
promptly upon Lender’s request.
(iv)
Security
Agreement (stock) executed by the Borrower, granting a first priority security
interest in 100% of the outstanding shares of NGS Delaware, together with a UCC
financing statement pertaining thereto.
(v)
Security
Agreement (stock) executed by NGS Delaware, granting a first priority security
interest in 100% of the outstanding shares of NGS Sub, together with a UCC
Financing Statement pertaining thereto.
(vi)
Security
Agreement (stock) executed by NGS Sub, granting a first priority security
interest in 100% of the outstanding shares of Four Star and 100% of the
membership interestship of Arkla, together with a UCC Financing Statement
pertaining thereto.
(vii)
A deposit
account control agreement executed by the depositary bank, the Borrower and the
Lender pertaining to the DSR Account.
(viii)
Mortgage
or deed of trust executed by existing or to be created Restricted Subsidiaries
granting a first priority mortgage, security interest and assignment of
production in any acquired or developed assets held by existing or to be created
Restricted Subsidiaries in any oil and gas properties, including related
contracts, intangibles and other collateral, together with a UCC financing
statement pertaining thereto, where such acquired or developed assets have a
book value in excess of $100,000.00 and where such assets are acquired or
developed using Advances under the Loan.
Section
3.2
Warrants. At
Closing the Borrower shall deliver to the Lender the detachable warrants (the
“Warrants”)
exercisable, in the aggregate, for 450,000 shares of the Borrower’s common
stock. The Borrower shall deliver additional warrants of like tenor in the
amount of one share for every six and two thirds ($6.666667) dollars of
additional drawdowns on the Loan in excess of the initial $3,000,000.00 Advance
(so if the full additional $1,800,000.00 is drawn, then warrants for 270,000
shares). These Warrants shall be exercisable any time for five (5) years after
the Closing Date at an exercise price of $0.75 per share. The Warrants shall be
exercisable any time, have a cashless exercise feature and piggyback
registration rights, pursuant to the terms and conditions of the “Warrant
Agreement” and the “Registration Rights Agreement” executed by the Borrower
contemporaneously with this Agreement.
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Section
3.3
Revocable
Warrants. At
Closing, the Borrower shall deliver to the Lender the detachable revocable
warrants (the “Revocable Warrants”) exercisable, in the aggregate, for 300,000
shares of the Borrower’s common stock. All Revocable Warrants granted under this
Section 3.3, including the additional Revocable Warrants below, shall be
revocable without any further consideration by Borrower if Borrower and its
Subsidiaries, on a consolidated basis, reach an EBITDA of at least $200,000.00
per month for any three consecutive calendar months prior to February 1, 2006,
as described in the terms and conditions of the Revocable Warrant Agreement
executed by the Borrower contemporaneously with this Agreement. The Borrower
shall deliver additional Revocable Warrants of like tenor in the amount of 1
share for every ten ($10.00) dollars of additional drawdowns on the Loan in
excess of the initial $3,000,000.00 Advance. These Revocable Warrants shall be
exercisable, if not previously revoked, after March 15, 2006 until five (5)
years after the Closing Date at an exercise price of $0.75 share.
ARTICLE
4
REPRESENTATIONS
AND WARRANTIES
In order
to induce the Lender to enter into this Agreement, the Borrower represents and
warrants to the Lender that:
Section
4.1
Existence.
(a)
The
Borrower is a corporation duly organized, legally existing and in good standing
under the laws
of its state of incorporation (Nevada) and is duly qualified as a foreign
corporation in Texas and all other jurisdictions wherein the property it owns or
the business it transacts make such qualification necessary and the failure to
so qualify would have a Material Adverse Effect.
(b)
NGS
Delaware is a corporation duly organized, legally existing and in good standing
under the laws of its state of incorporation (Delaware) and is duly qualified as
foreign corporation in all other jurisdictions wherein the property it owns or
the business it transacts make such qualification necessary and the failure to
so qualify would have a Material Adverse Effect.
(c)
NGS Sub
is a corporation duly organized, legally existing and in good standing under the
laws of its state of incorporation (Delaware) and is duly qualified as a foreign
corporation in Louisiana and all other jurisdictions wherein the property it
owns or the business it transacts make such qualification necessary and the
failure to so qualify would have a Material Adverse Effect.
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(d)
Four Star
is a corporation duly organized, legally existing and in good standing under the
laws of its state of incorporation (Louisiana) and is duly qualified as a
foreign corporation in all other jurisdictions wherein the property it owns or
the business it transacts make such qualification necessary and the failure to
so qualify would have a Material Adverse Effect.
(e)
Arkla is
a limited liability company duly organized, legally existing and in good
standing under the laws of its state of organization (Louisiana) and is duly
qualified as a foreign limited liability company in all other jurisdictions
wherein the property it owns or the business it transacts make such
qualification necessary and the failure to so qualify would have a Material
Adverse Effect .
Section
4.2
Names,
Numbers and Offices.
(a)
The
Borrower is not currently doing business under any name (including trade names)
other than the name of the Borrower set forth above, except for its pre-merger
name Reality Interactive, Inc., until May 26, 2004. The Borrower’s Subsidiaries
do business only under their names, or the name of the Borrower, as provided in
this Agreement.
(b)
The
secretary of state registration number and locations of its state of
incorporation and chief executive office of each Company signing the Collateral
Documents are accurately set forth in the Collateral Documents.
(c)
The
Borrower’s chief executive office has been located in the State of Texas since
June 2004.
Section
4.3
Power
and Authorization. Each
Company is duly authorized and empowered to execute, deliver and perform this
Agreement, the Note and the Collateral Documents and the Warrants executed by
it. All corporate action on the part of each Company (including all shareholder
action) requisite for the due creation and execution of the Loan and this
Agreement, the Note and Collateral Documents and the Warrants have been duly and
effectively taken.
Section
4.4
Review
of Documents; Binding Obligations. Each
Company has reviewed this Agreement, the Note and the Collateral Documents and
the Warrants with counsel for such Company and has had the opportunity to
discuss the provisions thereof with the Lender prior to execution. This
Agreement, the Note and the Collateral Documents and the Warrants constitute
valid and binding obligations of each Company, which is a party thereto
enforceable in accordance with their terms (except that enforcement may be
subject to any applicable bankruptcy, insolvency or similar laws generally
affecting the enforcement of creditors’ rights). Each Company further represents
and warrants that it is in compliance with all of the affirmative and negative
covenants contained in this Agreement and the Collateral Documents.
Section
4.5
No
Legal Bar or Resultant Lien. This
Agreement, the Note and the Collateral Documents and the Warrants do not and
will not violate any provisions of any Company’s articles of incorporation or
bylaws, will not violate any contract, agreement, law, regulation, order,
injunction, judgment, decree or writ to which any Company is subject (except as
would not have a Material Adverse Effect), and will not result in the creation
or imposition of any Lien upon any property of any Company other than as
contemplated by this Agreement.
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Section
4.6
No
Consent. The
Companies’ execution, delivery and performance of this Agreement, the Note and
the Collateral Documents and the Warrants do not require the consent or approval
of any other Person, including without limitation any regulatory authority or
governmental body of the United States or any state thereof or any political
subdivision of the United States or any state thereof.
Section
4.7
Financial
Condition. All
financial statements of the Borrower and any Affiliates delivered to Lender have
been submitted in good faith and fairly and accurately present the financial
condition of the parties for whom such statements are submitted and the
financial statements of the Borrower and any Affiliates have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved, and there are no contingent liabilities not
disclosed thereby which would adversely affect the financial condition of
Borrower or any Affiliates. Since the close of the period covered by the latest
financial statement delivered to Lender with respect to Borrower and any
Affiliates, there has been no material adverse change in the assets,
liabilities, or financial condition of Borrower or any Affiliates not disclosed
thereby. The Borrower has filed in a timely manner all reports required to be
filed with the Securities and Exchange Commission since June 2004, and all such
filings made by the Borrower with the Securities and Exchange Commission since
June 1, 2004, complied at the time of filing in all material respects with the
applicable requirements of the Securities Act of 1933 and the Securities
Exchange Act of 1934, as applicable, in each case as in effect on the dates such
filings were made.
Section
4.8
Taxes
and Governmental Charges. The
Companies have filed all tax returns and reports required to be filed and have
paid all taxes, assessments, fees and other governmental charges levied upon
them or upon their property or income which are due and payable, including
interest and penalties, or have filed an extension for payment thereof, or is
contesting the same in good faith by appropriate proceedings and has provided
adequate reserves for the payment thereof (including penalties and interest),
except that certain tax returns for years ending prior to the merger of Reality
Interactive into the Borrower have not been filed. All such tax returns and
reports accurately reflect in all material respects the taxes for the Companies
for the periods covered thereby. There are no material taxes owing for years
ending prior to the merger of Reality Interactive, Inc. into the Borrower. No
audit of any governmental authority is pending or, to the knowledge of the
Borrower, threatened, and the results of any completed audits are properly
reflected in the financial statements of the Companies.
Section
4.9
Defaults. The
Companies are not in default under any indenture, mortgage, deed of trust,
agreement or other instrument to which such Company is a party or by which it or
any of its property is bound.
Section
4.10
Liabilities
and Litigation. Except
for liabilities incurred in the normal course of business, the Borrower and its
Restricted Subsidiaries have no material (individually or in the aggregate)
liabilities, direct or contingent, except as disclosed in the most recent
financial statements furnished to the Lender, which, if not paid, would have a
Material Adverse Effect. Except as disclosed in the most recent financial
statements furnished to the Lender, there is no litigation, legal or
administrative proceeding, investigation or other action of any nature pending
or, to the knowledge of Borrower, threatened against or affecting the Borrower
or its Restricted Subsidiaries, or any of the assets owned or used by any
Company, which involves the possibility of any judgment or liability not fully
covered by insurance which if adversely determined would have a Material Adverse
Effect. Without limiting the foregoing, on the Closing Date there is no
litigation, legal or administrative proceeding, investigation or other action
pending or, to the knowledge of Borrower, threatened against or affecting the
Borrower or any Restricted Subsidiary involving non-compliance by the Borrower
or any Restricted Subsidiary or its respective properties with any Applicable
Environmental Laws (as defined in Section
4.17).
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Section
4.11
Margin
Stock. None of
the Loan proceeds will be used for the purpose of, and the Borrower is not
engaged in the business of extending credit for the purpose of, purchasing or
carrying any “margin stock” as defined in Regulation U of the Board of Governors
of the Federal Reserve System (12 C.F.R. Part 221), or for the purpose of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry a margin stock or for any other purpose which might constitute this
transaction a “purpose credit” within the meaning of said Regulation U. The
Borrower is not engaged principally, or as one of the Borrower’s important
activities, in the business of extending credit for the purpose of purchasing or
carrying margin stocks. Neither the Borrower nor any Person acting on behalf of
the Borrower has taken or will take any action which might cause this Agreement
to violate Regulation U or any other regulation of the Board of Governors of the
Federal Reserve System or to violate the Securities Exchange Act of 1934 or any
rule or regulation thereunder, in each case as now in effect or as the same may
hereinafter be in effect.
Section
4.12
Utility
or Investment Company. No
Company is engaged in the generation, transmission, or distribution and sale of
electric power; operation of a local distribution system for the sale of natural
or other gas for domestic, commercial, industrial, or other use; ownership or
operation of a pipeline for the regulated transmission or sale of natural or
other gas, crude oil or petroleum products (except for ownership of interests in
gathering line systems); provision of telephone or telegraph service to others;
production, transmission, or distribution and sale of steam or water; operation
of a railroad; or provision of sewer service to others; or any other activity
which cause such Company to be subject to regulation as a utility. The Borrower
is not an “investment company” within the meaning of the Investment Company Act
of l940, as amended.
Section
4.13
Compliance
with the Law. Each
Company (i) is not in violation of any law, judgment, decree, order, ordinance,
or governmental rule or regulation to which such Company or any of its property
is subject; and (ii) has not failed to obtain any license, permit, franchise or
other governmental authorization necessary to the ownership of any of its
property or the conduct of its business; in each case, which violation or
failure is reasonably anticipated would have a Material Adverse Effect.
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Section
4.14
ERISA. The
Borrower is in compliance in all material respects with the applicable
provisions of ERISA, and no “reportable event”, as such term is defined in
Section 4043 of ERISA, has occurred with respect to any Plan of the Borrower.
Section
4.15
Other
Information. All
factual information prepared by the Company and given to the Lender by the
Borrower pursuant to this Agreement and in connection with the Borrower’s
application for the Loan and the Lender’s commitment letter are accurate and
correct in all material respects. All financial projections given to the Lender
were prepared in good faith based on facts and circumstances existing at the
time of preparation and were believed by the Borrower to be accurate in all
material respects. No factual information furnished by the Borrower to the
Lender in connection with the negotiation of this Agreement contains any
material misstatement of fact or fails to state a material fact or any fact
necessary to make the statement contained therein not materially
misleading.
Section
4.16
Title
to Collateral.
(a)
Each
Company has good and marketable title to its Collateral, and the Collateral
Documents create legal, valid and perfected Liens on the Collateral, free of all
Liens except those permitted by this Agreement in Section
6.2.
(b)
NGS Sub
has, in all material respects with respect to its Collateral, the working
interests and net revenue interests therein as set forth on Exhibit A to the
Mortgage granted to Lender, as reduced by the interest assigned to James Jones
in Subsection 4.16 (d) below. Without limiting the foregoing sentence, all of
the proved reserves (whether producing or not, and whether proved developed or
proved undeveloped) included in the reserve reports covering NGS Sub’s
properties in Richland and LaSalle Parishes, Louisiana (by W.D. Von Gonten &
Co. dated September 15, 2004 and October 7, 2004, each effective as of July 1,
2004) are encumbered Collateral in favor of the Lender properly described in the
Collateral Documents. Except as otherwise specifically disclosed to the Lender
in writing with respect to any particular part of NGS Sub’s properties, (i) NGS
Sub is not obligated, whether by virtue of any payment under any contract
providing for the sale by such Company of hydrocarbons which contains a “take or
pay” clause or under any similar arrangement or by virtue of any production
payment or otherwise, to deliver hydrocarbons produced or to be produced from
NGS Sub’s properties at any time after the Closing Date without then or
thereafter receiving full payment therefor, except for Permitted Hedge
Agreements; (ii) none of NGS Sub’s properties is subject to any contractual or
other arrangement whereby payment for production is to be deferred for a
substantial period after the month in which such production is delivered; (iii)
none of NGS Sub’s properties is subject to an arrangement or agreement under
which any purchaser or other Person is currently entitled to “make-up” or
otherwise receive material deliveries of hydrocarbons at any time after the
Closing Date without paying at such time the full contract price therefor; and
(iv) no Person is currently entitled to receive any material portion of the
interest of NGS Sub in any hydrocarbons or to receive cash or other payments
from NGS Sub to “balance” any disproportionate allocation of hydrocarbons under
any operating agreement, cash balancing and storage agreement, gas processing or
dehydration agreement, or other similar agreements. For purposes of this
paragraph, “material” shall mean ten thousand ($10,000.00) dollars (or more) or
an amount of property with an equivalent value.
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(c)
As of the
Closing Date, none of the Collateral is subject to any calls on production of
hydrocarbons or any gathering or transportation dedications or commitments of
any kind.
(d)
As of the
Closing Date, none of the Collateral is subject to any contractual commitment,
right or option for any Person to acquire any working interest, revenue right,
royalty or other interest therein, except that the Borrower’s contract
superintendent, James Jones, is entitled (as a fee for originating the
transaction, conducting the environmental assessment without cash charge and
overseeing the daily field operations) to be assigned a 5% working interest,
proportionately reduced to NGS Sub’s purchased interest, in both the Tullos I
and the Tullos II properties, after payout of NGS Sub’s purchase costs and
capital expenditures.
(e)
As of the
Closing Date, the Borrower itself owns no material assets other than the stock
of NGS Delaware, and cash and short-term investments. As of the Closing Date,
NGS Delaware owns no assets other than the stock of NGS Sub, miscellaneous
office furniture and equipment.
(f)
As of the
Closing Date, Verdisys, Inc. does not own or have any entitlement to acquire
from any Company any net profits or other future or contingent interest in any
of the Collateral.
Section
4.17
Environmental
Matters. No
friable asbestos, or any substance containing asbestos deemed hazardous by
federal or state regulations on the date of this Agreement, has been installed
in any Collateral constituting immovable property. where the installation could
be expected to have a Material Adverse Effect. Such immovable property and the
Companies are not in violation of or subject to any existing, pending, or, to
the Borrower’s knowledge threatened investigation or inquiry by any governmental
authority or to any remedial obligations under any applicable laws pertaining to
health or the environment (hereinafter sometimes collectively called “Applicable
Environmental Laws”), including without limitation the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986 (as amended,
hereinafter called “CERCLA”), the Resource Conservation and Recovery Act of
1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal
Act Amendments of 1980, and the Hazardous and Solid Waste Amendments of 1984 (as
amended, hereinafter called “RCRA”), except where the failure to do so would not
have a Material Adverse Effect, and this representation and warranty would
continue to be true and correct following disclosure to the applicable
governmental authorities of all relevant facts, conditions and circumstances, if
any, pertaining to such property and known to the Borrower, except where the
failure to do so would not have a Material Adverse Effect. No hazardous
substances or solid wastes have been disposed of or otherwise released on or to
such property, except where the existence would not have a Material Adverse
Effect. The terms “hazardous substance” and “release” as used in this Agreement
shall have the meanings specified in CERCLA, and the terms “solid waste” and
“disposal” (or “disposed”) shall have the meanings specified in RCRA; provided,
in the event that the laws of any applicable state establish a meaning for
“hazardous substance,” “release,” “solid waste,” or “disposal” which is broader
than that specified in either CERCLA or RCRA, such broader meaning shall
apply.
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Section
4.18
Governmental
Requirements. Any
Collateral constituting immovable property is in compliance with all current
governmental requirements affecting such property, including, without
limitation, all current coastal zone protection, zoning and land use
regulations, building codes and all restrictions and requirements imposed by
applicable governmental authorities with respect to the construction of any
improvements on such property and the contemplated use of such property, except
where the failure to do so would not have a Material Adverse
Effect.
Section
4.19
Contracts. The
Contracts when considered as a whole do not materially affect the rights,
benefits or security of the Lender under the Collateral Documents and the
Contracts do not contain any provision which would prevent in all material
respects the Lender’s practical realization of the benefits of the Collateral
Documents as to the Collateral. After giving effect to the Contracts, the net
revenue interests of each Company in the Collateral are not less than those set
forth in the Collateral Documents.
Section
4.20
Affiliates.
(a)
On the
Closing Date, the Borrower has no Subsidiaries, directly or indirectly, other
than NGS Delaware, NGS Sub, Arkla, and Four Star. On the Closing Date, none of
the Companies has an ownership (direct or beneficial) interest in any Person
(whether stock, partnership interest, membership interest or otherwise) other
than as stated in
the preceding sentence. The Borrower directly or indirectly owns and controls
100% of the ownership and voting rights in NGS Delaware, NGS Sub, Arkla and Four
Star. The Borrower has furnished to the Lender true, accurate and complete
copies of the organizational documents (articles of incorporation, bylaws, or
operating agreement, as applicable) of the Companies.
(b)
None of
the Collateral is owned by, or has record title to it in the name of, another
Person other than Borrower or NGS Sub, and as to the life insurance,
Herlin.
Section
4.21
Debt
and Preferred Stock.
(a)
On the
Closing Date, the Borrower has no material Debt for borrowed money from any
Person (other than this new Loan), except for Debt listed on Schedule
4.21. There
are no filed or perfected (i) mortgages, (ii) security interests or (iii) other
Liens securing any of the Debt listed on Schedule
4.21.
(b)
On the
Closing Date, the Borrower has no preferred stock issued or
outstanding.
Section
4.22
Patriot
Act. To the
extent applicable, each Company is in compliance, in all material respects, with
the (i) federal Trading with the Enemy Act, as amended, and each of the foreign
assets control regulations of the United States Treasury Department (31 CFR,
Subtitle B, Chapter V, as amended) and any other enabling legislation or
executive order relating thereto, and (ii) Federal Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism (USA Patriot Act of 2001) (the “Patriot
Act”). No
part of the proceeds of any Loan will be used, directly or indirectly, for any
payments to any governmental official or employee, political party, official of
a political party, candidate for office or any one use acting in an official
capacity, in order to obtain, retain or direct business or obtain any improper
advantage, in violation of the United States Foreign Corrupt Practices Act of
1977, as amended.
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Loan Agreement
ARTICLE
5
AFFIRMATIVE
COVENANTS
Unless
the Lender’s prior written consent to the contrary is obtained, the Borrower
will at all times comply with the covenants contained in this Article 5
(including, where applicable without the necessity of expressly so stating in
each instance, causing its Restricted Subsidiaries to comply with such
covenant), from the date hereof and for so long as any part of the Indebtedness
is outstanding.
Section
5.1
Performance
of Obligations. The
Borrower will repay the Indebtedness according to the terms of the Note and this
Agreement. Each Company will do and perform every act required of it by this
Agreement, the Note or in the Collateral Documents and the Warrants at the time
or times and in the manner specified.
Section
5.2
Financial
Statements and Reports. The
Borrower will furnish or cause to be furnished to the Lender from time to time:
| (a) | Borrower’s Annual Reports - (i) upon filing with the SEC, copies of the Borrower’s Annual Report on Form 10KSB or, (ii) if Borrower is no longer required to file such reports, within 90 days after the close of each fiscal year of the Borrower, the audited consolidated balance sheet of the Borrower as of the end of such year, the audited consolidated statement of income of the Borrower for such year, the audited consolidated statement of shareholder equity of the Borrower for such year, and the audited consolidated statement of cash flow of Borrower for such year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, accompanied by a report of the Borrower’s independent certified public accountants which accountants shall be reasonably acceptable to Lender (it being agreed that Borrower’s existing accountants and any subsequent firm registered with the public company accounting oversight board are acceptable to Lender). |
| (b) | Borrower’s Quarterly Reports - (i) upon filing with the SEC, copies of the Borrower’s Quarterly Report on Form 10QSB or, (ii) if Borrower is no longer required to file such reports, within 45 days after the end of each quarter (other than the fourth fiscal quarter), the unaudited consolidated balance sheet of the Borrower as of the end of such quarter, the unaudited consolidated statement of income of the Borrower for the period from the beginning of the fiscal year to the close of such fiscal quarter, the unaudited consolidated statement of shareholder equity of the Borrower for the period from the beginning of the fiscal year to the close of such fiscal quarter, and the unaudited consolidated statement of cash flow of Borrower for such fiscal quarter and for the period from the beginning of the fiscal year to the close of such fiscal quarter, setting forth in each case in comparative form the corresponding figures for the corresponding period of the preceding fiscal year (and showing without limitation any over or under produced imbalances of production). Such internally prepared quarterly reports at the end of each fiscal quarter shall be accompanied by the certificates of compliance required by Section 5.3. |
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| (c) | Annual Engineering Report -as soon as available and in any event within 60 days following the end of each fiscal year commencing 2005, an annual independent third party engineering report covering the Borrowing Base / Collateral properties, with an effective date no earlier than 60 days preceding, in form and substance reasonably acceptable to the Lender prepared by the independent petroleum engineering firm utilized by the Borrower for its SEC filings and reasonably acceptable to the Lender (it being agreed that the firm used by the Borrower for the last such report is acceptable to Lender). Without limiting the foregoing sentence, such report shall include a discussion of assumptions as to engineering, pricing (which shall be consistent with the pricing described in the definition of Borrowing Base) and expenses, and an economic evaluation together with the reserve value of each well of each property in the Borrowing Base, and further categorized as Proved Developed Producing Reserves, Proved Developed Non-Producing Reserves, or Proved Undeveloped Reserves. |
| (d) | Quarterly Reports - within 45 days after the end of each fiscal quarter, a quarterly production tracking report pertaining to the Borrowing Base properties on a field basis or on a well-by-well basis for new wells drilled, in form reasonably acceptable to the Lender, including production volumes and revenue and expense statements. |
| (e) | Periodic Title Information - periodically as available and in any event no later than the date for the delivery of the annual independent engineering report, copies of drill site title opinions or division order title opinions covering newly drilled wells included in the Collateral that are not covered by title opinions previously delivered to the Lender (i.e., wells drilled within the preceding year); and in addition promptly upon the Lender’s request, detailed information concerning any and all requirements or exceptions set forth in any title opinions concerning any of the Collateral. |
| (f) | Environmental - (I) promptly upon receipt thereof, documentation in its possession pertaining to any fines levied during the prior year against the Borrower, or to the extent known and available to the Borrower against an operator of any Collateral, for non-compliance with all applicable federal, state and local environmental laws and regulations; and (II) promptly upon learning thereof, notice of Borrower’s acquisition of actual knowledge of the presence of any hazardous materials or solid waste (as defined elsewhere in this Agreement) on or under any Collateral; except in each case, however, where the results of which would not have a Material Adverse Effect. |
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Loan Agreement
| (g) | Notices - when required by the terms thereof, the notices required under Section 5.11. |
| (h) | Audit Reports - promptly upon receipt thereof, one copy of each report submitted to the Borrower by independent accountants in connection with any annual, interim or special audit made by them of the books of the Borrower. |
| (i) | Insurance Report - within 30 days after the end of each fiscal year of the Borrower, an annual insurance coverage report detailing Borrower’s insurance program. |
| (j) | S.E.C. Reports - promptly notify Lender, upon such information becoming publicly available, (i) that periodic or special reports, schedules and other material have been filed with or delivered to the Securities and Exchange Commission (or any other governmental authority succeeding to the functions thereof) by the Borrower and (ii) material public news releases and annual reports relating to the Borrower (provided that in no event shall the failure of the Borrower to provide the Lender with notice of the public filing of a report in and of itself constitute an Event of Default). |
| (k) | Hedging Agreements - promptly after entering into such contract if requested by the Lender but in any event on a quarterly basis, a list of all Hedging Agreements of the Borrower and its Subsidiaries describing the material terms thereof made pursuant to the Hedging Program or otherwise. |
| (l) | Budgets and Other Information - for informational purposes only, promptly after adoption thereof, all regular budgets, and upon the request of the Lender, such other financial, technical or other information regarding the business and affairs and financial condition of the Borrower as the Lender may reasonably request. |
All
balance sheets and other financial reports referred to above shall be in such
detail as the Lender may reasonably request and shall conform to the standards
described in Section
1.3.
Section
5.3
Certificate
of Compliance.
(a)
So long
as not contrary to the then current rules, regulations or recommendations of the
American Institute of Certified Public Accountants or similar body or to any
internal policy of the Borrower’s independent certified public accountants,
concurrently with the furnishing of the annual financial statements described
above, the Borrower will cause to be furnished to the Lender a certificate from
the independent certified public accountants for the Borrower stating that in
the ordinary course of their audit of the Borrower, insofar as it relates to
accounting matters, their audit has not disclosed the existence of any condition
which constitutes a Default, or if their audit has disclosed the existence of
any such condition, specifying the nature, period of existence and status
thereof; provided,
however, that the independent certified public accountants shall not be liable
to the Lender for their failure to discover a Default.
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Loan Agreement
(b)
Concurrently
with the furnishing of the annual and quarterly financial statements described
above, the Borrower will furnish to the Lender a certificate signed by the
principal financial officer of the Borrower, stating either that no Default
occurred during such quarter (or if it did but no longer exists, the nature and
duration thereof) and that no Default then exists, or if a Default exists, the
nature, period of existence and status thereof, and specifically setting forth
the calculations showing the Borrower’s compliance with the financial covenants
in Section 5.15.
Section
5.4
Taxes
and Other Liens. Each
Company will file all tax returns and reports required to be filed and pay (or
cause to be paid) and discharge promptly when due, or alternatively have filed
an extension for payment thereof, all taxes, assessments and governmental
charges or levies imposed upon it or upon income or upon any of its property
(including production, severance, windfall profit, excise and other taxes
assessed against or measured by the production of, or the value or proceeds of
production of, the Collateral) as well as all claims of any kind (including
claims for labor, materials, supplies and rent) which, if unpaid, might become a
material Lien upon any or all of its property; provided, however, such Company
shall not be required to pay or cause to be paid any such tax, assessment,
charge, levy or claim if the amount, applicability or validity thereof shall
currently be contested in good faith by appropriate proceedings diligently
conducted and if the contesting party shall have set up reserves therefor
adequate under generally accepted accounting principles (provided that such
reserves may be set up under generally accepted accounting principles) and so
long as the payment of same is not a condition to be met in order to maintain an
oil, gas or mineral lease in force. Notwithstanding the foregoing the Lender
agrees and acknowledges that the tax returns for the Borrower for certain prior
years have not yet been filed, as set forth in Section
4.8.
Section
5.5
Maintenance
and Compliance. The
Borrower will, and will cause each Restricted Subsidiary to, (i) maintain its
corporate or partnership existence and rights and its current business
operations; (ii) observe and comply (to the extent necessary so that any failure
will not materially and adversely affect the business of such Person) with all
valid existing and future laws, statutes, codes, acts, ordinances, orders,
judgments, decrees, injunctions, rules, regulations, certificates, franchises,
permits, licenses, authorizations, directions and requirements (including
without limitation applicable statutes, regulations, orders and restrictions
relating to environmental standards or controls or to energy regulations) of all
federal, state, county, municipal and other governments, departments,
commissions, boards, courts, authorities, officials and officers, domestic or
foreign; and (iii) maintain its properties (and any property leased by or
consigned to it or held under title retention or conditional sales contracts) in
generally good and workable condition at all times and make all repairs,
replacements, additions, betterments and improvements to its properties to the
extent necessary; in each case however, except where the failure of which would
not cause a Material Adverse Effect.
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Section
5.6
Further
Assurances. Each
Company at its expense will promptly (and in no event later than 30 days after
written notice from the Lender is received) cure any defects, errors or
omissions in the creation, execution, delivery or contents of this Agreement,
the Note or the Collateral Documents, and execute and deliver (or cause to be
executed and delivered) to the Lender upon Lender’s reasonable request all such
other and further documents, agreements and instruments in compliance with or
accomplishment of the covenants and agreements of the Companies in this
Agreement, the Note or in the Collateral Documents and the Warrants or to
further evidence and more fully describe the Collateral (including without
limitation any renewals, additions, substitutions, replacements or accessions to
the Collateral), or to correct any omissions in the Collateral Documents and the
Warrants, or more fully state the security obligations set out herein or in any
of the Collateral Documents, or to perfect, protect or preserve any Liens and
the priority thereof created pursuant to any of the Collateral Documents, or to
make any recordings, to file any notices, or obtain any consents as may be
necessary or appropriate in connection with the transactions contemplated by
this Agreement.
Section
5.7
Reimbursement
of Expenses. The
Borrower will pay all reasonable legal fees and expenses incurred by the Lender
in connection with the preparation or administration of this Agreement, the Note
and the Collateral Documents, the Warrants and the Revocable Warrants. Legal
fees through January 28, 2005, in connection with preparation of the documents
will not exceed $45,000.00. Borrower acknowledges that additional post closing
legal work regarding legal opinions and title opinions for the initial Loan
Advance remains to be done, which legal fees for such work will not exceed
$6,000.00, provided such matters are completed by January 31. Future legal
work in connection with other post closing items (such as the life insurance
pledge) or the administration of the Loan, future Defaults, added Collateral or
otherwise are not covered by the preceding two sentences. Solely upon and during
the continuance of an Event of Default, the Borrower will, upon request promptly
reimburse the Lender for all amounts expended, advanced or incurred by the
Lender to satisfy any obligation of any Company under this Agreement, or to
protect the property or business of any Company or to collect the Indebtedness,
or to enforce the rights of the Lender under this Agreement or the Note or the
Collateral Documents or the Warrants, which amounts will include all court
costs, reasonable attorneys’ fees and expenses, fees and expenses of engineers,
auditors and accountants, travel expenses and investigation expenses reasonably
incurred by the Lender in connection with any such matters, together with
interest at the Default Rate on each such amount from the date that the same
paid by the Lender (and after written notification to Borrower for request of
payment) until the date of reimbursement to the Lender. The Borrower also agrees
to pay, and to hold the Lender harmless from any failure or delay in paying, all
recording taxes, documentary stamp taxes or other similar taxes, if any, which
may be payable or determined to be payable in connection with the execution and
delivery of this Agreement, the Note, the Collateral Documents, or any
modification or supplement thereof or thereto.
Section
5.8
Insurance. Each
Company will maintain with financially sound and reputable insurers, insurance
with respect to its properties and businesses against such liabilities,
casualties, risks and contingencies and in such types and amounts as are
customary in accordance with standard industry practice or as more specifically
provided in the Collateral Documents. Upon request of the Lender, the Borrower
will furnish the Lender original certificates of insurance and/or copies of the
applicable policies.
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Section
5.9
Accounts
and Records. The
Borrower will keep books of record and accounts in which true and correct
entries will be made as to all material matters of all dealings or transactions
in relation to the Companies’ business and activities.
Section
5.10
Right
of Inspection. The
Borrower will permit any officer, employee or agent of the Lender at Lender’s
sole risk and expense to visit and inspect any of the properties of the
Companies, examine the books of record and accounts of the Companies, take
copies and extracts therefrom, and discuss the affairs, finances and accounts of
the Companies with the Borrower’s officers, accountants and auditors, and the
Borrower will furnish information in its possession concerning the Collateral,
including schedules of all internal and third party information identifying the
Collateral (such as, for example, lease and well names and numbers assigned by
the Borrower or the operator of any mineral properties, division orders and
payment names and numbers assigned by purchasers of the hydrocarbons, and
internal identification names and numbers used by the Borrower in accounting for
revenues, costs and joint interest transactions attributable to the mineral
properties), all on reasonable notice, at such reasonable times without
hindrance or delay and as often as the Lender may reasonably desire, provided
that such visit is not unreasonably burdensome on the Borrower. Notwithstanding
the foregoing, such visits to Borrower’s office shall be limited to one per
calendar month, so long as an Event of Default has not occurred and is not
continuing. The Borrower will furnish to the Lender promptly upon request and in
the form and content specified by the Lender lists of purchasers of hydrocarbons
and other account debtors, schedules of equipment and other data concerning the
Collateral as the Lender may from time to time specify.
Section
5.11
Notice
of Certain Events.
(a)
The
Borrower shall promptly notify the Lender if the Borrower learns of the
occurrence of any event which constitutes a Default, together with a detailed
statement by a responsible officer of the Borrower of the steps being taken to
cure the effect of such Default.
(b)
The
Borrower shall promptly notify the Lender of any change in location of any
Company’s principal place of business or the office where it keeps its records
concerning accounts and contract rights or a change in its name, state of
organization, federal taxpayer identification number or organizational status.
(c)
The
Borrower shall promptly notify the Lender of the arising of any litigation or
dispute threatened against or affecting the Borrower or any Restricted
Subsidiary which, if adversely determined, would have a Material Adverse Effect.
So long as an Event of Default has occurred and is continuing, the Lender may
(but shall not be obligated to), (i) without prior notice to Borrower, commence,
appear in, or defend any action or proceeding purporting to affect the Loan, or
the respective rights and obligations of Lender and Borrower pursuant to this
Agreement, and (ii) pay all necessary expenses, including reasonable attorneys’
fees and expenses incurred in connection with such proceedings or actions, which
Borrower agrees to repay to Lender upon demand.
(d)
The
Borrower shall promptly notify the Lender of the occurrence of any material
adverse change of which it becomes aware in the value of any oil or gas property
which is included in the Borrowing Base, or from which any Company otherwise
derives material revenue. Without limiting the foregoing, the Borrower shall
promptly notify the Lender of any notice of default or cancellation from any
lessor of any material mineral lease in the Collateral.
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Loan Agreement
(e)
The
Borrower shall promptly notify the Lender of the creation, incurrence,
assumption, existence or filing of any material Lien on any Borrowing Base
property now owned or hereafter acquired, except for Liens permitted under
Section
6.2.
(f)
The
Borrower shall promptly notify the Lender of each creation, acquisition,
disposition, dissolution, merger or addition or removal of any Subsidiary
(whether Restricted Subsidiary or Unrestricted Subsidiary).
(g)
The
Borrower shall promptly notify the Lender of the execution of each employment
contract with any officer of the Borrower, and shall provide the Lender with a
complete copy thereof.
The
foregoing requirements of notice shall not be construed to imply permission or
consent by the Lender as to such events or to waive any representations,
covenants and defaults set forth in this Agreement.
Section
5.12
ERISA
Information and Compliance. The
Borrower will promptly furnish to the Lender (i) promptly after the filing
thereof with the United States Secretary of Labor or the Pension Benefit
Guaranty Corporation, copies of each annual and other report with respect to
each Plan or any trust created by the Borrower, and (ii) promptly upon becoming
aware of the occurrence of any “reportable event,” as such term is defined in
Section 4043 of ERISA, or of any “prohibited transaction,” as such term is
defined in Section 4975 of the Code, in connection with any Plan or any trust
created by the Borrower, a written notice signed by the president or the
principal financial officer of the Borrower specifying the nature thereof, what
action the Borrower is taking or proposes to take with respect thereto, and,
when known, any action taken by the Internal Revenue Service with respect
thereto. The Borrower will comply with all of the applicable funding and other
requirements of ERISA as such requirements relate to the Plans of the
Borrower.
Section
5.13
Indemnification.
(a)
The
Borrower will indemnify the Lender and hold the Lender harmless from claims of
brokers with whom the Borrower has contracted in the execution hereof or the
consummation of the transactions contemplated hereby. The Lender will indemnify
the Borrower and hold the Borrower harmless from claims of brokers with whom the
Lender has contracted in connection with the transactions contemplated
hereby.
(b)
The
Borrower will indemnify the Lender and hold the Lender harmless from any and all
liabilities, obligations, losses, damages, penalties, claims, actions, suits,
costs and expenses of whatever kind or nature which may be imposed on, incurred
by or asserted at any time against the Lender in any way relating to, or arising
in connection with, the use or occupancy of any of the Collateral as a result of
any breach of any representation, warranty or covenant by Borrower or any
Restricted Subsidiary under the terms of this Agreement or the Collateral
Documents.
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Section
5.14
Environmental
Indemnity. The
Borrower shall defend, indemnify and hold Lender and its directors, officers,
agents and employees harmless from and against all claims, demands, causes of
action, liabilities, losses, costs and expenses (including, without limitation,
costs of suit, reasonable attorneys’ fees and fees of expert witnesses) arising
from or in connection with (i) the presence on or under all Collateral
constituting real (immovable) property of any hazardous substances or solid
wastes (as defined elsewhere in this Agreement), or any releases or discharges
of any hazardous substances or solid wastes on, under or from such property, or
(ii) any activity carried on or undertaken on or off such property, whether
prior to or during the term of this Agreement, and whether by Borrower or its
Subsidiary or any predecessor in title or any officers, employees, agents,
contractors or subcontractors of Borrower or any Subsidiary or any predecessor
in title, or any third persons at any time occupying or present on such
property, in connection with the handling, use, generation, manufacture,
treatment, removal, storage, decontamination, clean-up, transport or disposal of
any hazardous substances or solid wastes at any time located or present on or
under such property. The foregoing indemnity shall further apply to any residual
contamination on or under such property, or affecting any natural resources, and
to any contamination of any property or natural resources arising in connection
with the generation, use, handling, storage, transport or disposal of any such
hazardous substances or solid wastes, and irrespective of whether any of such
activities were or will be undertaken in accordance with applicable laws,
regulations, codes and ordinances. Without prejudice to the survival of any
other agreements of the Borrower hereunder, the provisions of this Section shall
survive the final payment of all Indebtedness and the termination of this
Agreement and shall continue thereafter in full force and effect.
Section
5.15
Financial
Covenants. The
Borrower shall comply with the following financial covenants (determined in
accordance with Section
1.3 and on a
consolidated basis with its Restricted Subsidiaries), except as specifically
stated otherwise:
| (a) | Minimum Collateral Ratio. The Borrower and its Restricted Subsidiaries, on a consolidated basis, shall maintain a ratio of the Borrowing Base to Total Debt of not less than 1.50 to 1.00 as of the date of each quarterly report of the Borrower. |
| (b) | Minimum EBITDA to Interest Expense. The Borrower and its Restricted Subsidiaries, on a consolidated basis, shall maintain a ratio of EBITDA for the most recently completed fiscal quarter to Interest Expense on Total Debt during such quarter of not less than 2.00 to 1.00 (the “Interest Coverage Ratio”) as of the date of each quarterly report of the Borrower, commencing with the report for the quarter ended September 30, 2005. |
Notwithstanding
the foregoing, in the event that the Interest Coverage Ratio is not met for any
fiscal quarter, the Borrower shall not be deemed to be in breach of Section
5.15(b) if the Interest Coverage Ratio is met for the three month period ended
as of the end of the first month immediately following the end of such fiscal
quarter.
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Section
5.16
DSR
Account.
(a)
The
Borrower shall establish on the Closing Date and thereafter maintain a debt
service reserve account (the “DSR
Account”) at
AmSouth Bank or at such bank or other financial institution reasonably
satisfactory to the Lender, which shall be under the control of the Lender and
subject to access and withdrawal by the Lender only in accordance with the terms
of this Agreement. The Borrower shall fund the DSR Account on the Closing Date
with an amount no less than 7.5% of the Initial Advance (i.e., if the initial
Advance is $3,000,000.00, then $225,000.00). From the Closing Date through
September 30, 2005, the Borrower shall maintain (and replenish as needed) at all
times funds in the DSR Account equal to or exceeding 7.5% of the outstanding
principal balance of the Loan at any time and from time to time; commencing on
October 1, 2005, the Borrower shall maintain (and replenish as needed) at all
times funds in the DSR Account equal to or exceeding five (5%) percent of the
outstanding principal balance of the Loan at any time and from time to time. In
the event that the DSR Account becomes under-funded, the Borrower shall within
ten (10) days replenish the DSR Account to the required amount from any and all
(i) free cash flow, defined as any operating cash flow net of required payments
on the Loan, (ii) the proceeds from any offering of securities or other
financing event by any of the Companies, and (iii) any sources of cash. Upon the
occurrence of an Event of Default, the Lender, at its option, may withdraw funds
from the DSR Account to pay any interest or principal of the Indebtedness then
due.
(b)
The
Borrower hereby grants to the Lender a continuing security interest in the DSR
Account as security for the Indebtedness, and all funds, investment property and
proceeds pertaining thereto.
(c)
Notwithstanding
the terms of Section
5.16(a) above,
if Borrower and its Subsidiaries, on a consolidated basis, have not achieved an
EBITDA of at least $70,000.00 per month for two consecutive calendar months (the
“DSR Test”), commencing with the two months ended April 30, 2005, then Borrower
shall fund the DSR Account with a total amount not less than fourteen (14%)
percent (the “DSR Penalty Rate”) of the outstanding principal balance of the
Loan no later than the forty fifth (45th) day
following the end of the two month period where the DSR Test was applied. The
DSR Penalty Rate shall thereafter remain in effect until Borrower achieves the
DSR Test, at which point the terms (7.5% or 5%) described in Section
5.16(a) above
shall apply; provided, however, that if Borrower meets the DSR Test for April
2005, but not March 2005, the Borrower shall be allowed the month of May 2005 to
meet the DSR Test before the DSR Penalty Rate shall apply. Once the DSR Test has
been met by the Borrower, the DSR Test shall not apply to any future periods and
this Section 5.16(c) shall no longer apply. For clarification, if on June 14,
2005, the Borrower determines that it has not passed the DSR Test for the months
of March and April 2005, then Borrower shall increase the amount in the DSR
Account from 7.5% to the DSR Penalty Rate (14%) until the Borrower meets the DSR
Test. If the Borrower has $70,000.00 of EBITDA for the month of April 2005, then
the DSR Penalty shall not apply unless Borrower fails to have $70,000.00 of
EBITDA for May 2005.
Section
5.17
Life
Insurance. The
Borrower shall cause the life insurance required by Section
3.1(ii) to be
issued and a first priority Lien thereon to be perfected in favor of Lender on
or before April 30, 2005. Notwithstanding the foregoing or any other provision
in this Agreement to the contrary, the Borrower shall not be deemed to be in
breach of this Section 5.17 covenant and its obligation to obtain such life
insurance shall be permanently waived if both (i) such life insurance is denied
by at least three providers as a result of the un-insurability of Herlin and
(ii) on or before April 30, 2005, the Borrower has entered into an employment
agreement with an individual reasonably acceptable to the Lender to serve as the
Borrower’s full time Vice President of Operations.
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Section
5.18
Hedging
Program. The
Borrower shall implement a Hedging Program as described below no later than
February 28, 2005, and maintain such Hedging Program until the later of (i) the
Maturity Date and (ii) the date at which Lender has been repaid in full
including all Interest Expense, fees and Prepayment Premiums, if any, associated
with the Loan. The Hedging Program will encompass the purchase of swaps,
costless collars or comparable hedging instruments that have the effect of
eliminating pricing risk on fifty (50%) percent of Net Production for at least a
two year period from the implementation of that Hedging Program. Borrower will
review and update the Hedging Program on at least a monthly such that the
Hedging Program continues to address two years of forward production. The
Hedging Program shall at all times be subject to the Lender’s approval, which
approval will not be unreasonably withheld.
Section
5.19
Future
Collateral.
(a)
The
Lender shall have the right to receive a first priority mortgage, security
interest or assignment in the case where Borrower or any Subsidiary acquires new
assets with Advances under the Loan, as provided in Section
3.1, subject
to the provisions of Section
2.12.
(b)
The
Lender shall have the right to receive a guaranty from each newly acquired or
created Restricted Subsidiary, as provided in Section
3.1.
Section
5.20
Post
Closing Obligations.
(a)
The
Borrower will furnish the Lender with updated Limited Title Opinions on or
before ten (10) Business Days after the Closing Date on the Collateral, updating
title through and confirming the recordation of the Lender’s Mortgage
and confirming the absence of other mortgages, liens or judgments affecting
title to the Collateral.
(b)
The
Borrower agrees to use commercially reasonable efforts to obtain an amendment to
the Act of Sale and Assignment dated September 2, 2004, to NGS Sub of the Tullos
I property as required by the Limited Title Opinion pertaining
thereto.
(c)
The
Borrower will cause an amendment to the Articles of Organization of Arkla to be
executed and filed with the Louisiana Secretary of State providing that the
membership interest in Arkla is uncertificated, on or before ten (10) Business
Days after the Closing Date.
(d)
Concurrently
with the filing of the Collateral Documents, the Borrower shall obtain and
record in Winn Parish a certified copy of the assignment of interest in the oil,
gas and mineral leases and conveyance of movable property dated June 21, 1990,
by LTF Limited Partnership to Chadco, Inc., as required by the Preliminary
Limited Title Opinion pertaining to Tullos II.
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(e)
The
Borrower agrees to use commercially appropriate efforts to obtain the consents
to assignment from any lessor of oil and gas leases requiring same in the
Collateral, in those instances where the Borrower and the Lender mutually agree
such consent should be sought, including without limitation the consent of
Annadarko Land Corp. under the Oil and Gas Lease dated February 1, 2003,
pertaining to Tullos II.
(f)
The
Borrower will execute and record a supplemental mortgage encumbering the mineral
leases underlying the additional eleven (11) wells purchased by the Borrower as
part of the Tullos II acquisition, on or before February 28, 2005.
ARTICLE
6
NEGATIVE
COVENANTS
Unless
the Lender’s prior written consent to the contrary is obtained, the Borrower
will at all times comply with the covenants contained in this Article 6
(including, where applicable without the necessity of expressly so stating in
each instance, causing its Restricted Subsidiaries to comply with such
covenants), from the date hereof and for so long as any part of the Indebtedness
is outstanding.
Section
6.1
Debts,
Guaranties and Other Obligations.
Borrower will not, and will not allow or suffer any Restricted Subsidiary to,
incur, create, assume, guaranty or in any manner become or be liable in respect
of any Debt direct or contingent, except for:
| (a) | The Indebtedness to the Lender. |
| (b) | Future Senior Debt incurred pursuant to Section 2.12. |
| (b) | Endorsements of negotiable instruments for deposit or collection, from time to time incurred in the ordinary course of business. |
| (c) | Debt under operating agreements, unitization and pooling agreements and orders, farmout agreements and gas balancing agreements, in each case that are customary in the oil, gas and mineral production business and that are entered into in the ordinary course of business. |
| (d) | Taxes, assessments or other government charges, if such reserve as shall be required by generally accepted accounting principles shall have been made therefor. |
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| (e) | Hedging Obligations incurred in the ordinary course of business under Permitted Hedge Agreements and under the approved Hedging Program. |
| (f) | Debt in existence as of the Closing Date described in Section 4.21. |
| (g) | Debt by any Restricted Subsidiary to any other Restricted Subsidiary or to the Borrower or from Borrower to any Restricted Subsidiary; provided, all such Debt shall be evidenced by promissory notes copies of which are made available to Lender. |
| (h) | Debt constituting (x) purchase money obligations in an aggregate amount not to exceed ten million ($10,000,000.00) dollars outstanding at any time (but exclusive of Future Senior Debt, which is otherwise permitted by paragraph (b) above) and (ii) capital lease obligations in an aggregate amount not to exceed one million ($1,000,000.00) dollars outstanding at any time; provided, that such Debt shall be secured only by the asset acquired in connection with the incurrence of such Debt, shall in each incurrence constitute not more than ninety (90%) percent of the aggregate consideration paid with respect to such asset and shall be incurred prior to or within ten (10) days after the acquisition of such asset. |
| (i) | Debt, including without limitation redeemable preferred stock) which is subordinated in right of payment to the Loan and evidenced as such by a written instrument containing commercially reasonable subordination provisions. |
| (j) | Guaranties by Restricted Subsidiaries of Debt of the Borrower or any Restricted Subsidiary if the Debt so guaranteed is permitted to be incurred under this Agreement. |
| (k) | Debt constituting reimbursement obligations to issuers of letters of credit secured by a pledge of cash or cash equivalents. |
| (l) | Obligations under volumetric production payments if the associated reserves are not Collateral. |
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| (m) | Debt incurred to refinance the then outstanding aggregate principal amount of any Debt permitted under this Section 6.1 (including any additional Debt incurred to pay premiums and fees in connection therewith); provided that such refinancing Debt shall be in an aggregate principal amount not to exceed the then outstanding aggregate principal amount of such Debt to be refinanced plus any amount incurred to pay premiums and fees in connection therewith, shall have an average life no shorter than the Debt being so refinanced, and to the extent the Debt refinances Debt subordinated to the Indebtedness, such refinanced Debt is subordinated at least to the same extent. |
Section
6.2
Liens. The
Borrower will not, and will not allow or suffer any Restricted Subsidiary to,
create, incur, assume or permit to exist any Lien on any of its property now
owned, except for:
| (a) | Liens for taxes, assessments, or other governmental charges not yet due or which are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as shall be required by generally accepted accounting principles shall have been made therefor. |
| (b) | Liens of landlords, vendors, carriers, warehousemen, mechanics, laborers and materialmen arising by law in the ordinary course of business for sums either not more than 90 days past due or being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as shall be required by generally accepted accounting principles shall have been made therefor, and enforcement of such Lien is staged pending such contest. |
| (c) | Inchoate liens arising under ERISA to secure the contingent liability of the Borrower permitted by this Agreement. |
| (d) | The pledge of the Collateral and any other Liens in favor of the Lender to secure the Indebtedness of the Borrower to the Lender. |
| (e) | Minor imperfections of title or non-monetary Liens that do not materially impair the development, operation or value of property in its intended use or the title thereto and which are of a nature commonly existing with respect to properties of a similar character as the Collateral. |
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| (f) | Royalties, overriding royalties, net profits interests, production payments, reversionary interests, calls on production, preferential purchase rights and other burdens on or deductions from the proceeds of production, that do not secure Debt for borrowed money and that are taken into account in computing the net revenue interests and working interests of the Company warranted in the Collateral Documents. |
| (g) | Operating agreements, unitization and pooling agreements and orders, farmout agreements, gas balancing agreements and other agreements, in each case that are customary in the oil, gas and mineral production business in the general area of such portion of such property, and that are entered into in the ordinary course of business in good faith. |
| (h) | Judgment Liens arising in the ordinary course of business (provided the claim is actively being contested in good faith and by appropriate proceedings) and which do not constitute an Event of Default under Section 8.1(j). |
| (i) | Liens with Lender’s prior written approval securing Permitted Hedge Agreements, not to be unreasonably withheld. |
| (j) | Liens securing permitted Future Senior Debt. |
| (k) | Reserved. |
| (l) | Liens on assets or entities acquired after the Closing Date, provided each such Lien (i) was in existence prior to such acquisition, (ii) was not created in contemplation of such acquisition, (iii) does not extend to any assets other than those acquired, and (iv) secures only the Debt that it secures on the date of such acquisition. |
| (m) | Liens on equipment and Liens securing capital lease obligations securing Debt permitted by Section 6.1(h), provided, that each such Lien is limited to such equipment so acquired and secures only the Debt incurred in connection with the acquisition of such equipment. |
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| (n) | Liens on cash or cash equivalents securing reimbursement obligations in connection with letters of credit. |
| (o) | Liens pursuant to paragraph 8 of the Secured Promissory Note dated August 10, 2004, by the Borrower to Laird Q. Cagan, provided each such Lien (i) secures only the Debt in existence as of the Closing Date described in Section 4.21, and (ii) is not perfected or otherwise made effective as to third parties by any filings or recordings of mortgages, uniform commercial code financing statements or other collateral documents of any type. (For the avoidance of doubt, this paragraph (o) does not modify or negate the representation in Section 4.21(a) above). |
The
inclusion of this Section
6.2 shall
not constitute in any way an acknowledgment by the Lender of the validity,
legality, enforceability or binding effect on the Lender of such Liens, the sole
purpose of this provision being to provide that the existence of any such
permitted Liens shall not in and of itself constitute an Event of Default under
this Agreement.
Section
6.3
Investments,
Loans and Advances. The
Borrower will not (directly or indirectly through any Restricted Subsidiary),
and will not allow or suffer any Restricted Subsidiary to, make or permit to
remain outstanding any loans or advances or extensions of credit to, or
purchases or other acquisitions of capital stock or ownership (direct or
beneficial) interests or obligations of, or other investments in, any Person
(including without limitation any Subsidiary), except for:
| (a) | Investments in cash, cash equivalents, and readily marketable direct obligations of the United States of America or any agency thereof. |
| (b) | Investments in certificates of deposit of maturities less than one year issued by banks satisfactory to Lender. |
| (c) | Investments in commercial paper of maturities less than one year with the best rating by Standard & Poors, Moody’s Investors Service, Inc., or any other rating agency reasonably satisfactory to the Lender. |
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| (d) | Advances and loans to employees and officers made in the ordinary course of business not exceeding in the aggregate $10,000 for all such advances and loans. |
| (e) | Advances pursuant to operating agreements, unitization and pooling agreements and orders, farmout agreements and gas balancing agreements, in each case that are customary in the oil, gas and mineral production business and that are entered into in the ordinary course of business. |
| (f) | Ownership of equity interests in Restricted Subsidiaries. |
| (g) | Loans and advances made by the Borrower to its Restricted Subsidiaries in the ordinary course of business to be used in the normal business operations of such Restricted Subsidiary. (However, nothing in this Section modifies or overrides the limitation on use of proceeds of the Loan in Section 2.7.). |
| (h) | Accounts receivables created or acquired in the ordinary course of business. |
| (i) | Investments in connection with Permitted Hedging Agreements incurred under the Hedging Program approved by the Lender. |
| (j) | Repurchases of non vested options and securities from Herlin pursuant to Herlin’s existing founder common stock purchase agreement attached hereto as Exhibit 6.3(j) as in effect on the Closing Date (without consideration of any amendments thereto made without the Lender’s written consent), solely pursuant to the Repurchase Option (as defined therein) under Section 3(a) thereof, but excluding other purchases thereunder including without limitation purchases under the Right of First Refusal under Section 3(b) thereof. |
| (k) | Investments in (x) Unrestricted Subsidiaries or (y) Persons who derive substantial revenue from operations similar or ancillary to the Borrower’s business as conducted at the time of such Investment, provided that the total Investments under this clause (k) shall not exceed the greater of (A) $100,000.00 or (B) the total of the aggregate net proceeds from equity offerings made after the Closing Date plus proceeds from issuances of subordinate Debt made after the Closing Date and outstanding at any one time. |
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Section
6.4
Nature
of Business. The
Borrower will not permit any material change to be made in the character of its
business or the business of any Restricted Subsidiary as carried on at the
Closing Date.
Section
6.5
Mergers
and Consolidations. The
Borrower will not, and will not allow or suffer any Restricted Subsidiary to,
merge with or consolidate with any Person (whether or not such merger or
consolidation requires any capital expenditures on the part of the Borrower or
such Restricted Subsidiary) without the prior written consent of the Lender, or
except as permitted by this Section. Mergers and consolidations shall be allowed
without Lender’s consent so long as (i) the surviving entity continues to be
engaged in the acquisition and development of oil and gas properties with proved
reserves, (ii) the merger or consolidation does not trigger a Default and is not
projected to trigger a Default for the remaining term of the Loan, and (iii) the
merger does not materially reduce the Collateral associated with the
Loan.
Section
6.6
ERISA
Compliance. The
Borrower will not at any time permit any Plan maintained by it to engage in any
“prohibited transaction” as such term is defined in Section 4975 of the Code;
incur any “accumulated funding deficiency” as such term is defined in Section
302 of ERISA; or terminate any such Plan in a manner which could result in the
imposition of a Lien on the property of the Borrower pursuant to Section 4068 of
ERISA.
Section
6.7
Changes. Each
Company will not without 30 days prior notice to the Lender change the location
of any of its Collateral, or change the location of its state of organization or
chief executive office or change its name or taxpayer identification
number.
Section
6.8
Sales. The
Borrower will not, and will not allow or suffer any Restricted Subsidiary to,
sell, assign, transfer by bond for deed, lease or otherwise dispose of (whether
in one transaction or in a series of transactions) all or substantially all of
its property (whether now owned or hereafter acquired) to any Person. The
Borrower will not, and will not allow or suffer any Restricted Subsidiary to,
sell, assign, transfer by bond for deed, lease or otherwise dispose of any of
its Collateral or any material portion of its other property, business, or
assets, including without limitation any producing mineral properties, except
for (i) sales of production, (ii) collection of its accounts, (iii) sales of
items of equipment which are obsolete or otherwise no longer useful for such
Person’s operations, in each case in the ordinary course of business, (iv) sales
of assets consisting of lesser amounts of assets than an Asset Sale and the
proceeds of which are paid to Lender as required by Section
2.5(b), and (v)
sales under clause (z) of the definition of Excluded Sales.
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Section
6.9
Agreements. Each
Company will not enter into or be a party to any contract or agreement for the
purchase of materials, supplies or other property or services if such contract
or agreement shall require that the Company make payment for such materials,
supplies or other property irrespective of whether delivery thereof is made or
whether such services are rendered. Except in the ordinary course of business,
each Company will not enter into any arrangement with any gas pipeline company
or any other purchaser of hydrocarbons regarding the Collateral whereby the
Company agrees that said gas pipeline company or purchaser may set off any claim
against the Company by withholding payment for any hydrocarbons actually
delivered.
Section
6.10
No
Dividends or Redemption of Shares. The
Borrower will not (i) pay or declare any dividend on any class of its stock
(other than stock dividends), (ii) make any other distribution or other
shareholder expenditure on account of any class of its stock, nor set aside any
funds for such purpose, (iii) otherwise make or agree to pay for or make,
directly or indirectly, any other distribution with respect to any shares of any
class of its stock, or any payment (whether in cash, securities or other
property), including any sinking fund or similar deposit, on account of the
purchase, redemption, retirement, acquisition, cancellation or termination of
any such shares or any option, warrants or other right to acquire any such
shares, nor (iv) make any payments of principal or interest, or any purchase,
redemption, retirement, acquisition or defeasance, with respect to any Debt
which is subordinated in right of payment to the payment of the Indebtedness,
except (A) under the Warrants, (B) in the case of (i) through (iv), if at the
time thereof and immediately after giving effect thereto no Default or Event of
Default shall have occurred and be continuing and all of the Distribution
Conditions defined below are met, and (C) for the costs incurred by the Borrower
on behalf of any shareholder in connection with registering the shares of stock
held by such shareholder. The Borrower may make and pay such cash dividends so
declared within 30 days of such declaration without testing the Distribution
Conditions again under this Section as of the payment date. The “Distribution
Conditions” shall
mean that all of the following shall be true:
| (1) | DSR Account. The DSR Account shall be fully funded as required by Section 5.16. |
| (2) | Total Debt to EBITDA. Total Debt as of the last day of the Borrower’s most recently ended fiscal quarter, divided by EBITDA for such quarter shall not exceed 14.00. |
| (3) | Interest Coverage. EBITDA for the Borrower’s most recently ended fiscal quarter, divided by total Interest Expense on Total Debt for such quarter shall be at least 2.00. |
| (4) | PV10 Test. The Borrowing Base as determined by the most recent independent engineering report delivered to the Lender in accordance with this Agreement shall not be less than 1.50 times the amount of Total Debt then outstanding. |
| (5) | No Distributions to Common. There shall be no distributions with respect to shares of Borrower’s common equity so long as the Loan is outstanding; provided, however, that this Section 6.10(5) is not intended to limit dividends, coupon payments or other distributions to holders of preferred equity or debt subordinate to that of the Lender so long as the provisions of Sections 6.10(1)-(4) are met or to limit the ability of Borrower to acquire shares of its equity held by Herlin permitted by Section 6.3(j). |
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Section
6.11
Compensation. The
Borrower will not pay compensation to its employees, officers or directors in
excess of reasonable salaries, bonuses and other benefits that are incurred in
the ordinary course of business and, without limiting the foregoing, are not
paid with the purpose or effect of avoiding the limitation established in
Section
6.10
above.
Section
6.12
Management. The
Borrower shall use commercially reasonably efforts not to permit or suffer a
change in the key management of the Borrower and its Restricted Subsidiaries to
occur. For purposes of this Section, key management shall mean the continued
active full time employment of Robert S. Herlin (as President) as his primary
and essentially exclusive business activity, excluding his current position on
the board of directors of Boots and Coots Group.
Section
6.13
Transactions
with Affiliates. The
Borrower will not, and will not allow or suffer any Restricted Subsidiary to,
sell, transfer, lease or otherwise dispose of (including pursuant to any merger)
any property or assets to, or purchase, lease or otherwise acquire (including
pursuant to a merger) any property or assets from, or otherwise engage in any
other transactions with, any Affiliates, except in the ordinary course of
business at prices and on terms and conditions not less favorable to the
Borrower or such Restricted Subsidiary as could be obtained on an arms-length
basis from unrelated third persons in a comparable transaction.
Section
6.14
Subsidiaries. The
Borrower will not allow or suffer any changes to be made in the ownership
structure of each Restricted Subsidiary, and shall not own and control directly
or indirectly less than one hundred (100%) percent of the ownership and voting
rights in each Restricted Subsidiary. The Borrower will not, and will not allow
or suffer any Restrictive Subsidiary to, create, incur, assume or permit to
exist any Lien on its equity interest in any Restricted Subsidiary, other than
in favor of the Lender.
Section
6.15
Restrictive
Agreements. The
Borrower will not directly or indirectly enter into, incur or permit to exist,
or permit any Restricted Subsidiary so to do, any agreement or other arrangement
that prohibits, restricts or imposes any condition upon the ability of a
Restricted Subsidiary to create, incur or permit to exist any Lien upon any of
its property or assets or prohibits, restricts or imposes any condition upon the
ability of any Restricted Subsidiary to pay dividends or other distributions
with respect to any shares of its equity securities or other ownership interest
or to repay to the Borrower any loans or advances, provided that the foregoing
shall not apply to restrictions and conditions imposed by corporate law or by
this Agreement.
Section
6.16
Repayment
of Director Loans. The
Borrower shall not repay any loans to any officers in excess of $50,000.00 in
the aggregate or to any directors other than outside director fees unless the
following conditions are met:
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(a)The
Hedging Program provisions of Section
5.18 have
been implemented, with Permitted Hedge Agreements executed and in effect,
and
(b)The new
employment contract with Herlin has been approved by the compensation committee
of the Borrower.
Section
6.17
Subordination. The
Borrower will not pay any management or other fee to Cagan McAfee Capital
Partners or its Affiliates, unless at the time of such payment and immediately
after giving effect thereto no Default or Event of Default shall have occurred
and be continuing.
ARTICLE
7
CONDITIONS
OF LENDING
Section
7.1
Conditions
of Lending. The
obligation of the Lender to make the Loan is subject to the absence of a Default
or an Event of Default, and to the receipt of the following on or before the
Closing Date:
| (a) | Agreement. A duly executed counterpart of this Agreement signed by all the parties hereto. |
| (b) | Note. The duly executed Note signed by the Borrower. |
| (c) | Good Standing. Certificates of good standing of the Companies issued by the Secretaries of State of Delaware, Texas, Nevada and Louisiana. |
| (d) | Corporate Certificate. A certificate of the secretary of each Company (i) setting forth resolutions of its board of directors in form and substance reasonably satisfactory to the Lender with respect to the unanimous authorization of this Agreement, the Note and the Collateral Documents to which it is a party, (ii) attaching the articles of incorporation and bylaws of the Company, (iii) stating its Federal tax identification number and corporate registration identification number, and (iv) setting forth the officers authorized to sign such instruments. |
| (e) | Fee. The commitment fee required by Section 2.6 to be paid from the proceeds of the initial draw. |
| (f) | Collateral Documents. Duly executed and recorded mortgages, executed deposit account control agreement, and executed security agreements, and filed financing statements covering the Collateral, and executed guaranty agreement. |
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| (g) | Stock Certificates. The original stock certificates for its shares in NGS Delaware, NGS Sub and Four Star, all duly endorsed in blank and delivered to the Lender. |
| (h) | Lien Searches. UCC lien searches reasonably satisfactory to the Lender pertaining to the Companies. |
| (i) | Title. Title Opinions (limited in time coverage) and certificates of land title records run sheets and title documentation with respect to the Collateral in form, scope and substance reasonably satisfactory to the Lender and Lender’s counsel, which indicate that NGS Sub has good and marketable title to the interests in the Collateral in amounts not less than those specified in the Collateral Documents or otherwise represented to Lender, subject to no Liens other than the Collateral Documents and those accepted by the Lender in writing, unless waived by Lender in writing on or in advance of the Closing Date. |
| (j) | Legal Opinions. Legal opinions from Borrower’s counsel (The Boles Law Firm, and Troy & Gould) in form, scope and substance reasonably satisfactory to the Lender. |
| (k) | Insurance. Satisfactory evidence of all insurance coverages relating to the Collateral and the Companies. |
| (l) | Environmental. Complete documentation in Borrower’s possession pertaining to any previous material fines levied against the Borrower or any current operator of the Collateral for non-compliance with applicable federal, state and local environmental laws and regulations. |
| (m) | Warrants. Executed Warrant Agreement, Registration Rights Agreement and Revocable Warrant Agreement. |
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| (n) | Release. Executed and recorded release of Mortgage by Delta Exploration and Development Company, Inc., of that certain Mortgage dated September 25, 2003, covering Delhi. |
In the
event that the Lender in its sole and absolute discretion waives the receipt of
any items set forth above, the Borrower agrees that it nonetheless will promptly
deliver such item to the Lender upon request within the time period reasonably
specified by the Lender in connection with such waiver.
Section
7.2
Certification. The
obligation of the Lender to make the Loan available is further subject to the
certification by the Borrower, which the Borrower hereby makes, that no Default
or Event of Default exists, and that no Material Adverse Effect has occurred,
since the time of the issuance of Lender’s commitment letter.
Section
7.3
Incurrence
Covenants. The
obligation of the Lender to make an Advance under the Loan is subject to all of
the following conditions being met at the time of such Advance, which may occur
within ninety (90) days after the Closing Date:
| (a) | Each of the representations and warranties of the Companies contained in this Agreement and the Collateral Documents shall be true and correct in all material respects on and as of the date of each subsequent Advance, both before and after giving effect to the proposed Advance and to the application of the proceeds therefrom, as though made on and as of such date, other than any such representations or warranties that by their terms refer to a specific date other than the date of the proposed Advance or issuance, in which case as of such specific date, and except as such representations and warranties relate to matters that are changed as permitted by this Agreement. |
| (b) | At the time of such Advance, no Default shall have occurred and be continuing. |
| (c) | The Borrower shall not have had a Material Adverse Effect from its condition represented in the most recent financial statements furnished to the Lender prior to the Closing Date, except to the extent that such changes are permitted by this Agreement. |
| (d) | If reasonably required by Lender, Borrower shall deliver to Lender a bringdown title search in the appropriate states, confirming the absence of Lien filings against the Collateral or the Companies since the effective date of the preceding bringdown search. |
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| (e) | Delivery of additional Warrants in accordance with Section 3.2 and additional Revocable Warrants in accordance with Section 3.3. |
Section
7.4
Title
Matters. It is
expressly acknowledged by the Borrower that the waiver by the Borrower (on the
basis of the Borrower’s business judgment) of any title requirements contained
in any title opinions delivered to the Lender from time to time in connection
with this Agreement, or other acceptance of potential title deficiencies, and
funding by the Lender of Advances, shall not constitute a waiver by the Lender
of any of the representations and warranties of the Companies contained herein
or in the Collateral Documents.
ARTICLE
8
DEFAULT
Section
8.1
Events
of Default. Any of
the following events shall be considered an “Event of Default” as that term is
used herein:
| (a) | Principal and Interest Payments. The Borrower fails to make payment (x) when due of any principal or interest installment on the Note, any fee, or any other Indebtedness incurred pursuant to this Agreement to the Lender, and such default continues unremedied for a period of ten (10) days after the notice thereof being given by the Lender to the Borrower, or (y) when due of any mandatory prepayment under Subsection 2.5(b) or Subsection 2.5(c) , and such default continues unremedied for a period of seven (7) days after the notice thereof being given by the Lender to the Borrower. |
| (b) | Representations and Warranties. Any representation or warranty made by or on behalf of any Company contained in this Agreement, the Note or any of the Collateral Documents proves to have been incorrect in any material respect as of the date thereof, provided however, that such event will only be an Event of Default if the failure of such representation or warranty to be correct would have a Material Adverse Effect. |
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| (c) | Specific Covenants. The Borrower fails to observe or perform at any time any covenant or agreement contained in Section 5.15, Section 5.17, Section 5.18, Section 6.1, Section 6.2, Section 6.3, Section 6.4, Section 6.5, Section 6.8, Section 6.10, Section 6.14, Section 6.15, Section 6.16 and Section 6.17 of this Agreement. |
| (d) | Covenants. The Borrower or other party thereto (other than the Lender) defaults in any material respect in the observance or performance of any of the covenants or agreements contained in this Agreement, the Note or any of the Collateral Documents to be kept or performed by the Borrower or such Person (other than a default under Subsections (a) through (c) hereof), and such default continues unremedied for a period of thirty (30) days (or, if applicable, any longer cure period expressly set forth in any of the Collateral Documents) after notice thereof being given by the Lender to the Borrower and such other party. |
| (e) | Other Debt to Lender. The Borrower defaults on the payment of any amounts due to the Lender or in the observance or performance of any of the covenants or agreements contained in any loan agreement or any promissory note relating to any Debt for borrowed money of the Borrower to the Lender other than the Loan, and any grace period applicable to such default has elapsed. |
| (f) | Other Debt to Other Lenders. The Borrower defaults in the payment of any amounts due to any Person (other than the Lender) or in the observance or performance of any of the covenants or agreements contained in any credit agreements, notes, leases, collateral or other documents relating to any Debt (senior, pari passu or subordinate) of the Borrower to any Person (other than the Lender) in excess of $250,000.00, and, in either case, any grace period applicable to such default has elapsed, including without limitation if any event or condition occurs that results in any such Debt becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder of any such Debt to cause any portion of such Debt to become due prior to its scheduled maturity or payment date or to require the prepayment thereof (in each case after giving effect to any applicable cure period). |
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| (g) | Involuntary Bankruptcy or Receivership Proceedings. A receiver, conservator, liquidator or trustee of any Company, or of any of its property, is appointed by order or decree of any court or agency or supervisory authority having jurisdiction; or an order for relief is entered against any Company under the Federal Bankruptcy Code; or any Company is adjudicated bankrupt or insolvent; or any material portion of the property of any Company is sequestered by court order and such order remains in effect for more than 30 days after such party obtains knowledge thereof; or a petition is filed against any Company under any reorganization, arrangement, insolvency, readjustment of debt, dissolution, liquidation or receivership law of any jurisdiction, whether now or hereafter in effect, and such petition is not dismissed within 60 days. |
| (h) | Voluntary Petitions. Any Company files a case under the Federal Bankruptcy Code or seeking relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any case or petition against it under any such law. |
| (i) | Assignments for Benefit of Creditors. Any Company makes an assignment for the benefit of its creditors, or admits in writing its inability to pay its debts generally as they become due, or consents to the appointment of a receiver, trustee or liquidator of any Company or of all or any part of its property. |
| (j) | Undischarged Judgments. Judgment for the payment of money in excess of $100,000.00 (which is not covered by insurance) is rendered by any court or other governmental body against any Company, and such Company does not discharge the same or provide for its discharge in accordance with its terms, or procure a stay of execution thereof within 30 days from the date of entry thereof, and within said 30-day period or such longer period during which execution of such judgment shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal while providing such reserves therefor as may be required under generally accepted accounting principles. |
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| (k) | Attachment. A writ or warrant of attachment or any similar process shall be issued by any court against all or any material portion of the Collateral, and such writ or warrant of attachment or any similar process is not released or bonded within 30 days after its entry. |
| (l) | Condemnation. The Collateral, or any substantial portion thereof, is condemned or expropriated under power of eminent domain by any legally constituted governmental authority. |
| (m) | Invalidity. Any Company shall assert in writing that any material provision of this Agreement, the Note or any of the Collateral Documents shall for any reason be or cease to be valid and binding on such Company after the Closing Date. |
| (n) | Change of Control. A Change of Control shall occur. |
| (o) | Herlin. Robert S. Herlin shall cease for any reason to be actively employed full time as President of the Borrower, as his primary and essentially exclusive business activity, as contemplated by Section 6.12; provided, however, that the cessation of employment of Mr. Herlin shall not be a Default hereunder so long as the Borrower hires or promotes a replacement officer with experience and qualifications reasonably acceptable to the Lender within 90 days of Mr. Herlin’s cessation of full active employment. |
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Section
8.2
Remedies.
(a)
Upon the
happening of any Event of Default specified in the preceding Section (other than
Subsections (g) or (h) thereof), (i) all obligations, if any, of the Lender to
make Advances to the Borrower shall immediately cease and terminate, and (ii)
the Lender may by written notice to the Borrower declare the entire principal
amount of
all Indebtedness then outstanding including interest accrued thereon to be
immediately due and payable without presentment, demand, protest, notice of
protest or dishonor or other notice of default of any kind, all of which are
hereby expressly waived by the Borrower.
(b)
Upon the
happening of any Event of Default specified in Subsections (g) or (h) of the
preceding Section, (i) all obligations, if any, of the Lender to make Advances
to the Borrower shall immediately cease and terminate, and (ii) the entire
principal amount of all obligations then outstanding including interest accrued
thereon shall, without notice or action by the Lender, be immediately due and
payable without presentment, demand, protest, notice of protest or dishonor or
other notice of default of any kind, all of which are hereby expressly waived by
the Borrower.
(c)
In
addition to the foregoing, the Lender may exercise any of the rights and
remedies established in the Collateral Documents or avail itself of any other
rights and remedies provided by applicable law.
Section
8.3
Set-Off. Upon
the occurrence of any Event of Default, the Lender shall have the right to
set-off any funds of the Borrower or any Company in the possession or control of
the Lender (including without limitation funds in the accounts provided for in
Article 5) against any amounts then due by the Borrower to the Lender pursuant
to the Agreement.
Section
8.4
Marshaling. The
Companies shall not at any time hereafter assert any right under any law
pertaining to marshaling (whether of assets or liens) and the Borrower expressly
agrees that the Lender may execute or foreclose upon the Collateral Documents in
such order and manner as the Lender, in its sole discretion, deems appropriate.
ARTICLE
9
MISCELLANEOUS
Section
9.1
Notices. Any
notice or demand which, by provision of this Agreement or any Collateral
Document referencing this provision, is required or permitted to be given by one
Person to another Person, shall be given by (i) deposit, postage prepaid, in the
mail, registered or certified mail, or (ii) delivery to a recognized express
courier service, or (iii) delivery by hand, or (iv) by facsimile, in each case
addressed (until another address or addresses is given in writing by such party
to the other party) as follows:
NGS/Prospect
Loan Agreement
NGS/Prospect
Loan Agreement
NGS/Prospect
Loan Agreement
|
If
to Borrower |
Natural
Gas Systems, Inc. | |
|
or
any Subsidiary: |
Two
Memorial City Plaza | |
|
|
820
Gessner, Suite 1340 | |
|
|
Houston,
Texas 77024 | |
|
|
Attention:
Robert S. Herlin, President | |
|
|
Facsimile
Number: (713) 935-0199 | |
|
|
Telephone
Number: (713) 935-0122 | |
|
|
AND | |
|
|
Laird
Cagan, Chairman | |
|
|
10600
N. De Anza Blvd., Suite 250 | |
|
|
Cupertino,
California 95014 | |
|
|
Facsimile
Number: (408) 904-6085 | |
|
|
Telephone
Number: (408) 873-0400 | |
|
With
copies to |
Troy
& Gould | |
|
(which
copies shall |
1801
Century Park East, 16th Floor | |
|
not
constitute |
Los
Angeles, California 90067-2367 | |
|
notice) |
||
|
Attention:
Lawrence P. Schnapp | ||
|
Facsimile
Number: (310) 201-4746 | ||
|
Telephone
Number: (310) 553-4441 | ||
|
AND | ||
|
Steven
D. Lee | ||
|
|
10600
N. De Anza Blvd., Suite 250 | |
|
|
Cupertino,
California 95014 | |
|
|
Facsimile
Number: (415) 358-4579 | |
|
|
Telephone
Number: (650) 303-2313 | |
|
If
to Lender: |
Prospect
Energy | |
|
|
10
East 40th Street, Suite 4400 | |
|
|
New
York, New York 10016 | |
|
|
Attention:
John Barry, Chief Executive Officer | |
|
|
Facsimile
Number: (212) 448-9652 | |
|
|
Telephone
Number: (212) 448-0702 x14 |
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All
notices sent by facsimile transmission shall be deemed received by the addressee
upon the transmitter’s receipt of acknowledgment of receipt from the offices of
such addressee (if before 5:00 p.m. on a Business Day; if later, then on the
next Business Day).
Section
9.2
Entire
Agreement. This
Agreement, the Note and the Collateral Documents and the Warrants set forth the
entire agreement of the Lender and the Borrower with respect to the
Indebtedness, and supersede all prior written or oral understandings with
respect thereto; provided, however, that all written representations, warranties
and certifications made by the Borrower to the Lender with respect to the
Indebtedness and the security therefor shall survive the execution of this
Agreement. The Borrower is not relying on any representation by the Lender, and
no representation has been made, that the Lender will, at the time of a Default
or at any other time, waive, negotiate, discuss, or take or refrain from taking
any action with respect to such Default.
Section
9.3
Renewal,
Extension or Rearrangement. All
provisions of this Agreement relating to the Note shall apply with equal force
and effect to each and all promissory notes or security instruments hereinafter
executed which in whole or in part represent a renewal, extension for any
period, increase or rearrangement of any part of the Note.
Section
9.4
Amendment. Neither
this Agreement nor any provisions hereof may be changed, waived, discharged or
terminated orally or in any manner other than by an instrument in writing signed
by the party against whom enforcement of the change, waiver, discharge or
termination is sought.
Section
9.5
Invalidity. In the
event that any one or more of the provisions contained in this Agreement, the
Note, or the Collateral Documents shall, for any reason, be held invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement, the
Note or the Collateral Documents.
Section
9.6
Survival
of Agreements. All
representations and warranties of the Borrower herein, and all covenants and
agreements herein not fully performed before the effective date of this
Agreement, shall survive such date.
Section
9.7
Waivers. No
course of dealing on the part of the Lender, its officers, employees,
consultants or agents, nor any failure or delay by the Lender with respect to
exercising any of its rights, powers or privileges under this Agreement, the
Note or the Collateral Document and the Warrants, shall operate as a waiver
thereof.
Section
9.8
Cumulative
Rights. The
rights and remedies of the Lender under this Agreement, the Note and the
Collateral Documents and the Warrants 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.
Section
9.9
Time
of the Essence. Time
shall be deemed of the essence with respect to the performance of all of the
terms, provisions and conditions on the part of the Borrower and the Lender to
be performed hereunder.
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Section
9.10
Successors
and Assigns.
(a)
All
covenants and agreements made by or on behalf of the Borrower in this Agreement,
the Note and the Collateral Documents shall bind its successors and assigns and
shall inure to the benefit of the Lender and its successors and assigns. The
Borrower may not assign its rights or obligations under this
Agreement.
(b)
This
Agreement is for the benefit of the Lender and for such other Person or Persons
as may from time to time become or be the holders of any of the Indebtedness,
and this Agreement shall be transferrable and negotiable, with the same force
and effect and to the same extent as the Indebtedness may be transferrable, it
being understood that, upon the transfer or assignment by the Lender of any of
the Indebtedness, the legal holder of such Indebtedness shall have all of the
rights granted to the Lender under this Agreement.
Section
9.11
Relationship
Between the Parties. The
relationship between the Lender and the Borrower shall be solely that of lender
and borrower, and such relationship shall not, under any circumstances
whatsoever, be construed to be a joint venture, joint adventure, or partnership.
The Lender has no fiduciary obligation to the Borrower with respect to this
Agreement or the transactions contemplated hereby.
Section
9.12
Limitation
of Liability. This
Agreement, the Note and the Collateral Documents are executed by an officer of
the Lender, and by acceptance of the Loan, the Borrower agrees that for the
payment of any claim or the performance of any obligations hereunder resulting
from any default by the Lender, resort shall be had solely to the assets and
property of the Lender, and no shareholder, officer, employee or agent of the
Lender shall be personally liable therefor.
Section
9.13
Titles
of Articles, Sections and Subsections. All
titles or headings to articles, sections, subsections or other divisions of this
Agreement or the exhibits hereto are only for the convenience of the parties and
shall not be construed to have any effect or meaning with respect to the other
content of such articles, sections, subsections or other divisions, such other
content being controlling as to the agreement between the parties hereto.
Section
9.14
Singular
and Plural. Words
used herein in the singular, where the context so permits, shall be deemed to
include the plural and vice versa. The definitions of words in the singular
herein shall apply to such words when used in the plural where the context so
permits and vice versa.
Section
9.15 GOVERNING
LAW.
THIS AGREEMENT IS, AND THE NOTE WILL BE, CONTRACTS MADE UNDER AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS OF
LOUISIANA.
Section
9.16
Counterparts. This
Agreement may be executed in two or more counterparts, and it shall not be
necessary that the signatures of all parties hereto be contained on any one
counterpart hereof; each counterpart shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Section
9.17
WAIVER
OF JURY TRIAL; SUBMISSION TO JURISDICTION.
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(a)
THE
BORROWER AND THE LENDER HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING
TO WHICH THE BORROWER AND THE LENDER MAY BE PARTIES, ARISING OUT OF OR IN ANY
WAY PERTAINING TO (i) THE NOTE, (ii) THIS AGREEMENT, (iii) THE COLLATERAL
DOCUMENTS AND THE WARRANTS OR (iv) THE COLLATERAL. IT IS AGREED AND UNDERSTOOD
THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL
PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE
NOT PARTIES TO THIS AGREEMENT. THIS WAIVER IS KNOWINGLY, WILLINGLY AND
VOLUNTARILY MADE BY THE BORROWER AND THE LENDER, AND THE BORROWER AND THE
LENDER
HEREBY REPRESENT THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY
ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR
NULLIFY ITS EFFECT. THE BORROWER AND THE LENDER FURTHER REPRESENT THAT IT HAS
BEEN REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS
WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT
HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.
(b)
THE
BORROWER HEREBY IRREVOCABLY CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF
ANY STATE COURT OF LOUISIANA OR FEDERAL COURT SITTING IN LOUISIANA, AND AGREES
THAT ANY ACTION OR PROCEEDING ARISING OUT OF OR BROUGHT TO ENFORCE THE
PROVISIONS OF THE NOTE, THIS AGREEMENT AND/OR THE COLLATERAL DOCUMENTS MAY BE
BROUGHT IN ANY COURT HAVING SUBJECT MATTER JURISDICTION. THE BORROWER HEREBY
IRREVOCABLY WAIVES ANY OBJECTIONS THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE
OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT ANY SUCH ACTION OR
PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM
THE SAME. THE BORROWER AGREES THAT NOTHING HEREIN SHALL LIMIT THE LENDER’S RIGHT
TO SUE IN ANY OTHER JURISDICTION.
(c)
THE
BORROWER HEREBY AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING
MAY BE EFFECTED BY MAILING A COPY BY REGISTERED OR CERTIFIED MAIL (OR ANY
SUBSTANTIALLY SIMILAR FORM OF MAIL) POSTAGE PREPAID, TO THE BORROWER AT ITS
ADDRESS SET FORTH IN SECTION 9.1 OR AT SUCH OTHER ADDRESS AS TO WHICH THE LENDER
SHALL HAVE BEEN NOTIFIED PURSUANT THERETO. THE BORROWER AGREES THAT NOTHING
HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW.
Section
9.18
AGREEMENT
SUPERCEDES ALL PRIOR AGREEMENTS. THIS
AGREEMENT, TOGETHER WITH THE NOTE, THE COLLATERAL DOCUMENTS, THE WARRANTS, 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 EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES AND SHALL
SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HEREOF, WHETHER WRITTEN OR
ORAL, RELATING TO THE SUBJECT HEREOF. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN THE PARTIES.
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NGS/Prospect
Loan Agreement
Section
9.19
Patriot
Act. The
Lender hereby notifies the Borrower that pursuant to the requirements of the
Patriot Act, it is required to obtain, verify and record information that
identifies the Borrower and the other Companies, which information includes the
name and address of the Borrower and other information that will allow the
Lender to identify the Borrower in accordance with the Patriot Act.
Section
9.20
Confidentiality.
The Lender
shall hold all non-public information obtained pursuant to the requirements of
this Agreement in accordance with the Lender’s customary procedures for handling
confidential information of this nature and in accordance with safe and sound
commercial lending practices. It is understood and agreed by the Borrower that
the Lender may make disclosures (a) to its Affiliates and to its Affiliates’
directors, officers, employees and agents, including accountants, legal counsel,
petroleum engineers and other advisors (it being understood that the Persons to
whom such disclosure is made will be informed of the confidential nature of such
information and instructed to keep such information confidential), (b) to the
extent requested by any government authority, (c) to the extent required by
applicable laws or regulations or by any subpoena or similar legal process, (d)
to any other party to this Agreement, (e) for the purposes specified in this
Agreement or in the Collateral Documents, (f) in connection with the exercise of
any remedies hereunder or any suit, action or proceeding relating to this
Agreement or the enforcement of the rights hereunder or under the Collateral
Documents, (g) subject to an agreement containing provisions substantially the
same as those in this Section
9.20, to (1)
any assignee or any prospective eligible assignee of any of its rights or
obligations under this Agreement, or (2) any actual or proposed contractual
counterparty (or its professional advisors) to any Hedge Agreement relating to a
party’s obligations hereunder, (h) with the consent of the Borrower, (i) to the
extent such information (1) becomes publicly available other than as a result of
a breach of this Section
9.20, or (2)
becomes available to the Lender on a nonconfidential basis from a source other
than the Borrower, or (j) any nationally recognized rating agency that requires
access to information about the Lender’s or its Affiliates’ investment portfolio
in connection with ratings issued with respect to the Lender or its Affiliates.
However, no information that is designated as privileged or as attorney work
product by the Borrower may be disclosed to any Person unless such Person is the
Lender or a participant hereunder or its legal counsel. In no event shall the
Lender be obligated or required to return any materials furnished by the
Borrower.
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NGS/Prospect
Loan Agreement
IN
WITNESS WHEREOF, the parties hereto have caused this instrument to be duly
executed as of the date first above written.
| BORROWER: | NATURAL GAS SYSTEMS, INC. | |
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| By: | /s/ | |
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Name: Robert S. Herlin | ||
| Title: President & CEO | ||
| LENDER: | PROSPECT ENERGY CORPORATION | |
| |
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| By: | /s/ | |
|
Name: Bart J. de Bie | ||
| Title: Authorized Representative | ||
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|
MORTGAGE,
COLLATERAL |
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UNITED
STATES OF AMERICA | ||||||||
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ASSIGNMENT,
SECURITY |
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AGREEMENT AND |
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STATE
OF | ||||||||
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FINANCING
STATEMENT |
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COUNTY/PARISH
OF____________ | |||||||||
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BY |
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* |
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NGS SUB. CORP. |
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* |
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* |
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BE
IT KNOWN, that on this 2nd day of February, 2005, before me, the undersigned
Notary Public duly commissioned and qualified, personally came and
appeared:
NGS
SUB. CORP., a Delaware corporation (the “Mortgagor”), having a mailing address
of 820 Gessner, Suite 1340, Houston, Texas 77024, and a federal taxpayer
identification number with the last four digits of _____,
appearing
herein by and through its undersigned officer, duly authorized by resolutions of
its Board of Directors, a certified copy of which is attached
hereto,
who
declared that Mortgagor does by these presents declare and acknowledge an
indebtedness unto:
PROSPECT
ENERGY CORPORATION, a Maryland corporation (the “Lender”) having a place of
business at 10 East 40th Street, Suite 4400, New York, New York
10016, and a federal taxpayer identification number with the last four digits of
__________.
RECITALS
A.
Natural Gas Systems, Inc., a Nevada corporation (the “Borrower”) is indebted
unto the Lender for loans made and to be made pursuant to the terms of a certain
loan agreement (as amended, supplemented or restated from time to time, and all
other agreements given in substitution therefor, or in renewal, extension or
restatement thereof, in whole or in part, being herein called the “Loan
Agreement”) dated as of February 2, 2005, by and between the Borrower and the
Lender.
B.
From time to time Borrower will make a portion of the proceeds of the loans
available to Mortgagor for the acquisition of properties and working capital
purposes, and therefore the making of such loans by Lender to Borrower will be
of substantial benefit to Mortgagor, and consequently in order to secure the
full and punctual payment and performance of the Indebtedness (as hereafter
defined), the Mortgagor has agreed to execute and deliver this
Mortgage
and to grant a mortgage lien and continuing security interest in and to the
Collateral (as
hereafter defined).
ARTICLE
1
GENERAL
TERMS
Section
1.1 Definitions. As used in this Mortgage, the terms “Borrower”, “Lender”,
“Loan Agreement” and “Mortgagor” shall have the meanings indicated above. As
used in this Mortgage, the following additional terms shall have the meanings
indicated:
“Accounts”
means all “accounts” (as defined in the UCC) now owned or hereafter acquired by
the Mortgagor, including without limitation accounts resulting from the sale of
Hydrocarbons at the welihead and accounts now or hereafter arising in connection
with the sale or other disposition of any Hydrocarbons, and all revenues and
rights to payment relating to the Mortgagor’s compensation for services as
operator of any Mineral Properties or to joint interest billings or to amounts
recoverable by the Mortgagor from nonoperating parties by virtue of nonconsent
elections or otherwise, and further means all rights accrued, accruing or to
accrue to receive payments of any and every kind under all Contracts, including
without limitation bonuses, rents and royalties which are payable out of or
measured by production of any Hydrocarbons or are otherwise attributable to the
Mineral Properties and all other revenues owing to the Mortgagor in connection
with the Mineral Properties, including revenues from the treatment,
transportation or storage of Hydrocarbons for third parties.
“Advances”
has the meaning set forth in Section 4.8 (“Advances by Lender”) of this
Mortgage.
“Collateral”
has the meaning set forth in Section 2.2 (“The Security Interests”) of this
Mortgage.
“Collateral
Account” has the meaning set forth in Section 5.3
(“Collateral
Account”) of this Mortgage.
“Collateral
Documents” means collectively all mortgages, deeds of trust, pledges, security
agreements and other documents by which the Mortgagor or the Borrower grants
Liens and security interests in immovable or movable property to the
Lender.
2
“Contracts”
means (a) all contracts and agreements described in Exhibit A and Exhibit B and
all other contracts, operating agreements, farm-out or farm-in agreements,
sharing agreements, limited or general partnership agreements, area of mutual
interest agreements, mineral purchase agreements, contracts for the sale,
exchange, transportation or processing of Hydrocarbons, rights-of-way,
easements, surface leases, salt water disposal agreements, service contracts,
permits, franchises, licenses, pooling or unitization agreements, unit
designations and pooling orders now in effect or hereafter entered into by the
Mortgagor affecting any of the Mineral Properties, Equipment or Hydrocarbons now
or hereafter covered hereby, or which are useful or appropriate in drilling for,
producing, treating, handling, storing, transporting or marketing oil, gas or
other minerals produced from any lands affected by the Mineral Properties and
(b) all rights and choses in action (i.e., rights to enforce contracts or to
bring claims thereunder) relating to the foregoing, regardless of whether the
same arose or arise, or the events giving rise thereto occurred or occur on,
before or after the date hereof.
“Default”
means the occurrence of any of the events specified as an Event of Default,
whether or not any requirement for notice or lapse of time or other condition
precedent has been satisfied.
“Equipment”
means all equipment now owned or hereafter acquired by the Mortgagor, now or
hereafter located on or used in connection with the Mineral Properties or in
connection with the operation thereof or the treating, handling, storing,
transporting, processing, purchasing, exchanging or marketing of Hydrocarbons,
including without limitation all wells, rigs, platforms, constructions,
extraction plants, facilities, gas systems (for gathering, treating, injection
and compression), water systems (for treating, disposal and injection),
compressors, casing, tubing, rods, flow lines, pipelines, derricks, tanks,
separators, pumps, machinery, tools and all other movable property and fixtures
now or hereafter located upon and dedicated to be used in connection with any of
the Mineral Properties, together with all additions, accessories, parts,
attachments, special tools and accessions now and hereafter affixed thereto or
used in connection therewith, and all replacements thereof and substitutions
therefor.
“Event
of Default” has the meaning set forth in Section 5.1 (“Events Of Default”) of
this Mortgage.
3
“General
Intangibles” means all “general intangibles” (as defined in the UCC) now owned
or hereafter acquired by the Mortgagor related to the Mineral Properties, the
Equipment or the Hydrocarbons, the operation of the Mineral Properties or the
Equipment (whether the Mortgagor is operator or non-operator), or the treating,
handling, storing, transporting, processing, purchasing, exchanging or marketing
of Hydrocarbons, or under which the proceeds of Hydrocarbons arise or are
evidenced or governed, and further including, without limitation, (i) all
contractual rights and obligations or indebtedness owing to the Mortgagor (other
than Accounts) from whatever source arising in connection with the sale or other
disposition of any Hydrocarbons, including all rights to payment owed or
received by the Mortgagor pursuant to a “take-or-pay” provision or gas balancing
arrangement, (ii) all Contracts and other general intangibles now or hereafter
arising in connection with or resulting from Contracts, (iii) all insurance
proceeds and unearned insurance premiums affecting all or any part of the
Collateral, and (iv) all amounts received in judgment, settlement, assignment or
otherwise of claims or litigation and all things in action, rights represented
by judgments, claims arising out of tort and other claims relating to the
Collateral, including the right to assert and otherwise to be the plaintiff and
proper party of interest to commence, control, prosecute and settle such action
(whether as claims, counterclaims or otherwise, and whether involving matters
arising from casualty, condemnation, indemnification, negligence, strict
liability, other tort, contract or in any other manner).
“Hydrocarbons”
mean all oil, gas, casing head gas, condensate, distillate, other liquid and
gaseous hydrocarbons, sulfur, and all other minerals, whether similar to the
foregoing or not, produced, obtained or secured from or allocable to the Mineral
Properties, and any products refined, processed, recovered or obtained
therefrom, including oil in tanks.
“Indebtedness”
means all present and future amounts, liabilities or obligations of the Borrower
or the Mortgagor to the Lender (or to any successor or transferee of the Note),
including without limitation any such amounts, liabilities or obligations under
or pursuant to the Loan Agreement, the Note, this Mortgage or the other
Collateral Documents, whether said amounts, liabilities or obligations are
liquidated or unliquidated, now existing or hereafter arising, and including
without limitation the Note and all other promissory notes heretofore or
hereafter executed by the
4
Borrower
pursuant to the Loan Agreement, in principal, interest, deferral and delinquency
charges, prepayment premiums, costs and attorneys’ fees, as therein stipulated,
and under and pursuant to all amendments, supplements and restatements to any of
said documents. The Indebtedness includes without limitation all Advances and
other amounts for which the Mortgagor is obligated under the terms of this
Mortgage. The Indebtedness also includes, without limitation, all post-petition
interest, expenses, and other duties and liabilities with respect to
indebtedness or other obligations described above, which would be owed but for
the fact that they are unenforceable or not allowable due to the existence of a
bankruptcy, reorganization, or similar proceeding. The Indebtedness secured by
this Mortgage further continues with respect to any renewals, modifications,
amendments, revisions or extensions of the Indebtedness. It is contemplated and
acknowledged that the Indebtedness may include future advances or revolving
credit loans and advances from time to time, and that this Mortgage shall have
effect, as of the date hereof, to secure all Indebtedness, regardless of whether
any amounts are advanced on the date hereof or on a later date or, whether
having been advanced, are later repaid in part or in whole and further advances
made at a later date. The Indebtedness secured by this Mortgage further
continues with respect to any new obligation arising from any novation
(subjective or objective) of the Indebtedness as permitted by Louisiana Civil
Code Article 1884, as well as to any other renewals, modifications, amendments,
revisions or extensions ofthe Indebtedness.
“Instruments”
means all instruments (as defined in the UCC) now owned or hereafter acquired by
the Mortgagor arising in connection with any Accounts, or under or in connection
with any Contracts or other General Intangibles, or otherwise in connection with
the sale or other disposition of any Hydrocarbons, Equipment, Inventory or
Mineral Properties.
“Inventory”
means all “inventory” (as defined in the UCC) now owned or hereafter acquired by
the Mortgagor which are now or hereafter produced from or allocable to the
Mineral Properties or located on or used or held for use in connection with the
Mineral Properties or in connection with the operation thereof or the treating,
handling, storing, transporting, processing or marketing of
Hydrocarbons.
5
“Investment
Property” means all “investment property” (as defined in the UCC) now owned or
hereafter acquired by the Mortgagor, arising from or pertaining to any Mineral
Properties or the operation thereof or the transporting or marketing of
Hydrocarbons.
“Lien”
means any interest in property securing an obligation owed to, or a claim by, a
Person other than the owner of the property, whether such interest is based on
jurisprudence, statute or contract, and including but not limited to the lien or
security interest arising from a mortgage, encumbrance, pledge, security
agreement, conditional sale or trust receipt or a lease, consignment or bailment
for security purposes. The term “Lien” shall include reservations, exceptions,
encroachments, easements, servitudes, usufructs, rights-of-way, covenants,
conditions, restrictions, leases and other title exceptions and encumbrances
affecting property. For the purposes of this Mortgage, the Mortgagor shall be
deemed to be the owner of any property which it has accrued or holds subject to
a conditional sale agreement, financing lease or other arrangement pursuant to
which title to the property has been retained by or vested in some other Person
for security purposes.
“Mineral
Properties” means collectively:
(a)
the oil, gas and mineral leases, mineral servitudes, subleases, farmouts,
royalties, operating rights, area of mutual interest rights, and/or other
mineral properties and/or mineral rights and assignments of such mineral rights
which are described in Exhibit A, attached hereto and made a part
hereof;
(b)
without limitation ofthe foregoing, all other right, title and interest of
Mortgagor, of whatever kind or character (whether now owned or hereafter
acquired by operation of law or otherwise) in and to (i) the oil, gas and/or
mineral leases or other agreements described in Exhibit A hereto, (ii) the lands
described or referred to in Exhibit A (or described in any of the instruments
described or referred to in Exhibit A), without regard to any limitations as to
specific undivided interests, lands or depths that may be set forth in Exhibit A
hereto or in any of the leases or other agreements described in Exhibit A
hereto;
(c)
all of Mortgagor’s right, title and interest (whether now owned or hereafter
acquired by operation of law or otherwise) in and to all presently existing and
hereafter created oil, gas and/or
6
mineral
unitization, pooling and/or communitization agreements, declarations and/or
orders, and in and to the properties, rights and interests covered and the units
created thereby (including, without limitation, units formed under orders,
rules, regulations or other official acts of any federal, state or other
authority having jurisdiction), which cover, affect or otherwise relate to the
properties, rights and interests described in clause (a) above and described on
Exhibit A;
(d)
all of Mortgagor’s right, title and interest (whether now owned or hereafter
acquired by operation of law or otherwise) in and to all easements, servitudes,
rights-of-way, surface leases, licenses, permits and other surface or subsurface
rights, which are now or hereafter used, or held for use, in connection with the
properties, rights and interests described in clause (a), (b) or (c) above, or
in connection with the operation of such properties, rights and interests, or in
connection with the treating, handling, storing, processing, transporting or
marketing of oil, gas, other hydrocarbons, or other minerals produced from (or
allocated to) such properties, rights and interests described on Exhibit
A;
(e)
all rights, estates, powers and privileges appurtenant to the foregoing rights,
interests and properties; and
(f)
all extensions, renewals and corrections of any of the foregoing.
“Mortgage”
means this Mortgage, Collateral Assignment, Security Agreement and Financing
Statement, as amended or supplemented from time to time.
“Mortgaged
Property” has the meaning set forth in Section 2.1 (“Hypothecation”) of this
Mortgage.
“Note”
shall mean the promissory note in the principal amount of $4,800,000.00 made and
subscribed by the Borrower to the order of the Lender, together with any renewal
or refinancing note or notes delivered in substitution therefor or other
amendments, supplements, renewals or restatements thereto.
“Other
Proceeds” has the meaning set forth in Section 2.3 (“Assignment”) of this
Mortgage.
“Person”
means any individual, corporation, partnership, joint venture, association,
joint stock company, limited liability
company,
trust, unincorporated organization, government or any agency or political
subdivision thereof, or any other form of entity.
“Proceeds”
means all “proceeds” (as defined in the UCC), including without limitation cash
and non-cash proceeds of, and all other profits, rentals or receipts, in
whatever form, arising from the collection, sale, lease, exchange, assignment,
licensing or other disposition of, or realization upon, Collateral, including
without limitation all claims ofthe Mortgagor against third parties for loss of,
damage to or destruction of, or for proceeds payable under, or unearned premiums
with respect to, policies of insurance in respect of, any Collateral, and any
condemnation or requisition payments with respect to any Collateral, and
including proceeds of all such proceeds, in each case whether now existing or
hereafter arising.
“Proceeds
of Runs” has the meaning set forth in Section 2.3 (“Assignment”) of this
Mortgage.
“Production
Proceeds” has the meaning set forth in Section 2.3 (“Assignment”) of this
Mortgage.
“Security
Interests” means the security interests in the Collateral granted hereunder
securing the Indebtedness.
“UCC”
means the Uniform Commercial Code, Commercial Laws. Secured
Transactions (Louisiana Revised Statutes 10:9-101 through 9-710) in the State of
Louisiana, as amended from time to time; provided that if by reason of mandatory
provisions of law, the perfection or the effect of perfection or non-perfection
of the Security Interests in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than Louisiana, “UCC” means
the Uniform Commercial Code as in effect in such other jurisdiction for purposes
of the provisions hereof relating to such perfection or effect of perfection or
non-perfection.
ARTICLE
2
LIENS
AND SECURITY INTERESTS
Section
2.1 Hypothecation. (a) In order to secure the full and punctual payment and
performance of all present and future Indebtedness, the Mortgagor does by these
presents specially mortgage, affect, hypothecate, pledge and assign unto and in
favor of the Lender, to inure to the use and benefit ofthe Lender, all of
Mortgagor’s right, title and interest in and to the following described
property, to-wit:
8
(1)
The Mineral Properties, together with all rents, issues, profits, products and
proceeds, whether now or hereafter existing or arising, from the Mineral
Properties.
(2)
The Mortgagor’s rights in the improvements and other constructions now or
hereafter located on the Mineral Properties, including without limitation the
Equipment, to the extent (i) any such property should constitute or be deemed to
constitute immovable property for the purposes of Louisiana law, including
without limitation any buildings, platforms, structures, towers, rigs or other
immovable property or component parts thereof, or (ii) any such property is
otherwise susceptible of mortgage pursuant to Louisiana Civil Code Article 3286
or Louisiana Mineral Code Article 203.
The
descriptions of the Mineral Properties contained in Exhibit A are amplified by
the explanations contained in Exhibit 1 attached hereto and made a part
hereof.
All
of the foregoing property and rights covered by and subject to this Mortgage are
herein collectively referred to as the “Mortgaged Property.”
SUBJECT,
however, the condition that the Lender shall not be liable in any respect for
the performance of any covenant or obligation of the Mortgagor in respect of the
Mortgaged Property.
The
Mortgaged Property is to remain so specially mortgaged, affected and
hypothecated unto and in favor of Lender until the full and final payment or
discharge of the Indebtedness, and Mortgagor is herein and hereby bound and
obligated not to sell or alienate the Mortgaged Property to the prejudice of
this act.
(b)
In the event that the Mortgagor acquires (by operation of law or otherwise)
additional undivided interests in some or all of the Mineral Properties, this
Mortgage shall automatically encumber such additions or increases to the
Mortgagor’s interest in the Mineral Properties without need of further act or
document. Further, in the event the Mortgagor becomes the owner of an interest
in any part of the land described either in Exhibit A or in the documents
described in Exhibit A or otherwise subject to or covered by the Mineral
Properties, this Mortgage shall automatically encumber such ownership interest
of the Mortgagor without need of further act or document.
Section
2.2 The Security Interests. In order to secure the full and punctual payment and
performance of all present and future Indebtedness, the Mortgagor hereby grants
to the Lender a continuing security interest in and to all right, title and
interest of the Mortgagor in, to and under the following property, whether now
owned or existing or hereafter acquired or arising and regardless of where
located:
(1)
the Mineral Properties;
(2)
the Accounts;
(3)
the Hydrocarbons, together with all liens and security interests securing
payment of the proceeds of the Hydrocarbons, including, but not limited to,
those liens and security interests provided for under (i) statutes, rules,
orders or regulations enacted in the jurisdictions in which the Mortgaged
Properties are located, or (ii) statutes, rules, orders or regulations made
applicable to the Mortgaged Properties under federal law (or some combination of
federal and state law);
(4)
the Equipment;
(5)
the General Intangibles (including the Contracts);
(6)
the Collateral Account, all cash deposited therein from time to time, and other
monies and property of any kind of the Mortgagor in the possession or under the
control ofthe Lender;
(7)
the Instruments;
(8)
the Inventory;
(9)
the Investment Property;
(10)
all engineering, seismic, reserve, production, accounting, title and legal data,
reports and information and all books and records in any form (including,
without limitation, customer lists, credit files, computer programs, tapes,
disks, punch cards, data processing software, transaction files, master files,
printouts and other computer materials and records) of the Mortgagor pertaining
to any of the Mineral Properties or Collateral; and
(11)
all Proceeds and products of all or any of the Collateral described in clauses 1
through 10 hereof.
The
term “Collateral” means each and all of the items and property rights described
in clauses 1-11 above, together with the Mortgaged Property and the Proceeds Of
Runs.
Section
2.3 Assignment. (a) To further secure the full and punctual payment and
performance of all present and future Indebtedness, up to the maximum amount
outstanding at any time and from time to time set forth in Section 2.5 (“Maximum
Amount”) below, the
10
Mortgagor
does hereby absolutely, irrevocably and unconditionally pledge, pawn, assign,
transfer and assign to the Lender:
(i)
all Hydrocarbons and all monies which accrue to the Mortgagor’s interest in the
Mineral Properties (regardless of whether such monies accrued, and/or the events
which give rise to such accrual occurred, on or before or after the date hereof)
and all present and future rents therefrom (which rents include without
limitation all royalties, delay rentals, shut-in payments and other payments
which are rentals under Title 31 of the Louisiana Revised Statutes) and all
proceeds of the Hydrocarbons (which proceeds include without limitation all
payments for Hydrocarbons not yet delivered, such as those received pursuant to
“take or pay” arrangements) and of the products obtained, produced or processed
from or attributable to the Mineral Properties now or hereafter (herein
collectively referred to as the “Production Proceeds”) and
(ii)
all other monies which accrue to Mortgagor’s interest in the Mineral Properties,
and all present and future rents therefrom, which rents include, without
limitation, all royalties, delay rentals, shut-in payments and similar payments
(herein collectively called the “Other Proceeds”).
The
Mortgagor hereby authorizes and directs all purchasers of any Hydrocarbons and
all other obligors of Production Proceeds and Other Proceeds (herein
collectively called “Proceeds of Runs”) to pay and deliver to Lender, upon
request therefor by Lender, all of the Proceeds of Runs accruing to the
Mortgagor’s interest without further inquiry as to the rights ofthe Lender to
receive the same. The Mortgagor agrees that such obligors shall have no
responsibility to see to the application of any funds so paid to
Lender.
(b)
Mortgagor constitutes and appoints Lender as Mortgagor’s special
attorney-in-fact (with full power of substitution, either generally or for such
periods or purposes as Lender may from time to time prescribe) in the name,
place and stead of Mortgagor to do any and every act and exercise any and every
power that Mortgagor might or could do or exercise personally with respect to
all Hydrocarbons and Proceeds of Runs (the same having been assigned by
Mortgagor to Lender pursuant to Section 2.3(a) hereof), expressly inclusive, but
not limited to, the right, power and authority to:
(1)
execute and deliver in the name of Mortgagor any and all transfer orders,
division orders, letters in lieu of transfer orders, indemnifications,
certificates and other instruments of every nature that may be requested or
required by any purchaser of Hydrocarbons from any of the Mortgaged Properties
for the purposes of effectuating payment of the Production Proceeds to Lender or
which Lender may otherwise deem necessary or appropriate to effect the intent
and purposes ofthe assignment contained in Section 2.3(a); and
(2)
if under any product sales agreements other than division orders or transfer
orders, any Production Proceeds are required to be paid by the purchaser to
Mortgagor so that under such existing agreements payment cannot be made of such
Production Proceeds to
Lender,
to make, execute and enter into such sales agreements or other agreements as are
necessary to direct Production Proceeds to be payable to Lender;
giving
and granting unto said attorney-in-fact full power and authority to do and
perform any and every act and thing whatsoever necessary and requisite to be
done as fully and to all intents and purposes, as Mortgagor might or could do if
personally present. Mortgagor shall be bound thereby as fully and effectively as
if Mortgagor had personally executed, acknowledged and delivered any of the
foregoing certificates or documents. The powers and authorities herein conferred
upon Lender may be exercised by Lender through any person who, at the time of
the execution of the particular instrument, is an officer of Lender. The power
of attorney herein conferred is granted for valuable consideration and hence is
coupled with an interest and is irrevocable so long as the Indebtedness, or any
part thereof, shall remain unpaid. All persons dealing with Lender or any
substitute shall be fully protected in treating the powers and authorities
conferred by this paragraph as continuing in full force and effect until advised
by Lender that all the Indebtedness is fully and finally paid. Lender may, but
shall not be obligated to, take such action as it deems appropriate in an effort
to collect the Production Proceeds and any reasonable expenses (including
reasonable attorney’s fees) so incurred by Lender shall be a demand obligation
of Mortgagor (which obligation the Mortgagor expressly promises to pay) owing by
the Mortgagor to Lender and shall bear interest, from the date expended until
paid, at the rate described in Section 4.8 (“Advances by Lender”)
hereof.
(c)
Anything contained in this Section 2.3 above notwithstanding, so long as
Mortgagor is not in Default, Lender shall have no right to collect and receive
any Proceeds of Revenue from any obligator or purchaser.
Section
2.4 Condemnation. The Mortgagor hereby assigns to the Lender any and all awards
that may be given or made in any proceedings by any legally constituted
authority to condemn or expropriate the Collateral, or any part thereof, under
power of eminent domain, and if there is such a condemnation or expropriation
and Mortgagor is in Default, the Lender may, at its election, either pay the net
proceeds thereof toward the payment ofthe Indebtedness or pay the net proceeds
thereof to the Mortgagor, provided, that so long as Mortgagor is not in Default,
Lender shall have no right to the proceeds of any condemnation or
expropriation.
Section
2.5 Maximum Amount. (a) The maximum amount of the Indebtedness that may be
outstanding at any time and from time to time that this Mortgage secures,
including without limitation as a mortgage and as a collateral assignment, and
including any Advances made and included within the Indebtedness, is twenty
million ($20,000,000.00) dollars.
(b)
The Mortgagor acknowledges that this Mortgage secures all Indebtedness under or
pursuant to the Loan Agreement, the Note, this Mortgage or the other Collateral
Documents, whether such loans or advances made or incurred by the Lender are
optional or obligatory by the Lender. This Mortgage is and shall remain
effective, even though the amount of the Indebtedness may now be zero or may
later be reduced to zero, until all of the amounts,
12
liabilities
and obligations, present and future, comprising the Indebtedness have been
incurred and are extinguished. When no Indebtedness secured by this Mortgage
exists and the Lender is not bound to permit any Indebtedness to be incurred,
this Mortgage may be terminated by the Mortgagor upon thirty (30) days prior
written notice sent by the Mortgagor to the Lender in accordance with the
provisions of this Mortgage, and Lender shall provide Mortgagor with written,
recordable, evidence of termination within said thirty (30) day
period.
Section
2.6 Delivery of Transfer Orders. Independent of the other provisions and
authorities herein granted, the Mortgagor agrees to execute and deliver any and
all transfer orders, letters in lieu thereof division orders and other
instruments that may be requested by Lender or that may be required by any
purchaser of any Hydrocarbons for the purpose of effectuating payment of the
Proceeds of Runs to Lender to the extent that said Proceeds are payable to
Lender under the terms of this Mortgage. If under any existing sales agreements,
other than division orders or transfer orders, any Proceeds of Runs are required
to be paid by the purchaser to the Mortgagor so that under such existing
agreements payment cannot be made of such Proceeds of Runs to Lender, the
Mortgagor’s interest in all Proceeds of Runs under such sales agreements and in
all other Proceeds of Runs which for any reason may be paid to the Mortgagor
shall, when received by the Mortgagor, constitute trust funds in the Mortgagor’s
hands and shall be immediately paid over to Lender.
Section
2.7 Change of Purchaser. If Lender is entitled to Proceeds of Runs under terms
of this Mortgage, should any Person now or hereafter purchasing or taking
Hydrocarbons fail to make payment to Lender of the Proceeds of Runs within 30
days of when due, Lender shall have the right to make, or to require the
Mortgagor to make, a change of connection and the right to designate or approve
the purchaser with whose facilities a new connection shall be made, and Lender
shall have no liability or responsibility in connection therewith so long as
ordinary care is used in making such designation.
Section
2.8 Payment of Proceeds. Until such time as Lender is entitled to receive
Proceeds of Runs under the terms of this Mortgage, the purchasers or other
Persons obligated to make such payment shall continue to make payment to the
Mortgagor. Should Lender become entitled to receive payment of the Proceeds of
Runs, Lender shall make written demand upon said Purchaser that payment be made
direct to the Lender. Said written demand shall recite that Mortgagor is in
Default. Any failure to notify such purchasers or other Persons shall not in any
way waive, remit or release the right of the Lender to receive any payments not
theretofore paid over to the Mortgagor before the giving of written notice. In
this regard, in the event payments are made direct to the Lender, and then, at
the request of the Lender payments are, for a period or periods of time, paid to
the Mortgagor, the Lender shall nevertheless have the right, effective upon
written notice, to require future payments be again made to it.
Section
2.9 Limitation of Liability. The Lender and its successors and assigns are
hereby absolved from all liability for failure to enforce collection of the
Proceeds of Runs and from all other responsibility in connection therewith,
except the responsibility of each to account (by application upon the
Indebtedness or otherwise) to the Mortgagor for funds actually
13
received.
The Mortgagor agrees to indemnify and hold harmless Lender against any and all
liabilities, actions, claims, judgments, costs, charges and attorneys’ fees by
reason of the assertion that such parties received, either before or after
payment and performance in full of the Indebtedness, funds from the production
of Hydrocarbons or the Proceeds of Runs claimed by third persons (and/or funds
attributable to sales of production which (i) were made at prices in excess of
the maximum price permitted by or (ii) were otherwise made in violation of laws,
rules, regulations and/or orders governing such sales), and the Lender shall
have the right to defend against any such claims or actions, employing attorneys
of Lender’s own selection and if not furnished with indemnity satisfactory to
them, the Lender shall have the right to compromise and adjust any such claims,
actions and judgments, and in addition to the rights to be indemnified as herein
provided, all amounts paid by the Lender in compromise, satisfaction or
discharge of any such claims, actions or judgments, and all court costs,
attorneys’ fees and other expenses of every character expended by the Lender
pursuant to the provisions of this Section shall be a demand obligation (which
obligation the Mortgagor hereby expressly promises to pay) owing by the
Mortgagor to such parties and shall bear interest, from the date expended until
paid, at the rate described in Section 4.8 (“Advances by Lender”) hereof.
WITHOUT LIMITATION, IT IS THE INTENTION OF MORTGAGOR AND MORTGAGOR AGREES THAT
THE FOREGOING RELEASES AND INDEMNITIES SHALL APPLY TO EACH INDEMNIFIED PARTY
WITH RESPECT TO ALL CLAIMS, DEMANDS, LIABILITIES, LOSSES, DAMAGES (INCLUDING
WITHOUT LIMITATION CONSEQUENTIAL DAMAGES, CAUSES OF ACTION, JUDGMENTS,
PENALTIES, COSTS AND EXPENSES AND FURTHER INCLUDING WITHOUT LIMITATION
REASONABLE ATTORNEYS’ FEES AND EXPENSES, WHICH IN WHOLE OR IN PART ARE CAUSED BY
OR ARISE OUT OF STRICT LIABILITY OR OUT OF THE NEGLIGENCE OF SUCH (AND/OR ANY
OTHER) INDEMNIFIED PARTY. However, such indemnities and releases shall not apply
to any particular indemnified party (but shall apply to the other indemnified
parties) to the extent the subject of the indemnification is caused by or arises
out of the gross negligence or willful misconduct of such particular indemnified
party.
Section
2.10 Duty to Perform. Nothing herein contained shall detract from or limit the
obligation of the Mortgagor to make prompt payment of the Indebtedness at the
time and in the manner provided herein and in the Loan Agreement, regardless of
whether the Proceeds of Runs herein assigned are sufficient to pay same. The
Mortgagor will do and perform every act required of it by this Mortgage at the
time or times and in the manner specified.
Section
2.11 Limitation of Liability. The foregoing mortgage Liens and Security
Interests are granted as security only and shall not subject the Lender to, or
transfer or in any way affect or modify, any obligation or liability of the
Mortgagor with respect to any of the Collateral or any transaction in connection
therewith.
ARTICLE
3
REPRESENTATIONS
AND WARRANTIES
14
The
Mortgagor represents and warrants to the Lender that:
Section
3.1 Title. The Collateral (including without limitation the Mineral Properties)
is accurately, completely, adequately and sufficiently described herein and in
Exhibit A as required by all applicable laws for this Mortgage to create a Lien
on all of the Collateral. The execution, delivery and performance of this
Mortgage and the creation of the liens hereunder do not violate any provision of
or constitute a default under any operating agreement or other instrument
affecting or comprising any of the Collateral or to which the Mortgagor is a
party. The Mortgagor represents and warrants to the Lender that (a) the Mineral
Properties described in Exhibit A hereto are valid, subsisting leases and
contracts, in full force and effect, (b) all producing wells located on the
lands described in Exhibit A have been drilled, operated and produced in
conformity with all applicable laws, rules and regulations of all regulatory
authorities having jurisdiction, and are subject to no penalties on account of
past production, and that such wells are in fact bottomed under and are
producing from, and the well bores are wholly within, lands described in Exhibit
A (or in the case of wells located on properties unitized therewith, such
unitized properties), (c) the Mortgagor, to the extent of the interest specified
in Exhibit A, has legal, valid and defensible title to each property right or
interest constituting the Mineral Properties, subject to exceptions permitted by
Section 6.2 of the Loan Agreement, and the respective operating interests and
net revenue interests of the Mortgagor in and to the Hydrocarbons as set forth
on Exhibit A hereto, and the Mortgagor’s percentage interests in the Mineral
Properties, cash flow, net income and other distributions and in the cost of
exploration, development and production, all as set forth in Exhibit A hereto,
are true and correct in all material respects and accurately reflect the
respective interests to which the Mortgagor is legally obligated or entitled,
(d) the Mortgagor is not obligated, by virtue of any prepayment under any
contract providing for the sale by the Mortgagor of Hydrocarbons which contains
a “take or pay” clause or under any similar arrangement, to deliver Hydrocarbons
at some future time without then or thereafter receiving full payment therefor,
and (e) no agreement, contract or instrument set forth in Exhibit A or Exhibit B
contains any provision which would prevent the practical realization of the
benefits of this Mortgage as to the Collateral. With respect to all wells
existing on the date hereof, such shares of production and expenses are not
subject to change (pursuant to non-consent provisions of operating agreements
described in Exhibit A or Exhibit B or otherwise) except, and only to the extent
that, such changes are expressly described in Exhibit A. The Mortgagor will
warrant and forever defend the Collateral unto the Lender against every person
whomsoever lawfully claiming the same or any part thereof except persons
claiming under encumbrances of record permitted by Section 6.2 of the Loan
Agreement, and will maintain and preserve the Lien hereby created so long as any
of the Indebtedness remains unpaid.
Section
3.2 Rents, Royalties. All rents, royalties and other payments (except for those
which are being contested in good faith and by appropriate proceedings and for
which the Mortgagor has established adequate reserves and so long as the payment
of same is not a condition to be met in order to maintain an oil, gas and/or
other mineral lease or other agreement in force) due and payable under the
Mineral Properties which are productive of oil and/or gas (or are included in
units productive of oil and/or gas) and all other oil, gas and/or mineral
leases,
15
contracts
and other agreements forming a part of the Mortgaged Property, have been and are
being properly and timely paid, and the Mortgagor is not in default with respect
to any obligations (and the Mortgagor is not aware of any default by any third
party with respect to such third party’s obligations) under such leases,
contracts and other agreements, or otherwise attendant to the ownership or
operation of the Collateral, where such default could adversely affect the
ownership or operation of the Collateral to which such obligations relate. The
Mortgagor is not currently accounting (and does not anticipate accounting) for
any royalties, or overriding royalties or other payments out of production, on a
basis (other than delivery in kind) where such payments are based other than on
proceeds received by Mortgagor from sale; the Mortgagor has advised the Lender
in writing of situations, if any, where a contingent liability to so account may
exist.
Section
3.3 No Limitations on Payments for Production. Except as otherwise specifically
disclosed to the Lender in writing with respect to any particular part of the
Mineral Properties, (i) neither Mortgagor, nor its predecessors in title, have
received prepayments (including, but not limited to, payments for gas not taken
pursuant to “take or pay” arrangements) for any Hydrocarbons produced or to be
produced from the Mineral Properties after the date hereof; (ii) none of the
Mineral Properties is subject to any contractual or other arrangement whereby
payment for production is to be deferred for a substantial period after the
month in which such production is delivered (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); (iii) none of the Mineral Properties is subject to any contractual, or
other, arrangement for the sale of crude oil which cannot be cancelled on ninety
(90) days (or less) notice, and none of the Mineral Properties is subject to a
gas sales contract which contains terms which are not customary in the industry;
(iv) none of the Mineral Properties is subject at the present time to any
regulatory refund obligation and, to the best of Mortgagor’s knowledge, no facts
exist which might cause the same to be imposed; (v) none of the Mineral
Properties is subject to an arrangement or agreement under which any purchaser
or other Person is entitled to “make-up” or otherwise receive deliveries of
Hydrocarbons at any time after the date hereof without paying at such time the
full contract price therefor; and (vi) no Person is entitled to receive any
portion of the interest of the Mortgagor in any Hydrocarbons or to receive cash
or other payments from the Mortgagor to “balance” any disproportionate
allocation of Hydrocarbons under any operating agreement, gas balancing and
storage agreement, gas processing or dehydration agreement, or other similar
agreements.
Section
3.4 Pricing. The prices being received for the production of Hydrocarbons do not
violate any Contract, law or regulation. Where applicable, all of the wells
located
on the Mineral Properties and production of Hydrocarbons therefrom have been
properly classified under appropriate governmental regulations.
Section
3.5
Consents
and Preferential Rights. There are no preferential purchase rights held by third
parties affecting any part of the Collateral, or rights of third parties to
prohibit the pledge or mortgage to Lender of any part of the Collateral without
the consent of such third parties.
Section
3.6 No Inconsistent Agreements. The Mortgagor has not performed any acts or
signed any agreements which might prevent the Lender from enforcing any of the
terms of this Mortgage or which would limit the Lender in any such
enforcement.
Section
3.7 Status of Contracts. All material Contracts in effect on the date hereof are
specifically listed or Exhibit A or Exhibit B hereof. All of the Contracts and
obligations of the Mortgagor that relate to the Mineral Properties (i) are in
full force and effect and constitute legal, valid and binding obligations of the
Mortgagor, and (ii) neither the Mortgagor nor, to the knowledge of the
Mortgagor, any other party to the Contracts (a) is in breach of or default, or
with the lapse of time or the giving of notice, or both, would be in breach or
default, with respect to any of its obligations thereunder or (b) has given or
threatened to give notice of any default under or inquiry into any possible
default under, or action to alter, terminate, rescind or procure a judicial
reformation of any Contract.
Section
3.8 Accounts. The Accounts represent bona fide obligations of the respective
account debtors, which obligations are free and clear of any set off,
compensation, counterclaim, defense, allowance or adjustment other than
discounts for prompt payment shown on the invoice, and arose in the ordinary
course of the Mortgagor’s business.
Section
3.9 Status of Equipment. To the best of the Mortgagor’s knowledge, the
Equipment, fixtures and other tangible personal property forming a part of the
Collateral are in good repair and condition and are adequate for the normal
operation of the Collateral in accordance with prudent industry standards; all
of such Collateral is located on the Mineral Properties, except for that portion
thereof which is located elsewhere (including that usually located on the
Mineral Properties but now temporarily located elsewhere) in the course of the
normal operation of the Mineral Properties.
Section
3.10 UCC Information. The chief executive office of the Mortgagor has been
continuously located within the State of Texas from and after its formation.
Mortgagor was formed as a legal entity after July 1, 2001. The exact name of the
Mortgagor is set forth on the cover page of this Mortgage.
ARTICLE
4
COVENANTS
Section
4.1 Insurance and Notice. The Mortgagor will procure and maintain for the
benefit of the Lender original paid-up insurance policies against such
liabilities, casualties, risks and contingencies, in such amounts and form and
substance, with such financially sound and reputable companies, and with such
expiration dates, as are acceptable to the Lender, and containing a
non-contributory standard mortgagee clause or its equivalent in favor of the
Lender. The Mortgagor will at all times maintain costs of regaining control of
well insurance or similar insurance to the extent customary in the industry in
the pertinent area of operations. Each policy shall contain an agreement by the
insurer not to cancel or amend the policy without giving the Lender at least
thirty (30) days prior written notice of its intention to do
17
so.
Upon request of the Lender, the Mortgagor will furnish or cause to be furnished
to the Lender from time to time a summary of the insurance coverage of the
Mortgagor in form and substance satisfactory to the Lender and if requested will
furnish the Lender original certificates of insurance and/or copies of the
applicable policies and all renewals thereof. In the event the Mortgagor should,
for any reason whatsoever, fail to keep the corporeal (tangible) Collateral or
any part thereof so insured, or to keep said policies so payable, or fail to
deliver to the Lender the original or certified policies of insurance and the
renewals therefor upon demand, then the Lender, if it so elects, may itself have
such insurance effected in such amounts and with such companies as it may deem
proper and may pay the premiums therefor (as an Advance as defined hereinbelow).
The Mortgagor will notify the Lender immediately in writing of any material
blowout, fire or other casualty to or accident involving the Mortgaged Property,
the Equipment or the Hydrocarbons, whether or not such blowout, fire, casualty
or accident is covered by insurance. The Mortgagor will promptly further notify
the Mortgagor’s insurance company and to submit an appropriate claim and proof
of claim to the insurance company if such a casualty or accident occurs. In the
event of any loss on any of such policies while Mortgagor is in Default, the
Lender may, at its election, either apply the net proceeds thereof toward the
payment of the Indebtedness or pay the net proceeds thereof to the Mortgagor,
either wholly or in part, and under such conditions as the Lender may determine
to enable the Mortgagor to repair or restore the Collateral. So long as
Mortgagor is not in Default, the net proceeds of any loss on any insurance
policy shall be paid to Mortgagor to repair or restore the collateral or to pay
the Indebtedness at Mortgagor’s election.
Section
4.2 Operation of the Mortgaged Property. Whether or not the Mortgagor is the
operator of the Mortgaged Property, the Mortgagor will, at the Mortgagor’s own
expense, (a) do all things necessary to keep unimpaired the Mortgagor’s rights
in the Mortgaged Property (subject to any permitted abandonment provisions
hereinbelow), (b) cause the lands described in Exhibit A to be maintained,
developed, protected against drainage, and continuously operated for the
production of hydrocarbons in a good and workmanlike manner as would a prudent
operator, and in accordance with generally accepted practices in the field where
the Mortgaged Properties are located and applicable operating agreements, and
(c) cause to be paid, promptly as and when due and payable, all rentals and
royalties payable in respect of the Mortgaged Property, and all expenses
incurred in or arising from the operation or development of the Mortgaged
Property. The Mortgagor will observe and comply with all terms and provisions,
express or implied, of the Mineral Properties, and all agreements and contracts
of any type relating to the Mortgaged Property, in order to keep the same in
full force and effect, including, without limitation, maintenance of productive
capacity of each well or unit comprising the Mortgaged Property, and will not,
without the prior written consent of the Lender, surrender, abandon or release
(or otherwise reduce its rights under) any such lease, in whole or in part, so
long as any well situated thereon (whether or not such well is located on the
Mineral Properties), or located on any unit containing all or any part of such
leases, is capable (or is subject to being made capable through drilling,
reworking or other operations which it would be economically feasible to
conduct) of producing hydrocarbons in commercial quantities (as determined
without considering the effect of this Mortgage but considering the cost of such
drilling, reworking and other operations); provided, however, that the Mortgagor
may, to the extent expressly required
18
by
the terms of any such lease under a “Pugh clause” or similar provision, or to
the extent otherwise required by law, confirm to the lessor thereof that the
lease has by its terms terminated as to any specified portion thereof on which
no such well exists. Without the express prior written consent of the Lender,
Mortgagor will not abandon or consent to the abandonment of any well producing
from the Mortgaged Property (or properties unitized therewith) so long as such
well is capable (or is subject to being made capable through drilling, reworking
or other operations which it would be commercially feasible to conduct) of
producing hydrocarbons in commercial quantities (as determined without
considering the effect of this Mortgage but considering the cost of such
drilling, reworking and other operations). The Mortgagor will not without the
express prior written consent of the Lender elect not to participate in a
proposed operation on the Mortgaged Property where the effects of such election
would be the forfeiture either temporarily (i.e., until a certain sum of money
is received out of the forfeited interest) or permanently of any interest in the
Mortgaged Property.
Section
4.3 Pooling and Unitization. The Mortgagor has the right, and is hereby
authorized, to pooi or unitize all or any part of any tract of land described in
Exhibit A, insofar as relates to the Mortgaged Property, with adjacent lands,
leaseholds and other interests, when, in the reasonable judgment of the
Mortgagor, it is necessary or advisable to do so in order to form a drilling
unit to facilitate the orderly development of that part of the Mortgaged
Property affected thereby, or to comply with the requirements of any law or
governmental order or regulation relating to the spacing of wells or proration
of the production therefrom; provided, however, that the Hydrocarbons produced
from any unit so formed shall be allocated among the separately owned tracts or
interests comprising the unit in proportion to the respective surface areas
thereof; and provided further that the Mortgagor is not be entitled to form any
such unit without the written consent of the Lender (which consent shall not be
unreasonably withheld) if the effect of such formation would be to decrease the
amount of Hydrocarbons which would be subject to this Mortgage. Any unit so
formed may relate to one or more zones or horizons, and a unit formed for a
particular zone or horizon need not conform in area to any other unit relating
to a different zone or horizon, and a unit formed for the production of oil need
not conform in area with any unit formed for the production of gas. Immediately
after formation of any such unit, the Mortgagor shall furnish to the Lender a
true copy of the pooling agreement, declaration of pooling or other instrument
creating such unit, in such number of counterparts as the Lender may reasonably
request. The interest in any such unit attributable to the Mortgaged Property
(or any part thereof) included therein shall become a part of the Mortgaged
Property and shall be subject to the Lien hereof in the same manner and with the
same effect as though such unit and the interest of the Mortgagor therein were
specifically described in Exhibit A. The Mortgagor may enter into pooling or
unitization agreements not hereinabove authorized only with the prior written
consent of the Lender.
Section
4.4 Contracts. The Mortgagor will not enter into any operating agreement or
other Contract which materially adversely affects the Collateral or the Mineral
Properties, or which is not in the ordinary course of business. The Mortgagor
will promptly take all action necessary to enforce or secure the observance or
performance of any term, covenant, agreement or condition to be observed or
performed by third parties under any Contract, or any
19
part
thereof, or to exercise any of its rights, remedies, powers and privileges under
any Contract, all in accordance with the respective terms thereof The Mortgagor
will not do or permit anything to be done to the Collateral that may violate the
terms of any insurance covering the Collateral or any part thereof
Section
4.5
Filing.
The Mortgagor agrees that a carbon, photographic, facsimile, photostatic or
other reproduction of this Mortgage or of a financing statement is sufficient as
a financing statement. This Mortgage may be effective as a financing statement
filed as a fixture filing with respect to all fixtures included within the
Collateral, and shall also be effective as the financing statement covering as
extracted collateral and minerals or the like (including oil and gas) and other
substances of value that may be extracted or severed from the earth and accounts
related thereto. The mailing address of the Mortgagor and the address of the
Lender from which information concerning the Security Interests evidenced
hereunder may be obtained are the respective addresses of the Mortgagor and the
Lender set forth in Article 6. The Mortgagor shall pay all costs of or
incidental to the recording or filing this Mortgage and of any financing,
amendment, continuation, termination or other statements concerning the
Collateral.
Section
4.6 Collateral Indemnity. If the validity or priority of this Mortgage or any
rights, security interests or other interests created or evidenced hereby shall
be attacked, endangered or questioned or if any legal proceedings are instituted
with respect thereto, the Mortgagor will give prompt written notice thereof to
the Lender and at the Mortgagor’s own cost and expense will take commercially
reasonable steps to cure any defect that may be developed or claimed, and to
defend such legal proceedings, and the Lender (whether or not named as a party
to legal proceedings with respect thereto) is hereby authorized and empowered to
take such additional steps as are commercially reasonable for the defense of any
such legal proceedings or the protection of the validity or priority of this
Mortgage and the rights, security interests and other interests created or
evidenced hereby, and all reasonable expenses so incurred shall be considered
Advances as provided in Section 4.8 (“Advances by Lender”) hereof, and shall be
a part of the Indebtedness.
Section
4.7 Taxation of Mortgage. In the event that any governmental authority shall
impose any taxation of mortgages or the indebtedness they secure, the Mortgagor
agrees to pay such governmental taxes, assessments or charges either to the
governmental authority or to the Lender, as provided by law.
Section
4.8 Advances by Lender. Should the Mortgagor fail to pay same within ten (10)
business days of written demand, the Mortgagor authorizes the Lender in the
Lender’s discretion to advance any sums necessary for the purpose of paying (i)
insurance premiums, (ii) taxes, forced contributions, service charges, local
assessments and governmental charges, (iii) any Liens or encumbrances affecting
the Collateral (whether superior or subordinate to the Lien of this Mortgage)
not permitted by this Mortgage or the Loan Agreement, (iv) necessary repairs and
maintenance expenses or (v) any other amounts which are covered by the Loan
Agreement or which the Lender deems necessary and appropriate to preserve the
validity and ranking of this Mortgage, to cure any Defaults or to prevent the
occurrence of any
Default,
or otherwise authorized by this Mortgage (collectively, the “Advances”) of
whatever kind; provided, however, that nothing herein contained shall be
construed as making such Advances obligatory upon Lender, or as making Lender
liable for any loss, damage, or injury resulting from the nonpayment thereof The
Mortgagor covenants and agrees that within five (5) days after demand therefor
by the Lender, the Mortgagor will repay the Advances to the Lender, together
with interest thereon at the rate provided in the Loan Agreement and the Note
from the date incurred. All such Advances (and interest) shall be included in
the Indebtedness secured hereby, subject to the maximum amount of the
Indebtedness set forth above in Section 2.5
(“Maximum
Amount”).
ARTICLE
5
DEFAULT
AND REMEDIES
Section
5.1 Events of Default. Any of the following events shall be considered an “Event
of Default” as that term is used herein:
(a)
Principal and Interest Payments. The Borrower fails to make payment when due of
any principal or interest installment on the Note or any other Indebtedness to
the Lender.
(b)
Loan Agreement. The occurrence of an Event of Default as defined in the Loan
Agreement.
Section
5.2 Remedies. (a) Upon the occurrence of any Event of Default, the Lender may
take such action, without notice or demand, as it deems advisable to protect and
enforce its rights against the Mortgagor and in and to the Collateral,
including, but not limited to, the following actions, each of which may be
pursued concurrently or otherwise, at such time and in such order as the Lender
may determine, in its sole discretion, without impairing or otherwise affecting
the other rights and remedies of the Lender: (i) institute proceedings for the
complete foreclosure of this Mortgage in which case the Collateral or any part
thereof may be sold for cash or upon credit in one or more portions; or (ii) to
the extent permitted and pursuant to the procedures provided by applicable law,
institute proceedings for the partial foreclosure of this Mortgage for the
portion of the Indebtedness then due and payable, subject to the continuing Lien
of this Mortgage for the balance of the Indebtedness not then due; or (iii)
institute an action, suit or proceeding in equity for the specific performance
of any covenant, condition or agreement contained in this Mortgage or the Loan
Agreement; or (iv) recover judgment on the Note either before, during or after
any proceedings for the enforcement of this Mortgage; or (v) apply for the
appointment of a trustee, receiver, liquidator or conservator of the Collateral,
without regard for the adequacy of the security for the Indebtedness and without
regard for the solvency of the Mortgagor or of any person, firm or other entity
liable for the payment of the Indebtedness; or (vi) pursue such other remedies
as the Lender may have under applicable law.
(b)
The proceeds or avails of any sale made under or by virtue of this Section,
together with any other sums which then may be held by the Lender under this
Mortgage,
whether
under the provisions of this Section or otherwise, shall be applied to the
Indebtedness in such manner as the Lender, in its sole discretion, shall
determine.
(c)
Upon any sale made under or by virtue of this Section, the Lender may bid for
and acquire the Collateral or any part thereof and in lieu of paying cash
therefor may make settlement for the purchase price by crediting upon the
Indebtedness the net sales price after deducting therefrom the expenses of the
sale and the costs of the action and any other sums which the Lender is
authorized to deduct under this Mortgage.
Section
5.3 Collateral Account. Upon an Event of Default the Lender shall have the right
to require the Mortgagor to use a lockbox account (the “Collateral Account”) at
a bank selected by Lender. Upon an Event of Default the Collateral Account shall
be subject to access and withdrawal by the Lender only. Payments due and payable
on the Note may be debited from the Collateral Account. Upon an Event of Default
payments (in the form of checks, drafts, cash or otherwise) received by the
Mortgagor (and not paid directly to Lender) in satisfaction, in whole or in
part, of any Proceeds of Runs, Accounts or General Intangibles (or Proceeds
therefrom) of the Mortgagor shall be deposited by the Mortgagor in the
Collateral Account. The Mortgagor will deposit for credit to the Collateral
Account all such items of payment and remittances within two (2) business days
of the receipt thereof, and shall not commingle any such items of payment and
remittances with any of the Mortgagor’s other property. Funds in the Collateral
Account shall be subject to a security interest in favor of the Lender to secure
the Indebtedness, and the Lender may apply or cause to be applied (subject to
collection) any or all of the balance from time to time standing in the
Collateral Account against any amounts then due and payable under the
Indebtedness in such order as determined by the Lender.
Section
5.4 General Authority. The Mortgagor hereby irrevocably appoints the Lender its
agent and attorney in fact, with full power of substitution, in the name of the
Mortgagor or the Lender, for the sole use and benefit of the Lender, but at the
Mortgagor’s expense, to exercise, at any time and from time to time while an
Event of Default has occurred and is continuing, all or any of the following
powers with respect to all or any of the Collateral:
(i)
to endorse the name of the Mortgagor upon any check, draft or other instrument
payable to the Mortgagor evidencing payment upon any Accounts or General
Intangible,
(ii)
to notify postal service authorities to change the address for delivery of the
assigned payments of Collateral to a “lockbox” address designated and controlled
by the Lender, and to receive, open and dispose of assigned payments of
Collateral addressed to the Mortgagor,
(iii)
to demand, sue for, collect, receive and give acquittance for any and all
Accounts and other monies due or to become due for or as Collateral or by virtue
thereof,
(iv)
to settle, compromise, compound, prosecute or defend any action or proceeding
with respect to any of the Collateral, and
(v)
to extend the time of payment of any or all of the Collateral and to make any
allowance and other adjustments with reference thereto.
The
aforesaid mandate and power of attorney, being coupled with an interest, is
irrevocable so long as any of the Indebtedness remain outstanding.
Section
5.5 Accounts and Contracts. While an Event of Default has occurred and is
continuing, (i) the Mortgagor will make no material change to the terms of any
Account or Contract without the prior written permission of the Lender, and (ii)
the Mortgagor upon request of the Lender will promptly notify (and the Mortgagor
hereby authorizes the Lender so to notify) each account debtor in respect of any
Account or General Intangible that such Collateral has been assigned to the
Lender hereunder, and that any payments due or to become due in respect of such
Collateral are to be made directly to the Lender or its designee.
Section
5.6 Sale. Upon the occurrence of an Event of Default, the Lender may exercise
all rights of a secured party under the UCC and other applicable law (including
the Uniform Commercial Code as in effect in another applicable jurisdiction)
and, in addition, the Lender may, without being required to give any notice,
except as herein provided or as may be required by mandatory provisions of law,
(i) withdraw all cash in the Collateral Account and apply such cash and other
cash, if any, then held by it as Collateral against the Indebtedness or (ii)
sell the Collateral or any part thereof at public or private sale, for cash,
upon credit or for future delivery, and at such price or prices as the Lender
may deem satisfactory. The Lender may be the purchaser of any or all of the
Collateral so sold at any public sale (or, if the Collateral is of a type
customarily sold in a recognized market or is of a type which is the subject of
widely distributed standard price quotations, at any private sale). The
Mortgagor will execute and deliver such documents and take such other action as
the Lender deems necessary or advisable in order that any such sale may be made
in compliance with law. Upon any such sale the Lender shall have the right to
deliver, assign and transfer to the purchaser thereof the Collateral so sold.
Each purchaser at any such sale shall hold the Collateral so sold to it
absolutely and free from any claim or right of whatsoever kind, including any
equity or right of redemption of the Mortgagor which may be waived, and the
Mortgagor, to the extent permitted by law, hereby specifically waives all rights
of redemption, stay or appraisal which it has or may have under any law now
existing or hereafter adopted. The Mortgagor agrees that ten (10) days prior
written notice of the time and place of any sale or other intended disposition
of any of the Collateral constitutes “reasonable notification” within the
meaning of the UCC, except that shorter or no notice shall be reasonable as to
any Collateral which is perishable or threatens to decline speedily in value or
is of a type customarily sold on a recognized market. The notice (if any) of
such sale shall (1) in case of a public sale, state the time and place fixed for
such sale, and (2) in the case of a private sale, state the day after which such
sale may be consummated. Any such public sale shall be held at such time or
times within ordinary business hours and at such place or places as
23
the
Lender may fix in the notice of such sale. At any such sale the Collateral may
be sold in one lot as an entirety or in separate parcels, as the Lender may
determine. The Lender shall not be obligated to make any such sale pursuant to
any such notice. The Lender may, without notice or publication, adjourn any
public or private sale or cause the same to be adjourned from time to time by
announcement at the time and place fixed for the sale, and such sale may be made
at any time or place to which the same may be so adjourned. In case of any sale
of all or any part of the Collateral on credit or for future delivery, the
Collateral so sold may be retained by the Lender until the selling price is paid
by the purchaser thereof, but the Lender shall not incur any liability in case
of the failure of such purchaser to take up and pay for the Collateral so sold
and, in case of any such failure, such Collateral may again be sold upon like
notice.
Section
5.7 Set-Off. Upon the occurrence of any Event of Default, the Lender shall have
the right to set-off any funds of the Mortgagor in the possession of the Lender
against any amounts then due by the Mortgagor to the Lender pursuant to the
Mortgage.
Section
5.8 Confession of Judgment. For purposes of foreclosure under Louisiana
executory process procedures, the Mortgagor hereby acknowledges the Indebtedness
and confesses judgment in favor of Lender for the full amount of the
Indebtedness.
Section
5.9 Expenses. The Mortgagor will pay all reasonable expenses, including but not
limited to reasonable attorneys’ fees, incurred in connection with the full
protection and preservation of, and foreclosure, collection or other realization
of or on, the Collateral or this Mortgage, or in connection with the enforcement
of any of the Mortgagor’s obligations or the Lender’s rights and remedies set
forth herein, whether or not suit or any foreclosure proceedings are filed. All
insurance expenses and all expenses of protecting, storing, warehousing,
appraising, preparing for sale, handling, maintaining and shipping the
Collateral, any and all excise, property, sales, and use taxes imposed by any
federal, state or local authority on any of the Collateral, all expenses in
respect of periodic appraisals and inspections of the Collateral to the extent
the same may be requested from time to time, and all expenses in respect of the
sale or other disposition thereof shall be borne and paid by the Mortgagor. All
such expenses shall be treated as Advances as provided in Section 4.8 (“Advances
by Lender”) hereof and thus included in the Indebtedness secured
hereby.
Section
5.10 Keeper. In the event the Collateral, or any part thereof, is seized as an
incident to an action for the recognition or enforcement of this Mortgage by
executory process, ordinary process, sequestration, writ of fieri facias or
otherwise, the Mortgagor and the Lender agree that the court issuing any such
order shall, if petitioned for by Lender, direct the applicable sheriff to
appoint as a keeper of the Collateral, the Lender or any agent designated by
Lender or any person named by the Lender at the time such seizure is effected.
This designation is pursuant to Louisiana Revised Statutes 9:5131 through 5135
and 9:5136 through 5140.2, as the same may be amended, and Lender shall be
entitled to all the rights and benefits afforded thereunder. It is hereby agreed
that the keeper shall be entitled to receive as compensation, in excess of its
reasonable costs and expenses incurred in the administration or preservation of
the Collateral, an amount equal to two percent of the gross revenues of the
Collateral, which shall be
24
included
as Indebtedness secured by this Mortgage. The designation of keeper made herein
shall not be deemed to require Lender to provoke the appointment of such a
keeper.
Section
5.11 Waivers. The Mortgagor waives in favor of the Lender any and all homestead
exemptions and other exemptions of seizure or otherwise to which Mortgagor is or
may be entitled under the constitution and statutes of the State of Louisiana
insofar as the Collateral is concerned. The Mortgagor further waives: (a) the
benefit of appraisement as provided in Louisiana Code of Civil Procedure
Articles 2332, 2336, 2723 and 2724, and all other laws conferring the same; (b)
the demand and three days delay accorded by Louisiana Code of Civil Procedure
Article 2721; (c) the notice of seizure required by Louisiana Code of Civil
Procedure Articles 2293 and 2721; (d) the three days delay provided by Louisiana
Code of Civil Procedure Articles 2331 and 2722; and (e) the benefit of the other
provisions of Louisiana Code of Civil Procedure Articles 2331, 2722 and 2723,
not specifically mentioned above.
Section
5.12 Authentic Evidence. Any and all declarations of facts made by authentic act
before a notary public in the presence of two witnesses by a person declaring
that such facts lie within his knowledge, shall constitute authentic evidence of
such facts for the purpose of executory process. The Mortgagor specifically
agrees that such an affidavit by a representative of the Lender as to the
existence, amount, terms and maturity of the Indebtedness and of a default
thereunder shall constitute authentic evidence of such facts for the purpose of
executory process.
Section
5.13 Assemble Collateral. For the purpose of enforcing any and all rights and
remedies under this Mortgage the Lender may (i) require the Mortgagor to, and
the Mortgagor agrees that it will, at its expense and upon the request of the
Lender, forthwith assemble all or any part of the Collateral as directed by the
Lender and make it available at a place designated by the Lender which is, in
its opinion, reasonably convenient to the Lender and the Mortgagor, whether at
the premises of the Mortgagor or otherwise, and Lender shall be entitled to
specific performance of this obligation, (ii) to the extent permitted by
applicable law of this or any other state, enter, with or without process of law
and without breach of the peace, any premise where any of the Collateral is or
may be located, and without charge or liability to it seize and remove such
Collateral from such premises, (iii) have access to and use the Mortgagor’s
books and records relating to the Collateral, and (iv) prior to the disposition
of the Collateral, store or transfer it without charge in or by means of any
storage or transportation facility owned or leased by the Mortgagor, process,
repair or recondition it or otherwise prepare it for disposition in any manner
and to the extent the Lender deems appropriate and, in connection with such
preparation and disposition, use without charge any trademark, trade name,
copyright, patent or technical process used by the Mortgagor.
Section
5.14 Limitation on Duty of Lender. Beyond the exercise of reasonable care in the
custody thereof, the Lender shall have no duty as to any Collateral in its
possession or control or in the possession or control of any agent or bailee or
any income thereon. The Lender shall be deemed to have exercised reasonable care
in the custody of the Collateral in its possession if the Collateral is accorded
treatment substantially equal to that which it accords its
own
property, and shall not be liable or responsible for any loss or damage to any
of the Collateral, or for any diminution in the value thereof, by reason of the
act or omission of any warehouse man, carrier, forwarding agency, consignee or
other agent or bailee selected by the Lender in good faith.
Section
5.15
Appointment
of Agent. At any time or times, in order to comply with any legal requirement in
any jurisdiction, the Lender may appoint a bank or trust company or one or more
other Persons with such power and authority as may be necessary for the
effectual operation of the provisions hereof and may be specified in the
instrument of appointment.
ARTICLE
6
MISCELLANEOUS
Section
6.1 Notices. Any notice or demand which, by provision of this Mortgage,
is required or permitted to be given or served to the Mortgagor and the Lender
shall be deemed to have been sufficiently given and served for all purposes if
made in accordance with the Loan Agreement to the following
addresses:
|
If
to Mortgagor: |
NGS
Sub. Corp. |
|
820
Gessner, Suite 1340 | |
|
Houston,
Texas 77024 | |
|
Attention:
Robert S. Hlerlin | |
|
If
to Lender: |
Prospect
Energy Corporation |
|
10
East 40th
Street,
Suite 4400 | |
|
New
York, New York 10016 | |
|
Attention:
John Barry |
Section
6.2 Amendment. Neither this Mortgage nor any provisions hereof may be changed,
waived, discharged or terminated orally or in any manner other than by an
authentic instrument in writing signed by the party against whom enforcement of
the change, waiver, discharge or termination is sought.
Section
6.3 Invalidity. In the event that any one or more of the provisions contained in
this Mortgage shall, for any reason, be held invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Mortgage.
Section
6.4 Waivers. No course of dealing on the part of the Lender, its officers,
employees, consultants or agents, nor any failure or delay by the Lender with
respect to
26
exercising
any of its rights, powers or privileges under this Mortgage shall operate as a
waiver thereof
Section
6.5 Cumulative Rights. The rights and remedies of the Lender under this Mortgage
and the Collateral Documents 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.
Section
6.6 Titles of Articles, Sections and Subsections. All titles or headings to
articles, sections, subsections or other divisions of this Mortgage or the
exhibits hereto are only for the convenience of the parties and shall not be
construed to have any effect or meaning with respect to the other content of
such articles, sections, subsections or other divisions, such other content
being controlling as to the agreement between the parties hereto.
Section
6.7 Singular and Plural. Words used herein in the singular, where the context so
permits, shall be deemed to include the plural and vice versa. The definitions
of words in the singular herein shall apply to such words when used in the
plural where the context so permits and vice versa.
Section
6.8 Termination. Upon full and final payment and performance of the Indebtedness
and the termination of the Loan Agreement, this Mortgage shall terminate, and
the Lender shall pay to the Mortgagor all amounts then remaining in the
possession of the Lender from collections on or proceeds of the Collateral. Upon
request of the Mortgagor, the Lender shall execute and deliver to the Mortgagor
at the Mortgagor’s expense such termination statements as the Mortgagor may
reasonably request to evidence such termination.
Section
6.9 Successors and Assigns. (a) All covenants and agreements contained by or on
behalf of the Mortgagor in this Mortgage shall bind its successors and assigns
and shall inure to the benefit of the Lender and its successors and
assigns.
(b)
This Mortgage is for the benefit of the Lender and for such other Person or
Persons as may from time to time become or be the holders of any of the
Indebtedness, and this Mortgage shall be transferrable and negotiable, with the
same force and effect and to the same extent as the Indebtedness may be
transferrable, it being understood that, upon the transfer or assignment by the
Lender of any of the Indebtedness, the legal holder of such Indebtedness shall
have all of the rights granted to the Lender under this Mortgage. The Mortgagor
specifically agrees that upon any transfer of all or any portion of the
Indebtedness, this Mortgage shall secure with retroactive rank the then existing
Indebtedness to the transferee and any and all Indebtedness to such transferee
thereafter arising.
(c)
If less than all of the Indebtedness secured by this Mortgage is transferred,
each part of such Indebtedness shall share pro-rata in the security of this
Mortgage as provided by Louisiana Civil Code Article 3311, and the Lender or
subsequent transfer or shall not be deemed to have warranted or agreed to have
subordinated any remaining or future Indebtedness to that portion of such
Indebtedness transferred.
27
(d)
The Mortgagor hereby recognizes and agrees that the Lender may, from time to
time, one or more times, transfer all or any portion of the Indebtedness to one
or more third parties. Such transfers may include, but are not limited to, sales
of participation interests in such Indebtedness in favor of one or more third
party lenders. Upon any transfer of all or any portion of the Indebtedness, the
Lender may transfer and deliver any or all of the Collateral to the transferee
of such Indebtedness and such Collateral shall secure any and all of the
Indebtedness in favor of such a transferee then existing and thereafter arising,
and after any such transfer has taken place, the Lender shall be fully
discharged from any and all future liability and responsibility to the Mortgagor
with respect to such Collateral, and the transferee thereafter shall be vested
with all the powers, rights and duties with respect to such
Collateral.
SECTION
6.10 GOVERNING LAW. THIS MORTGAGE IS MADE UNDER AND SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE UNITED STATES OF AMERICA AND THE
STATE OF LOUISIANA.
Section
6.11 Certificates. The production of mortgage, conveyance, tax research or other
certificates is waived by consent, and the Mortgagor agrees to hold me, Notary,
harmless for failure to procure and attach same.
Section
6.12 Acceptance. Pursuant to Louisiana Civil Code Article 3289, this Mortgage
need not be signed by the Lender, and the Mortgagor hereby confirms that the
Lender’s consent to and acceptance of this Mortgage shall be irrevocably
presumed.
28
THUS
DONE AND PASSED in the place and on the day and in the month and year
hereinabove written, in the presence of the two undersigned witnesses who
hereunto sign their names with the Mortgagor and me, Notary, after due reading
of the whole.
| WITNESSES: | MORTGAGOR: NGS SUB. CORP. | ||
|
By: |
|||
|
|
Name: Title: | ||
NOTARY
PUBLIC
29
| PROMISSORYNOTE |
|
Borrower: |
Lender: |
||
|
Natural Gas Systems, Inc. |
Prospect Energy Corporation | ||
|
Two Memorial City Plaza |
10 East 40th Street |
||
|
820 Gessner, Suite 1340 |
Suite 4400 |
||
|
Houston, Texas 77024 |
New York, New York 10016 | ||
|
Principal Amount: |
Maturity Date of Note: Date of Note: | ||
|
U.S. $4,800,000.00 |
February 2, 2010 |
February 2, 2005 | |
PROMISE TO PAY. NATURAL GAS SYSTEMS, INC., a Nevada corporation (“Borrower”) promises to pay to the order of PROSPECT ENERGY CORPORATION, a Maryland corporation (“Lender”) in lawful money of the United States of America the sum of four million eight hundred thousand and 00/100 dollars (U.S. $4,800,000.00), or such other or lesser amounts as may be reflected from time to time on the books and records of Lender as evidencing the aggregate unpaid principal balance of loan advances made to Borrower on the basis as provided below, together with simple interest assessed on the variable rate basis provided below, with interest being assessed on the unpaid principal balance of this Note as outstanding from time to time, commencing on the date hereof and continuing until this Note is paid in full.
Interest on Advances under this Note shall be calculated on the basis of a 365 (or in a leap year 366) day year and the actual number of days elapsed.
LOAN AGREEMENT. This Note is made and executed pursuant to a loan agreement between Borrower and Lender dated the date hereof (as amended, renewed or restated from time to time, the “Loan Agreement”), and is entitled to the benefits thereof Unless otherwise defined herein, each capitalized term used herein shall have the same meaning set forth in the Loan Agreement. Reference is made to the Loan Agreement for provisions for the acceleration of the maturity hereof on the occurrence of certain events specified therein, for mandatory prepayments required of the Borrower in certain circumstances, and for all other pertinent provisions.
LINE OF CREDIT. This Note is a non-revolving “master note” evidencing advances that may be made from time to time to Borrower under the Loan Agreement as provided in the Loan Agreement. Advances under this Note may be requested only in writing by Borrower or by an authorized person. All communications, instructions or directions by telephone or otherwise to Lender are to be directed to Lender’s office as provided in the Loan Agreement. The following persons are authorized to request advances under the Line of Credit until Lender receives from Borrower at Lender’s address shown above written notice of revocation of their authority: Robert S. Herlin or Sterling McDonald. Borrower agrees to be liable for all sums either (a) advanced in accordance with the instructions of an authorized person
or (b) credited pursuant to
|
| ||
the Loan Agreement to any of Borrower’s deposit accounts. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender’s internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower has with Lender, including the Loan Agreement and any other agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor’s guarantee of this Note or any other loan with Lender; or (d) Borrower has applied funds provided pursuant to
this Note for purposes other than those authorized by Lender pursuant to the Loan Agreement.
PAYMENT. Borrower will pay interest on Advances at the Base Rate monthly in arrears on the last day of each successive calendar month. Borrower will pay the balance of all outstanding principal on this Note, together with all accrued but unpaid interest, at the Maturity Date. Borrower will pay Lender at Lender’s address shown above or at such other place as Lender may designate in writing. All payments and prepayments made by Borrower hereunder shall be made to Lender, in immediately available funds, before 11:00 a.m. (Eastern Time) on the day that such payment is required, or otherwise is, to be made. Any payment received and accepted by Lender after such time shall be considered for all purposes (including the calculation of interest to the extent permitted by law) as having been made on the next
following Business Day. Whenever any payment to be made hereunder falls on a day other than a Business Day, then unless otherwise provided in the Loan Agreement such payment shall be made on the next succeeding Business Day (without penalty or default), and such extension of time shall in each case be included in the calculation of interest. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. This Note bears interest on and after the date hereof to and including the Maturity Date at the variable rate per annum equal to the Base Rate in accordance with the Loan Agreement. The interest rate on this Note is subject to change from time to time based on changes in the Treasury Rate, as provided in the Loan Agreement. If the index rate used in determining the Treasury Rate becomes unavailable during the term of this Note, Lender may designate a substitute index after notice to Borrower. Borrower understands that Lender may make loans based on other rates as well. Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. The unpaid principal balance of this Note shall bear interest from and after an Event of Default or the
Maturity Date until paid at the Default Rate from time to time in effect.
PREPAYMENT. Borrower may prepay this Note in full or in part at any time by paying the then unpaid principal balance of this Note, plus accrued simple interest and any unpaid late charges through date of prepayment, subject to restrictions regarding permitted timing and advance notice set forth in the Loan Agreement, and subject to payment of the Prepayment Premium under the circumstances set forth in the Loan Agreement. Borrower may be required to prepay
| 2 | ||
|
| ||
this Note from time to time in accordance with the Loan Agreement. If Borrower prepays this Note in full, or if Lender accelerates payment, Borrower understands that, unless otherwise required by law, any prepaid fees or charges will not be subject to rebate and will be earned by Lender at the time this Note is signed. Unless otherwise agreed to in writing by Lender, any partial prepayments of this Note will be applied in inverse order of maturity and will not relieve Borrower of Borrower’s obligation to make scheduled payments under this Note.
LATE CHARGE. If Borrower fails to pay any payment under this Note in full within ten (10) days of when due, Borrower agrees to pay Lender a late payment fee in an amount equal to 10.000% of the delinquent amount due. Late charges will not be assessed following declaration of default and acceleration of maturity of this Note.
DEFAULT. If any Event of Default occurs, Lender shall have all the rights and remedies (including acceleration of the Maturity Date of this Note) available to it pursuant to the Loan Agreement or applicable law. Upon the occurrence of an Event of Default, Lender shall have the right, at its sole option, to declare formally this Note to be in default and to accelerate the maturity and insist upon immediate payment in full of the unpaid principal balance then outstanding under this Note, plus accrued interest and Prepayment Premium, together with reasonable attorneys’ fees, costs, expenses and other fees and charges as provided herein, and Lender shall have the rights and remedies set forth in the Loan Agreement. Lender shall have the further right, again at its sole option, to declare formal default and
to accelerate the maturity and to insist upon immediate payment in full of each and every other loan, extension of credit, debt, liability and/or obligation of every nature and kind that Borrower may then owe to Lender, whether direct or indirect or by way of assignment, and whether absolute or contingent, liquidated or unliquidated, voluntary or involuntary, determined or undetermined, secured or unsecured, whether Borrower is obligated alone or with others on a “solidary” or “joint and several” basis, as a principal obligor or otherwise, all without further notice or demand, unless Lender shall otherwise elect.
DEFAULT RATE. If Borrower defaults under this Note, Lender shall have the right to prospectively increase the simple interest rate under this Note to be equal to the Default Rate per annum until this Note is paid in full.
ATTORNEYS’ FEES. If Lender refers this Note to an attorney for collection, or files suit against Borrower to collect this Note, or if Borrower files for bankruptcy or other relief from creditors, Borrower agrees to pay Lender’s reasonable attorneys’ fees.
COLLATERAL. This Note is secured by the Collateral and collateral documents as provided in the Loan Agreement.
GOVERNING LAW. BORROWER AGREES THAT THIS NOTE AND THE LOAN EVIDENCED HEREBY SHALL BE GOVERNED UNDER THE LAWS OF THE STATE OF LOUISIANA. SPECIFICALLY, THIS BUSINESS OR COMMERCIAL NOTE IS SUBJECT TO LA. R.S. 9:3509 ET SEQ.
| 3 | ||
|
| ||
WAIVERS. Borrower and each guarantor of this Note hereby waive presentment for payment, protest, notice of protest and notice of nonpayment, and all pleas of division and discussion, and severally agree that their obligations and liabilities to Lender hereunder shall be on a “solidary” or “joint and several” basis. Borrower and each guarantor further severally agree that discharge or release of any party who is or may be liable to Lender for the indebtedness represented hereby, or the release of any collateral directly or indirectly securing repayment hereof, shall not have the effect of releasing any other party or parties, who shall remain liable to Lender, or of releasing any other collateral that is not expressly released by Lender. Borrower and each guarantor additionally agree that
Lender’s acceptance of payment other than in accordance with the terms of this Note, or Lender’s subsequent agreement to extend or modify such repayment terms, or Lender’s failure or delay in exercising any rights or remedies granted to Lender, shall likewise not have the effect of releasing Borrower or any other party or parties from their respective obligations to Lender, or of releasing any collateral that directly or indirectly secures repayment hereof In addition, any failure or delay on the part of Lender to exercise any of the rights and remedies granted to Lender shall not have the effect of waiving any of Lender’s rights and remedies. Any partial exercise of any rights and/or remedies granted to Lender shall furthermore not be construed as a waiver of any other rights and remedies; it being Borrower’s intent and agreement that Lender’s rights and remedies shall be cumulative in nature. Borrower and each guarantor further agrees that, should any event of default
occur or exist under this Note, any waiver or forbearance on the part of Lender to pursue the rights and remedies available to Lender, shall be binding upon Lender only to the extent that Lender specifically agrees to any such waiver or forbearance in writing. A waiver or forbearance on the part of Lender as to one event of default shall not be construed as a waiver or forbearance as to any other default. Borrower and each guarantor of this Note further agrees that any late charges provided for under this Note will not be charges for deferral of time for payment and will not and are not intended to compensate Lender for a grace or cure period, and no such deferral, grace or cure period has been or will be granted to Borrower in return for the imposition of any late charge. Borrower recognizes that Borrower’s failure to make timely payment of amounts due under this Note will result in damages to Lender, including but not limited to Lender’s loss of the use of amounts due, and Borrower agrees
that any late charges imposed by Lender hereunder will represent reasonable compensation to Lender for such damages. Failure to pay in full any installment or payment timely when due under this Note, whether or not a late charge is assessed, will remain and shall constitute an event of default hereunder.
SUCCESSORS AND ASSIGNS LIABLE. Borrower’s and each guarantor’s obligations and agreements under this Note shall be binding upon Borrower’s and each guarantor’s respective successors, heirs, legatees, devisees, administrators, executors and assigns. The rights and remedies granted to Lender under this Note shall inure to the benefit of Lender’s successors and assigns, as well as to any subsequent holder or holders of this Note.
CAPTION HEADINGS. Caption headings of the sections of this Note are for convenience purposes only and are not to be used to interpret or to define their provisions. In this Note,
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whenever the context so requires, the singular includes the plural and the plural also includes the singular.
SEVERABILITY. If any provision of this Note is held to be invalid, illegal or unenforceable by any court, that provision shall be deleted from this Note and the balance of this Note shall be interpreted as if the deleted provision never existed.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER: NATURAL GAS SYSTEMS, INC.
By:
Name:
Title:
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STATE OF LOUISIANA )
)
)SS:
)
PARISH OF ORLEANS )
BEFORE ME, the undersigned Notary Public duly commissioned qualified and sworn within and for the State and Parish written above, personally came and appeared __________________,to me personally known, and who being by me duly sworn, did say that he is the authorized _______________ of Natural Gas Systems, Inc., whose name is subscribed to the foregoing Promissory Note and that he executed the foregoing Promissory Note by authority of said corporation’s Board of Directors on behalf of said corporation as its free act and deed.
THUS DONE AND SIGNED before me and the two undersigned witnesses in the Parish and State aforesaid, on this 2nd day of February, 2005. Witness my hand and official seal.
WITNESSES:
________________________ __________________________
Name: Name:
________________________
Name:
________________________
NOTARY PUBLIC
Seal
My Commission expires:_________
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SECURITY AGREEMENT
(Stock)
(Stock)
THIS SECURITY AGREEMENT (“Agreement”) dated as of February 2, 2005, is made by and between NGS Sub. Corp., a Delaware corporation (“Pledgor”), and PROSPECT ENERGY CORPORATION, a Maryland corporation (“Lender”), who agree as follows:
RECITALS
A. The Pledgor is a subsidiary of Natural Gas Systems, Inc., a Delaware corporation, which in turn is a subsidiary of Natural Gas Systems, Inc., a Nevada corporation (the “Borrower”). The Borrower is or will be indebted unto the Lender for loans made or to be made pursuant to the terms of a loan agreement (as amended, supplemented or restated from time to time, the “Loan Agreement”) dated as of February 2, 2005, by and between the Borrower and the Lender.
B. In order to secure the Borrower’s full and punctual payment and performance of the Indebtedness as defined in the Loan Agreement, the Pledgor has agreed to execute and deliver this Agreement and to pledge, deliver and grant a continuing security interest in and to the Collateral (as hereafter defined).
AGREEMENT
NOW, THEREFORE, in consideration of the premises, the Pledgor and the Lender agree as follows:
Section 1. Definitions. (A) As used in this Agreement, the terms “Agreement”, “Borrower”, “Lender”, “Loan Agreement” and “Pledgor” shall have the meanings indicated above.
(B) As used in this Agreement, the terms “Event of Default”, “Indebtedness” and “Person” have the respective meanings defined in the Loan Agreement.
(C) As used in this Agreement, the terms “Arkla”, “Four Star” and “Subsidiary and Subsidiaries” shall have the meanings indicated in Section 2 below.
Section 2. Security Interest. (A) To secure the Borrower’s full and punctual payment and performance of all present and future Indebtedness to the Lender or any successor or transferee thereof, including without limitation all promissory notes heretofore or hereafter executed by the Borrower pursuant to the Loan Agreement, in principal, interest, deferral and delinquency charges, prepayment premiums, costs and attorney’s fees, as therein stipulated, or under or pursuant to any present or future hedging or derivative agreements relating to interest rates, currency exchange rates or commodity prices (such as any swap agreement, any cap,
collar, floor, exchange or forward transaction, any option, or other similar transaction), the Pledgor hereby pledges, pawns, transfers and grants to the Lender a continuing security interest in and to all of the following property of the Pledgor, whether now owned or existing or hereafter acquired or arising (collectively the “Collateral”):
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| 1. | 1,000 shares of the common stock, no par value, of Four Star Development Corporation, a Louisiana corporation (“Four Star”) represented by Certificate No. dated __________, 20, registered in the Pledgor’s name, together with any additional shares of Four Star issued hereafter as stock dividends, stock splits or otherwise, or shares received as a result of any merger or consolidation of Four Star, all rights of any nature whatsoever which may be issued or granted by Four Star to the Pledgor, all right, title and interest of the Pledgor as a shareholder of Four Star including without limitation the right to vote, all certificates and instruments representing or evidencing all such shares and rights, all cash, liquidation and other dividends now or hereafter declared thereon, all stock redemption payments and all other monies due or to become due thereunder, all stock warrants and other rights to subscribe to securities now or hereafter incident thereto or declared or granted in connection therewith, and all distributions (cash or property) made or to be made in connection therewith or incident thereto, and together with all proceeds of all or any of the foregoing, in whatever form. |
| 2. | 100% of the membership interests in Arkla Petroleum, L.L.C., a Louisiana limited liability company (“Arkla”), registered in the Pledgor’s name, together with any additional membership interests of Arkla issued hereafter as distributions or otherwise, or membership interests received as a result of any merger or consolidation of Arkla, all rights of any nature whatsoever which may be issued or granted by Arkia to the Pledgor, all right, title and interest of the Pledgor as a member of Arkla including without limitation the right to vote, all certificates and instruments representing or evidencing all such membership interests and rights, all cash, liquidation and other distributions now or hereafter declared thereon, all redemption payments and all other monies due or to become due thereunder, all warrants and other rights to subscribe to membership interests now or hereafter incident thereto or declared or granted in connection therewith, and all distributions (cash or property) made or to be made in connection therewith or incident thereto, and together with all proceeds of all or any of the foregoing, in whatever form. |
Four Star and Arkla are hereinafter sometimes referred to collectively as the “Subsidiaries”, and each as a “Subsidiary”.
(C) The security interests are granted as security only and shall not subject the Lender to, or transfer or in any way affect or modify, any obligation or liability of the Pledgor with respect to any of the Collateral or any transaction in connection therewith.
Section 3. Delivery of Collateral. The Lender hereby accepts the delivery of the Collateral on behalf of itself and on behalf of any future transferee of the Indebtedness. The Pledgor will execute and deliver to the Lender all assignments, endorsements, powers and other documents reasonably requested at any time and from time to time by the Lender with respect to
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the Collateral and the rights and powers granted to the Lender hereunder, and will deliver to the Lender any stock certificates representing stock dividends on, or stock splits of, any of the Collateral or any certificated membership interests representing distributions on any of the Collateral.
Section 4. Waiver of Rights; Intervention. The Pledgor and Four Star acknowledge that Article VII of the Articles of Incorporation of Four Star dated September 26, 1978, grants to Four Star a right of first refusal to purchase the stock of any shareholder desiring to sell any of its stock. In addition, Article VII of Four Star’s Articles of Incorporation provides that a shareholder may pledge its shares as security for an indebtedness of a shareholder provided that the pledge agreement provides that before any pledgee requests a transfer of the shares under the pledge, the stock must be offered to the corporation at the same price that the
pledgee is crediting the indebtedness secured by the pledge. Four Star here by joins in the execution of this Agreement and waives its rights of first refusal to purchase the stock of any shareholder or any stock held by any pledgee. Four Star further waives the requirement that any pledge agreement entered into by a shareholder must contain a right of first refusal in favor of the corporation to purchase shares of stock offered for sale by any pledgee of such stock.
Section 5. Representations. (A) Except as expressly provided above in Section 4 of this Agreement, the Pledgor has not performed any acts or signed any agreements which might prevent the Lender from enforcing any of the terms of this Agreement or which would limit the Lender in any such enforcement. No security agreement or similar or equivalent document or instrument covering all or any part of the Collateral has been executed by the Pledgor and remains in effect. No Collateral is in the possession of any Person (other than the Pledgor) asserting any
claim thereto or security interest therein, except that the Lender or its designee may have possession of Collateral as contemplated hereby.
(B) The certificated securities evidencing the Collateral and the uncertificated membership interest, are each owned legally, directly and beneficially and of record by the Pledgor, and each is not subject to any interest, option or right of any Person except as expressly provided above in Section 4 of this Agreement. The Collateral constitutes all of the interest that the Pledgor owns in the Subsidiaries, which as of the date of this Agreement is one hundred (100%) percent of the stock and membership interests, as applicable, issued by each Subsidiary. The Pledgor has delivered a complete and accurate copy of each Subsidiary’s articles of
incorporation or organization and by laws or operating agreement, in each instance as applicable, to the Lender.
Section 6. Covenants. (A) The Pledgor agrees not to sell, offer to sell, transfer or otherwise dispose of any of the Collateral or any interest therein, and not to create, incur or permit to exist any pledge, security interest, lien, charge, encumbrance, restriction on transfer, right to purchase, option, right of first refusal or other impediment to title whatsoever with respect to any of the Collateral, other than this Agreement and other than the rights referenced in Section 3 of this Agreement that Four Star waives herein.
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(B) The Pledgor will not amend or agree to amend any Subsidiary’s articles of incorporation or organization or by laws or operating agreement, in each instance as applicable, or otherwise enter into any further agreement pertaining to any of the Collateral. The Pledgor will not consent to or permit the issuance to any Person of any additional shares or membership interests in any Subsidiary.
Section 7. Voting Rights. (A) So long as no Event of Default as defined in the Loan Agreement shall have occurred, the Pledgor shall have the right, from time to time, to exercise voting and other consensual rights to give approvals, ratifications and waivers pertaining to the Collateral, and the Lender upon receiving a written request from the Pledgor and the Borrower accompanied by a certificate stating that no Event of Default has occurred will deliver to the Pledgor (or as specified in such request) such proxies, approvals, ratifications, waivers and other instruments pertaining to the Collateral as may be specified in such request and be in form
and substance satisfactory to the Lender.
(B) Upon the occurrence of an Event of Default, the Lender shall have the right, at Lender’s option, to exercise the voting and other consensual rights to give approvals, ratifications and waivers and to take any other action with respect to all the Collateral with the same force and effect as if the Lender were the absolute and sole owner thereof, and the Pledgor’ s right to exercise such voting and other consensual rights shall, at Lender’s option, cease and become vested in the Lender.
Section 8. Remedies upon Default. (A) Upon the occurrence of an Event of Default as defined in the Loan Agreement the Lender may exercise all rights of a secured party under the Louisiana Commercial Laws - - Secured Transactions and other applicable law (including the Uniform Commercial Code as in effect in another applicable jurisdiction) and, in addition, the Lender may, without being required to give any notice, except as herein provided or as may be required by
mandatory provisions of law, (i) transfer the whole or any part of the Collateral into the name of the Lender or its nominee, (ii) sell the Collateral or any part thereof at a broker’s board or on a securities exchange, or (iii) sell the Collateral or any part thereof at public or private sale, for cash, upon credit or for future delivery, and at such price or prices as the Lender may deem satisfactory. The Lender may be the purchaser of any or all of the Collateral so sold at any public sale (or, if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations, at any private sale). The Pledgor will execute and deliver such documents and take such other action as the Lender deems necessary or advisable in order that any such sale may be made in compliance with law. Upon any such sale the Lender shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold. Each
Purchaser at any such sale shall hold the Collateral so sold to it absolutely and free from any claim or right of whatsoever kind, including any equity or right of redemption of the Pledgor which may be waived, and the Pledgor, to the extent permitted by law, hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any law now existing or hereafter adopted. The Pledgor agrees that ten (10) days prior written notice of the time and place of any sale or other intended disposition of any of the Collateral constitutes “reasonable notification” within the meaning of Sections 9-611 and 9-612 of the UCC except that shorter or no notice shall
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be reasonable as to any Collateral which is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market. The notice (if any) of such sale shall (1) in case of a public sale, state the time and place fixed for such sale, and (2) in the case of a private sale, state the day after which such sale may be consummated. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Lender may fix in the notice of such sale. At any such sale the Collateral may be sold in one lot as an entirety or in separate parcels, as the Lender may determine. The Lender shall not be obligated to make any such sale pursuant to any such notice. The Lender may, without notice or publication, adjourn any public or private sale
or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by the Lender until the selling price is paid by the purchaser thereof, but the Lender shall not incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may again be sold upon like notice.
(B) The Lender, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the security interests and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. For the purposes of Louisiana executory process procedures, the Pledgor does hereby acknowledge the Indebtedness and confess judgment in favor of the Lender for the full amount of the Indebtedness. The Pledgor does by these presents consent, agree and stipulate that upon the occurrence of an Event of Default it shall be lawful for the Lender, and the Pledgor does
hereby authorize the Lender, to cause all and singular the Collateral to be seized and sold under executory or ordinary process, at the Lender’s sole option, without appraisement, appraisement being hereby expressly waived, in one lot as an entirety or in separate parcels as the Lender may determine, to the highest bidder, and otherwise exercise the rights, powers and remedies afforded herein and under applicable Louisiana law. Any and all declarations of fact made by authentic act before a Notary Public in the presence of two witnesses by a person declaring that such facts lie within his knowledge shall constitute authentic evidence of such facts for the purpose of executory process. The Pledgor hereby waives in favor of the Lender: (a) the benefit of appraisement as provided in Louisiana Code of Civil Procedure Articles 2332, 2336, 2723 and 2724, and all other laws conferring the same; (b) the demand and three days delay accorded by Louisiana Code of Civil Procedure Article 2721; (c) the notice
of seizure required by Louisiana Code of Civil Procedure Articles 2293 and 2721; (d) the three days delay provided by Louisiana Code of Civil Procedure Articles 2331 and 2722; and (e) the benefit of the other provisions of Louisiana Code of Civil Procedure Articles 2331, 2722 and 2723, not specifically mentioned above.
(C) The Pledgor recognizes that the Lender may be unable to effect a public sale of all or part of the Collateral by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws but may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obligated to agree, among other things, to acquire all or a part of the Collateral for their own account, for investment, and not with a view to the distribution or resale thereof. If the Lender deems it
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advisable to do so for the foregoing or for other reasons, the Lender is authorized to limit the prospective bidders on or purchasers of any of the Collateral to such a restricted group of purchasers and may cause to be placed on certificates for any or all of the Collateral a legend to the effect that such security has not been registered under the Securities Act of 1933, as amended, and may not be disposed of in violation of the provision of said act, and to impose such other limitations or conditions in connection with any such sale as the Lender deems necessary or advisable in order to comply with said act or any other securities or other laws. The Pledgor acknowledges and agrees that any private sale so made may be at prices and on other terms less favorable to the seller than if such Collateral were
sold at public sale and that the Lender has no obligation to delay the sale of such Collateral for the period of time necessary to permit the registration of such Collateral for public sale under any securities laws. The Pledgor agrees that a private sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. If any consent, approval, or authorization of any federal, state, municipal or other governmental department, agency or authority should be necessary to effectuate any sale or other disposition of the Collateral, or any partial sale or other disposition of the Collateral, the Pledgor will execute all applications and other instruments as may be required in connection with securing any such consent, approval or authorization and will otherwise use its best efforts to secure same. In addition, if the Collateral is disposed of pursuant to Rule 144, the Pledgor agrees to complete and execute a Form 144, or comparable successor form, at
the Lender’s request; and the Pledgor agrees to provide any material adverse information in regard to the current and prospective operations of any corporation whose stock constitutes all or a portion of the Collateral of which the Pledgor has knowledge and which has not been publicly disclosed, and the Pledgor hereby acknowledges that the Pledgor’s failure to provide such information may result in criminal and/or civil liability.
Section 9. Limitation on Duty of lender. Beyond the exercise of reasonable care in the custody thereof, the Lender shall have no duty as to any Collateral in its possession or control or in the possession or control of any agent or bailee or any income thereon. The Lender shall be deemed to have exercised reasonable care in the custody of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which it accords its own property,
and shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any broker or other agent or bailee selected by the Lender in good faith. The Lender shall be deemed to have exercised reasonable care with respect to any of the Collateral in its possession if the Lender takes such action for that purpose as the Pledgor shall reasonably request in writing; but no failure to comply with any such request shall, of itself, be deemed a failure to exercise reasonable care.
Section 10. Appointment of Agent. At any time or times, in order to comply with any legal requirement in any jurisdiction, the Lender may appoint a bank or trust company or one or more other Persons with such power and authority as may be necessary for the effectual operation of the provisions hereof and may be specified in the instrument of appointment.
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Section 11. Expenses. In the event that the Borrower fails to comply with any provisions of the Loan Agreement or the Pledgor fails to comply with any provisions of this Agreement, such that the value of any Collateral or the validity, perfection, rank or value of any security interest hereunder is thereby diminished or potentially diminished or put at risk, the Lender may, but shall not be required to, effect such compliance on behalf of the Borrower and/or the Pledgor, and the Pledgor shall reimburse the Lender for the costs thereof on demand. All insurance expenses and all expenses of protecting, storing, appraising, preparing for sale, handling,
maintaining and shipping the Collateral, any and all excise, property, sales, and use taxes imposed by any federal, state or local authority on any of the Collateral, all expenses in respect of periodic appraisals and inspections of the Collateral to the extent the same may be requested from time to time, and all expenses in respect of the sale or other disposition thereof shall be borne and paid by the Pledgor; and if the Pledgor fails to promptly pay any portion thereof when due, the Lender may, at its option, but shall not be required to, pay the same and charge the Pledgor’s account therefor, and the Pledgor agrees to reimburse the Lender therefor on demand. All sums so paid or incurred by the Lender for any of the foregoing and any and all other sums for which the Pledgor may become liable hereunder and all costs and expenses (including reasonable attorneys’ fees, legal expenses and court costs) incurred by the Lender in enforcing or protecting any of the rights or remedies under this
Agreement, together with interest thereon until paid at the Default Rate, shall be additional Indebtedness under the Loan Agreement and the Pledgor agrees to pay all of the foregoing sums promptly on demand.
Section 12. Termination. Upon the payment in full of the Indebtedness and the termination of the Loan Agreement, this Agreement shall terminate. Upon request of the Pledgor, the Lender shall deliver the remaining Collateral (if any) to the Pledgor.
Section 13. Notices. Any notice or demand which, by provision of this Agreement, is required or permitted to be given or served to the Pledgor and the Lender shall be deemed to have been sufficiently given and served for all purposes if made in accordance with the Loan Agreement. For purposes of this Section 12, any notice or demand to be given or served to the Pledgor shall be sent to the following address (until another address or addresses is given in writing by the Pledgor to the other parties):
If to Pledgor: NGS Sub. Corp.
Two Memorial City Plaza
820 Gessner, Suite 1340
Houston, Texas 77024
Attention: Robert S. Herlin, President
Facsimile Number: (713) 935-0199
Telephone Number: (713) 935-0122
Section 14. Amendment. Neither this Agreement nor any provisions hereof may be changed, waived, discharged or terminated orally or in any manner other than by an instrument in writing signed by the party against whom enforcement of the change, waiver,
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discharge or termination is sought.
Section 15. Waivers. No course of dealing on the part of the Lender, its officers, employees, consultants or agents, nor any failure or delay by the Lender with respect to exercising any of its rights, powers or privileges under this Agreement shall operate as a waiver thereof.
Section 16. Cumulative Rights. The rights and remedies of the Lender under this Agreement 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.
Section 17. Titles of Sections. All titles or headings to sections of this Agreement are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such sections, such other content being controlling as to the agreement between the parties hereto.
Section 18. GOVERNING LAW. THIS AGREEMENT IS A CONTRACT MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE UNITED STATES OF AMERICA AND THE STATE OF LOUISIANA.
Section 19. Successors and Assigns. All covenants and agreements contained by or on behalf of the Pledgor in this Agreement shall bind the Pledgor’s successors and assigns and shall inure to the benefit of the Lender and its successors and assigns. This Agreement is for the benefit of the Lender and for such other Person or Persons as may from time to time become or be the holders of any of the Indebtedness, and this Agreement shall be transferable with the same force and effect and to the same extent as the Indebtedness may be transferable, it being understood that, upon the transfer or assignment by the Lender of any of the Indebtedness, the
legal holder of such Indebtedness shall have all of the rights granted to the Lender under this Agreement. The Pledgor specifically agrees that upon any transfer of all or any portion of the Indebtedness, the Lender may transfer and deliver the Collateral to the transferee of such Indebtedness and the Collateral shall secure any and all of the Indebtedness in favor of such a transferee, that such transfer of the Collateral shall not affect the priority and ranking thereof, and that the Collateral shall secure with retroactive rank the then existing Indebtedness of the Borrower to the transferee and any and all Indebtedness thereafter arising. After any such transfer has taken place, the Lender shall be fully discharged from any and all future liability and responsibility to the Pledgor with respect to the Collateral and the transferee thereafter shall be vested with all the powers, rights and duties with respect to the Collateral.
Section 20. Counterparts. This Agreement may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof, each counterpart shall be deemed an original, but all of which when taken together shall constitute one and the same instrument.
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{Remainder of Page Intentionally Blank; Signature Page Follows]
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IN WITNESS WHEREOF, the Pledgor and the Lender have caused this Agreement to be duly executed as of the date first above written.
PLEDGOR: NGS Sub. Corp.,
a Delaware corporation
BY: ________________________
Name:
Title:
FOUR STAR: FOUR STAR DEVELOPMENT
CORPORATION,
a Louisiana corporation
BY:___________________
Name:
Title:
LENDER: PROSPECT ENERGY
CORPORATION,
a Maryland corporation
BY:____
Name:
Title:
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SECURITY AGREEMENT
(Stock)
THIS SECURITY AGREEMENT (“Agreement”) dated as of February 2, 2005, is made by and between NATURAL GAS SYSTEMS, INC., a Delaware corporation (“Pledgor”), and PROSPECT ENERGY CORPORATION, a Maryland corporation (“Lender”), who agree as follows:
RECITALS
A. The Pledgor is a subsidiary of Natural Gas Systems, Inc., a Nevada corporation (the “Borrower”). The Borrower is or will be indebted unto the Lender for loans made or to be made pursuant to the terms of a loan agreement (as amended, supplemented or restated from time to time, the “Loan Agreement”) dated as of February 2, 2005, by and between the Borrower and the Lender.
B. In order to secure the Borrower’s full and punctual payment and performance of the Indebtedness as defined in the Loan Agreement, the Pledgor has agreed to execute and deliver this Agreement and to pledge, deliver and grant a continuing security interest in and to the Collateral (as hereafter defined).
AGREEMENT
NOW, THEREFORE, in consideration of the premises, the Pledgor and the Lender agree as follows:
Section 1. Definitions. (A) As used in this Agreement, the terms “Agreement”, “Borrower”, “Lender”, “Loan Agreement” and “Pledgor” shall have the meanings indicated above.
(B) As used in this Agreement, the terms “Event of Default”, “Indebtedness” and “Person” have the respective meanings defined in the Loan Agreement.
(C) As used in this Agreement, the terms “NGS Sub” and “Subsidiary” shall have the meanings indicated in Section 2 below.
Section 2. Security Interest. (A) To secure the Borrower’s full and punctual payment and performance of all present and future Indebtedness to the Lender or any successor or transferee thereof, including without limitation all promissory notes heretofore or hereafter executed by the Borrower pursuant to the Loan Agreement, in principal, interest, deferral and delinquency charges, prepayment premiums, costs and attorney’s fees, as therein stipulated, or under or pursuant to any present or future hedging or derivative agreements relating to interest rates, currency exchange rates or commodity prices (such as any swap agreement, any cap,
collar, floor, exchange or forward transaction, any option, or other similar transaction), the Pledgor hereby pledges, pawns, transfers and grants to the Lender a continuing security interest in and to all of the following property of the Pledgor, whether now owned or existing or hereafter acquired or arising (collectively the “Collateral”):
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One Hundred Thousand (100,000) shares of the common stock of NGS Sub. Corp., a Delaware corporation (“NGS Sub”) represented by Certificate No. CS-i dated September 26, 2003, registered in the Pledgor’s name, together with any additional shares of NGS Sub issued hereafter as stock dividends, stock splits or otherwise, or shares received as a result of any merger or consolidation of NGS Sub, all rights of any nature whatsoever which may be issued or granted by NGS Sub to the Pledgor, all right, title and interest of the Pledgor as a shareholder of NGS Sub including without limitation the right to vote, all certificates and instruments representing or evidencing all such shares and rights, all cash, liquidation and other dividends now or hereafter declared thereon, all stock redemption
payments and all other monies due or to become due thereunder, all stock warrants and other rights to subscribe to securities now or hereafter incident thereto or declared or granted in connection therewith, and all distributions (cash or property) made or to be made in connection therewith or incident thereto, and together with all proceeds of all or any of the foregoing, in whatever form.
NGS Sub is hereinafter sometimes referred to as the “Subsidiary”.
(C) The security interests are granted as security only and shall not subject the Lender to, or transfer or in any way affect or modify, any obligation or liability of the Pledgor with respect to any of the Collateral or any transaction in connection therewith.
Section 3. Delivery of Collateral. The Lender hereby accepts the delivery of the Collateral on behalf of itself and on behalf of any future transferee of the Indebtedness. The Pledgor will execute and deliver to the Lender all assignments, endorsements, powers and other documents reasonably requested at any time and from time to time by the Lender with respect to the Collateral and the rights and powers granted to the Lender hereunder, and will deliver to the Lender any stock certificates representing stock dividends on, or stock splits of, any of the Collateral.
Section 4. Representations. (A) The Pledgor has not performed any acts or signed any agreements which might prevent the Lender from enforcing any of the terms of this Agreement or which would limit the Lender in any such enforcement. No security agreement or similar or equivalent document or instrument covering all or any part of the Collateral has been executed by the Pledgor and remains in effect. No Collateral is in the possession of any Person (other than the Pledgor) asserting any claim thereto or security interest therein, except that the Lender or its designee may have possession of Collateral as contemplated hereby.
(B) The certificated securities evidencing the Collateral are each owned legally, directly and beneficially and of record by the Pledgor, and each is not subject to any interest, option or right of any Person. The Collateral constitutes all of the interest that the Pledgor owns in the Subsidiary, which as of the date of this Agreement is one hundred (100%) percent of the stock issued by the Subsidiary. The Pledgor has delivered a complete and accurate copy of the Subsidiary’s articles of incorporation and bylaws to the Lender.
Section 5. Covenants. (A) The Pledgor agrees not to sell, offer to sell,
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transfer or otherwise dispose of any of the Collateral or any interest therein, and not to create, incur or permit to exist any pledge, security interest, lien, charge, encumbrance, restriction on transfer, right to purchase, option, right of first refusal or other impediment to title whatsoever with respect to any of the Collateral, other than this Agreement.
(B) The Pledgor will not amend or agree to amend the Subsidiary’s articles of incorporation or bylaws, or otherwise enter into any further agreement pertaining to any of the Collateral. The Pledgor will not consent to or permit the issuance to any Person of any additional shares in the Subsidiary.
Section 6. Voting Rights. (A) So long as no Event of Default as defined in the Loan Agreement shall have occurred, the Pledgor shall have the right, from time to time, to exercise voting and other consensual rights to give approvals, ratifications and waivers pertaining to the Collateral, and the Lender upon receiving a written request from the Pledgor and the Borrower accompanied by a certificate stating that no Event of Default has occurred will deliver to the Pledgor (or as specified in such request) such proxies, approvals, ratifications, waivers and other instruments pertaining to the Collateral as may be specified in such request and be in form
and substance satisfactory to the Lender.
(B) Upon the occurrence of an Event of Default, the Lender shall have the right, at Lender’s option, to exercise the voting and other consensual rights to give approvals, ratifications and waivers and to take any other action with respect to all the Collateral with the same force and effect as if the Lender were the absolute and sole owner thereof, and the Pledgor’s right to exercise such voting and other consensual rights shall, at Lender’s option, cease and become vested in the Lender.
Section 7. Remedies upon Default. (A) Upon the occurrence of an Event of Default as defined in the Loan Agreement the Lender may exercise all rights of a secured party under the Louisiana Commercial Laws - - Secured Transactions and other applicable law (including the Uniform Commercial Code as in effect in another applicable jurisdiction) and, in addition, the Lender may, without being required to give any notice, except as herein provided or as may be required by
mandatory provisions of law, (i) transfer the whole or any part of the Collateral into the name of the Lender or its nominee, (ii) sell the Collateral or any part thereof at a broker’s board or on a securities exchange, or (iii) sell the Collateral or any part thereof at public or private sale, for cash, upon credit or for future delivery, and at such price or prices as the Lender may deem satisfactory. The Lender may be the purchaser of any or all of the Collateral so sold at any public sale (or, if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations, at any private sale). The Pledgor will execute and deliver such documents and take such other action as the Lender deems necessary or advisable in order that any such sale may be made in compliance with law. Upon any such sale the Lender shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold. Each
purchaser at any such sale shall hold the Collateral so sold to it absolutely and free from any claim or right of whatsoever kind, including any equity or right of redemption of the Pledgor which may be waived, and the Pledgor, to the extent permitted by law, hereby specifically waives all rights of
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redemption, stay or appraisal which it has or may have under any law now existing or hereafter adopted. The Pledgor agrees that ten (10) days prior written notice of the time and place of any sale or other intended disposition of any of the Collateral constitutes “reasonable notification” within the meaning of Sections 9-611 and 9-612 of the UCC except that shorter or no notice shall be reasonable as to any Collateral which is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market. The notice (if any) of such sale shall (1) in case of a public sale, state the time and place fixed for such sale, and (2) in the case of a private sale, state the day after which such sale may be consummated. Any such public sale shall be held at such time or times
within ordinary business hours and at such place or places as the Lender may fix in the notice of such sale. At any such sale the Collateral may be sold in one lot as an entirety or in separate parcels, as the Lender may determine. The Lender shall not be obligated to make any such sale pursuant to any such notice. The Lender may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by the Lender until the selling price is paid by the purchaser thereof, but the Lender shall not incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may again be sold upon like
notice.
(B) The Lender, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the security interests and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. For the purposes of Louisiana executory process procedures, the Pledgor does hereby acknowledge the Indebtedness and confess judgment in favor of the Lender for the full amount of the Indebtedness. The Pledgor does by these presents consent, agree and stipulate that upon the occurrence of an Event of Default it shall be lawful for the Lender, and the Pledgor does
hereby authorize the Lender, to cause all and singular the Collateral to be seized and sold under executory or ordinary process, at the Lender’s sole option, without appraisement, appraisement being hereby expressly waived, in one lot as an entirety or in separate parcels as the Lender may determine, to the highest bidder, and otherwise exercise the rights, powers and remedies afforded herein and under applicable Louisiana law. Any and all declarations of fact made by authentic act before a Notary Public in the presence of two witnesses by a person declaring that such facts lie within his knowledge shall constitute authentic evidence of such facts for the purpose of executory process. The Pledgor hereby waives in favor of the Lender: (a) the benefit of appraisement as provided in Louisiana Code of Civil Procedure Articles 2332, 2336, 2723 and 2724, and all other laws conferring the same; (b) the demand and three days delay accorded by Louisiana Code of Civil Procedure Article 2721; (c) the notice
of seizure required by Louisiana Code of Civil Procedure Articles 2293 and 2721; (d) the three days delay provided by Louisiana Code of Civil Procedure Articles 2331 and 2722; and (e) the benefit of the other provisions of Louisiana Code of Civil Procedure Articles 2331, 2722 and 2723, not specifically mentioned above.
(C) The Pledgor recognizes that the Lender may be unable to effect a public sale of all or part of the Collateral by reason of certain prohibitions contained in the Securities
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Act of 1933, as amended, and applicable state securities laws but may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obligated to agree, among other things, to acquire all or a part of the Collateral for their own account, for investment, and not with a view to the distribution or resale thereof. If the Lender deems it advisable to do so for the foregoing or for other reasons, the Lender is authorized to limit the prospective bidders on or purchasers of any of the Collateral to such a restricted group of purchasers and may cause to be placed on certificates for any or all of the Collateral a legend to the effect that such security has not been registered under the Securities Act of 1933, as amended, and may not be disposed of in violation of the provision
of said act, and to impose such other limitations or conditions in connection with any such sale as the Lender deems necessary or advisable in order to comply with said act or any other securities or other laws. The Pledgor acknowledges and agrees that any private sale so made may be at prices and on other terms less favorable to the seller than if such Collateral were sold at public sale and that the Lender has no obligation to delay the sale of such Collateral for the period of time necessary to permit the registration of such Collateral for public sale under any securities laws. The Pledgor agrees that a private sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. If any consent, approval, or authorization of any federal, state, municipal or other governmental department, agency or authority should be necessary to effectuate any sale or other disposition of the Collateral, or any partial sale or other disposition of the
Collateral, the Pledgor will execute all applications and other instruments as may be required in connection with securing any such consent, approval or authorization and will otherwise use its best efforts to secure same. In addition, if the Collateral is disposed of pursuant to Rule 144, the Pledgor agrees to complete and execute a Form 144, or comparable successor form, at the Lender’s request; and the Pledgor agrees to provide any material adverse information in regard to the current and prospective operations of any corporation whose stock constitutes all or a portion of the Collateral of which the Pledgor has knowledge and which has not been publicly disclosed, and the Pledgor hereby acknowledges that the Pledgor’s failure to provide such information may result in criminal and/or civil liability.
Section 8. Limitation on Duty of Lender. Beyond the exercise of reasonable care in the custody thereof, the Lender shall have no duty as to any Collateral in its possession or control or in the possession or control of any agent or bailee or any income thereon. The Lender shall be deemed to have exercised reasonable care in the custody of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which it accords its own property, and shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any broker or
other agent or bailee selected by the Lender in good faith. The Lender shall be deemed to have exercised reasonable care with respect to any of the Collateral in its possession if the Lender takes such action for that purpose as the Pledgor shall reasonably request in writing; but no failure to comply with any such request shall, of itself, be deemed a failure to exercise reasonable care.
Section 9. Appointment of Agent. At any time or times, in order to comply with any legal requirement in any jurisdiction, the Lender may appoint a bank or trust company or one or more other Persons with such power and authority as may be necessary for the
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effectual operation of the provisions hereof and may be specified in the instrument of appointment.
Section 10. Expenses. In the event that the Borrower fails to comply with any provisions of the Loan Agreement or the Pledgor fails to comply with any provisions of this Agreement, such that the value of any Collateral or the validity, perfection, rank or value of any security interest hereunder is thereby diminished or potentially diminished or put at risk, the Lender may, but shall not be required to, effect such compliance on behalf of the Borrower and/or the Pledgor, and the Pledgor shall reimburse the Lender for the costs thereof on demand. All insurance expenses and all expenses of protecting, storing, appraising, preparing for sale, handling, maintaining and shipping the Collateral, any and all excise, property, sales, and use taxes imposed by any federal, state or local authority on any of the
Collateral, all expenses in respect of periodic appraisals and inspections of the Collateral to the extent the same may be requested from time to time, and all expenses in respect of the sale or other disposition thereof shall be borne and paid by the Pledgor; and if the Pledgor fails to promptly pay any portion thereof when due, the Lender may, at its option, but shall not be required to, pay the same and charge the Pledgor’s account therefor, and the Pledgor agrees to reimburse the Lender therefor on demand. All sums so paid or incurred by the Lender for any of the foregoing and any and all other sums for which the Pledgor may become liable hereunder and all costs and expenses (including reasonable attorneys’ fees, legal expenses and court costs) incurred by the Lender in enforcing or protecting any of the rights or remedies under this Agreement, together with interest thereon until paid at the Default Rate, shall be additional Indebtedness under the Loan Agreement and the Pledgor agrees
to pay all of the foregoing sums promptly on demand.
Section 11. Termination. Upon the payment in full of the Indebtedness and the termination of the Loan Agreement, this Agreement shall terminate. Upon request of the Pledgor, the Lender shall deliver the remaining Collateral (if any) to the Pledgor.
Section 12. Notices. Any notice or demand which, by provision of this Agreement, is required or permitted to be given or served to the Pledgor and the Lender shall be deemed to have been sufficiently given and served for all purposes if made in accordance with the Loan Agreement. For purposes of this Section 12, any notice or demand to be given or served to the Pledgor shall be sent to the following address (until another address or addresses is given in writing by the Pledgor to the other parties):
If to Pledgor: Natural Gas Systems, Inc.
Two Memorial City Plaza
820 Gessner, Suite 1340
Houston, Texas 77024
Attention: Robert S. Herlin, President
Facsimile Number: (713) 935-0199
Telephone Number: (713) 935-0122
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Section 13. Amendment. Neither this Agreement nor any provisions hereof may be changed, waived, discharged or terminated orally or in any manner other than by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought.
Section 14. Waivers. No course of dealing on the part of the Lender, its officers, employees, consultants or agents, nor any failure or delay by the Lender with respect to exercising any of its rights, powers or privileges under this Agreement shall operate as a waiver thereof.
Section 15. Cumulative Rights. The rights and remedies of the Lender under this Agreement 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.
Section 16. Titles of Sections. All titles or headings to sections of this Agreement are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such sections, such other content being controlling as to the agreement between the parties hereto.
Section 17. GOVERNING LAW. THIS AGREEMENT IS A CONTRACT MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE UNITED STATES OF AMERICA AND THE STATE OF LOUISIANA.
Section 18. Successors and Assigns. All covenants and agreements contained by or on behalf of the Pledgor in this Agreement shall bind the Pledgor’s successors and assigns and shall inure to the benefit of the Lender and its successors and assigns. This Agreement is for the benefit of the Lender and for such other Person or Persons as may from time to time become or be the holders of any of the Indebtedness, and this Agreement shall be transferable with the same force and effect and to the same extent as the Indebtedness may be transferable, it being understood that, upon the transfer or assignment by the Lender of any of the Indebtedness, the
legal holder of such Indebtedness shall have all of the rights granted to the Lender under this Agreement. The Pledgor specifically agrees that upon any transfer of all or any portion of the Indebtedness, the Lender may transfer and deliver the Collateral to the transferee of such Indebtedness and the Collateral shall secure any and all of the Indebtedness in favor of such a transferee, that such transfer of the Collateral shall not affect the priority and ranking thereof, and that the Collateral shall secure with retroactive rank the then existing Indebtedness of the Borrower to the transferee and any and all Indebtedness thereafter arising. After any such transfer has taken place, the Lender shall be fully discharged from any and all future liability and responsibility to the Pledgor with respect to the Collateral and the transferee thereafter shall be vested with all the powers, rights and duties with respect to the Collateral.
Section 19. Counterparts. This Agreement may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof, each counterpart shall be deemed an original, but all of which when taken together shall constitute one and the same instrument.
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[Remainder of Page Intentionally Blank; Signature Page Follows]
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N WITNESS WHEREOF, the Pledgor and the Lender have caused this Agreement to be duly executed as of the date first above written.
PLEDGOR: NATURAL GAS SYSTEMS, INC.,
a Delaware corporation
BY:
Name:
Title:
LENDER: PROSPECT ENERGY
CORPORATION,
a Maryland corporation
BY:
Name:
Title:
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WARRANT
AGREEMENT
NATURAL
GAS SYSTEMS, INC.
THIS
WARRANT AGREEMENT (this
“Agreement”) is made and entered into as of February, ___, 2005, between Natural
Gas Systems, Inc.,
a Nevada
corporation (the “Company”), and Prospect Energy Corporation, a Maryland
Corporation (“Holder”). Terms not defined herein shall have the meaning defined
in the Loan Agreement (defined below).
R
E C I T A L S
WHEREAS, the
Company proposes to issue to Holder a maximum of SEVEN HUNDRED TWENTY THOUSAND
(720,000) warrants (the “Warrants”), each such Warrant entitling the holder
thereof to purchase one share of common stock, .001 par value, of the Company
(the “Shares” or the “Common Stock”). Initially, the Holder shall be
granted 450,000
Warrants. The Company shall deliver additional Warrants under this Agreement in
the amount of One (i) Warrant for every Six and two thirds ($6.666667) dollars
of additional drawdowns on the Loan in excess of the initial $3,000,000 Advance
on the date of each such additional drawdown (so if the full additional
$1,800,000 is drawn, then warrants for 270,000 shares);
WHEREAS, the
Warrants which are the subject of this Agreement will be issued by the Company
to Holder as additional consideration related to a Secured Loan Agreement,
attached hereto as Exhibit
B, made by
the Company to the Holder (the “Loan Agreement”);
WHEREAS, the
Shares issuable upon the exercise of the Warrants herein shall be subject to the
Registration Rights Agreement (defined below), attached hereto as Exhibit
C, between
the Company and the Holder; and
NOW,
THEREFORE, in
consideration of the premises and the mutual agreements herein set forth, the
parties hereto agree as follows:
A
G R E E M E N T
1. Warrant
Certificates. The
warrant certificates to be delivered pursuant to this Agreement (the “Warrant
Certificates”) shall be in the form set forth in Exhibit
A,
attached hereto and made a part hereof, with such appropriate insertions,
omissions, substitutions and other variations as are required or permitted by
this Warrant Agreement.
2. Right
to Exercise Warrants. Each
Warrant may be exercised, in whole or in part, from the date of this Agreement
until 11:59 P.M. (Eastern Standard Time) on the date that is five (5) years
after the date of this Agreement (the “Expiration Date”). Each Warrant not
exercised on or before the Expiration Date shall expire.
Each
Warrant shall entitle its holder to purchase from the Company one share of
Common Stock (each an “Exercise Share”) at an exercise price of Seventy Five
Cents ($0.75) per share, subject to adjustment as set forth below (“Exercise
Price”).
The
Company shall not be required to issue fractional shares of Common Stock upon
the exercise of this Warrant or to deliver Warrant Certificates which evidence
fractional shares of capital stock. In the event that a fraction of an Exercise
Share would, except for the provisions of this paragraph 2, be issuable upon the
exercise of this Warrant, the Company shall pay to the Holder exercising the
Warrant an amount in cash equal to such fraction multiplied by the current
market value of the Exercise Share. For purposes of this paragraph 2, the
current market value shall be determined as follows:
(a) if the
Shares are traded in the over-the-counter market and not on any national
securities exchange and not in the NASDAQ Reporting System, the average of the
mean between the last bid and asked prices per share, as reported by the
National Quotation Bureau, Inc., or an equivalent generally accepted reporting
service, for the last business day prior to the date on which the Warrant is
exercised, or, if not so reported, the average of the closing bid and asked
prices for a Share as furnished to the Company by any member of the National
Association of Securities Dealers, Inc., selected by the Company and Holder for
that purpose.
(b) if the
Shares are listed or traded on a national securities exchange or in the NASDAQ
Reporting System, the closing price on the principal national securities
exchange on which they are so listed or traded or in the NASDAQ Reporting
System, as the case may be, on the last business day prior to the date of the
exercise of the Warrant. The closing price referred to in this Clause (b) shall
be the last reported sales price or, in case no such reported sale takes place
on such day, the average of the reported closing bid and asked prices on such
day, in either case on the national securities exchange on which the Shares are
then listed or in the NASDAQ Reporting System; or
(c) if no
such closing price or closing bid and asked prices are available, as determined
by the Holder and the Board of Directors of the Company.
3. Mutilated
or Missing Warrant Certificates. In case
any of the Warrant Certificates shall be mutilated, lost, stolen or destroyed
prior to the Expiration Date, the Company shall issue and deliver, in exchange
and substitution for and upon cancellation of the mutilated Warrant Certificate,
or in lieu of and in substitution for the Warrant Certificate lost, stolen or
destroyed, a new Warrant Certificate of like tenor and representing an
equivalent right or interest.
4. Reservation
of Shares. The
Company will at all times reserve and keep available, free from preemptive
rights, out of the aggregate of its authorized but unissued Shares or its
authorized and issued Shares held in its treasury for the purpose of enabling it
to satisfy its obligation to issue Exercise Shares upon exercise of Warrants,
the full number of Exercise Shares deliverable upon the exercise of all
outstanding Warrants.
The
Company covenants that all Exercise Shares which may be issued upon exercise of
Warrants will be validly issued, fully paid and non-assessable outstanding
Shares of the Company.
5. Rights
of Holder. The
Holder shall not, by virtue of anything contained in this Warrant Agreement or
otherwise, prior to
exercise of this Warrant, be entitled to any right whatsoever, either in law or
equity, of a stockholder of the Company, including without limitation, the right
to receive dividends or to vote or to consent or to receive notice as a
stockholder in respect of the meetings of stockholders or the election of
directors of the Company of any other matter.
6. Investment
Intent; Accredited Investor. Holder
represents and warrants to the Company that Holder is acquiring the Warrants for
investment purposes and with no present intention of distributing or reselling
any of the Warrants. Holder represents that it is an “accredited investor”
within the meaning of Rule 501 of Regulation D under the Securities Act of 1933,
as amended (the “Act”).
7. Certificates
to Bear Legend. The
Warrants and the certificate or certificates therefore shall bear the following
legend by which each holder shall be bound:
2
“THE
SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANS-FERRED WITHOUT AN EFFECTIVE REGIS-TRATION THEREOF UNDER SUCH ACT OR
PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL, REASON-ABLY SATISFACTORY TO THE
COR-PORATION AND ITS COUN-SEL, THAT SUCH REGISTRATION IS NOT
REQUIRED.”
The
Exercise Shares and the certificate or certificates evidencing any such Exercise
Shares shall bear the following legend:
“THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.”
Certificates
for Warrants or Exercise Shares, as the case may be, without such legend shall
be issued if such Warrants or Exercise Shares are sold pursuant to an effective
registration statement under the Act or if the Company has received an opinion
from counsel reasonably satisfactory to counsel for the Company that such legend
is no longer required under the Act.
8. Adjustment
of Number of Shares and Class of Capital Stock Purchasable. The
number of Exercise Shares and class of capital stock purchasable under this
Warrant are subject to adjustment from time to time as set forth in this Section
8.
(a) Adjustment
for Change in Capital Stock. If the
Company:
|
(i) |
pays
a dividend or makes a distribution on its Common Stock, in each case, in
shares of its Common Stock; |
|
(ii) |
subdivides
its outstanding shares of Common Stock into a greater number of
shares; |
|
(iii) |
combines
its outstanding shares of Common Stock into a smaller number of shares;
or |
|
(iv) |
makes
a distribution on its Common Stock in shares of its capital stock other
than Common Stock |
then the
number and classes of Exercise Shares purchasable upon exercise of each Warrant
in effect immediately prior to such action shall be adjusted so that the holder
of any Warrant thereafter exercised may receive the number and classes of shares
of capital stock of the Company which such holder would have owned immediately
following such action if such holder had exercised the Warrant immediately prior
to such action.
For a
dividend or distribution the adjustment shall become effective immediately after
the record date for the dividend or distribution. For a subdivision, combination
or reclassification, the adjustment shall become effective immediately after the
effective date of the subdivision, combination or reclassification.
3
If after
an adjustment the holder of a Warrant upon exercise of it may receive shares of
two or more classes of capital stock of the Company, the Board of Directors of
the Company shall in good faith determine the allocation of the adjusted
Exercise Price between or among the classes of capital stock. After such
allocation, that portion of the Exercise Price applicable to each share of each
such class of capital stock shall thereafter be subject to adjustment on terms
comparable to those applicable to the Exercise Shares in this Agreement.
(b) Consolidation,
Merger or Sale of the Company. If the
Company is a party to a consolidation, merger, transfer of assets or any other
business combination which reclassifies or changes its outstanding Common Stock,
the successor corporation (or corporation controlling the successor corporation
or the Company, as the case may be) shall by operation of law assume the
Company’s obligations under this Agreement. Upon consummation of such
transaction, the Warrants shall auto-matically become exercisable for the kind
and amount of securities, cash or other assets which the holder of a Warrant
would have owned immediately after the consolidation, merger, transfer or
business combination if the holder had exercised the Warrant immediately before
the effective date of such transaction. As a condition to the consummation of
such transaction, the Company shall arrange for the person or entity obligated
to issue securities or deliver cash or other assets upon exercise of the Warrant
to, concurrently with the consummation of such transaction, assume the Company’s
obligations hereunder by executing an instrument so providing and further
providing for adjustments which shall be as nearly equivalent as may be
practical to the adjustments provided for in this Section 8. The provisions of
this Section 8(b) shall similarly apply to successive reclassifications,
reorganizations, consolidations, mergers or other business combinations.
9. Successors. All the
covenants and provisions of this Agreement by or for the benefit of the Company
or Holder shall bind and inure to the benefit of their respective successor and
assigns hereunder.
10. Counterparts. This
Agreement may be executed in any number of counterparts and each of such
counterparts shall for all proposes be deemed to be an original, and such
counterparts shall together constitute by one and the same
instrument.
11. Notices. All
notices or other communications under this Agreement shall be in writing and
shall be deemed to have been given if delivered by hand or mailed by certified
mail, postage prepaid, return receipt requested, addressed as follows: if to the
Company: Natural Gas Systems, Inc., Two
Memorial City Plaza, 820 Gessner, Suite 1340. Houston, TX 77024
,
Attention: Chief Executive Officer, and to the Holder: at the address of the
Holder appearing on the books of the Company or the Company’s transfer agent, if
any.
Either
the Company or the Holder may from time to time change the address to which
notices to it are to be mailed hereunder by notice in accordance with the
provisions of this Paragraph 11.
12. Supplements
and Amendments. The
Company may from time to time supplement or amend this Agreement without the
approval of any Holders in order to cure any ambiguity or to be correct or
supplement any provision contained herein which may be defective or inconsistent
with any other provision, or to make any other provisions in regard to matters
or questions herein arising hereunder which the Company may deem necessary or
desirable and which shall not materially adversely affect the interest of the
Holder. Except as set forth in the immediately preceding sentence, this
Agreement may not be amended without the prior written consent of the
Holder.
4
13. Severability. If for
any reason any provision, paragraph or term of this Agreement is held to be
invalid or unenforceable, all other valid provisions herein shall remain in full
force and effect and all terms, provisions and paragraphs of this Agreement
shall be deemed to be severable.
14. Governing
Law. This
Agreement shall be deemed to be a contract made under the laws of the State of
Nevada and for all purposes shall be governed and construed in accordance with
the laws of said State.
17. Headings.
Paragraphs and subparagraph headings, used herein are included herein for
convenience of reference only and shall not affect the construction of this
Agreement nor constitute a part of this Agreement for any other
purpose.
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, as of the date and year first above written.
|
COMPANY
Natural
Gas Systems, Inc.
By:
_________________________________
Name:
Robert S. Herlin, CEO |
HOLDER:
Prospect
Energy Corporation
By:
_________________________________
Name:
_______________________________ |
5
Exhibit
A
THE
SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANS-FERRED WITHOUT AN EFFECTIVE REGIS-TRATION THEREOF UNDER SUCH ACT OR
PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL, REASON-ABLY SATISFACTORY TO THE
COR-PORATION AND ITS COUN-SEL, THAT SUCH REGISTRATION IS NOT
REQUIRED.
WARRANT
TO PURCHASE SHARES
OF COMMON
STOCK OF
NATURAL
GAS SYSTEMS, INC
Initial
Number of Shares: 450,000
Exercise
Price:
$0.75 per
share
Date of
Grant:
January
___, 2005
Expiration
Date:
January
___, 2010
THIS
CERTIFIES THAT, Prospect Energy Corporation, a Maryland corporation, or any
person or entity to whom the inter-est in this Warrant is lawful-ly transferred
( Holder ) is entitled to purchase the above number (as adjust-ed pursuant to
Section 4 hereof) of fully paid and non-assess-able shares of the Common Stock
(the Shares ) of Natural Gas Systems, Inc., a Nevada corporation (the
Company), having an Exercise Price as set forth above, subject to the
provi-sions and upon the terms and condi-tions set forth herein and in the
Warrant Agreement dated January __, 2005 (the Warrant Agreement ). The exercise
price, as adjusted from time to time as provided herein, is referred to as the
Exercise Price.
1. Term. The
purchase right represented by this Warrant is exer-cisable, in whole or in part,
at any time commencing on the Date of Grant and ending on the Expiration Date,
after which time the Warrant shall be void.
2. Method
of Exercise; Payment; Issuance of New Warrant. Subject
to Section 1 hereof, the right to purchase Shares repre-sented by this Warrant
may be exercised by Holder, in whole or in part, for the total number of Shares
remaining available for exercise by the surrender of this Warrant (with the
notice of exercise form attached hereto as Exhibit A duly executed) at the
principal office of the Company and by the payment to the Company, by check made
payable to the Company drawn on a United States bank and for United States
funds, or by delivery to the Company of evidence of cancellation of indebtedness
of the Company to such Holder, of an amount equal to the then appli-cable
Exercise Price per share multiplied by the number of Shares then being purchased
or by net exercise pursuant to Section 6 hereof. In the event of any exercise of
the purchase right represented by this War-rant, certificates for the Shares so
purchased shall be promptly delivered to Holder and, unless this Warrant has
been fully exercised or has expired, a new Warrant representing the portion of
the Shares, if any, with respect to which this Warrant shall not then have been
exer-cised shall also be promptly delivered to Holder.
3. Exercise
Price. The
Exercise Price at which this Warrant may be exercised shall be the Exercise
Price, as adjusted from time to time pursuant to Section 4 hereof.
4. Adjustment
of Number of Shares. The
number of
shares and/or class of capital stock purchasable upon exercise of this Warrant
are subject to adjustment as provided in Section 8 of the Warrant
Agreement.
5. Transferability
and Negotiability of Warrant. This
Warrant may not be transferred or assigned in whole or in part without
compliance with applicable federal and state securities laws by the transferor
and the transferee (includ-ing, without limitation, the delivery of investment
represen-tation letters and legal opinions reasonably satisfactory to the
Company, if reasonably requested by the Com-pany). Subject to the provisi-ons of
this Section 5, title to this War-rant may be transferred in the same
manner as a negotiable instrument transferable by endorsement and
delivery.
6. Net
Exercise. In lieu
of exercising this Warrant for cash, the Holder may elect to exchange this
Warrant for Shares equal to the value of this Warrant by surrender of this
Warrant, together with notice of such election, at the principal office of the
Company, in which event the Company shall issue to the holder a number of Shares
computed using the following formula:
X =
Y
(A-B)
A
Where:
X= the
number of Shares to be issued to the holder.
Y= the
number of Shares to be purchased under this Warrant.
A= value
per share of one Share determined in accordance with Section 2 of the Warrant
Agreement.
B= the
Exercise Price (as adjusted).
7. Registration
Rights. Upon
exercise of this Warrant, the Holder shall have and be entitled to exercise,
together with all other holders of registrable securities possessing piggy
back registration rights under that certain Registration Rights Agreement, of
even date herewith and attached hereto as Exhibit
C, between
the Company and the parties who have executed the counterpart signature pages
thereto or are otherwise bound thereby (the Registration Rights Agreement ),
the rights of registration granted under the Registration Rights Agreement (with
respect to the Shares of Common Stock issuable upon exercise of this Warrant).
By its receipt of this Warrant, Holder agrees to be bound by the Registration
Rights Agreement.
8. Miscellaneous. The
Company cove-nants that it will at all times reserve and keep available, solely
for the purpose of issue upon the exercise hereof, a sufficient number of Shares
to permit the exer-cise hereof in full. Such Shares, when issued in compliance
with the provisions of this Warrant and the Company s Certificate of
Incorporation, will be duly authorized, validly issued, fully paid and
non-assessable. No Holder of this Warrant, as such, shall, prior to the exercise
of this Warrant, be entitled to vote or receive dividends or be deemed to be a
stockholder of the Company for any purpose, nor shall anything contained in this
Warrant be construed to confer upon Holder, as such, any rights of a stockholder
of the Company or any right to vote, give or withhold consent to any corporate
action, receive notice of meetings, receive dividends or subscription rights, or
otherwise. Upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon delivery of an indemnity agreement
reason-ably satisfactory in form and amount to the Company or, in the case of
any such mutila-tion, upon surrender and cancellation of such Warrant, the
Company at its expense will execute and deliver, in lieu thereof, a new Warrant
of like date and tenor. The terms and provisions of this Warrant shall inure to
the bene-fit of, and be binding upon, the Company and the Holder hereof and
their respec-tive successors and as-signs. This Warrant shall be governed by and
construed under the laws of the State of Nevada.
2
IN
WITNESS WHEREOF, the parties have executed and delivered this Agreement as of
the date and year first written above.
| Holder:
________________________________ |
Company: Natural Gas Systems, a Nevada Corporation |
| By:
_____________________________ Name: ___________________________ |
By:
_____________________________ Name: ___________________________ |
3
NOTICE
OF EXERCISE
TO: NATURAL
GAS SYSTEMS, INC.
1. The
undersigned hereby elects to purchase _________ shares of the Common Stock of
NATURAL GAS SYSTEMS, INC. pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price of such shares in full, together
with all applicable transfer taxes, if any.
2. The
undersigned hereby elects to purchase __________ shares of the Common Stock of
NATURAL GAS SYSTEMS, INC. pursuant to the terms of the attached Warrant on a net
exercise basis in accordance with Section 6.
3. Please
issue a certificate or certificates repre-senting said shares of the Common
Stock in the name of the under-signed or in such other name as is specified
below:
|
Name:________________________________
Tax
ID:___________________
Address:________________________________
________________________________
________________________________
________________________________
________________________________
Signed:__________________________________ Date:___________________ |
4
REVOCABLE
WARRANT AGREEMENT
NATURAL
GAS SYSTEMS, INC.
THIS
REVOCABLE WARRANT AGREEMENT (this
“Agreement”) is made and entered into as of February, ___, 2005, between Natural
Gas Systems, Inc.,
a Nevada
corporation (the “Company”), and Prospect Energy Corporation, a Maryland
Corporation (“Holder”). Terms not defined herein shall have the meaning defined
in the Loan Agreement (defined below).
R
E C I T A L S
WHEREAS, the
Company proposes to issue to Holder a maximum of FOUR HUNDRED EIGHTY THOUSAND
(480,000) revocable warrants (the “Revocable Warrants”), each such Revocable
Warrant entitling the holder thereof to purchase, under certain conditions, one
share of common stock, .001 par value, of the Company (the “Shares” or the
“Common Stock”). Initially,
the Holder shall be granted 300,000 Revocable Warrants. The Company shall
deliver additional Revocable Warrants under this Agreement in the amount of One
(1) Warrant for every Ten ($10.00) dollars of additional drawdowns on the Loan
in excess of the initial $3,000,000.00 Advance on the date of each such
additional drawdown;
and
WHEREAS, the
Revocable Warrants which are the subject of this Agreement will be issued by the
Company to Holder as additional consideration related to a Secured Loan
Agreement, attached hereto as Exhibit
B, made by
the Company to the Holder (the “Loan Agreement”);
WHEREAS, the
Revocable Warrants shall be subject to revocation by the Company without any
further consideration if the Company meets certain financial tests specified in
Section 3 below.
NOW,
THEREFORE, in
consideration of the premises and the mutual agreements herein set forth, the
parties hereto agree as follows:
A
G R E E M E N T
1. Revocable
Warrant Certificates. The
warrant certificates to be delivered pursuant to this Agreement (the “Revocable
Warrant Certificates”) shall be in the form set forth in Exhibit
A,
attached hereto and made a part hereof, with such appropriate insertions,
omissions, substitutions and other variations as are required or permitted by
this Revocable Warrant Agreement.
2. Right
to Exercise Revocable Warrants. Each
Revocable Warrant may be exercised, in whole or in part, from March 15, 2006
until 11:59 P.M. (Eastern Standard Time) on the date that is five (5) years
after the date of this Agreement (the “Expiration Date”). Each Revocable Warrant
not exercised or revoked on or before the Expiration Date shall
expire.
Other
than as specified in Section 3 herein, each Revocable Warrant shall entitle its
holder to purchase from the Company one share of Common Stock (each an “Exercise
Share”) at an exercise price of Seventy Five Cents ($0.75) per share, subject to
adjustment as set forth below (“Exercise Price”).
The
Company shall not be required to issue fractional shares of Common Stock upon
the exercise of this Revocable Warrant or to deliver Revocable Warrant
Certificates which evidence fractional shares of capital stock. In the event
that a fraction of an Exercise Share would, except for the provisions of this
paragraph 2, be issuable upon the exercise of this Revocable Warrant, the
Company shall pay to the Holder exercising the Revocable Warrant an amount in
cash equal to such fraction multiplied by the current market value of the
Exercise Share. For purposes of this paragraph 2, the current market value shall
be determined as follows:
(a) if the
Shares are traded in the over-the-counter market and not on any national
securities exchange and not in the NASDAQ Reporting System, the average of the
mean between the last bid and asked prices per share, as reported by the
National Quotation Bureau, Inc., or an equivalent generally accepted reporting
service, for the last business day prior to the date on which the Revocable
Warrant is exercised, or, if not so reported, the average of the closing bid and
asked prices for a Share as furnished to the Company by any member of the
National Association of Securities Dealers, Inc., selected by the Company and
Holder for that purpose.
(b) if the
Shares are listed or traded on a national securities exchange or in the NASDAQ
Reporting System, the closing price on the principal national securities
exchange on which they are so listed or traded or in the NASDAQ Reporting
System, as the case may be, on the last business day prior to the date of the
exercise of the Revocable Warrant. The closing price referred to in this Clause
(b) shall be the last reported sales price or, in case no such reported sale
takes place on such day, the average of the reported closing bid and asked
prices on such day, in either case on the national securities exchange on which
the Shares are then listed or in the NASDAQ Reporting System; or
(c) if no
such closing price or closing bid and asked prices are available, as determined
by the Holder and the Board of Directors of the Company.
3. Revocation
of the Revocable Warrants.
Notwithstanding anything to the contrary, all Revocable Warrants granted by the
Company to the Holder under this Agreement shall be subject to forfeiture,
revocation and cancellation without any further or additional consideration due
or owed to Holder in the event that the Company and its Subsidiaries, on a
consolidated basis, prior to February 1, 2006 meets the “EBITDA Test,” as
defined below in this Section 3. The “EBITDA Test” shall mean that the Company
and its Subsidiaries, on a consolidated basis, generates EBITDA of at least
$200,000.00 per month for any three consecutive calendar months prior to March
1, 2006. Terms not defined in this Agreement with regards to this Section 3 are
defined in the Loan Agreement, attached hereto as Exhibit
B.
4. Mutilated
or Missing Revocable Warrant Certificates. In case
any of the Revocable Warrant Certificates shall be mutilated, lost, stolen or
destroyed prior to the Expiration Date, the Company shall issue and deliver, in
exchange and substitution for and upon cancellation of the mutilated Revocable
Warrant Certificate, or in lieu of and in substitution for the Revocable Warrant
Certificate lost, stolen or destroyed, a new Revocable Warrant Certificate of
like tenor and representing an equivalent right or interest.
5. Reservation
of Shares. The
Company will at all times reserve and keep available, free from preemptive
rights, out of the aggregate of its authorized but unissued Shares or its
authorized and issued Shares held in its treasury for the purpose of enabling it
to satisfy its obligation to issue Exercise Shares upon exercise of Revocable
Warrants, the full number of Exercise Shares deliverable upon the exercise of
all outstanding Revocable Warrants.
The
Company covenants that all Exercise Shares which may be issued upon exercise of
Revocable Warrants will be validly issued, fully paid and non-assessable
outstanding Shares of the Company.
6. Rights
of Holder. The
Holder shall not, by virtue of anything contained in this Revocable Warrant
Agreement or otherwise, prior to
exercise of this Revocable Warrant, be entitled to any right whatsoever, either
in law or equity, of a stockholder of the Company, including without limitation,
the right to receive dividends or to vote or to consent or to receive notice as
a stockholder in respect of the meetings of stockholders or the election of
directors of the Company of any other matter.
2
7. Investment
Intent; Accredited Investor. Holder
represents and warrants to the Company that Holder is acquiring the Revocable
Warrants for investment purposes and with no present intention of distributing
or reselling any of the Revocable Warrants. Holder represents that it is an
“accredited investor” within the meaning of Rule 501 of Regulation D under the
Securities Act of 1933, as amended (the “Act”).
8. Certificates
to Bear Legend. The
Revocable Warrants and the certificate or certificates therefore shall bear the
following legend by which each holder shall be bound:
“THE
SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGIS-TRATION THEREOF UNDER SUCH ACT OR
PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL, REASON-ABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT
REQUIRED.”
The
Exercise Shares and the certificate or certificates evidencing any such Exercise
Shares shall bear the following legend:
“THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.”
Certificates
for Revocable Warrants or Exercise Shares, as the case may be, without such
legend shall be issued if such Revocable Warrants or Exercise Shares are sold
pursuant to an effective registration statement under the Act or if the Company
has received an opinion from counsel reasonably satisfactory to counsel for the
Company that such legend is no longer required under the Act.
9. Adjustment
of Number of Shares and Class of Capital Stock Purchasable. The
number of Exercise Shares and class of capital stock purchasable under this
Revocable Warrant are subject to adjustment from time to time as set forth in
this Section 9.
(a) Adjustment
for Change in Capital Stock. If the
Company:
|
(i) |
pays
a dividend or makes a distribution on its Common Stock, in each case, in
shares of its Common Stock; |
|
(ii) |
subdivides
its outstanding shares of Common Stock into a greater number of
shares; |
|
(iii) |
combines
its outstanding shares of Common Stock into a smaller number of shares;
or |
3
|
(iv) |
makes
a distribution on its Common Stock in shares of its capital stock other
than Common Stock |
then the
number and classes of Exercise Shares purchasable upon exercise of each
Revocable Warrant in effect immediately prior to such action shall be adjusted
so that the holder of any Revocable Warrant thereafter exercised may receive the
number and classes of shares of capital stock of the Company which such holder
would have owned immediately following such action if such holder had exercised
the Revocable Warrant immediately prior to such action.
For a
dividend or distribution the adjustment shall become effective immediately after
the record date for the dividend or distribution. For a subdivision, combination
or reclassification, the adjustment shall become effective immediately after the
effective date of the subdivision, combination or reclassification.
If after
an adjustment the holder of a Revocable Warrant upon exercise of it may receive
shares of two or more classes of capital stock of the Company, the Board of
Directors of the Company shall in good faith determine the allocation of the
adjusted Exercise Price between or among the classes of capital stock. After
such allocation, that portion of the Exercise Price applicable to each share of
each such class of capital stock shall thereafter be subject to adjustment on
terms comparable to those applicable to the Exercise Shares in this Agreement.
(b) Consolidation,
Merger or Sale of the Company. If the
Company is a party to a consolidation, merger, transfer of assets or any other
business combination which reclassifies or changes its outstanding Common Stock,
the successor corporation (or corporation controlling the successor corporation
or the Company, as the case may be) shall by operation of law assume the
Company’s obligations under this Agreement. Upon consummation of such
transaction, the Revocable Warrants shall auto-matically become exercisable for
the kind and amount of securities, cash or other assets which the holder of a
Revocable Warrant would have owned immediately after the consolidation, merger,
transfer or business combination if the holder had exercised the Revocable
Warrant immediately before the effective date of such transaction. As a
condition to the consummation of such transaction, the Company shall arrange for
the person or entity obligated to issue securities or deliver cash or other
assets upon exercise of the Revocable Warrant to, concurrently with the
consummation of such transaction, assume the Company’s obligations hereunder by
executing an instrument so providing and further providing for adjustments which
shall be as nearly equivalent as may be practical to the adjustments provided
for in this Section 9. The provisions of this Section 9(b) shall similarly apply
to successive reclassifications, reorganizations, consolidations, mergers or
other business combinations.
10. Successors. All the
covenants and provisions of this Agreement by or for the benefit of the Company
or Holder shall bind and inure to the benefit of their respective successor and
assigns hereunder.
11. Counterparts. This
Agreement may be executed in any number of counterparts and each of such
counterparts shall for all proposes be deemed to be an original, and such
counterparts shall together constitute by one and the same
instrument.
12. Notices. All
notices or other communications under this Agreement shall be in writing and
shall be deemed to have been given if delivered by hand or mailed by certified
mail, postage prepaid, return receipt requested, addressed as follows: if to the
Company: Natural Gas Systems, Inc., Two
Memorial City Plaza, 820 Gessner, Suite 1340. Houston, TX 77024
,
Attention: Chief Executive Officer, and to the Holder: at the address of the
Holder appearing on the books of the Company or the Company’s transfer agent, if
any.
4
Either
the Company or the Holder may from time to time change the address to which
notices to it are to be mailed hereunder by notice in accordance with the
provisions of this Paragraph 12.
13. Supplements
and Amendments. The
Company may from time to time supplement or amend this Agreement without the
approval of any Holders in order to cure any ambiguity or to be correct or
supplement any provision contained herein which may be defective or inconsistent
with any other provision, or to make any other provisions in regard to matters
or questions herein arising hereunder which the Company may deem necessary or
desirable and which shall not materially adversely affect the interest of the
Holder. Except as set forth in the immediately preceding sentence, this
Agreement may not be amended without the prior written consent of the
Holder.
14. Severability. If for
any reason any provision, paragraph or term of this Agreement is held to be
invalid or unenforceable, all other valid provisions herein shall remain in full
force and effect and all terms, provisions and paragraphs of this Agreement
shall be deemed to be severable.
15. Governing
Law. This
Agreement shall be deemed to be a contract made under the laws of the State of
Nevada and for all purposes shall be governed and construed in accordance with
the laws of said State.
16. Headings.
Paragraphs and subparagraph headings, used herein are included herein for
convenience of reference only and shall not affect the construction of this
Agreement nor constitute a part of this Agreement for any other
purpose.
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, as of the date and year first above written.
|
COMPANY
Natural
Gas Systems, Inc.
By:
_________________________________
Name:
Robert S. Herlin, CEO |
HOLDER:
Prospect
Energy Corporation
By:
_________________________________
Name:
_______________________________ |
5
Exhibit
A
THE
SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANS-FERRED WITHOUT AN EFFECTIVE REGIS-TRATION THEREOF UNDER SUCH ACT OR
PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL, REASON-ABLY SATISFACTORY TO THE
COR-PORATION AND ITS COUN-SEL, THAT SUCH REGISTRATION IS NOT
REQUIRED.
REVOCABLE
WARRANT TO PURCHASE SHARES
OF COMMON
STOCK OF NATURAL GAS SYSTEMS, INC
Initial
Number of Shares: 300,000
Exercise
Price:
$0.75 per
share
Date of
Grant:
January
___, 2005
Expiration
Date: January
___, 2010
THIS
CERTIFIES THAT, Prospect Energy Corporation, a Maryland corporation, or any
person or entity to whom the inter-est in this Revocable Warrant is lawfully
transferred (“Holder”) is entitled to purchase the above number (as adjust-ed
pursuant to Section 4 hereof) of fully paid and non-assessable shares of the
Common Stock (the “Shares”) of Natural Gas Systems, Inc., a Nevada corporation
(the “Company), having an Exercise Price as set forth above, subject to the
provisions and upon the terms and condi-tions set forth herein and in the
Revocable Warrant Agreement dated January __, 2005 (“Revocable Warrant
Agreement”). The exercise price, as adjusted from time to time as provided
herein, is referred to as the “Exercise Price.”
NOTWITHSTANDING
ANYTING TO THE CONTRARY, THIS REVOCABLE WARRANT IS SUBJECT TO REVOCATION WITHOUT
CONSIDERATION BY THE COMPANY UNDER CERTAIN CONDITIONS DEFINED IN THE REVOCABLE
WARRANT AGREEMENT.
1. Term. Subject
to the revocation provisions of Section 3 of the Revocable Warrant Agreement,
the purchase right represented by this Revocable Warrant is exer-cisable, in
whole or in part, at any time commencing on the March 15, 2006 and ending on the
Expiration Date, after which time the Revocable Warrant shall be
void.
2. Method
of Exercise; Payment; Issuance of New Revocable Warrant. Subject
to Section 1 hereof, the right to purchase Shares repre-sented by this Revocable
Warrant may be exercised by Holder, in whole or in part, for the total number of
Shares remaining available for exercise by the surrender of this Revocable
Warrant (with the notice of exercise form attached hereto as Exhibit A duly
executed) at the principal office of the Company and by the payment to the
Company, by check made payable to the Company drawn on a United States bank and
for United States funds, or by delivery to the Company of evidence of
cancellation of indebtedness of the Company to such Holder, of an amount equal
to the then appli-cable Exercise Price per share multiplied by the number of
Shares then being purchased or by net exercise pursuant to Section 6 hereof. In
the event of any exercise of the purchase right represented by this Revocable
Warrant, certificates for the Shares so purchased shall be promptly delivered to
Holder and, unless this Revocable Warrant has been fully exercised or has
expired, a new Revocable Warrant representing the portion of the Shares, if any,
with respect to which this Revocable Warrant shall not then have been exer-cised
shall also be promptly delivered to Holder.
3. Exercise
Price. The
Exercise Price at which this Revocable Warrant may be exercised shall be the
Exercise Price, as adjusted from time to time pursuant to Section 4
hereof.
4. Adjustment
of Number of Shares. The
number of
shares and/or class of capital stock purchasable upon exercise of this Revocable
Warrant are subject to adjustment as provided in Section 9 of the Revocable
Warrant Agreement.
5. Transferability
and Negotiability of Revocable Warrant. This
Revocable Warrant may not be transferred or assigned in whole or in part without
compliance with applicable federal and state securities laws by the transferor
and the transferee (includ-ing, without limitation, the delivery of investment
represen-tation letters and legal opinions reasonably satisfactory to the
Company, if reasonably requested by the Com-pany). Subject to the provisi-ons of
this Section 5, title to this Revocable Warrant may be transferred in the
same manner as a negotiable instrument transferable by endorsement and
delivery.
6. Net
Exercise. In lieu
of exercising this Revocable Warrant for cash, the Holder may elect to exchange
this Revocable Warrant for Shares equal to the value of this Revocable Warrant
by surrender of this Revocable Warrant, together with notice of such election,
at the principal office of the Company, in which event the Company shall issue
to the holder a number of Shares computed using the following
formula:
X =
Y
(A-B)
A
Where:
X= the
number of Shares to be issued to the holder.
Y= the
number of Shares to be purchased under this Revocable Warrant.
A= value
per share of one Share determined in accordance with Section 2 of the Revocable
Warrant Agreement.
B= the
Exercise Price (as adjusted).
7. Registration
Rights. Upon
exercise of this Revocable Warrant , the Holder shall have and be entitled to
exercise, together with all other holders of registrable securities possessing
“piggy back” registration rights under that certain Registration Rights
Agreement, of even date herewith and attached hereto as Exhibit
C, between
the Company and the parties who have executed the counterpart signature pages
thereto or are otherwise bound thereby (the “Registration Rights Agreement”),
the rights of registration granted under the Registration Rights Agreement (with
respect to the Shares of Common Stock issuable upon exercise of this Revocable
Warrant ). By its receipt of this Revocable Warrant , Holder agrees to be bound
by the Registration Rights Agreement.
2
8. Miscellaneous. The
Company cove-nants that it will at all times reserve and keep available, solely
for the purpose of issue upon the exercise hereof, a sufficient number of Shares
to permit the exer-cise hereof in full. Such Shares, when issued in compliance
with the provisions of this Revocable Warrant and the Company’s Certificate of
Incorporation, will be duly authorized, validly issued, fully paid and
non-assessable. No Holder of this Revocable Warrant, as such, shall, prior to
the exercise of this Revocable Warrant, be entitled to vote or receive dividends
or be deemed to be a stockholder of the Company for any purpose, nor shall
anything contained in this Revocable Warrant be construed to confer upon Holder,
as such, any rights of a stockholder of the Company or any right to vote, give
or withhold consent to any corporate action, receive notice of meetings, receive
dividends or subscription rights, or otherwise. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Revocable Warrant and, in the case of any such loss, theft or
destruction, upon delivery of an indemnity agreement reason-ably satisfactory in
form and amount to the Company or, in the case of any such mutila-tion, upon
surrender and cancellation of such Revocable Warrant, the Company at its expense
will execute and deliver, in lieu thereof, a new Revocable Warrant of like date
and tenor. The terms and provisions of this Revocable Warrant shall inure to the
bene-fit of, and be binding upon, the Company and the Holder hereof and their
respec-tive successors and as-signs. This Revocable Warrant shall be governed by
and construed under the laws of the State of Nevada.
3
IN
WITNESS WHEREOF, the parties have executed and delivered this Agreement as of
the date and year first written above.
|
Holder:
_____________________________________________________________ |
Company: Natural Gas Systems, a Nevada Corporation | ||
| By:
_____________________________ Name: ___________________________ |
By:
_____________________________ Name: ___________________________ |
4
NOTICE
OF EXERCISE
TO: NATURAL
GAS SYSTEMS, INC.
1. The
undersigned hereby elects to purchase _________ shares of the Common Stock of
NATURAL GAS SYSTEMS, INC. pursuant to the terms of the attached Revocable
Warrant, and tenders herewith payment of the purchase price of such shares in
full, together with all applicable transfer taxes, if any.
2. The
undersigned hereby elects to purchase __________ shares of the Common Stock of
NATURAL GAS SYSTEMS, INC. pursuant to the terms of the attached Revocable
Warrant on a net exercise basis in accordance with Section 6.
3. Please
issue a certificate or certificates repre-senting said shares of the Common
Stock in the name of the under-signed or in such other name as is specified
below:
|
|
Name:________________________________
Tax
ID:___________________
Address:________________________________
________________________________
________________________________
________________________________
________________________________ Signed:__________________________________
Date:___________________ |
5
NATURAL
GAS SYSTEMS, INC.
REGISTRATION
RIGHTS AGREEMENT
THIS
REGISTRATION RIGHTS AGREEMENT (the “Agreement”) is
made as of January ____, 2005, by and among Natural Gas Systems, Inc., a Nevada
corporation (the “Company”), and
the undersigned holders of common stock of the Company together with their
qualifying transferees (the “Holders”).
RECITALS:
A. In
connection with the Company’s issuance of a note to Holders, the Company has
granted to the Holders warrants exercisable into Common Shares.
B. The
issuance of the note and the warrants is conditional upon the extension of the
rights set forth herein, and by this Agreement the Company and the Holders
desire to provide for certain rights as set forth herein.
NOW,
THEREFORE, in consideration of the foregoing and of the mutual promises and
covenants contained herein, the parties, severally and not jointly, hereby agree
as follows:
AGREEMENT:
NOW,
THEREFORE, in consideration of the foregoing and of the mutual promises and
covenants contained herein, the parties agree as follows:
1. Registration
Rights.
1.1 Definitions. As used
in this Agreement, the following terms shall have the following respective
meanings:
(a) The terms
“register”,
“registered” and
“registration” refer
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933, as amended (the “Securities
Act”), and
the declaration or ordering of the effectiveness of such registration
statement.
(b) The term
“Registrable
Securities” means
(i) any and all shares of Common Stock of the Company issuable upon the exercise
of that certain Warrant Agreement dated January __, 2005 (which shares of
Registrable Common Stock are referred to herein as the “Common
Shares”); (ii)
stock issued in lieu of the stock referred to in (i) in any reorganization which
has not been sold to the public; or (iii) stock issued in respect of the stock
referred to in (i) and (ii) as a result of a stock split, stock dividend,
recapitalization or the like, which has not been sold to the public;
provided,
however, that
Registrable Securities shall not include any Common Shares which have previously
been registered or which have been sold to the public either pursuant to a
registration statement or in a private transaction in which the transferor’s
rights under this Agreement are not assigned.
(c) The terms
“Holder” or
“Holders” means
any person or persons to whom Registrable Securities were originally issued or
qualifying transferees under subsection 1.9 hereof who hold Registrable
Securities.
(d) The term
“Initiating
Holders” means
any Holder or Holders, of 40% or greater of the aggregate of the Registrable
Securities then outstanding.
(e) The term
“SEC” means
the Securities and Exchange Commission.
(f) The term
“Registration
Expenses” shall
mean all expenses incurred by the Company in complying with subsections 1.2,
1.3, 1.4 and 1.5 hereof, including, without limitation, all registration,
qualification and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for the Company, blue sky fees and expenses, and the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Company which shall
be paid in any event by the Company.)
1.2 Company
Registration.
(a) Registration. If at
any time or from time to time, the Company shall determine to register any of
its securities, for its own account or the account of any of its shareholders,
other than a registration on Form S-8 relating solely to employee stock option
or purchase plans, or a registration on Form S-4 relating solely to a SEC Rule
145 transaction, or a registration pursuant to Section 1.3 hereof, the Company
will:
(i) promptly
give to each Holder written notice thereof at least 30 days prior to the initial
filing of the registration statement relating to such offering; and
(ii) use
commercially reasonable efforts to include in such registration (and
compliance), and in any underwriting involved therein, all the Registrable
Securities specified in a written request or requests, made within 15 days after
receipt of such written notice from the Company, by any Holder or Holders,
except as set forth in subsection 1.2(b) below.
(b) Underwriting.
(i) If the
registration of which the Company gives notice is for a registered public
offering involving an underwriting, the Company shall so advise the Holders as a
part of the written notice given pursuant to subsection 1.2(a)(i). In such event
the right of any Holder to registration pursuant to subsection 1.2 shall be
conditioned upon such Holder’s participation in such underwriting and the
inclusion of such Holder’s Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall (together with the Company and the other
shareholders distributing their securities through such underwriting) enter into
an underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company.
(ii) Notwithstanding
any other provision of this subsection 1.2, if the underwriter managing such
public offering determines that marketing factors require a limitation of the
number of shares to be underwritten, the underwriter may limit the number of
Registrable Securities to be included in the registration and underwriting, or
may exclude Registrable Securities entirely from such registration and
underwriting. The Company shall so advise all Holders of Registrable Securities
which would otherwise be registered and underwritten pursuant hereto, and the
number of shares of Registrable Securities that may be included in the
registration and underwriting shall be allocated among Holders requesting
registration in proportion, as nearly as practicable, to the respective amounts
of Registrable Securities held by each of such Holders as of the date of the
notice pursuant to subsection 1.2(a)(i) above; provided that, if and to the
extent not in conflict with any registration rights granted to other holders of
the Company’s securities in existence as of the date hereof, the number of
shares of Registrable Securities requested to be included in such underwriting
shall not be reduced unless the securities being sold by shareholders other than
the Holders are excluded from the Underwriting on a proportional basis. If any
Holder disapproves of the terms of any such underwriting, he may elect to
withdraw therefrom by written notice to the Company and the underwriter. Any
Registrable Securities excluded or withdrawn from such underwriting shall be
withdrawn from such registration.
2
1.3 Form
S-3. In
addition to the rights and obligations set forth in subsection 1.2 above, if a
Holder requests that the Company file a registration statement on Form S-3 (or
any successor to Form S-3) for a public offering of shares of Registrable
Securities, the reasonably anticipated aggregate price to the public of which
(net of underwriting discounts and commissions) would exceed $1,000,000 and the
Company is then a registrant entitled to use Form S-3 to register the shares for
such an offering, the Company shall use commercially reasonable efforts to cause
such shares to be registered for the offering as soon as practicable on Form S-3
(or any successor form to Form S-3); provided, however the Company shall not be
required to effect a registration pursuant to this subsection 1.3:
(a) in any
particular jurisdiction in which the Company would be required to execute a
general consent to service of process in effecting such registration,
qualification or compliance unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities
Act;
(b) during
the period starting with the date of filing of, and ending on a date 60 days
following the effective date of, a registration statement pursuant to subsection
1.2, provided that the Company is actively employing in good faith commercially
reasonable efforts to cause such registration statement to become
effective;
(c) if the
Company at the request of a Holder has effected a registration pursuant to this
subsection 1.3 within a 12-month period from the date of such request;
or
(d) if the
Company shall furnish to such Holder a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be detrimental to the Company and its shareholders for
such registration statement to be filed on or before the date filing would be
required and it is therefore essential to defer the filing of such registration
statement, in which case the Company shall have the right to defer such filing
for a period of not more than 90 days after the furnishing of such a certificate
of deferral, provided that the Company may not defer such filing pursuant to
this subsection 1.3 more than once in any six month period.
3
In the
event such Holders propose to offer the shares of Registrable Securities
pursuant to this subsection 1.3 by means of an underwriting, the proposed
underwriter(s) shall be selected by a majority in interest of the Holders and
shall be reasonably acceptable to the Company. The Company shall give written
notice to all other Holders and all other shareholders of the Company with
registration rights (collectively, the “Other
Holders”) of the
receipt of a request for registration pursuant to this subsection 1.3 and shall
provide a reasonable opportunity for the Other Holders to participate in the
registration. The right of any Holder to registration pursuant to this
subsection 1.3 shall be conditioned upon such Holder’s participation in such
underwriting and the inclusion of such Holder’s and/or such Other Holders’
Registrable Securities and/or other securities of the Company eligible for
registration in the underwriting (unless otherwise mutually agreed by a majority
in interest of the Holders and the Other Holders) to the extent provided herein.
The Company shall (together with the Holders and the Other Holders proposing to
distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters.
Notwithstanding any other provision of this subsection 1.3, if the underwriter
advises the Company in writing that marketing factors require a limitation of
the number of shares to be underwritten, the Company shall so advise the Holders
and the Other Holders of the number of shares of Registrable Securities and
other securities of the Company eligible for registration that may be included
in the registration and underwriting shall be allocated among the Holders and
Other Holders thereof in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities, and other securities of the Company eligible
for registration, to be included in such underwriting shall not be reduced
unless all other securities are first entirely excluded from the underwriting.
If any Holder of Registrable Securities or other disapproves of the terms of the
underwriting, such Holder may elect to withdraw therefrom by written notice to
the Company, the underwriter and the Initiating Holders. Any Registrable
Securities which are excluded from the underwriting by reason of the
underwriter’s marketing limitation or withdrawn from such underwriting shall be
withdrawn from such registration.
1.4 Expenses
of Registration. All
Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to this Section 1 shall be borne by the
Company except as follows:
(a) The
Company shall not be required to pay for expenses of any registration proceeding
begun pursuant to subsection 1.3, the request for which has been subsequently
withdrawn by the Holders, in which latter such case, such expenses shall be
borne by the Holders requesting such withdrawal. In the event that a withdrawal
by the Holders is based on material adverse information relating to the Company
that is different from the information known or available to the Holders
requesting registration at the time of their request for registration under
subsection 1.3, such registration shall not be treated as a counted requested
registration for the purposes of subsection 1.3 hereof, and in which case, such
expenses shall be borne by the Company.
4
(b) For each
registration, the Company shall not be required to pay fees or disbursements of
more than one firm of legal counsel to the Holders, such fees to not exceed
$10,000 in the aggregate.
(c) The
Company shall not be required to pay underwriters’ fees, discounts or
commissions relating to Registrable Securities, and all stock transfer taxes
applicable to the sale of Registrable Securities and fees and disbursements of
counsel for any Holder (other than fees and disbursements of counsel included in
the Registration Expenses).
1.5 Registration
Procedures. In the
case of each registration, qualification or compliance effected by the Company
pursuant to this Agreement, the Company will keep each Holder participating
therein advised in writing as to the initiation of each registration,
qualification and compliance and as to the completion thereof. Except as
otherwise provided in subsection 1.4, at its expense the Company
will:
(a) with
respect to a demand made for registration pursuant to Section 1.3, prepare and
file with the SEC a registration statement with respect to such Registrable
Securities and use its best efforts to cause such registration statement to
become effective, and, upon the request of the Holders of a majority of the
Registrable Securities registered thereunder, keep such registration statement
effective for up to 120 days or if such registration statement is on Form S-3
(or any successor to Form S-3) and provides for sales of securities from time to
time pursuant to Rule 415 under the Securities Act for up to one
year.
(b) Prepare
and file with the SEC such amendments and supplements to such registration
statement and the prospectus used in connection with such registration statement
as may be necessary to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such registration
statement.
(c) Furnish,
without charge, to the Holders such numbers of copies of a prospectus, including
each preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by
them.
(d) Use its
best efforts to register and qualify the securities covered by such registration
statement under such other securities or Blue Sky laws of such jurisdictions as
shall be reasonably requested by the Holders or any managing underwriter,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) In the
event of any underwritten public offering, enter into and perform its
obligations under an underwriting agreement, in usual and customary form, with
the managing underwriter of such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under such an
agreement.
(f) Notify
each Holder of Registrable Securities covered by such registration statement at
any time when a prospectus relating thereto is required to be delivered under
the Securities Act or the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.
5
(g) The
Company shall:
(i) make
available for inspection by a representative of the Holders, the managing
underwriter participating in any disposition pursuant to such registration
statement and one firm of attorneys designated by the Holders (upon execution of
customary confidentiality agreements reasonably satisfactory to the Company and
its counsel), at reasonable times and in reasonable manner, financial and other
records, documents and properties of the Company that are pertinent to the
conduct of due diligence customary for an underwritten offering, and cause the
officers, directors and employees of the Company to supply all information
reasonably requested by any such representative, underwriter or attorney in
connection with a registration statement as shall be necessary to enable such
persons to conduct a reasonable investigation within the meaning of Section 11
of the Securities Act;
(ii) use its
best efforts to cause all Registrable Securities covered by a registration
statement to be listed on any securities exchange or any automated quotation
system on which similar securities issued by the Company are then
listed;
(iii) cause to
be provided to the Holders that are selling Registrable Securities pursuant to
such registration statement and to the managing underwriter if any disposition
pursuant to such registration statement is an underwritten offering, upon the
effectiveness of such registration statement, a customary “10b-5” opinion
of independent counsel (an “Opinion”) and a
customary “cold comfort” letter of independent auditors (a “Comfort
Letter”) in
each case addressed to such Holders and managing underwriter, if
any;
(iv) notify in
writing the Holders that are selling Registrable Securities pursuant to such
registration statement and any managing underwriter if any disposition pursuant
to such registration statement is an underwritten offering, (A) when the
registration statement has become effective and when any post-effective
amendment thereto has been filed and becomes effective, (B) of any request by
the SEC or any state securities authority for amendments and supplements to the
registration statement or of any material request by the SEC or any state
securities authority for additional information after the registration statement
has become effective, (C) of the issuance by the SEC or any state securities
authority of any stop order suspending the effectiveness of the registration
statement or the initiation of any proceedings for that purpose, (D) if, between
the effective date of the registration statement and the closing of any sale of
Registrable Securities covered thereby, the representations and warranties of
the Company contained in any underwriting agreement, securities sales agreement
or other similar agreement, including this Agreement, relating to disclosure
cease to be true and correct in all material respects or if the Company receives
any notification with respect to the suspension of the qualification of the
Registrable Securities for sale in any jurisdiction or the initiation of any
proceeding for such purpose, (E) of the happening of any event during the period
the registration statement is effective such that such registration statement or
the related prospectus contains an untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to make
statements therein not misleading (in the case of a prospectus, in light of
circumstances under which they were made) and (F) of any determination by the
Company that a post-effective amendment to the registration statement would be
appropriate. The Holders hereby agree to suspend, and to cause any managing
underwriter to suspend, use of the prospectus contained in a registration
statement upon receipt of such notice under clause (C), (E) or (F) above until,
in the case of clause (C), such stop order is removed or rescinded or, in the
case of clauses (E) and (F), the Company has amended or supplemented such
prospectus to correct such misstatement or omission or otherwise.
6
If the
notification relates to an event described in clause (C), the Company promptly
shall use its best efforts to obtain the withdrawal of the stop order. If the
notification relates to an event described in clauses (E) or (F), the Company
shall promptly prepare and furnish to such seller and each underwriter, if any,
a reasonable number of copies of a prospectus supplemented or amended so that,
as thereafter delivered to the purchasers of such Registrable Securities, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein no misleading;
(v) provide
and cause to be maintained a transfer agent and registrar for all such
Registrable Securities covered by such registration statement not later than the
effective date of such registration statement;
(vi) deliver
promptly to each Holder participating in the offering and each underwriter, if
any, copies of all correspondence between the SEC and the Company, its counsel
or auditors and all memoranda relating to discussions with the SEC and its staff
with respect to the registration statement, other than those portions of any
such correspondence and memoranda which contain information subject to
attorney-client privilege with respect to the Company, and, upon receipt of such
confidentiality agreements as the Company may reasonably request, make
reasonably available for inspection by any Holder of such Registrable Securities
covered by such registration statement, by any underwriter, if any,
participating in any disposition to be effected pursuant to such registration
statement and by any attorney, accountant or other agent retained by any such
Holder or any such underwriter, all pertinent financial and other records,
pertinent corporate documents and properties of the Company, and cause all of
the Company’s officers, directors and employees to supply all information
reasonably requested by any such Holder, underwriter, attorney, accountant or
agent in connection with such registration statement;
(vii) use its
best efforts to obtain the withdrawal of any order suspending the effectiveness
of the registration statement;
(viii) provide a
CUSIP number for all Registrable Securities not later than the effective date of
the registration statement;
(ix) make
reasonably available its employees and personnel and otherwise provide
reasonable assistance to the underwriters in the marketing of Registrable
Securities in any underwritten offering;
(x) promptly
prior to the filing of any document which is to be incorporated by reference
into the registration statement or the prospectus (after the initial filing of
such registration statement) provide copies of such document to counsel to the
seller of Registrable Securities and to the managing underwriter, if any, and
make the Company’s representatives reasonably available for discussion of such
document and make such changes in such document concerning such sellers prior to
the filing thereof as counsel for such sellers or underwriters may reasonably
request; and
7
(xi) cooperate
with the sellers of Registrable Securities and the managing underwriter, if any,
to facilitate the timely preparation and delivery of certificates not bearing
any restrictive legends representing the Registrable Securities to be sold, and
cause such Registrable Securities to be issued in such denominations and
registered in such names in accordance with the underwriting agreement prior to
any sale of Registrable Securities to the underwriters or, if not an
underwritten offering, in accordance with the instructions of the sellers of
Registrable Securities at least three business days prior to any sale of
Registrable Securities.
1.6 Indemnification.
(a) The
Company will indemnify and hold harmless to the fullest extent permitted by law
each Holder of Registrable Securities and each of its officers, directors and
partners, and each person controlling such Holder, with respect to which such
registration, qualification or compliance has been effected pursuant to this
Agreement, and each underwriter, if any, and each person who controls any
underwriter of the Registrable Securities held by or issuable to such Holder,
against all claims, losses, expenses, damages and liabilities (or actions in
respect thereto) arising out of or based on (i) any untrue statement (or alleged
untrue statement) of a material fact contained in any registration statement
under which such securities were registered under the Securities Act or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading; (ii)
any untrue statement (or alleged untrue statement) of a material fact contained
in any preliminary, final or summary prospectus, offering circular or other
document (including any related registration statement, notification or the
like) incident to any such registration, qualification or compliance, or based
on any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statement therein, in light of the
circumstances under which they were made, or not misleading, or (iii) any
violation or alleged violation by the Company of the Securities Act, the
Securities Exchange Act of 1934, as amended, (the “Exchange Act”) or any state
securities law applicable to the Company or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any such state law and relating to
action or inaction required of the Company in connection with any such
registration, qualification of compliance, and will reimburse each such Holder,
each of its officers, directors and partners, and each person controlling such
Holder, each such underwriter and each person who controls any such underwriter,
within a reasonable amount of time after incurred for any reasonable legal and
any other expenses incurred in connection with investigating, defending or
settling any such claim, loss, damage, liability or action; provided, however,
that the indemnity agreement contained in this subsection 1.6(a) shall not apply
to amounts paid in settlement of any such claim, loss, damage, liability, or
action if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld); and provided further, that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage or liability arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by an
instrument duly executed by such Holder or underwriter specifically for use
therein.
8
(b) Each
Holder will, if Registrable Securities held by or issuable to such Holder are
included in the securities as to which such registration, qualification or
compliance is being effected, severally and not jointly, indemnify and hold
harmless to the fullest extent permitted by law the Company, each of its
directors and officers, each underwriter, if any, of the Company’s securities
covered by such a registration statement, each person who controls the Company
within the meaning of the Securities Act, and each other such Holder, each of
its officers, directors and partners and each person controlling such Holder,
against all claims, losses, expenses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such Holders, such directors, officers, partners, persons or
underwriters for any reasonable legal or any other expenses incurred in
connection with investigating, defending or settling any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by the Holder in an instrument duly executed by such
Holder specifically for use therein; provided, however, that the indemnity
agreement contained in this subsection 1.6(b) shall not apply to amounts paid in
settlement of any such claim, loss, damage, liability or action if such
settlement is effected without the consent of the Holder, (which consent shall
not be unreasonably withheld); provided further, that the total amount for which
any Holder shall be liable under this subsection 1.6(b) shall not in any event
exceed the net proceeds received by such Holder from the sale of Registrable
Securities held by such Holder in such registration; and provided further, that
a Holder will not be liable in any such case to the extent that any such claim,
loss, damage or liability arises out of or is based on any untrue statement or
omission based upon written information furnished to the Holder by an instrument
duly executed by the Company or underwriter specifically for use
therein.
(c) Each
party entitled to indemnification under this subsection 1.6 (the “Indemnified
Party”) shall
give notice to the party required to provide indemnification (the “Indemnifying
Party”)
promptly after such Indemnified Party has actual knowledge of any claim as to
which indemnity may be sought, and shall permit the Indemnifying Party to assume
the defense of any such claim or any litigation resulting therefrom; provided
that counsel for the Indemnifying Party, who shall conduct the defense of such
claim or litigation, shall be approved by the Indemnified Party (whose approval
shall not be unreasonably withheld), and the Indemnified Party may participate
in such defense at such party’s expense; and provided further, that the failure
of any Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations hereunder, except to the extent such
failure resulted in material prejudice to the Indemnifying Party; and provided
further, that an Indemnified Party (together with all other Indemnified Parties
which may be represented without conflict by one counsel) shall have the right
to retain one separate counsel, with the fees and expenses to be paid by the
Indemnifying Party, if representation of such Indemnified Party by the counsel
retained by the Indemnifying Party would be inappropriate due to actual or
potential differing interests between such Indemnified Party and any other party
represented by such counsel in such proceeding. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation.
9
(d) If for
any reason the foregoing indemnity is unavailable or is insufficient to hold
harmless an indemnified party under Section 1.6, then each Indemnifying Party
shall contribute to the amount paid or payable by such Indemnified Party as a
result of any Claim in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party, on the one hand, and the Indemnified Party, on
the other hand, with respect to such offering of securities. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Indemnifying
Party or the Indemnified Party and the parties’ relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. If, however, the allocation provided in the second
preceding sentence is not permitted by applicable law, then each Indemnifying
Party shall contribute to the amount paid or payable by such Indemnified Party
in such proportion as is appropriate to reflect not only such relative faults,
but also any other relevant equitable considerations. The parties hereto agree
that it would not be just and equitable if contributions pursuant to this
Section 1.6(d) were to be determined by pro rata allocation or by any other
method of allocation which does not take into account the equitable
considerations referred to in the preceding sentences of this Section 1.6(d).
The amount paid or payable in respect of any Claim shall be deemed to include
any legal or other expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such Claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the U.S.
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Notwithstanding anything in this
Section 1.6 to the contrary, no Indemnifying Party (other than the Company)
shall be required pursuant to this Section 1.6(d) to contribute any amount in
excess of the net proceeds received by such Indemnifying Party from the sale of
Registrable Securities in the offering to which the losses, claims, damages or
liabilities of the Indemnified Parties relate, less the amount of any
indemnification payment made pursuant to Section 1.6.
(e) The
indemnity agreements contained herein shall be in addition to any other rights
to indemnification or contribution which any Indemnified Party may have pursuant
to law or contract and shall remain operative and in full force and effect
regardless of any investigation made or omitted by, or on behalf of, any
Indemnified Party and shall survive the transfer of the Registrable Securities
by any such party.
1.7 Information
by Holder. Any
Holder or Holders of Registrable Securities included in any registration shall
promptly furnish to the Company such information regarding such Holder or
Holders and the distribution proposed by such Holder or Holders as the Company
may request in writing and as shall be required in connection with any
registration, qualification or compliance referred to herein.
10
1.8 Rule
144 Reporting. With a
view to making available to Holders the benefits of certain rules and
regulations of the SEC which may permit the sale of the Registrable Securities
to the public without registration, the Company agrees at all times
to:
(a) make and
keep public information available, as those terms are understood and defined in
SEC Rule 144;
(b) file with
the SEC in a timely manner all reports and other documents required of the
Company under the Securities Act and the Exchange Act (at any time after it has
become subject to such reporting requirements); and
(c) so long
as a Holder owns any Registrable Securities, to furnish to such Holder forthwith
upon request a written statement by the Company as to its compliance with the
reporting requirements of said Rule 144, and of the Securities Act and the
Exchange Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed by the Company as the
Holder may reasonably request in complying with any rule or regulation of the
SEC allowing the Holder to sell any such securities without
registration.
1.9 Transfer
of Registration Rights. A
Holder’s rights to cause the Company to register its securities and keep
information available, granted to it by the Company under subsections 1.2, 1.3
and 1.8, may be not be assigned except for an assignment (i) by such Holder of
at least 100,000 shares (as adjusted for stock splits, stock dividends,
recapitalizations and like events), (or such lesser number of shares as
represents all of the Registrable Shares then held by such Holder) or (ii) to
any constituent partners or members of a Holder which is a partnership or
limited liability company, or to affiliates (as such term is defined in Rule 405
of the Securities Act) of a Holder, provided, that (a) the Company is given
written notice by such Holder at the time of or within a reasonable time after
said transfer, stating the name and address of said transferee or assignee; and
identifying the securities with respect to which such registration rights are
being assigned; (b) the assignee or transferee of such rights agrees in writing
to be bound by the terms and conditions of this Agreement, and (c) solely as to
transfers pursuant to clause (iii) above, any transferees or assignees agree to
act through a single representative. The Company may prohibit the transfer of
any Holders’ rights under this subsection 1.9 to any proposed transferee or
assignee who the Company reasonably believes is a competitor of the Company, or
when such transfer may violate applicable securities laws.
1.10 Subordination
of Registration Rights.
Notwithstanding anything to the contrary, each Holder expressly agrees and
acknowledges that the rights granted to it pursuant to this Agreement subject to
the rights granted to certain other holders of the Company's securities pursuant
to those registration rights agreement in existence as of the date
hereof.
1.11 Limitations
on Subsequent Registration Rights. From
and after the date hereof, the Company shall not, without the prior written
consent of the Holders (which consent will not be unreasonably withheld) of not
less than a majority of the Registrable Securities then outstanding enter into
any agreement with any holder or prospective holder of any securities of the
Company which would allow such holder or prospective holder to demand any
registration including any registration rights similar to those rights described
in subsection 1.3 or include such securities in any registration filed under
subsections 1.2 or 1.3 hereof if such inclusion would adversely affect the
rights of any Holder (or any qualifying transferee under subsection 1.9) under
such subsections.
11
1.12 “Market
Stand-Off” Agreement. Each
Holder hereby agrees that, during the period of duration (not to exceed 90 days)
specified by the Company and an underwriter of common stock or other securities
of the Company following the effective date of public offering of securities ,
it shall not, to the extent requested by the Company and such underwriter,
directly or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase, pledge or otherwise
transfer or dispose of (other than to donees who agree to be similarly bound)
any securities of the Company held by it at any time during such period except
common stock included in such registration pursuant to the terms of this
Agreement. In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares of securities of every other person subject to the
foregoing restriction) until the end of such period.
1.13 Delay
of Registration. No
Holder shall have any rights to take any actions to restrain, enjoin, or
otherwise delay any registration as the result of any controversy that might
arise with respect to the interpretation or implementation of this Section
1.
1.14 Termination
of Registration Rights. No
holder shall be entitled to exercise any right provided for in this Section 1 at
any time when such Holder may sell all its shares in a three (3) month period
under Rule 144 of the Act.
2. General.
2.1 Waivers
and Amendments. With
the written consent of the record holders of at least a majority of the
Registrable Securities, the obligations of the Company and the rights of the
parties under this Agreement may be waived (either generally or in a particular
instance, either retroactively or prospectively, and either for a specified
period of time or indefinitely), and with the same consent the Company, when
authorized by resolution of its Board of Directors, may enter into a
supplementary agreement for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Agreement; provided,
however, that no such modification, amendment or waiver shall reduce the
aforesaid percentage of Registrable Securities without the consent of all of the
Holders of the Registrable Securities. . Upon the effectuation of each such
waiver, consent, agreement of amendment or modification, the Company shall
promptly give written notice thereof to the record holders of the Registrable
Securities who have not previously consented thereto in writing. This Agreement
or any provision hereof may be changed, waived, discharged or terminated only by
a statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, except to the extent
provided in this subsection 3.1.
2.2 Governing
Law. This
Agreement shall be governed in all respects by the laws of the State of Nevada
without regard the principles of conflicts of law thereof.
12
2.3 Successors
and Assigns. Except
as otherwise expressly provided herein, the provisions hereof shall inure to the
benefit of, and be binding upon, the successors, assigns, heirs, executors and
administrators of the parties hereto.
2.4 Entire
Agreement. This
Agreement and the other documents (include Exhibits referenced herein) delivered
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof, and this
Agreement shall supersede and cancel all prior agreements between the parties
hereto with regard to the subject matter hereof.
2.5 Notices,
etc. All
notices and other communications required or permitted hereunder shall be in
writing and shall be delivered by overnight courier service (receipt requested)
or mailed by first class mail, postage prepaid, certified or registered mail,
return receipt requested, addressed (a) if to any Holder , at such party’s
address as set forth in the Company’s records, or at such other address as such
party shall have furnished to the Company in writing, or (b) if to the Company,
at such address as the Company shall have furnished to the Holder in
writing.
2.6 Severability. In case
any provision of this Agreement shall be invalid, illegal, or unenforceable, the
validity, legality and enforceability of the remaining provisions of this
Agreement or any provision of the other Agreement s shall not in any way be
affected or impaired thereby.
2.7 Titles
and Subtitles. The
titles of the sections and subsections of this Agreement are for convenience of
reference only and are not to be considered in construing this
Agreement.
2.8 Counterparts. This
Agreement may be executed in any number of counterparts, each of which shall be
an original, but all of which together shall constitute one
instrument.
IN
WITNESS WHEREOF, the parties hereto have executed this Agreement on the date set
forth underneath their respective signatures below.
“COMPANY”
Natural
Gas Systems, Inc.,
a
Nevada corporation
By:
_________________________________
Robert S.
Herlin, President and CEO
Date:
____________, 2005
13
“HOLDER”
By:
_________________________________
Print:
_______________________________
Date:
_______________, 2005
14
DEFINITIVE ASSET PURCHASE AGREEMENT
THIS DEFINITIVE ASSET PURCHASE AGREEMENT (the “Agreement”) is made and entered into on the _____ day of ___________, 2005, by and between Chadco, Inc., a Louisiana corporation, and Alan Chadwick McCartney and Sonya Lynn McCarty McCartney (together “Sellers”), and NGS Sub. Corp., a foreign corporation domiciled in the State of Delaware (“Buyer”).
Sellers are the owners of oil, gas and mineral interests and wells; equipment; and improvements located in the Tullos Urania and Colgrade Fields, LaSalle and Winn Parishes, Louisiana (the “Facility”). Sellers desire to sell to Buyer, and Buyer desires to purchase from Sellers the property and assets of Sellers situated at the Facility described hereinbelow.
Accordingly, in consideration of the foregoing and of the mutual promises, covenants, and subject to the terms and conditions set forth below, the parties agree as follows:
SECTION 1. ASSETS TO BE CONVEYED. On the Closing Date (as defined in Section 9.1), Sellers shall sell, assign, transfer and deliver to Buyer, or its designee, and Buyer or its designee shall purchase from Sellers the following with warranty of title by through and under Sellers except as limited hereinbelow (collectively, the “Assets”):
1.1 Leases. The interests in the oil, gas and mineral leases, leasehold interests, operating interests, servitudes, working interests, royalty interests, overriding royalty interests, operating rights and/or mineral rights in oil, natural gas, petroleum, hydrocarbons, and other minerals as described in Exhibit “A” attached hereto and made a part hereof as to all depths
(the “Mineral Leases”).
1.1.1. It is the intention of Seller to sell and Buyer to buy all of Sellers’ net revenue interest in the mineral leases described up to and including 0.830000 except as otherwise noted, with Sellers reserving a royalty interest equal to the difference between 0.830000 and the lessor’s burden. For those leases in which Sellers own a net revenue interest of less than 0.830000, Sellers will convey all of their right, title and leasehold working interest. Anything contained herein to the contrary not withstanding, Sellers warrant that they are conveying to Buyer a net revenue interest in each
Mineral Lease of not less than the net revenue interests shown on Exhibit “A”.
1.2 Wells. Subject to the provisions of subpart 1.2.1, below, all oil and gas wells described on Exhibit “B-1” and B-2” attached hereto and made a part hereof (the
“Wells”). Sellers hereby warrant that they are conveying to Buyer not less than the net revenue interest set out for each well on Exhibit “B-1” and “B-2”.
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1.2.1 The records of the Louisiana Office of Conservation reflect breaks in production from the Wells described on Exhibit “B-2” which would result in the expiration of the leases on which said Wells were drilled in the absence of any other production or development activity on those Leases or on any units of which said leased lands formed a part. Sellers represent and warrant to Buyer that those Wells described on Exhibit “B-2” or other lease and/or unit wells have produced in sufficient quantities and with sufficient regularity to maintain the Leases in force and effect in accordance with their terms insofar as Sellers’ right to produce the Wells described on Exhibit “B-2” and retain said production. In the event it should be determined that one or more of the Wells described on Exhibit “B-2” have not produced sufficiently to maintain the leases in force and effect, then, in that event, the Purchase Price shall be reduced pro rata for each such Well. Sellers covenant and agree that upon
receipt of written notice from Buyer they will immediately refund to Buyer the pro rata portion of the Purchase Price for each Well on which the lease has not been maintained in force and effect.
1.3 Personal Property. All tangible personal property, accessories, fixtures, appurtenances, and equipment located on, used in connection with or attached to the Mineral Interests and Wells described in Paragraphs 1.1 and 1.2 above and having to do with production of oil, gas or other minerals in the Facility, including, but not limited to, fixtures, tanks, jacks, pumps, equipment, pipe, tubing, equipment in repair, pipelines, attached gathering systems, (whether on location or off site in storage or in repair)
depending upon or used in connection with the Mineral Interests and Wells described in Paragraphs 1.1 and 1.2 above described on Exhibit “C” attached hereto and made a part hereof (the “Equipment”); all oil, gas, casinghead gas, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons, products refined and manufactured therefrom, other minerals, and the accounts and proceeds from the sale of all of the foregoing; (the “Hydrocarbons”) (the “Severed Hydrocarbons”); all contracts and agreements that benefit or burden the Leasehold Interests and production therefrom described in the foregoing paragraph and located in or having to do with the Facility, including, but not limited to, operating agreements, unitization agreements, pooling agreements, declarations of pooling or unitization, farmout agreements, rights-of-way, easements, surface agreements, assignments, and oil, gas, liquids, condensate, casinghead gas and gas sales, purchase, exchange, gathering, transportation and processing contracts (the “Contracts”); and the pipelines and
all equipment associated therewith (collectively the “Personal Property”).
1.3.1 Warranty as to personal property. Seller warrants that personal property is located as is described on the attached exhibits, but does not warrant the condition thereof, the fitness for any intended purpose and sells same “as is, where is”.
1.4 Any causes of action against others that are assignable and not specifically dealt with herein, but that are attributable to the rights and properties described in Paragraphs 1.1, 1.2, 1.3, and 1.4, above.
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1.5 All records, files, engineering data, accounting records, production records, geologic and geophysical data (including all licenses and ownership rights, tapes, interpretations, and maps), well files and all other documentary information owned and maintained by Sellers pertaining to the Assets, and any other documents pertaining to or in any way dealing with the Leases, Wells, Equipment, Hydrocarbons, Severed Hydrocarbons, Surface Leases, Contracts and Gathering System as described hereinabove.
1.6 It is understood that Sellers shall continue to operate as contract operators and well service providers in the Facility and, as such, shall retain and own trucks, vehicles, workover equipment, spare parts, pipe, tubing, pumps, jacks, downhole equipment and other miscellaneous equipment normal to that operation and not included in the Personal Property (for example, a pump or jack removed from a shut-in well included in the Leasehold Interests shall be included in the Personal Property, whereas a pump or jack in inventory of Sellers for general use of its customers shall not be included in the
Personal Property). It is the intention of this Agreement that Buyer shall acquire all accessories, fixtures, equipment and appurtenances to any and all Assets, but shall not acquire any spare parts, pipe, tubing, pumps, jacks, downhole equipment and other personal property not derived from the Assets and used in the business of Sellers in their contract operations business.
1.7 It is Sellers’ intent to convey to Buyer all of Sellers’ interest of every nature and kind as to all depths in and to the Assets whether or not same are described with particularity in this Agreement. Sellers will execute such additional documents as Buyer may reasonably require to confirm title in Buyer to all Assets.
1.8 It is acknowledged that there is a pending dispute between Sellers and the State of Louisiana regarding expropriation of all or a portion of the LTF Urania No. 1, LTF Urania No. 2 and Tremont B No. 11 leases and the wells located thereon, a dispute that is expected to result in litigation in the 28th Judicial District Court for the Parish of LaSalle, State of Louisiana. It is agreed that Sellers will retain title in and to said lease and wells located thereon to fully
and completely prosecute that action. Upon termination of said lawsuit Sellers will convey to Buyer all of Sellers’ interest in said lease and wells, together with one-third (1/3) of the net compensation received therein after payment of related direct costs of litigation including attorney’s fees. If at the expiration of one year from the date of execution of this Agreement the dispute with respect to the LTF Urania No. 1 has not been resolved, Seller will, upon Buyer’s request, assign said well and the attendant lease rights to Buyer.
SECTION 2. ASSUMPTION OF LIABILITIES. Buyer shall assume any and all obligations of Sellers under the Leases and Contracts being acquired herein and which are specifically and individually described on the attached Exhibits, but Sellers shall remain obligated for the liability, cost of defense, and other expenses related to any breach of said obligations or violations of any laws, rules or regulations of any governmental entity which occur or relate to periods occurring prior to closing and Sellers shall, indemnify, defend and hold Buyer harmless from any claims or losses incurred by Buyer as a result thereof, including reasonable attorney’s
fees, reasonable costs of investigation and other reasonable costs incurred by Buyer in litigating same.
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SECTION 3. PURCHASE.
3.1 Price and Allocation. The total purchase price for the Assets is EIGHT HUNDRED TWELVE THOUSAND SEVEN HUNDRED THIRTY-THREE AND NO/100 ($812,733.00) DOLLARS (the “Purchase Price”) payable at closing adjusted for the net of revenues over direct expenses attributable to the Assets from the Effective Date to the Closing Date. Within ninety (90) days following the
Closing, Buyer and Sellers shall mutually agree upon an allocation of the Purchase Price among the Assets, and each party shall prepare and file with their respective income tax returns for the tax year in which the Closing occurs, IRS Form 8594 allocating the Purchase Price (including any adjustments pursuant to Section 4 or elsewhere in this Agreement) in accordance with Section 1060 of the Internal Revenue Code of 1986, as amended and in accordance with the Asset Allocation. Notwithstanding anything to the contrary in this Agreement, this Section 3 shall survive the Closing without limitation.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF SELLERS. Sellers, jointly and severally, make the following representations and warranties, all of which have been relied upon by Buyer in entering into this Agreement, all of which are true and correct as of the date hereof, and, except as otherwise provided, all of which shall be true and correct at the Closing Date.
4.1 Organization. Chadco, Inc. is a corporation duly organized, validly existing, and in good standing under the laws of the State of Louisiana, and has full power and authority to enter into and perform this Agreement.
4.2 Authorization; Binding Agreement. The execution and delivery of this Agreement by Sellers has been duly authorized by Chadco, Inc.’s Board of Directors, and, if necessary, its shareholders, and this Agreement constitutes a valid and binding agreement of Chadco, Inc., enforceable in accordance with its terms. At closing the execution and delivery of the Warranty Deed and any other documents requiring Chadco, Inc.’s signature will have been duly authorized by all necessary corporate and shareholder action and shall constitute the legal, valid and
binding obligations of Chadco, Inc.
4.3 No Breach. Except as set out on Exhibit “E” attached, the execution, delivery and performance of this Agreement by Sellers will not result in the breach of, or constitute a default under, the provisions of any agreement or other instrument to which Sellers are parties or by which they or their property is bound or affected including any of the Assets being transferred hereunder.
4.4 Title to Assets. Except as set out on Exhibit “E” attached, Sellers shall convey to Buyer at Closing Date, by Warranty Deed, title to the Assets, in each case free and clear of all liens, security interests, mortgages, deeds of trust, pledges, judgments, leases, rights of refusal or other encumbrances whatever (“Liens”).
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4.5 Litigation and Governmental Regulation. Except as set out on Exhibit “E” attached, there is no judgment outstanding and no litigation, proceeding, claim or investigation of any nature pending or threatened against Sellers or the Assets that might adversely affect the conveyance of the Facility or materially impair the value of the Assets. Sellers are not parties to or subject to the provisions of any judgment, order, writ, injunction, decree or award of any court, arbitrator or governmental or regulatory official, body or authority that could
adversely affect the Facility or any of the Assets.
4.6 Payment of Taxes. Sellers have duly and timely filed all returns for personal property, severance, ad valorem and other taxes and charges due as of the Effective Date of this Agreement and have paid all applicable taxes and charges. All severance, ad valorem, and other taxes and charges based on production attributable to the Assets shall be the obligation of the party entitled to the production on which such tax or charge is based. All other taxes against the Assets shall be prorated between Sellers and Buyer as of the Effective Date in accordance with
generally accepted accounting practices.
4.7 Insolvency Proceedings. No insolvency proceedings of any character, affecting Sellers or the Assets are pending or threatened. Sellers have not made an assignment for the benefit of creditors or taken any action with a view to or that would constitute a valid basis for the institution of any such insolvency proceedings or which transfer would constitute a fraudulent conveyance or preference.
4.8 Compliance with Law. Sellers have complied with each, and are not in violation of any, law, rule or regulation, and has not failed to obtain or to adhere to the requirements of any license, permit or authorization necessary to the ownership of the Assets and Facility or to the utilization of same in the ordinary course of business, which noncompliance, violation or failure to obtain or adhere might reasonably be expected to have a material adverse effect on any of the Assets or the Facility, including the timely and proper preparation and filing of all
state, local and federal reports.
4.9 Validity of Contemplated Transactions; etc. (a) The execution, delivery and performance of this Agreement and the Warranty Deed by Sellers will not contravene or violate (i) any law, rule or regulation to which Sellers are subject, (ii) any judgment, order, writ, injunction, decree or award of any court, arbitrator or governmental or regulatory official, body or authority which is applicable to Sellers, or (iii) the Articles of Incorporation, or By-laws of Chadco, Inc.
(b) Such execution, delivery or performance will not violate, be in conflict with or result in the breach (with or without giving notice or lapse of time, or both) of any term, condition, or provision of, or require the consent of any other party to any indenture, agreement, contract, commitment, lease, plan, license, permit, authorization or other instrument or document to which Sellers are parties, by which the Sellers have rights or by which any of the Assets or Facility may be bound or affected, other than those consents obtained prior to the Closing, or give any party with rights thereunder the right to terminate, modify, accelerate or otherwise change the existing rights or obligations of Sellers.
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4.10 No Third Party Options. There are no existing agreements, options, commitments, Liens or rights with, to or in any person to acquire any of the Assets or Facility.
4.11 Conditions Affecting Assets. There are no conditions existing with respect to Sellers’ markets, products, clients, customers, facilities, personnel or suppliers which could reasonably be expected to have a material adverse effect on the Assets and Facilities other than conditions that may affect the industry in which Sellers operate as a whole.
4.12 Environmental Matters.
(a) Definitions. For the purposes of this Section 4.12, the following terms shall have the meanings indicated:
(i) "Environment" shall mean soil, land surface or subsurface strata, surface waters (including navigable waters, ocean waters, streams, ponds, drainage basins, and wetlands), groundwater, drinking water supply, stream sediments, ambient air (including indoor air), plant and animal life, and any other environmental medium or natural resource.
(ii) "Environmental, Health, and Safety Liabilities" shall mean any cost, damages, expense, liability, obligation, or other responsibility arising from or under Environmental Law or Occupational Safety and Health Law and consisting of or relating to:
(A) any environmental, health, or safety matters or conditions (including on-site or off-site contamination, occupational safety and health, and regulation of chemical substances or products);
(B) fines, penalties, judgments, awards, settlements, legal or administrative proceedings, damages, losses, claims, demands and response, investigative, remedial, or inspection costs and expenses arising under Environmental Law or Occupational Safety and Health Law;
(C) financial responsibility under Environmental Law or Occupational Safety and Health Law for cleanup costs or corrective action, including any investigation, cleanup, removal, containment, or other remediation or response actions required by applicable Environmental Law or Occupational Safety and Health Law (whether or not such cleanup has been required or requested by any governmental body or any other person or entity) and for any natural resource damages; or
(D) any other compliance, corrective, investigative, or remedial measures required under Environmental Law or Occupational Safety and Health Law.
The terms "removal," "remedial," and "response action," include the types of activities covered by the United States Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. ' 9601 et seq., as amended ("CERCLA").
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(iii) "Environmental Law" shall mean the Hazardous Materials Transportation Act, 49 U.S.C. ' 1801 et seq., the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. ' 6901 et seq., the Clean Water Act, 33 U.S.C. '1251 et, the Clean Air Act, 42 U.S.C. ' 7401 et seq., the Toxic Substances Control Act, 15 U.S.C. ' 2601 et seq., the Oil Pollution Act of 1990, 33 U.S.C. ' 2701 et seq., the Occupational Safety and Health Act, 29 U.S.C. ' 651 et seq, the Universal Waste Rule (40 CFR Part
273) and all other legal requirements that relate to:
(A) advising appropriate authorities, employees, and the public of intended or actual releases of pollutants or hazardous substances or materials, violations of discharge limits, or other prohibitions and of the commencements of activities, such as resource extraction or construction, that could have significant impact on the environment;
(B) preventing or reducing to acceptable levels the release of pollutants or hazardous substances or materials into the environment;
(C) reducing the quantities, preventing the release, or minimizing the hazardous characteristics of wastes that are generated;
(D) assuring that products are designed, formulated, packaged, and used so that they do not present unreasonable risks to human health or the environment when used or disposed of;
(E) protecting resources, species, or ecological amenities;
(F) reducing to acceptable levels the risks inherent in the transportation of hazardous substances, pollutants, oil, or other potentially harmful substances;
(G) cleaning up pollutants that have been released, preventing the threat of release, or paying the costs of such clean up or prevention; or
(H) making responsible parties pay private parties, or groups of them, for damages done to their health or the environment, or permitting self-appointed representatives of the public interest to recover for injuries done to public assets.
(iv) "Hazardous Materials" shall mean any waste or other substance that is listed, defined, designated, or classified as, or otherwise determined to be, hazardous, corrosive, ignitable, radioactive, or toxic or a pollutant or a contaminant under or pursuant to any Environmental Law, including any admixture or solution thereof, and specifically including, but in no way limited to, petroleum and all derivatives thereof or synthetic substitutes therefor and asbestos or asbestos-containing materials.
(v) "Occupational Safety and Health Law" shall mean any legal requirement designed to provide safe and healthful working conditions and to reduce occupational safety and health hazards.
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(b) Environmental Compliance.
(i) With the exception of those matters set out on Exhibit “D” attached hereto and made a part hereto, insofar as the Mineral Interests, Wells and Facility in general, Sellers are not now and will not be at Closing in violation of any Environmental Law.
(ii) Sellers have no basis to expect, nor have Sellers, or, any other person or entity for whose conduct they are or may be held responsible, received any citation, directive, inquiry, notice, order, summons, warning, or other communication that relates to any alleged, actual, or potential violation or failure to comply with any Environmental Law, or of any alleged, actual, or potential obligation to undertake or bear the cost of any Environmental, Health, and Safety Liabilities with respect to any of the Assets of Facility.
(iii) Except for normal use of the Assets and Facility and normal operations in conformance with customary industry standards and not in violation of any Environmental Law, there are no Hazardous Materials present on or in the Assets or the Facility, including any Hazardous Materials contained in barrels, above or underground storage tanks, landfills, land deposits, land, water, dumps, equipment (whether moveable or fixed) or other containers, either temporary or permanent or incorporated into any structure therein or thereon, except for minerals that are naturally present in their original geological formation.
(iv) Sellers have no reports, studies, analyses, tests, or monitoring possessed or initiated by Sellers pertaining to Hazardous Materials in, on, or under the Facilities and the Assets, or concerning compliance by Sellers or any other person or entity for whose conduct they are or may be held responsible, with Environmental Laws.
4.13 Quality of Assets. The Assets were acquired and have been maintained in accordance with regular business practices of Sellers. The Assets are substantially all of the inventory, equipment, mineral interests, wells, contracts and real property used by Sellers in conducting their business in the Facility during the twelve-month period immediately preceding the Closing contemplated by this Agreement.
4.14 Completeness of Disclosure. No representation or warranty made in this agreement by or on behalf of Sellers and in any list, certificate, Exhibit, Schedule or other instrument, document, agreement or writing made a part hereof or delivered hereunder or in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact or omits or will omit to state any fact necessary to make any statement herein or therein not materially misleading.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer makes the following representations and warranties, all of which have been relied upon by Sellers in entering into this Agreement, all of which are true and correct as of the date hereof, and, except as otherwise provided, all of which shall be true and correct as of the Effective Date and the Closing Date.
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5.1 Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, is qualified to do business in and is in good standing under the laws of the State of Louisiana, and has full power and authority to enter into and perform this Agreement.
5.2 Authorization. The Board of Directors of Buyer has duly authorized the execution and delivery of this Agreement and this Agreement constitutes a valid and binding agreement of Buyer, enforceable in accordance with its terms.
5.3 No Breach. Except as set out on Exhibit “E” attached, the execution, delivery and performance of this Agreement by Buyer will not result in the breach of, or constitute default under, the provisions of any agreement or other instrument to which Buyer is a party or by which Buyer is bound.
5.4 Litigation. Except as otherwise provided herein, there is no action, suit, investigation or other proceedings pending or threatened which may adversely affect Buyer’s ability to perform this Agreement in accordance with its terms, and Buyer is not aware of any facts which could reasonably result in any such proceeding.
5.5 Employees. Buyer reserves the right to interview any employees currently working at the Facility for the purposes of continued employment with Buyer. If an offer of employment is tendered and accepted, Buyer assumes no prior obligation regarding said employees, including but not limited to employment contracts, accrued and unpaid leave, workman compensation claims, or any claims regarding employment benefits.
SECTION 6. PRE-CLOSING OBLIGATIONS. The parties covenant and agree as follows with respect to the period prior to the Closing Date:
6.1 Confidentiality. Each party agrees that any and all information learned or obtained by it from the other shall be confidential and agrees not to disclose any such information to any person other than such party’s attorneys, agents, representatives, lenders, or existing or potential investors who have executed a Confidentiality Agreement materially in the same form and term as to that between the parties hereto, as is necessary for the purpose of effecting the transactions contemplated by this Agreement. This Confidentiality Provision shall remain in
force and be binding on all parties for a period of two years after the Closing Date.
6.2 Access. Prior to the Closing Date, Sellers shall give Buyer or representatives of Buyer reasonable access to the Facility for purposes of inspection, appraisal, testing, surveying, and other activities that may be necessary in the course of the Inspection Period. The Buyer shall be given, or has been given, sufficient time to perform a Due Diligence Examination on the Facility, including, but not limited to, a thorough inventory of the land, buildings, and equipment to be purchased; verification of historical production, revenues, operating expenses and
historical capital expenditures; satisfactory completion of a third party Phase I Environmental audit; and verification of current production, flowing pressures, remaining reserves, product prices, gathering and processing agreements and costs and applicable product sales agreements. Buyer hereby agrees to indemnify and hold Sellers harmless from any loss, claim or liability arising out of or related to Buyer performing its Due Diligence Examination at the Facility or activities associated therewith.
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6.3 Additional Covenant. Buyer and Sellers shall take all commercially reasonable efforts to cause the consummation of the transaction contemplated by this Agreement and shall not take any action that is inconsistent with their obligations under this Agreement in any material respect.
SECTION 7. CONDITIONS PRECEDENT.
7.1 Conditions to Buyer’s Obligation. The obligation of Buyer to consummate the transaction contemplated by this Agreement is subject to the satisfaction of each of the following conditions (unless otherwise waived by Buyer):
7.1.1 Representations and Warranties. The representations and warranties of Sellers shall be true, complete, and correct in all material respects as of the Closing Date with the same force and effect as if then made.
7.1.2 Compliance with Conditions. All of the terms, conditions and covenants to be complied with or performed by Sellers on or before the Closing Date shall have been duly complied with and performed in all material respects.
7.1.3 Title to Assets. On the Closing Date, the Assets will be delivered to Buyer free and clear of all Liens.
7.1.4 Closing Documents. Sellers shall deliver to Buyer all of the closing documents specified in Section 8.2.1, all of which documents shall be dated as of the Closing Date, duly executed, and in a form reasonably acceptable to Buyer.
7.2 Conditions to Sellers’ Obligation. The obligation of Sellers to consummate the transaction contemplated by this Agreement is subject to satisfaction of each of the following conditions (unless otherwise waived by Sellers):
7.2.1 Representations and Warranties. The representations and warranties of Buyer to Sellers shall be true, complete and correct in all material respects as of the Closing Date with the same force and effect as if then made.
7.2.2 Compliance with Conditions. All of the terms, conditions and covenants to be complied with or performed by Buyer on or before the Closing Date shall have been duly complied with and performed in all material respects.
7.2.3 Payment. Buyer shall pay Sellers the Purchase Price as provided in Section 3 of this Agreement.
7.2.4 Closing Documents. Buyer shall deliver to Sellers all the closing documents specified in Section 8.2.2, all of which documents shall be dated as of the Closing Date, as applicable, duly executed, and in a form reasonably satisfactory to Sellers.
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SECTION 8. CLOSING. With regard to all dates and time periods set forth or referred to in this Agreement, it is understood and agreed that time is of the essence.
8.1 Closing Date. The Closing shall occur as soon as commercially possible, but no later than February 4, 2005. However, it shall have an effective date of December 1, 2004, at 12:01 a.m. (the “Effective Date”). The Closing shall occur at a place and time mutually agreed upon by the parties.
8.2 Performance at Closing. The following documents shall be executed and delivered at Closing:
8.2.1 By Sellers. Sellers shall deliver to Buyer (i) Deed conveying to Buyer title to the Assets with those warranties as provided herein and with full substitution and subrogation to any and all rights of warranty against Sellers’ predecessors in title; (ii) certificate of good standing of Chadco, Inc., issued as of a recent date by Secretary of State of the State of Louisiana; (iii) an officer’s certificate attesting to Chadco, Inc.’s compliance with the matters set forth in Sections 7.1 and certifying the resolutions of Sellers’ board
of directors and shareholders (if applicable) authorizing the execution and delivery of this Agreement and the transactions contemplated hereby; (iv) a certificate of non-foreign status on Chadco, Inc.; and (v) originals or copies, as applicable of all documents and records which Sellers are obligated to provide Buyer under the terms of this Agreement.
8.2.2 By Buyer. Buyer shall deliver to Sellers (i) a copy of the articles of incorporation of Buyer, certified as of a recent date by the Secretary of State of the state of Buyer’s formation; (ii) certificate of good standing of Buyer, issued as of a recent date by the Secretary of State of the State of Texas; (iii) certificate of good standing of Buyer, issued as of a recent date, by the Secretary of State of the State of Louisiana showing Buyer is authorized to do business in the State of Louisiana; (iv) certificates of Buyer which show Buyer is
qualified to own and operate the assets being conveyed herein, issued as of a recent date by the Louisiana Department of Conservation and any and all other Louisiana governmental agencies which may require said qualification; (v) an officer’s certificate attesting to Buyer’s compliance with the matters set forth in Sections 8.2.1 and 8.2.2, and certifying the resolutions of the board of directors of Buyer authorizing the execution and delivery of this Agreement and the transactions contemplated hereby, and (vi) the Purchase Price.
8.2.3 Other Documents and Acts. The parties will also execute such other documents, and perform such other acts, before and after Closing, as may be necessary for the complete implementation and consummation of this Agreement, including the execution by Sellers of any documents reasonably required by any purchaser of production to effectuate payment of proceeds attributable to production from the Facility to Buyer.
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SECTION 9. POST-CLOSING OBLIGATIONS. The parties covenant and agree as follows with respect to the period subsequent to Closing:
9.1 Indemnification. Sellers, jointly and severally, undertake and agree to indemnify and hold Buyer harmless against any and all losses, costs, liabilities, claims, obligations, assessments, damages, fines and expenses, including reasonable attorney’s fees and investigation costs (together, “Claims”), incurred or suffered by Buyer arising from (i) the ownership and operation of the Facility or ownership of the Assets during Sellers’ period of ownership prior to the Closing Date, and (ii) a breach, misrepresentation, or other violation of
any of Sellers’ covenants, warranties or representations contained in this Agreement. Buyer undertakes and agrees to indemnify and hold Sellers harmless against any and all Claims incurred or suffered by Sellers arising from (a) the ownership and operation of the Facility or ownership of the Assets after the Closing Date; (b) a breach, misrepresentation, or other violation of any of Buyer’s covenants, warranties and representations contained in this Agreement. The foregoing indemnities are intended by Sellers and Buyer, respectively, to cover all acts, suits, proceedings, claims, demands, assessments, adjustments, costs, and expenses with respect to any and all of the specific matters in these indemnities, respectively, set forth and shall be without limitation as to amount.
9.2 Agreement Not to Compete. Sellers shall not acquire any interest in any of the property intended to be included in the Assets, including, but not by way of limitation, by mineral deed, mineral lease, assignment, farmout, operating agreement or servitude, whether directly or through subsidiaries or parties interposed, so long as Buyer claims any ownership in or right to said Assets.
9.3 Agreement by Seller to Remediate Certain Areas. Seller shall, within thirty (30) days after the Closing Date, complete the remediation to full compliance with state regulations of the sites listed on Exhibit “D”, as generally described on such Exhibit.
9.4 Change of Operator. With fifteen (15) days of the Closing Date Buyer shall make all necessary filings with the Louisiana Office of Conservation to change the operator on all wells acquired by Buyer to Buyer or Buyer’s designated contract operator.
9.5 Post-Closing Requirements: Sellers agree to comply with the post-closing requirements set out on Exhibit “E”, attached.
SECTION 10. GENERAL PROVISIONS.
10.1 Risk of Loss. The risk of loss or damage to the Assets shall be upon Sellers at all times prior to Closing and Sellers shall keep all of the Assets fully insured through the date of Closing in accordance with Sellers’ usual business practice during the twelve (12) months preceding the Closing Date. In the event of loss or damage, Sellers shall promptly notify Buyer thereof and may, at their option, attempt to repair, replace or restore the lost or damaged property to its former condition. If such repair, replacement, or restoration has not been
completed prior to the scheduled Closing Date, Buyer may terminate this Agreement or, in Buyer’s sole and uncontrolled discretion, accept assignment of all insurance proceeds attributable to the loss and proceed with Closing in accordance with the terms and provisions of this Agreement.
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10.2 Expenses; Legal Fees. Except as otherwise provided herein, all expenses involved in the preparation and consummation of this Agreement shall be borne by the party incurring the same whether or not the transaction contemplated herein is consummated. If legal action is necessary to enforce any of the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys’ fees and costs incurred thereby.
10.3 Survival of Representations and Warranties. The several representations, warranties, and covenants of the parties contained herein shall survive for a period of four (4) years from the Closing Date.
10.4 Exclusive Dealings. For so long as this Agreement remains in effect, neither Sellers nor any person acting on Sellers’ behalf shall, directly or indirectly, solicit or initiate any offer or negotiations with any person concerning the acquisition of the Facility and Assets by any party other than Buyer.
10.5 Brokerage. Any commission or broker’s or finder’s fee due any broker or agent shall be paid by the party who retained said broker or agent in connection with the
transaction contemplated by this Agreement and the party incurring such fee shall indemnify and hold harmless the other party from any such fee.
10.6 Control. In the event a conflict occurs between the provisions of this Agreement and the provisions of the Act of Sale and Assignment to be executed in connection with this transaction, the terms and provisions of the Act of Sale and Assignment shall control except in case of a conflict with respect to Sellers’ representations and warranties to Buyer in this Agreement, which, in such event, shall be governed by the representations and warranties contained in this Agreement.
10.7 Notices. All notices and other communications pertaining to this Agreement shall be in writing and shall be deemed duly given when delivered personally (which shall include delivery by facsimile that issues a receipt or other confirmation of delivery) to the party for whom such communication is intended, or three (3) business days after the date mailed by certified mail, return receipt requested, postage prepaid, addressed as follows:
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If to Sellers, to: |
With a mandatory copy to: Donald R. Wilson Gaharan & Wilson P. O. Box 1346 Jena, Louisiana 71342-1346 Facsimile: 318-992-5110 |
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If to Buyer, to: |
With a mandatory copy to: Walter C. Dunn The Boles Law Firm P. O. Box 2065 Monroe, LA 71207-2065 Facsimile: 318-361-3371 |
Either party may change its address for notices by written notice to the other.
10.8 Waiver. Unless otherwise specifically agreed in writing to the contrary: (i) the failure of either party at any time to require performance by the other of any provision of this Agreement shall not affect such party’s right thereafter to enforce the same; (ii) no waiver by either party of any default by the other shall be taken or held to be a waiver by such party of any other preceding or subsequent default; and (iii) no extension of time granted by either party for the performance of any obligation or act by the other party shall be deemed to be an
extension of time for the performance of any other obligation or act hereunder.
10.9 Miscellaneous. This Agreement and the agreements referenced herein supersede and terminate any prior agreements between the parties and contain all of the terms agreed upon with respect to the subject matter hereof. This Agreement may not be altered or amended except by an instrument in writing signed by Sellers and Buyer. This Agreement may be signed in any number of counterparts with the same effect as if the signatures on each such counterpart were on the same instrument. The headings of the paragraphs of this Agreement are for convenience only and in
no way modify, interpret or construe the meaning of specific provisions of the Agreement. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality, and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. This Agreement may not be assigned without the prior written consent of Sellers and Buyer except that Buyer may designate a third party to take title to the Assets. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable to the parties’ successors and assigns.
10.10 Governing Law. This Agreement shall be governed by and construed under the laws of the State of Louisiana, without regard to conflicts-of-laws principles that would require the application of any other law.
10.11 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof, or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the parties to this Agreement hereby acknowledge and agree that the court making the determination of invalidity or unenforceability shall have the power (i) to reduce
the scope, duration, and/or area of the term or provision, (ii) to delete specific words or phrases, or (iii) to amend and replace any invalid or unenforceable term or provision, so that the provision as amended by said court is valid and enforceable and comes as close as is legally possible to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment of said court may be appealed.
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10.12 Construction. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to “Sections” and “Parts” refer to the corresponding Sections and Parts of this Agreement.
10.13 Time Is Of The Essence. Both Parties understand and agree that time is of the essence and, as such, will work diligently to consummate this transaction as quickly as is reasonably possible.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed individually or by their respective duly authorized officer as of the date first written above.
CHADCO, INC.
By:____________________________
Name: Alan Chadwick McCartney
Title: President
By:____________________________
Name: Alan Chadwick McCartney, Individually
By:_______________________________
Sonya Lynn McCarty McCartney
NATURAL GAS SYSTEMS, INC.
By:___________________________
Name: Robert S. Herlin
Title: President
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News Release
February 3, 2005
Natural Gas Systems, Inc. Announces Senior Secured Debt Financing
(Houston, Texas) NATURAL GAS SYSTEMS, INC. (OTC: NGSY) (“NGS”) announced that it has completed a senior secured debt facility in the amount of up to $4.8 million from Prospect Energy Corporation (NASDAQ:PSEC) (“Prospect”). The proceeds of the funding will be used to acquire oil and gas fields in the onshore Gulf Coast region and elsewhere, to further develop its existing onshore Delhi and Tullos Urania oil and gas producing fields in central and northern Louisiana and to repay certain outstanding debt. Under the terms of the Prospect facility, once certain financial hurdles have been met, NGS will have the option to raise new senior secured debt with a third party lender. The Prospect facility would then become subordinated to that new debt.
As compensation to enter into the facility, NGS will issue to Prospect a number of warrants equal to between approximately two and five percent of the common stock of NGS, subject to the amount of the facility drawn down and attainment by NGS of certain levels of cash flow. The warrants are exercisable at $0.75 per common share.
“In the past, the NGS team has been successful in finding underdeveloped onshore oil and gas properties and improving their production output efficiencies,” said John Barry, Prospect’s Chairman and Chief Executive Officer. “As important, NGS’s cash flow coverage and collateral coverage meet our credit standards as debt investors. We see NGS as a core relationship for us, and we expect to provide additional capital as the company continues to acquire and develop new fields.”
“Developing this relationship with Prospect is an important milestone for NGS,” stated Robert Herlin, President of NGS. “The funding allows us to add to our asset base in northern Louisiana and implement a development program to take advantage of the considerable resources in the Delhi and Tullos Fields. Furthermore, we are now positioned to pursue similar opportunities.”
Natural Gas Systems, Inc. (www.natgas.us) acquires and develops oil and gas properties and applies both conventional and specialized technology to accelerate production and develop incremental reserves. NGS owns 100% of the working interest in the 13,636 acre Delhi Field in northeastern Louisiana that includes 8 producing wells and 34 shut-in wells and historic cumulative production of over 200 million barrels of oil since its discovery in the 1940’s. Since the acquisition of the Delhi Field in 2003, NGS has significantly increased production by returning wells to operation and re-completing wells to new reservoirs, and plans to soon implement a development drilling program. NGS also owns a 100% working interest in approximately 140 producing wells and 100 shut-in wells in the Tullos Urania and adjoining fields in north central Louisiana that have produced cumulatively over 50 million barrels of oil since discovery in the 1920’s. NGS plans to increase oil production through returning wells to operation and increasing water re-injection capacity.
Prospect Energy Corporation (www.prospectstreet.com) is a closed-end investment company that lends to and invests in energy-related businesses and assets. Prospect Energy's investment objective is to generate both current income and long-term capital appreciation through debt and equity investments.
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Safe Harbor Statement
This press release includes certain "Forward-Looking Statements" within the meaning of section 21E of the United States Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. All statements regarding potential results and future plans and objectives of the company, are forward-looking statements that involve various risks and uncertainties. There can be no assurance that such statements will prove to be accurate and actual results and future events could differ materially from those anticipated in such statements. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, those factors that are disclosed under the heading "Risk Factors" and elsewhere in our documents filed
from time to time with the United States Securities and Exchange Commission and other regulatory authorities. Statements regarding production volumes, drilling and development activity, prices, future revenues and income and cash flows and other statements that are not historical facts contain predictions, estimates and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the company believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved and these statements will prove to be accurate. Important factors that could cause actual results to differ materially from those included in the forward-looking statements include the timing and extent of changes in commodity prices for oil and gas, the need to develop and replace reserves, environmental risks, 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 meet its stated business goals, as well as other factors that are disclosed as “Risk Factors” in our documents filed from time to time with the United States Securities and Exchange Commission.
For additional information contact:
Investor Contact: John Liviakis, Liviakis Financial Communications, Inc.
(415) 389-4670
NGS Contact: Sterling McDonald
(713) 935-0122
Prospect Contact: John Barry, or
Grier Eliasek
(212) 448-0702
News Release
February 8, 2005
Natural Gas Systems, Inc. Announces Purchase of Producing Properties
(Houston, Texas) NATURAL GAS SYSTEMS, INC. (OTC: NGSY) (“NGS” or the “Company”) announced its February 3, 2005 purchase of additional producing wells in the Tullos Urania Field in LaSalle Parish and in the Colgrade Field in Winn Parish, Louisiana from a privately owned company.
The purchase includes 100% of the working interest in 65 producing oil wells, 56 shut-in oil wells and 9 salt water injection wells with gross production of up to 70 barrels per day. The Company’s external reservoir engineer has estimated remaining proved developed producing reserves to be approximately 236,000 barrels of oil. NGS expects to add substantial recoverable reserves by returning to production most, if not all, of the shut-in wells and by installation of additional water injection capacity. Based on the price paid of $812,733, before adjustments, the purchase is equivalent to a price of $3.44 per barrel of oil of proved developed reserves. The acquired leases are, in most cases, direct offsets to leases purchased by NGS in September 2004 and offer what management believes will be excellent synergies in operations and development.
Previously, in September 2004, NGS purchased approximately 125 producing wells in the same fields for $725,000, before adjustments, and the Company’s external reservoir engineer assigned proved developed producing reserves of approximately 245,322 barrels of oil. That purchase price approximated $2.96 per barrel of oil of proved developed producing reserves, before adjustments. NGS expects to add substantial recoverable reserves by returning up to 45 shut-in wells to production and by adding water injection capacity.
NGS has commenced an aggressive program to restore up to 100 shut-in oil wells from the two purchases in the Tullos Urania, Colgrade and Crossroads Fields and to add salt water injection capacity designed to permit increased production rates. The program includes operational efficiencies that are expected to reduce repair and power costs. NGS is funding the latest purchase and planned development by drawing down its recently announced credit facility with Prospect Energy Corporation. Other planned development includes restoring or re-completing up to a dozen wells and drilling up to ten new wells in the Delhi Field in northeastern Louisiana.
“This purchase adds to our critical mass of producing properties in north central Louisiana and brings long-lived, predictable production,” said Robert Herlin, President of NGS. “Furthermore, we believe that considerable additional reserves can be added through aggressive repair and maintenance of wells. Nearby operators also have demonstrated that increasing the amount of water disposal capacity can result in increased oil production.”
Natural Gas Systems, Inc. (www.natgas.us) is a development stage company that acquires and develops oil and gas properties and applies both conventional and specialized technology to accelerate production and develop incremental reserves. NGS owns 100% of the working interest in the 13,636 acre Delhi Field in northeastern Louisiana that includes 8 producing wells and 34 shut-in wells and historic cumulative production of over 200 million barrels of oil since its discovery in the 1940’s. Since the acquisition of the Delhi Field in 2003, NGS has significantly increased production by returning wells to operation and re-completing wells to new reservoirs, and plans to soon implement a development drilling program. NGS also owns a 100% working interest in approximately 140 producing wells and 100 shut-in wells in the Tullos Urania and adjoining fields in north central Louisiana that have produced cumulatively over 50 million barrels of oil since discovery in the 1920’s.
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Safe Harbor Statement
This press release includes certain "Forward-Looking Statements" within the meaning of section 21E of the United States Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. All statements regarding potential results and future plans and objectives of the company, are forward-looking statements that involve various risks and uncertainties. There can be no assurance that such statements will prove to be accurate and actual results and future events could differ materially from those anticipated in such statements. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, those factors that are disclosed under the heading "Risk Factors" and elsewhere in our documents filed
from time to time with the United States Securities and Exchange Commission and other regulatory authorities. Statements regarding production volumes, drilling and development activity, prices, future revenues and income and cash flows and other statements that are not historical facts contain predictions, estimates and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the company believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved and these statements will prove to be accurate. Important factors that could cause actual results to differ materially from those included in the forward-looking statements include the timing and extent of changes in commodity prices for oil and gas, the need to develop and replace reserves, environmental risks, 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 meet its stated business goals, as well as other factors that are disclosed as “Risk Factors” in our documents filed from time to time with the United States Securities and Exchange Commission.
For additional information contact:
Investor Contact: John Liviakis, Liviakis Financial Communications, Inc.
(415) 389-4670
NGS Contact: Sterling McDonald, Chief Financial Officer
(713) 935-0122