NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY.
Original Issue Date: February 7, 2007
Original Conversion Price (subject to adjustment herein): $1.00
8% Senior Secured Convertible Note #1 $10,000,000.00
8% SENIOR SECURED CONVERTIBLE NOTE
----------------------------------
FOR VALUE RECEIVED, PETROSEARCH ENERGY CORPORATION, a Nevada corporation,
(the "COMPANY"), having its principal place of business at 000 Xxxxxx Xxxxx,
Xxxxx 000, Xxxxxxx, Xxxxx 00000, promises to pay to the order of RCH PETRO
INVESTORS, LP, a Delaware limited partnership, or its registered assigns (the
"HOLDER"), the principal sum of TEN MILLION AND NO/100 DOLLARS (US
$10,000,000.00) on the three (3) year anniversary of the Original Issue Date
hereof or such earlier date as this 8% Senior Secured Convertible Note (this
"CONVERTIBLE NOTE") is required or permitted to be repaid as provided hereunder,
whether by acceleration or otherwise (such three (3) year anniversary date, or
such earlier date, the "MATURITY DATE"), and to pay interest to the Holder on
the aggregate unconverted and then outstanding principal amount of this
Convertible Note in accordance with the provisions hereof.
This Convertible Note is a duly authorized and validly issued 8% Senior
Secured Convertible Note of the Company (collectively, the "CONVERTIBLE NOTE")
designated as its 8% Senior Secured Convertible Note by the Company in the
aggregate principal amount of $10,000,000, issued in registered form under that
certain Note and Warrant Purchase Agreement (together with all amendments,
supplements and modifications thereto in accordance with the terms hereof from
time to time, herein called the "PURCHASE AGREEMENT"), dated of even date
herewith, by and among the Company and the Holder, to which Purchase Agreement
reference is hereby made for additional rights, duties and obligations of the
Company and the Holder. This Convertible Note is secured by the Collateral
described herein and is subject to the following additional provisions:
1
Section 1. Definitions. For the purposes hereof, in addition to the
---------- -----------
terms defined elsewhere in this Convertible Note, (a) capitalized terms not
otherwise defined herein shall have the meanings set forth in the Purchase
Agreement and (b) the following terms shall have the following meanings:
"Affiliate" means, with respect to a specified Person, any other
---------
Person, whether now in existence or hereafter created, directly or
indirectly controlling, controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, "controlling," "controlled
by," and "under common control with") means the power to direct or cause
the direction of the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract
or otherwise.
"Xxxxxxx Petrosearch" means Xxxxxxx Petrosearch, L.L.C., a Texas
--------------------
limited liability company.
"Xxxxxxx Shale Project" means the project located in the Fort Worth
-----------------------
basin of Texas comprised a 2 million acre, 8-county contract area directed
by the Partnership (as defined in the Pledge and Security Agreement) in
which the Company indirectly owns a 5.54455% interest.
"Bankruptcy Event" means any of the following events: (a) the Company
-----------------
or any Significant Subsidiary thereof commences a case or other proceeding
under any bankruptcy, reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of
any jurisdiction relating to the Company or any Significant Subsidiary
thereof; (b) there is commenced against the Company or any Significant
Subsidiary thereof any such case or proceeding that is not dismissed within
60 days after commencement; (c) the Company or any Significant Subsidiary
thereof is adjudicated insolvent or bankrupt or any order of relief or
other order approving any such case or proceeding is entered; (d) the
Company or any Significant Subsidiary thereof suffers any appointment of
any custodian or the like for it or any substantial part of its property
that is not discharged or stayed within 60 calendar days after such
appointment; (e) the Company or any Significant Subsidiary thereof makes a
general assignment for the benefit of creditors; (f) the Company or any
Significant Subsidiary thereof calls a meeting of its creditors with a view
to arranging a composition, adjustment or restructuring of its debts; or
(g) the Company or any Significant Subsidiary thereof, by any act or
failure to act, expressly indicates its consent to, approval of or
acquiescence in any of the foregoing or takes any corporate or other action
for the purpose of effecting any of the foregoing.
"Business Day" means any day except Saturday, Sunday, any day which
-------------
shall be a federal legal holiday in the United States or any day on which
banking institutions in the State of New York are authorized or required by
law or other governmental action to close.
2
"Capital Lease" means a lease with respect to which the lessee is
--------------
required concurrently to recognize the acquisition of an asset and the
incurrence of a liability in accordance with GAAP.
"Collateral" has the meaning set forth in the Pledge and Security
----------
Agreement and includes without limitation the following:
(a) 25% of the membership interests (ownership interests)
owned by the Company in Exploration Holding (the "EXPLORATION HOLDING
MEMBERSHIP INTEREST");
(b) all products and proceeds of the foregoing Exploration
Holding Membership Interest, including, without limitation, all
revenues, distributions, dividends, stock dividends, securities and
other property, rights, and interests that the Company is at any time
entitled to receive on account of the same.
"Collateral Value" means 25% of the Fair Market Value of all assets of
----------------
Xxxxxxx Petrosearch (as long as Xxxxxxx Petrosearch continues to be owned
directly, or indirectly, by the Company).
"Common Stock" means the common stock, par value $0.001 per share, of
-------------
the Company and stock of any other class of securities into which such
securities may hereafter be reclassified or changed into.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
-------------
and the rules and regulations promulgated thereunder.
"Exploration Holding" means Exploration Holding Co., L.L.C., a Texas
--------------------
limited liability company.
"Fair Market Value" means the amount at which property would change
-------------------
hands between a willing buyer and a willing seller, neither being under any
compulsion to buy or sell and both having reasonable knowledge of the
relevant facts.
"GAAP" means generally accepted accounting principles in the United
----
States set forth in the opinions and pronouncements of the Accounting
Principles Board and the American Institute of Certified Public Accountants
and statements and pronouncements of the Financial Accounting Standards
Board or such other principles as may be approved by a significant segment
of the accounting profession in the United States, that are applicable to
the circumstances as of the date of determination, consistently applied.
"Guarantee" means, as to any Person, (a) any obligation, contingent or
---------
otherwise, of such Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness or other obligation payable or performable by
another Person (the "primary obligor") in any manner, whether directly or
---------------
indirectly, and including any obligation of such Person, direct or
indirect, (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or other obligation, (ii) to
purchase or lease
3
property, securities or services for the purpose of assuring the obligee in
respect of such Indebtedness or other obligation of the payment or
performance of such Indebtedness or other obligation, (iii) to maintain
working capital, equity capital or any other financial statement condition
or liquidity or level of income or cash flow of the primary obligor so as
to enable the primary obligor to pay such Indebtedness or other obligation,
or (iv) entered into for the purpose of assuring in any other manner the
obligee in respect of such Indebtedness or other obligation of the payment
or performance thereof or to protect such obligee against loss in respect
thereof (in whole or in part), or (b) any Lien on any assets of such Person
securing any Indebtedness or other obligation of any other Person, whether
or not such Indebtedness or other obligation is assumed by such Person (or
any right, contingent or otherwise, of any holder of such Indebtedness to
obtain any such Lien). The amount of any Guarantee shall be deemed to be an
amount equal to the stated or determinable amount of the related primary
obligation, or portion thereof, in respect of which such Guarantee is made
or, if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof as determined by the guaranteeing Person in
good faith. The term "Guarantee" as a verb has a corresponding meaning.
---------
"Indebtedness" means as to the Company at a particular time, without
------------
duplication, all of the following, whether or not included as indebtedness
or liabilities in accordance with GAAP:
(i) all obligations of the Company for borrowed money and all
obligations of the Company evidenced by bonds, debentures, notes, loan
agreements or other similar instruments;
(ii) all direct or contingent obligations of the Company arising
under letters of credit (including standby and commercial), bankers'
acceptances, bank guaranties, surety bonds and similar instruments;
(iii) net obligations of the Company under any Swap Contract;
(iv) all obligations of the Company to pay the deferred purchase
price of property or services (other than trade accounts payable in
the ordinary course of business that are not unpaid for more than 120
days after the date on which such trade account payable was created);
(v) indebtedness (excluding prepaid interest thereon) secured by
a Lien on property owned or being purchased by the Company (including
indebtedness arising under conditional sales or other title retention
agreements), whether or not such indebtedness shall have been assumed
by the Company or is limited in recourse;
(vi) Capital Lease Obligations and Synthetic Lease Obligations;
(vii) all obligations of the Company to purchase, redeem, retire,
defease or otherwise make any payment in respect of any equity
interest in the Company or any other entity or company, valued, in the
case of a redeemable preferred interest, at the greater of its
voluntary or involuntary liquidation preference plus
4
accrued and unpaid dividends (but excluding undeclared dividends where
the Company is not required to declare such dividends); and
(viii) all Guarantees of the Company in respect of any of the
foregoing.
"Initial Registration Statement" means the registration statement on
--------------------------------
Form SB-2 registering the Note Shares, as provided in the Registration
Rights Agreement.
"Lien" means any mortgage, pledge, hypothecation, assignment, deposit
----
arrangement, encumbrance, lien (statutory or other), charge, or preference,
priority or other security interest or preferential arrangement in the
nature of a security interest of any kind or nature whatsoever (including
any conditional sale or other title retention agreement, any easement,
right of way or other encumbrance on title to real property, and any
financing lease having substantially the same economic effect as any of the
foregoing).
"Note Shares" means the shares of Common Stock (i) to which the Holder
-----------
is entitled upon conversion of this Convertible Note and (ii) that have
been issued in lieu of cash interest payments under this Convertible Note
at the time of filing the applicable Registration Statement (as defined in
the Registration Rights Agreement) or Piggyback Registration Statement (as
defined in the Registration Rights Agreement).
"Optional Redemption Amount" means the sum of (i) 110% of the
----------------------------
principal amount of the Convertible Note then outstanding and (ii) all
accrued but unpaid interest.
"Original Issue Date" means the date of the first issuance of the
---------------------
Convertible Note, regardless of any transfers of any Convertible Note and
regardless of the number of instruments which may be issued to evidence
such Convertible Note.
"Outstanding Principal" means the outstanding principal balance of
----------------------
this Convertible Note at the time and excludes any principal that has been
converted into shares of Common Stock of the Company pursuant to the terms
of this Convertible Note, if, and to the extent that, the Holder has
received its Note Shares from the Company with respect to any such excluded
converted principal.
"Partnership" means the DDJET Limited, LLP, a Texas limited liability
-----------
limited partnership as further described in the recitals to the Pledge and
Security Agreement.
"Partnership Interest" means the 5.54455% limited partnership interest
--------------------
in the Partnership owned by Xxxxxxx Xxxxxxxxxxx.
"Permitted Amount" means the amount by which the Collateral Value
-----------------
exceeds the Outstanding Principal.
"Person" means an individual or corporation, partnership, trust,
------
incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind.
5
"Pledge and Security Agreement" means the Pledge and Security
--------------------------------
Agreement, dated of even date herewith, by and between the Company as
pledgor and the Holder as secured party.
"Purchase Agreement" shall have the meaning set forth on page 1 of
-------------------
this Convertible Note.
"Prime Rate" shall mean the "prime rate" as published in the money
-----------
rates section of the Wall Street Journal (Southwest Edition)
-------------------------------------------
"Proved Reserves" means collectively, the Proved Developed Oil and Gas
---------------
Reserves and Proved Undeveloped Reserves of the Company and its
subsidiaries, as such terms are defined in Sec. 210.4-10(a) of Regulation
S-X.
"PV-10 Value" means the estimated future gross revenue to be generated
-----------
from the production of Proved Reserves of the Company and its subsidiaries,
net of estimated production and future development costs, using prices and
costs in effect at the determination date, without giving effect to
non-property related expenses such as general and administrative expenses,
debt service and future income tax expense or to depreciation, depletion
and amortization, discounted using an annual discount rate of 10%.
"Registration Rights Agreement" means the Registration Rights
-------------------------------
Agreement, dated as of the date of the Purchase Agreement, among the
Company and the original Holders, as amended, modified or supplemented from
time to time in accordance with its terms.
"Registration Statement" means a registration statement that registers
----------------------
the resale of the Note Shares and names such Holder as a "selling
stockholder" therein, and meets the requirements of the Registration Rights
Agreement.
"SEC" means the United States Securities and Exchange Commission.
---
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
"Significant Subsidiary" shall mean (i) Exploration Holding or Xxxxxxx
----------------------
Petrosearch and (ii) any other Significant Subsidiary (as such term is
defined in Rule 1-02(w) of Regulation S-X ) but, at the option of the
Company, shall exclude any Significant Subsidiary (other than the
Significant Subsidiaries listed in foregoing clause (i)), which has
Indebtedness for which recourse is exclusive to the assets of any such
Significant Subsidiary and as to which there is no recourse to the Company
or to the Company's other subsidiaries, from the Indebtedness incurrence
test set forth in Section 7(a)(i) hereof.
6
"Swap Contract" means (a) any and all rate swap transactions, basis
--------------
swaps, credit derivative transactions, forward rate transactions, commodity
swaps, commodity options, forward commodity contracts, commodity futures
contracts, equity or equity index swaps or options, bond or bond price or
bond index swaps or options or forward bond or forward bond price or
forward bond index transactions, interest rate options, forward foreign
exchange transactions, cap transactions, floor transactions, collar
transactions, currency swap transactions, cross-currency rate swap
transactions, currency options, spot contracts, or any other similar
transactions or any combination of any of the foregoing (including any
options to enter into any of the foregoing), whether or not any such
transaction is governed by or subject to any master agreement, and (b) any
and all transactions of any kind, and the related confirmations, which are
subject to the terms and conditions of, or governed by, any form of master
agreement published by the International Swaps and Derivatives Association,
Inc., any international foreign exchange master agreement, or any other
master agreement (any such master agreement, together with any related
schedules, a "Master Agreement"), including any such obligations or
-----------------
liabilities under any Master Agreement.
"Synthetic Lease Obligation" means the monetary obligation of a Person
--------------------------
under a so-called synthetic, off-balance sheet or tax retention lease.
"Trading Day" means a day on which the principal Trading Market is
------------
open for business.
"Trading Market" means the following markets or exchanges on which the
--------------
Common Stock is listed or quoted for trading on the date in question: the
American Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global
Market, the Nasdaq Global Select Market, the New York Stock Exchange or the
OTC Bulletin Board.
"VWAP" means, for any date, the price determined by the first of the
----
following clauses that applies: (a) if the Common Stock is then listed or
quoted on a Trading Market, the daily volume weighted average price of the
Common Stock for such date (or the nearest preceding date) on the Trading
Market on which the Common Stock is then listed or quoted for trading as
reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York
City time) to 4:02 p.m. (New York City time); (b) if the OTC Bulletin Board
is not a Trading Market, the volume weighted average price of the Common
Stock for such date (or the nearest preceding date) on the OTC Bulletin
Board; (c) if the Common Stock is not then quoted for trading on the OTC
Bulletin Board and if prices for the Common Stock are then reported in the
"Pink Sheets" published by Pink Sheets, LLC (or a similar organization or
agency succeeding to its functions of reporting prices), the most recent
bid price per share of the Common Stock so reported; or (d) in all other
cases, the fair market value of a share of Common Stock as determined by an
independent appraiser selected in good faith by the Holder and reasonably
acceptable to the Company.
7
Section 2. Interest.
---------- --------
a) Payment of Interest. Interest shall accrue at the rate of the
---------------------
lesser of (i) eight percent (8%) per annum; and (ii) the maximum
nonusurious interest rate under applicable law (except that interest shall
accrue at the 8.5% per annum interest rate described below (limited by the
maximum nonusurious rate) in the specified circumstance) on the principal
balance of this Convertible Note from time to time outstanding commencing
on the Original Issue Date. Accrued interest from such time through
February 28, 2007 shall be paid by the Company to the Holder on March 1,
2007. Thereafter, commencing on April 1, 2007, the Company shall pay in
cash to the Holder, on the aggregate unconverted and then outstanding
principal amount of this Convertible Note, accrued interest quarterly in
arrears and continuing on each July 1, October 1, January 1, and April 1
thereafter throughout the term of this Convertible Note and shall pay
accrued interest on each Conversion Date (as to that principal amount then
being converted), on each Redemption Date (as to that principal amount then
being redeemed) and on the Maturity Date (each of the foregoing dates of
payment, an "INTEREST PAYMENT DATE"). If any Interest Payment Date is not a
Business Day, then the applicable payment shall be due on the next
succeeding Business Day and the amount of the accrued interest shall
include such additional Business Day or Days. At the sole discretion of the
Company, interest shall accrue at the rate of the lesser of (i) eight and
1/2 percent (8.5%) per annum; or (ii) the maximum nonusurious rate of
interest under applicable law, if, and to the extent that Company opts to
pay such interest in Common Stock of the Company priced using the closing
price of the last Trading Day of each quarter immediately preceding the
quarterly Interest Payment Date, or the date preceding the Conversion Date,
each Redemption Date or the Maturity Date. All cash payments of interest
payments shall be paid to the Holder in accordance with wire transfer
instructions provided by the Holder to the Company. All interest payments
made with Common Stock shall be made by delivery to the Holder by overnight
courier to the address for the Holder provided under Section 11 hereof.
b) Default Interest. The Company further agrees that if the
------------------
Company shall default in the payment of any payment required hereunder,
whether payment of principal, interest, or fees or otherwise, and whether
paid in cash or with Common Stock, the Company promises to pay, on demand,
interest on any such unpaid amounts, from the date the payment is due to
the date of actual payment, at the rate (the "DEFAULT RATE") of the lesser
of (i) the Prime Rate plus 5.00% per annum; and (ii) the maximum
nonusurious rate permitted by applicable law.
c) Interest Calculations. Interest shall be calculated on the
----------------------
basis of a 360-day year, consisting of twelve 30 calendar day periods, and
shall accrue daily commencing on the Original Issue Date until payment in
full of the principal sum, together with all accrued and unpaid interest
and other amounts which may become due hereunder, has been made. Interest
shall cease to accrue with respect to any principal amount converted,
provided that the Company actually delivers the Note Shares within the time
period required by Section 4(c)(iii) herein. Interest hereunder will be
paid to the Person in
8
whose name this Convertible Note is registered on the records of the
Company regarding registration and transfers of this Convertible Note (the
"CONVERTIBLE NOTE REGISTER").
d) Prepayment. Except for Company's right to redeem this
----------
Convertible Note in accordance with the provisions of Section 6 hereof, the
Company may not prepay any portion of the principal amount of this
Convertible Note, without the prior written consent of the Holder.
e) Maturity. On the Maturity Date, the outstanding principal
---------
balance on this Convertible Note, together with all accrued and unpaid
interest shall be paid by the Company to the Holder in cash in accordance
with wire transfer instructions previously provided by the Holder to the
Company for use in connection with cash interest payments.
Section 3. Registration of Transfers and Exchanges.
----------- -------------------------------------------
a) Different Denominations. This Convertible Note is exchangeable,
----------- from time to time, for Convertible Note in
different denominations and in the names of one or more different
designees, nominees or assignees, in an aggregate principal amount equal to
the aggregate principal balance outstanding on the Convertible Note being
exchanged at the time, as requested by the Holder surrendering the same. No
service charge will be payable for such exchanges, transfers, or
registrations of transfers.
b) Investment Representations. This Convertible Note has been
---------------------------
issued subject to certain investment representations of the original Holder
set forth in the Purchase Agreement and may be transferred or exchanged
only in compliance with the Purchase Agreement and applicable federal and
state securities laws and regulations.
c) Reliance on Convertible Note Register. Prior to due presentment
-------------------------------------
to the Company for transfer of this Convertible Note, the Company and any
agent of the Company may treat the Person in whose name this Convertible
Note is duly registered on the Convertible Note Register as the owner
hereof for the purpose of receiving payment as herein provided and for all
other purposes, whether or not this Convertible Note is overdue, and
neither the Company nor any such agent shall be affected by notice to the
contrary.
Section 4. Conversion.
----------- ----------
a) Voluntary Conversion. This Convertible Note shall be
---------------------
convertible, in whole or in part, into shares of Common Stock at a price of
$1.00 per share at the option of the Holder at the earlier to occur of (i)
one year after the Original Issue Date or (ii) three months after the
Initial Registration Statement becomes effective with the Securities and
Exchange Commission. The Holder shall effect conversions by delivering to
the Company a Notice of Conversion, the form of which is attached hereto as
Annex A (a "NOTICE OF CONVERSION"), specifying therein the principal amount
-------
of this Convertible Note to be converted and the date on which such
conversion shall be effected (such date,
9
the "CONVERSION DATE"). If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the date that such Notice of
Conversion is deemed delivered hereunder. To effect conversions hereunder,
the Holder shall not be required to physically surrender this Convertible
Note to the Company unless the entire principal amount of this Convertible
Note, plus all accrued and unpaid interest thereon, has been so converted.
Conversions hereunder shall have the effect of reducing the outstanding
principal amount of this Convertible Note in an amount equal to the
applicable conversion of principal. The Holder and the Company shall
maintain records showing the principal amount(s) converted and the date of
such conversion(s). The Company may deliver an objection to any Notice of
Conversion within two (2) Business Days of delivery of such Notice of
Conversion based on an inaccuracy in such Notice but not on any other
basis. In the event of any dispute or discrepancy, the records of the
Holder shall be controlling and determinative in the absence of manifest
error. THE HOLDER, AND ANY ASSIGNEE BY ACCEPTANCE OF THIS CONVERTIBLE NOTE,
ACKNOWLEDGE AND AGREE THAT, BY REASON OF THE PROVISIONS OF THIS PARAGRAPH,
FOLLOWING CONVERSION OF A PORTION OF THIS CONVERTIBLE NOTE, THE UNPAID AND
UNCONVERTED PRINCIPAL AMOUNT OF THIS CONVERTIBLE NOTE WILL BE LESS THAN THE
AMOUNT STATED ON THE FACE HEREOF.
b) Conversion Price. The conversion price in effect on any
-----------------
Conversion Date shall be $1.00 per share (the "CONVERSION PRICE").
c) Mechanics of Conversion.
-------------------------
i. Note Shares Issuable Upon Conversion of Principal Amount.
---------------------------------------------------------
The number of shares of Common Stock issuable upon a conversion
hereunder shall be determined by the quotient obtained by dividing (x)
the outstanding principal amount of this Convertible Note to be
converted by (y) the Conversion Price.
ii. Delivery of Certificate Upon Conversion. Not later than
-----------------------------------------
three (3) Trading Days after each Conversion Date (the "SHARE DELIVERY
DATE"), the Company shall deliver, or cause to be delivered, to the
Holder (A) a certificate or certificates representing the Note Shares
which, shall bear an appropriate restrictive legend and trading
restrictions as required by the Purchase Agreement representing the
number of shares of Common Stock being acquired upon the conversion of
this Convertible Note and (B) a bank check in the amount of accrued
and unpaid interest (if the Company has elected or is required to pay
accrued interest in cash).
iii. Failure to Deliver Certificates. If in the case of any
--------------------------------
Notice of Conversion such certificate or certificates are not
delivered to or as directed by the applicable Holder by the fifth
Trading Day after the Conversion Date, the Holder shall be entitled to
elect by written notice to the Company at any time on or before its
receipt of such certificate or certificates, to rescind such
Conversion, in which event the Company shall promptly return to the
Holder any original Convertible Note delivered to the Company and the
Holder shall promptly return
10
the Common Stock certificates representing the principal amount of
this Convertible Note tendered for conversion to the Company.
iv. Obligation Absolute. The Company's obligations to issue
--------------------
and deliver the Note Shares upon conversion of this Convertible Note
in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the
same, any waiver or consent with respect to any provision hereof, the
recovery of any judgment against any Person or any action to enforce
the same, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any
other Person of any obligation to the Company or any violation or
alleged violation of law by the Holder or any other Person, and
irrespective of any other circumstance which might otherwise limit
such obligation of the Company to the Holder in connection with the
issuance of such Note Shares; provided, however, that such delivery
-------- -------
shall not operate as a waiver by the Company of any such action the
Company may have against the Holder.
v. Reservation of Shares Issuable Upon Conversion. The
---------------------------------------------------
Company covenants that it will at all times reserve and keep available
out of its authorized and unissued shares of Common Stock for the sole
purpose of issuance upon conversion of this Convertible Note and
payment of interest on this Convertible Note, each as herein provided,
free from preemptive rights or any other actual contingent purchase
rights of Persons other than the Holder (and the other holders of the
Convertible Note), not less than such aggregate number of shares of
the Common Stock as shall (subject to the terms and conditions set
forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5) upon the conversion of the
outstanding principal amount of this Convertible Note and payment of
interest hereunder. The Company covenants that all shares of Common
Stock that shall be so issuable shall, upon issue, be duly authorized,
validly issued, fully paid and nonassessable and, if the Registration
Statement is then effective under the Securities Act, shall be
registered for public sale in accordance with such Registration
Statement.
vi. Fractional Shares. Upon a conversion hereunder the
------------------
Company shall not be required to issue stock certificates representing
fractions of shares of Common Stock, but may if otherwise permitted,
make a cash payment in respect of any final fraction of a share
calculated by the Company to be equal to the then fair value of one
share of Common Stock of the Company, as determined by the Board of
Directors of the Company in good faith, multiplied by such fraction
computed to the nearest whole cent. If the Company elects not, or is
unable, to make such a cash payment, the Holder shall be entitled to
receive, in lieu of the final fraction of a share, 1 whole share of
Common Stock.
vii. Transfer Taxes. The issuance of certificates for shares
--------------
of the Common Stock on conversion of this Convertible Note shall be
made without charge to the Holder hereof for any documentary stamp or
similar taxes that may
11
be payable in respect of the issue or delivery of such certificates,
provided that the Company shall not be required to pay any tax that
may be payable in respect of any transfer involved in the issuance and
delivery of any such certificate upon conversion in a name other than
that of the Holder of this Convertible Note so converted and the
Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof
shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been
paid.
Section 5. Certain Adjustments.
---------- --------------------
a) Stock Dividends and Stock Splits. If the Company, at any time
---------------------------------
while this Convertible Note is outstanding: (A) pays a stock dividend or
otherwise makes a distribution or distributions payable in shares of Common
Stock on shares of Common Stock or any security of the Company convertible
into Common Stock (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Company upon conversion of, or payment
of interest on, the Convertible Note); (B) subdivides outstanding shares of
Common Stock into a larger number of shares; (C) combines (including by way
of a reverse stock split) outstanding shares of Common Stock into a smaller
number of shares; or (D) issues, in the event of a reclassification of
shares of the Common Stock, any shares of capital stock of the Company,
then the Conversion Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock (excluding any
treasury shares of the Company) outstanding immediately before such event
and of which the denominator shall be the number of shares of Common Stock
outstanding immediately after such event. Any adjustment made pursuant to
this Section shall become effective immediately after the record date for
the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective
date in the case of a subdivision, combination or re-classification.
b) Pro Rata Distributions. If the Company, at any time while this
-----------------------
Convertible Note is outstanding, distributes to all holders of Common Stock
(and not to the Holder) evidences of its indebtedness or assets (including
cash and cash dividends) or rights or warrants to subscribe for or purchase
any security, then in each such case the Conversion Price shall be adjusted
by multiplying such Conversion Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive
such distribution by a fraction of which the denominator shall be the VWAP
determined as of the record date mentioned above, and of which the
numerator shall be such VWAP on such record date less the then fair market
value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of the
Common Stock as determined by the Board of Directors of the Company in good
faith. In either case the adjustments shall be described in a statement
delivered to the Holder describing the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one
share of Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the
record date mentioned above.
12
c) Fundamental Transaction.
------------------------
(i) If, at any time while this Convertible Note is
outstanding, (A) the Company effects any merger or consolidation of
the Company with or into another Person, (B) the Company effects any
sale of all or substantially all of its assets in one transaction or a
series of related transactions, (C) any tender offer or exchange offer
(whether by the Company or another Person) is completed pursuant to
which holders of Common Stock are permitted to tender or exchange
their shares for other securities, cash or property, or (D) the
Company effects any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or
property (in any such case, a "FUNDAMENTAL TRANSACTION"), then, upon
any subsequent conversion of this Convertible Note, the Holder shall
have the right to receive, for each Conversion Share that would have
been issuable upon such conversion immediately prior to the occurrence
of such Fundamental Transaction, the same kind and amount of
securities, cash or property as it would have been entitled to receive
upon the occurrence of such Fundamental Transaction if it had been,
immediately prior to such Fundamental Transaction, the holder of 1
share of Common Stock (the "ALTERNATE CONSIDERATION"). For purposes of
any such conversion, the determination of the Conversion Price shall
be appropriately adjusted to apply to such Alternate Consideration
based on the amount of Alternate Consideration issuable in respect of
1 share of Common Stock in such Fundamental Transaction, and the
Company shall apportion the Conversion Price among the Alternate
Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration. If holders of
Common Stock are given any choice as to the securities, cash or
property to be received in a Fundamental Transaction, then the Holder
shall be given the same choice as to the Alternate Consideration it
receives upon any conversion of this Convertible Note following such
Fundamental Transaction. To the extent necessary to effectuate the
foregoing provisions, any successor to the Company or surviving entity
in such Fundamental Transaction shall issue to the Holder a new
Convertible Note consistent with the foregoing provisions and
evidencing the Holder's right to convert such Convertible Note into
Alternate Consideration. The terms of any agreement pursuant to which
a Fundamental Transaction is effected shall include terms requiring
any such successor or surviving entity to comply with the provisions
of this Section 5(c) and insuring that this Convertible Note (or any
such replacement security) will be similarly adjusted upon any
subsequent transaction analogous to a Fundamental Transaction.
(ii) Any successor to the Company or any surviving entity in
a Fundamental Transaction shall (i) assume, prior to such Fundamental
Transaction, all of the obligations of the Company under this
Convertible Note, the Purchase Agreement, the Pledge and Security
Agreement, the Registration Rights Agreement and the other transaction
documents pursuant to written agreements in form and substance
satisfactory to the Holder (such approval not to be
13
unreasonably withheld or delayed) and (ii) issue to the Holder a new
Convertible Note of such successor entity evidenced by a written
instrument substantially similar in form and substance to this
Convertible Note, including, without limitation, having a principal
amount and interest rate equal to the principal amount and the
interest rate of this Convertible Note and having similar ranking to
this Convertible Note, which shall be satisfactory to the Holder (any
such approval not to be unreasonably withheld or delayed). The
provisions of this Section 5(c) shall apply similarly and equally to
successive Fundamental Transactions and shall be applied without
regard to any limitations of this Convertible Note.
d) Calculations. All calculations under this Section 5 shall be
------------
made to the nearest cent or the nearest 1/100th of a share, as the case may
be. For purposes of this Section 5, the number of shares of Common Stock
deemed to be issued and outstanding as of a given date shall be the sum of
the number of shares of Common Stock (excluding any treasury shares of the
Company) issued and outstanding.
e) Notice to the Holder.
-----------------------
i. Adjustment to Conversion Price. Whenever the Conversion
--------------------------------
Price is adjusted pursuant to any provision of this Section 5, the
Company shall promptly mail to each Holder a notice setting forth the
Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment and the calculations
undergirding such adjustment.
ii. Notice to Allow Conversion by Xxxxxx. If (A) the Company
------------------------------------
shall declare a dividend (or any other distribution in whatever form)
on the Common Stock, (B) the Company shall declare a special
nonrecurring cash dividend on or a redemption of the Common Stock, (C)
the Company shall authorize the granting to some or all holders of the
Common Stock of rights or warrants to subscribe for or purchase any
shares of capital stock of any class or of any rights, (D) the
approval of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of
any compulsory share exchange whereby the Common Stock is converted
into other securities, cash or property or (E) the Company shall
authorize the voluntary or involuntary dissolution, liquidation or
winding up of the affairs of the Company, then, in each case, the
Company shall cause to be filed at each office or agency maintained
for the purpose of conversion of this Convertible Note, and shall
cause to be delivered to the Holder at its last address as it shall
appear upon the Convertible Note Register, at least 10 calendar days
prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be
taken for the purpose of such dividend, distribution, redemption,
rights or warrants, or if a record is not to be taken, the date as of
which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification,
consolidation, merger,
14
sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the
Common Stock of record shall be entitled to exchange their shares of
the Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or
share exchange, provided that the failure to deliver such notice or
any defect therein or in the delivery thereof shall not affect the
validity of the corporate action required to be specified in such
notice. The Holder is entitled to convert this Convertible Note during
the 10-day period commencing on the date of such notice through the
effective date of the event triggering such notice.
Section 6. Redemption At Election Of Company.
---------- -------------------------------------
a) Redemption at Election of Company. Subject to the provisions
-----------------------------------
of this Section 6, the Company may redeem part or all of the outstanding
Convertible Note at the later of (i) such time as the Holder has the right
to convert this Convertible Note into Common Stock pursuant to the terms of
this Convertible Note and (ii) twelve (12) months from the Original Issue
Date (the "REDEMPTION PERIOD"), provided however that such redemption right
only applies if, upon receiving notice of redemption, (x) the Holder has
the right to convert any or all of the amount the Company intends to redeem
at the Conversion Price, (y) the Company intends to redeem at the
applicable Conversion Price, and (z) the Registration Statement registering
the Note Shares to be redeemed is effective. During the Redemption Period,
the Company may deliver a notice to the Holder (the "REDEMPTION NOTICE") of
its irrevocable election to redeem some or all of the then outstanding
principal amount of this Convertible Note for cash in an amount equal to
the Optional Redemption Amount ("REDEMPTION AMOUNT") on the 20th Trading
Day following the date the Redemption Notice is received by Holder
("REDEMPTION DATE"), and the Redemption Amount shall be payable to Holder
in full on the Redemption Date unless Holder elects to convert its
Convertible Note prior to such Redemption Date. The Company covenants and
agrees that it will honor all Notices of Conversion tendered from the time
of delivery of the Redemption Notice through the date the Redemption Amount
is paid in full.
b) Redemption Procedure. The Redemption Amount payment shall be
---------------------
payable in cash on the Redemption Date. Notwithstanding anything herein
contained to the contrary, if any portion of the Redemption Amount remains
unpaid after such date, the Holder may elect, by written notice to the
Company given at any time thereafter, to invalidate such Redemption, ab
--
initio, and, with respect to the Company's failure to pay the Redemption
------
Amount, the Company shall have no further right to exercise such
Redemption. Notwithstanding anything to the contrary in this Section 6, the
Company's determination to redeem in cash shall be applied ratably among
the Holders of Convertible Note. The Holder may elect to convert the
outstanding principal amount of the Convertible Note pursuant to Section 4
prior to actual payment in cash for any redemption under this Section 6 by
the delivery of a Notice of Conversion to the Company.
Section 7. Negative Covenants and Representations.
---------- -----------------------------------------
15
a) As long as any portion of this Convertible Note remains
outstanding and the Company has any obligations to the Holder under the
Convertible Note, the Purchase Agreement, the Pledge and Security Agreement
and any agreements executed in connection therewith, the Company shall not,
and shall not permit any of its Significant Subsidiaries to, directly or
indirectly:
i) Incur Indebtedness (including the Indebtedness evidenced by this
Convertible Note) in excess of fifty percent (50%) of the PV-10 Value
of the Company's (or such Significant Subsidiary's) total Proved
Reserves, plus the Fair Market Value of the leases and pipeline assets
associated with the Xxxxxxx Shale Project;
ii) Amend its charter documents, including, without limitation, its
certificate of incorporation or formation, and its articles and bylaws
or limited liability agreement or other operating agreement, as
applicable, in any manner that materially and adversely affects any
rights of the Holder, without the prior written consent of the Holder;
iii) Create, incur, assume or permit to exist any Lien on or with respect
to any of the assets or property of any character now owned or
hereafter acquired by the Company, Exploration Holding or Xxxxxxx
Petrosearch, except for Liens on assets and property that in the
aggregate are equal to or less than the Permitted Amount, without the
prior written consent of the Holder;
iv) Sell, transfer, or otherwise dispose of any of its membership
interests or partnership interests in Exploration Holding or Xxxxxxx
Petrosearch without the prior written consent of the Holder;
v) (A) Pay any dividends or make any distributions on its equity
securities; (B) purchase, redeem, retire, defease or otherwise acquire
for value any of its equity securities; (C) return any capital to any
holder of its equity securities; (D) make any distribution of assets,
equity securities, obligations or securities to any holder of its
equity securities; or (E) set apart any sum for any such purpose;
provided, however, that the Company may repurchase its capital stock
at cost from directors, officers, employees and consultants upon the
exercise of its right of repurchase upon termination of such person's
employment with or services to the Company; and provided, further,
however, that the Company and its subsidiaries shall be permitted to
take the actions described in clauses (A)-(D) as long as, and to the
extent that, after taking such actions, (Y) no Event of Default or
event which with the passage of time or the giving of notice would
constitute an Event of Default shall have occurred, and (Z) the
Collateral Value equals or exceeds the Outstanding Principal.
vi) Enter into any contractual obligation with any Affiliate or engage in
any other transaction with any Affiliate except upon terms at least as
favorable to Company or such Subsidiary as an arms-length transaction
with unaffiliated Person,
16
provided, however, that this negative covenant shall not apply to
contractual obligations with Affiliates and transactions with
Affiliates involving costs or liabilities to the Company or such
Subsidiary in the Permitted Amount.
As to Section 7(a)(i), on each quarterly Interest Payment Date,
the Company shall certify to the Holder, in a form satisfactory to the
Holder, that no Event of Default, or event which, with the passage of
time or the giving of notice would become an Event of Default, has
occurred. Such certificate shall demonstrate the Company's compliance
with the Indebtedness incurrence test set forth in subsection (a)
foregoing and shall set forth the calculations demonstrating
compliance. Such quarterly valuations shall be based on management's
valuations where and to the degree that such managers have the
expertise to make such estimates under SEC guidelines and such
valuations will be true and correct, to the best of such manager's
ability, and conducted in accordance with any SEC guidelines.
Additionally, on an annual basis, the Company shall conduct an
independent reserve audit by an audit company of recognized national
standing and experience in the area and provide the Holder a copy of
the results of such audit and its PV-10 Proved Reserves as filed with
the SEC, together with management's valuation of the leases and
pipeline assets associated with the Xxxxxxx Shale Project. In making
calculations of the Indebtedness incurrence test under Section 7(a)(i)
hereof, the Company shall not be entitled (i) to include either the
assets or the Indebtedness of any Significant Subsidiary which the
Company has elected to exclude from the test (which Significant
Subsidiary must also meet the other requirements of the definition of
Significant Subsidiary in order to be excluded); or (ii) to include
the Fair Market Value of the leases and pipelines assets associated
with the Xxxxxxx Shale Project, unless and only to the extent that,
the Company is a direct or indirect owner thereof by virtue of Xxxxxxx
Xxxxxxxxxxx's Partnership Interest therein. In the event that the
Holder disagrees with management's valuations of the leases and
pipeline assets associated with the Xxxxxxx Shale Project provided for
in this paragraph, the Holder shall be entitled, at the Company's
expense, to an appraisal thereof by an appraiser selected or approved
by the Holder.
b) The Company represents, warrants and covenants (i) that the
Company owns 100% of the membership interests in Exploration Holding; (ii)
that Exploration Holding owns 100% of the membership interests in Xxxxxxx
Petrosearch; (iii) that Xxxxxxx Xxxxxxxxxxx owns the Partnership Interest;
(iv) that the sole asset of Xxxxxxx Petrosearch on the Original Issue Date
is the Partnership Interest; and (v) that after the Original Issue Date,
the only assets that Xxxxxxx Petrosearch, L.L.C. will own are the
Partnership Interest with Exxon Mobil Corporation and others relating to
the development of the Xxxxxxx Shale geologic regions.
Section 8. Default By Company.
---------- --------------------
a) "EVENT OF DEFAULT" means, wherever used herein, any of the
following events (whatever the reason for such event and whether such event
shall be voluntary or
17
involuntary or effected by operation of law or pursuant to any judgment,
decree or order of any court, or any order, rule or regulation of any
administrative or governmental body):
i. any default in the payment of (A) the principal amount of
any Convertible Note or (B) interest, liquidated damages and other
amounts owing to a Holder on any Convertible Note or under the
Purchase Agreement, as and when the same shall become due and payable
(whether on a Conversion Date or the Maturity Date or by acceleration
or otherwise) which default, solely in the case of an interest payment
or other default under clause (B) above, is not cured within five (5)
Trading Days;
ii. the Company shall fail the Indebtedness incurrence test
set forth in Section 7(a)(i) hereof, provided that the Company shall
have 90 days to meet such test if Company's failure to meet such test
was as a result of mark-to-market matters out of the control of the
Company, as for example fluctuations in the price of the commodity;
iii. the Company breaches its obligations to deliver shares
of Common Stock to the Holder upon conversion;
iv. any covenant or agreement contained in the Purchase
Agreement or the Convertible Note other than those covered by the
Events of Defaults described in foregoing clause (i)-(iii),which
failure is not cured, if possible to cure, within the earlier to occur
of (A) 60 days after notice of such failure sent by the Holder or by
any other Holder and (B) 90 days after the Company has become or
should have become aware of such failure;
v. any representation or warranty made in this Convertible
Note, the Purchase Agreement, any written statement pursuant hereto or
thereto or any other report, financial statement or certificate made
or delivered to the Holder or any other Holder shall be untrue or
incorrect in any material respect as of the date when made or deemed
made provided however, that in the event that the untrue or incorrect
representation or warranty is of the type capable of being cured and
is cured by the Company within the time frame set forth in Section
8(a)(iv) above, then it shall be deemed to be cured and non-material;
vi. the Company or any Significant Subsidiary shall be
subject to a Bankruptcy Event or shall fail to pay its debts in the
aggregate amount of $500,000 or more, as they become due, or within
120 days of the stated due date, (except as to debts that are
legitimately in dispute as to which the Company is taking action to
resolve the dispute and as to which reserves are set aside in
accordance with and to the extent required by GAAP);
vii. the Company or any Significant Subsidiary shall default,
which default shall not be cured within any applicable cure period, on
any of its obligations
18
under any mortgage, credit agreement or other facility, indenture
agreement, factoring agreement or other instrument under which there
may be issued, or by which there may be secured or evidenced, any
indebtedness for borrowed money or money due under any long term
leasing or factoring arrangement that (a) involves an obligation
greater than $500,000, whether such indebtedness now exists or shall
hereafter be created, and (b) results in such indebtedness becoming or
being declared due and payable prior to the date on which it would
otherwise become due and payable;
viii. any monetary judgment, writ or similar final process
shall be entered or filed against the Company, any Significant
Subsidiary or any of their respective property or other assets for
$500,000 or more, and such judgment, writ or similar final process
shall remain unvacated, unbonded or unstayed for a period of 45
calendar days;
ix. any Event of Default under the Pledge and Security
Agreement, the Registration Rights Agreement, or any other agreement
executed in connection with this Convertible Note occurs; or
x. any tax lien in the amount of $500,000 or more, is filed
against the Company or Exploration Holding or on any property of the
Company or Exploration Holding for any past-due tax obligations
(except as to tax liens that are legitimately in dispute as to which
the Company is taking action to resolve the dispute and as to which
reserves are set aside in accordance with and to the extent required
by GAAP).
b) Remedies Upon Event of Default. If any Event of Default occurs,
------------------------------
the outstanding principal amount of this Convertible Note, plus accrued but
unpaid interest, liquidated damages (if any) and other amounts owing in
respect thereof through the date of acceleration, shall become, at the
Holder's election, immediately due and payable in cash; provided however
that in the case of an Event of Default under Section 8(a)(vi) hereof,
acceleration shall be automatic, without action by the Holder and the
indebtedness evidenced by this Convertible Note shall be immediately due
and payable. If an Event of Default occurs, the Holder shall be entitled to
pursue all rights and remedies with respect to the Collateral and to
foreclose on it, take possession, and otherwise realize on it in accordance
with the Pledge and Security Agreement. In connection with such
acceleration described herein, the Holder need not provide, and the Company
hereby waives, any presentment, demand, protest, notice of intent to
accelerate, notice of acceleration, and other notice of any kind, and the
Holder may immediately and without expiration of any grace period enforce
any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law. Such acceleration may be rescinded
and annulled by Xxxxxx at any time prior to payment hereunder and the
Holder shall have all rights as a holder of the Convertible Note until such
time, if any, as the Holder receives full payment pursuant to this Section
8(b). No such rescission or annulment shall affect any subsequent Event of
Default or impair any right consequent thereon.
19
Section 9. Registration Rights. The Company shall comply with its
--------------------
obligations under the Purchase Agreement and the Registration Rights Agreement
executed in connection therewith.
Section 10. Senior Status/ Release/Partial Release of Collateral. This
----------------------------------------------------
Convertible Note is a senior secured note and is pari passu with all other
senior indebtedness of the Company. This Convertible Note is secured by a first
and prior security interest in a twenty-five percent (25%) membership interest
in Exploration Holding and certain other Collateral as defined in and evidenced
by the Pledge and Security Agreement. The Holder shall execute and deliver to
the Company a full release of the Collateral in the case of clauses (a)-(c)
following, or a partial release of the Collateral in the case of clause (d),
upon the occurrence of the following: (a) payment in full of all principal,
interest and other sums due and owing to the Holder under this Convertible Note
in accordance with its terms and fulfillment of all obligations under the
Purchase Agreement and the Pledge and Security Agreement and any other agreement
executed in connection herewith; (b) redemption by the Company of the
Convertible Note under the redemption terms set forth in this Convertible Note
and fulfillment of all obligations under the Purchase Agreement and the Pledge
and Security Agreement and any other agreement executed in connection herewith;
(c) conversion in full of this Convertible Note by Holder under the terms set
forth in this Convertible Note and fulfillment of all obligations under the
Purchase Agreement and the Pledge and Security Agreement and any other agreement
executed in connection herewith; or (d) as long as no Event of Default, or event
which with the passage of time or the giving of notice would constitute an Event
of Default, occurs, if (i) the Company's shares of Common Stock trade above
$1.50 for a period of ten (10) consecutive Trading Days, (ii) the Holder has the
right to convert this Convertible Note under Section 4(a) hereof and (iii) the
Initial Registration Statement registering the Note Shares is effective,
provided that, to the extent that only a portion of the Note Shares represented
by a percentage is subject to the effective Initial Registration Statement, then
that same percentage of the Collateral shall be released by the Holder from the
lien and security interest created under the Pledge and Security Agreement. By
way of example, if 70% of the Note Shares are subject to an effective Initial
Registration Statement (and the other conditions in clause (d) foregoing are
met), then 70% of the Collateral (generally, 70% of the 25% membership interest
in Exploration Holding ) shall be released by the Holder from the lien and
security interest created under the Pledge and Security Agreement. The Holder
shall, at the cost and expense of the Company, and to the extent the Holder has
not exercised any of its remedies in accordance with the Pledge and Security
Agreement, (a) release from the lien and security interest created by the Pledge
and Security Agreement and reassign to the Company the percentage of the
Collateral (and any property or rights assigned by the Company to the Holder by
the Pledge and Security Agreement or by any agreement or agreements supplemental
hereto with respect thereto) required to be released by this Section, and (b) do
and execute all such acts, things and instruments as are necessary to effect
such partial release or partial reassignment including the return to the Company
of the certificates evidencing the released Pledged Securities (as defined in
the Pledge and Security Agreement, hereafter the "PLEDGED SECURITIES"),
including, without limitation, where appropriate, a partial release of any
financing statement; provided however, that, notwithstanding the foregoing, the
Holder shall not be required to redeliver any certificates representing
Collateral to be released to the Company, unless simultaneously therewith the
Holder shall receive from the Company (Y) a certificate representing the Pledged
Securities that will remain subject to the lien and security interest created
under the Pledge and Security Agreement, and (Z) a blank units power related
thereto.
20
Section 11. Miscellaneous.
----------- -------------
a) Notices. Any and all notices or other communications or
-------
deliveries to be provided by the Holder hereunder, including, without
limitation, any Notice of Conversion, shall be in writing and delivered
personally, by facsimile, or sent by a nationally recognized overnight
courier service, addressed to the Company, at the address set forth on page
1 hereof, facsimile number (000) 000-0000, Attn: Xxxxx Xxxxxxx or such
other facsimile number or address as the Company may specify for such
purpose by notice to the Holder delivered in accordance with this Section
11. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, or sent by a nationally recognized overnight
courier service addressed to the Holder at the following address: c/o RR
Advisors, LLC, 000 Xxxxxxxx Xxxxx, Xxxxx 0000, Xxxxxx, XX 00000-0000, Attn:
Xxxxxx Xxxxxxx, facsimile number (000) 000-0000 or at such other address or
facsimile number as the Holder may specify for such purpose by notice to
the Company delivered in accordance with this Section 11. Any notice or
other communication or deliveries hereunder shall be deemed given and
effective on the earliest of (i) the date of transmission, if such notice
or communication is delivered via facsimile at the facsimile number
specified in this Section 11 prior to 5:30 p.m. (New York City time), (ii)
the date immediately following the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified
in this Section 11 between 5:30 p.m. (New York City time) and 11:59 p.m.
(New York City time) on any date, (iii) the second Business Day following
the date of mailing, if sent by nationally recognized overnight courier
service, or (iv) upon actual receipt by the party to whom such notice is
required to be given.
b) Absolute Obligation. Except as expressly provided herein, no
--------------------
provision of this Convertible Note shall alter or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal of,
liquidated damages and accrued interest, as applicable, on this Convertible
Note at the time, place, and rate, and in the coin or currency, herein
prescribed. This Convertible Note is a direct debt obligation of the
Company. This Convertible Note ranks pari passu with all other Convertible
---- -----
Note now or hereafter issued under the terms set forth herein.
c) Lost or Mutilated Convertible Note. If this Convertible Note
------------------------------------
shall be mutilated, lost, stolen or destroyed, the Company shall execute
and deliver, in exchange and substitution for and upon cancellation of a
mutilated Convertible Note, or in lieu of or in substitution for a lost,
stolen or destroyed Convertible Note, a new Convertible Note for the
principal amount of this Convertible Note so mutilated, lost, stolen or
destroyed, but only upon receipt of evidence of such loss, theft or
destruction of such Convertible Note, and of the ownership hereof,
reasonably satisfactory to the Company and if requested by the Company,
indemnity also reasonably satisfactory to the Company.
d) Governing Law. All questions concerning the construction,
--------------
validity, enforcement and interpretation of this Convertible Note shall be
governed by and construed and enforced in accordance with the internal laws
of the State of Texas,
21
without regard to the principles of conflict of laws thereof. Each party
agrees that all legal proceedings concerning the interpretation,
enforcement and defense of the Convertible Note (whether brought against a
party hereto or its respective Affiliates, directors, officers,
shareholders, employees or agents) shall be commenced in the state and
federal courts sitting in the City of Houston, Texas (the "Houston
-------
Courts"). Each party hereto hereby irrevocably submits to the exclusive
------
jurisdiction of the Houston Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein, and hereby irrevocably waives, and agrees not
to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such Houston Courts, or that such
Houston Courts are improper or inconvenient venue for such proceeding. If
either party shall commence an action or proceeding to enforce any
provisions of this Convertible Note, then the prevailing party in such
action or proceeding shall be reimbursed by the other party for its
attorney's fees and other costs and expenses incurred in the investigation,
preparation and prosecution of such action or proceeding. The Company
agrees to reimburse the Holder on demand for all costs, expenses and
charges (including, without limitation, fees and charges of counsel and
court costs) in connection with the preparation or modification of this
Convertible Note, the Purchase Agreement, the Pledge and Security Agreement
and the other agreements executed in connection herewith, and the
collection, performance or enforcement of this Convertible Note and all
such agreements, and the defense or prosecution of any rights of the Holder
pursuant to this Convertible Note and such agreements.
e) Waiver. Any waiver by the Company or the Holder of a breach of
------
any provision of this Convertible Note shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach of
any other provision of this Convertible Note. The failure of the Company or
the Holder to insist upon strict adherence to any term of this Convertible
Note on one or more occasions shall not be considered a waiver or deprive
that party of the right thereafter to insist upon strict adherence to that
term or any other term of this Convertible Note. Any waiver by the Company
or the Holder must be in writing.
f) Severability. If any provision of this Convertible Note is
------------
invalid, illegal or unenforceable, the balance of this Convertible Note
shall remain in effect, and if any provision is inapplicable to any Person
or circumstance, it shall nevertheless remain applicable to all other
Persons and circumstances.
g) Usury Savings Clause. It is the intention of the Company and
----------------------
the holder of this Convertible Note to comply with applicable usury laws;
accordingly, it is agreed that notwithstanding any provisions to the
contrary in this Convertible Note, in no event shall this Convertible Note
and/or any other instrument or document executed in connection with this
Convertible Note require or permit the payment, charge or receipt of
interest, as defined under applicable usury laws, in excess of the maximum
amount permitted by such laws. If any such excess of interest is contracted
for, charged, taken, reserved or received under this Convertible Note, or
if the maturity of the indebtedness evidenced by this Convertible Note is
accelerated, in whole or in part, or in the event that
22
all or part of the principal of or interest on this Convertible Note shall
be prepaid, so that under any of such circumstances the amount of interest
contracted for, charged, taken, reserved or received under this Convertible
Note on the amount of principal actually outstanding from time to time
under this Convertible Note shall exceed the maximum amount of interest
permitted by applicable usury laws, then in any such event (a) the
provisions of this paragraph shall govern and control, (b) neither the
Company nor any other party now or hereafter liable for the payment of this
Convertible Note shall be obligated to pay the amount of such interest to
the extent that it is in excess of the maximum amount of interest permitted
to be contracted for by, charged to, taken, reserved or received from the
party obligated thereon under applicable usury laws, (c) any such excess
which may have been collected either shall be applied as a credit against
the then unpaid principal amount on this Convertible Note or refunded to
the party paying the same, at the holder's option, (d) any such excess
which may have been charged shall be canceled ab initio and be of no force
or effect, and (e) the effective rate of interest shall be automatically
reduced to the maximum lawful rate of interest permitted under applicable
usury laws as now or hereafter construed by the courts having jurisdiction
thereof. It is further agreed that, without limitation of the foregoing,
all calculations of the rate of interest contracted for, charged, taken,
reserved or received under this Convertible Note, which are made for the
purpose of determining whether such rate exceeds the maximum lawful rate of
interest shall be made, to the extent permitted by applicable usury laws,
by amortizing, prorating, allocating and spreading in equal parts during
the period of the full stated term of the indebtedness evidenced by this
Convertible Note, all interest at any time contracted for, charged or
received from the Company or otherwise by the holder or holders hereof in
connection with this Convertible Note.
h) Waiver. The Company covenants (to the extent that it may
-------
lawfully do so) that it shall not at any time insist upon, plead, or in any
manner whatsoever claim or take the benefit or advantage .of, any stay,
extension or usury law or other law which would prohibit or forgive the
Company from paying all or any portion of the principal of or interest on
this Convertible Note as contemplated herein, wherever enacted, now or at
any time hereafter in force, or which may affect the covenants or the
performance of this Convertible Note and the related agreements, and the
Company (to the extent it may lawfully do so) hereby expressly waives all
benefits or advantage of any such law, and covenants that it will not, by
resort to any such law, hinder, delay or impede the execution of any power
herein granted to the Holder, but will suffer and permit the execution of
every such as though no such law has been enacted.
i) Next Business Day. Whenever any payment or other obligation
-------------------
hereunder shall be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day.
j) Business Purpose. The Company agrees, represents, and
-----------------
acknowledges that the purposes of consideration furnished by the Holder
will be used for solely for business, commercial, investment or other
similar purposes and not personal, family or agricultural purposes.
23
k) Headings. The headings contained herein are for convenience
--------
only, do not constitute a part of this Convertible Note and shall not be
deemed to limit or affect any of the provisions hereof.
[SIGNATURES APPEAR ON THE FOLLOWING PAGE.]
24
IN WITNESS WHEREOF, the Company has caused this Convertible Note to be duly
executed by a duly authorized officer as of the date first above indicated.
PETROSEARCH ENERGY CORPORATION
By: /s/ Xxxxxxx X. Xxxx
------------------------------------------
Name: Xxxxxxx X. Xxxx
Title: Chief Executive Officer and
President
Signature page to Notes
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 8% Senior
Secured Convertible Note due February ___ 2010 of Petrosearch Energy
Corporation, a Nevada corporation (the "Company"), into shares of common stock,
-------
par value $0.001 per share (the "Common Stock"), of the Company according to the
------------
conditions hereof, as of the date written below. If shares of Common Stock are
to be issued in the name of a person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates and opinions as reasonably requested by the Company
in accordance therewith. No fee will be charged to the Holder for any
conversion, except for such transfer taxes, if any.
The undersigned agrees to comply with the prospectus delivery requirements
under the applicable securities laws in connection with any transfer of the
aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
------------------------
Principal Amount of Convertible Note to be Converted:
-------------------------------------------------------
Number of shares of Common Stock to be issued:
-------
Signature:
---------------------------------------------
Name:
--------------------------------------------------
Address:
----------------------------------------------
26
SCHEDULE 1
CONVERSION SCHEDULE
The 8% Senior Secured Convertible Note due February __, 2010 in the aggregate
principal amount of $10,000,000 is issued by Petrosearch Energy Corporation.
This Conversion Schedule reflects conversions made under Section 4 of the above
referenced Convertible Note.
Dated:
--------------------- ---------- -------------- ----------------
Aggregate
Principal
Date of Conversion Amount of Amount
(or for first entry, Conversion Remaining Company Attest
Original Issue Date) Subsequent to
Conversion
(or original
Principal
Amount)
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Schedule 1
