SECURED TERM NOTE
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FOR VALUE RECEIVED, ▇▇▇▇▇▇▇ PETROSEARCH, INC., a Texas corporation
("▇▇▇▇▇▇▇") promises to pay to LAURUS MASTER FUND, LTD., c/o M&C Corporate
Services Limited, P.O. Box 309 GT, ▇▇▇▇▇▇ House, South Church Street, ▇▇▇▇▇▇
Town, Grand Cayman, Cayman Islands, Fax: ▇▇▇-▇▇▇-▇▇▇▇ (the "HOLDER") or its
registered assigns or successors in interest, the sum of Eight Million Three
Hundred Thousand Dollars ($8,300,000), together with any accrued and unpaid
interest hereon, on November 1, 2009 (the "MATURITY DATE") if not sooner paid.
Capitalized terms used herein without definition shall have the
meanings ascribed to such terms in that certain Securities Purchase Agreement
dated as of the date hereof by and between ▇▇▇▇▇▇▇ and the Holder (as amended,
modified and/or supplemented from time to time, the "PURCHASE AGREEMENT").
The following terms shall apply to this Secured Term Note (this
"NOTE"):
ARTICLE 1
CONTRACT RATE AND AMORTIZATION
1.1 Contract Rate. Subject to Sections 2.2 and 3.9, interest
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payable on the outstanding principal amount of this Note (the "PRINCIPAL
AMOUNT") shall accrue at a rate per annum equal to the "PRIME RATE" published in
The Wall Street Journal from time to time (the "PRIME RATE"), plus two percent
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(2%) (the "CONTRACT RATE"). The Contract Rate shall be increased or decreased
as the case may be for each increase or decrease in the Prime Rate in an amount
equal to such increase or decrease in the Prime Rate; each change to be
effective as of the day of the change in the Prime Rate; provided, however, that
the Contract Rate shall not at any time be less than eight percent (8%) or more
than fifteen percent (15%). Interest shall be (i) calculated on the basis of a
360 day year, and (ii) payable monthly, in arrears, commencing on the First
Payment Date (as hereinafter defined), on the first business day of each
consecutive calendar month thereafter through and including the Maturity Date,
and on the Maturity Date, whether by acceleration or otherwise. For purposes of
this Section 1.1 and Section 1.2, the term "FIRST PAYMENT DATE" shall mean the
earlier of (i) the first business day of the month following ▇▇▇▇▇▇▇'▇ receipt
of proceeds from first production from the ▇▇▇▇▇▇▇ 46 #1 Well in the Southwest
▇▇▇▇▇▇▇ field in Colorado County, Texas or (ii) one-hundred twenty (120) days
from the date hereof.
1.2 Payments. Amortizing payments of the aggregate principal
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amount outstanding under this Note shall be made by ▇▇▇▇▇▇▇ on the First Payment
Date and on the first business day of each succeeding month thereafter through
and including the Maturity Date (each, an "AMORTIZATION DATE"). Subject to
Article III below, commencing on the first Amortization Date, ▇▇▇▇▇▇▇ shall make
monthly payments of principal and interest to the Holder on each Amortization
Date equal to the Amortization Amount (as hereafter defined). All such payments
shall be applied by the Holder first to accrued and unpaid interest, fees and
expenses owing by ▇▇▇▇▇▇▇ to the Holder and then to the outstanding principal
balance owing hereunder. In the event the Amortization Amount during any month
is less than $100,000 then
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▇▇▇▇▇▇▇ shall nevertheless make a monthly payment to the Holder during such
month in an amount equal to the difference between $100,000 and the then
applicable Amortization Amount, which such payment shall be applied by the
Holder to accrued and unpaid interest, fees and expenses owing by ▇▇▇▇▇▇▇ to the
Holder. Any outstanding Principal Amount together with any accrued and unpaid
interest and any and all other unpaid amounts which are then owing by ▇▇▇▇▇▇▇ to
the Holder under this Note, the Purchase Agreement and/or any other Related
Agreement shall be due and payable on the Maturity Date. For purposes of this
Section, (a) the term "AMORTIZATION AMOUNT" shall mean an amount equal to ninety
percent (90%) of the Net Revenue relating to all oil and gas properties of
▇▇▇▇▇▇▇ (the "OIL AND GAS PROPERTIES") for the calendar month immediately
preceding the Amortization Date; provided, however, such percentage shall
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increase to one hundred percent (100%) upon the occurrence and during the
continuance of an Event of Default and (b) the term "NET REVENUE" shall mean the
gross proceeds paid to ▇▇▇▇▇▇▇ in respect of oil, gas and/or other hydrocarbon
production in which it has an interest whether or not such proceeds are remitted
to the lockbox account and/or any other blocked account established by ▇▇▇▇▇▇▇
in connection with the transactions contemplated hereby net of, in each case,
with respect to the period for which such Net Revenue relates, the reasonable
ordinary day to day expenses associated with ▇▇▇▇▇▇▇'▇ operation of the leases,
▇▇▇▇▇ and equipment, including fuel, materials, labor, maintenance to maintain
production from an existing completed well, royalty, severance tax and ad
valorem tax, in each case using accounting practices and procedures ordinary and
customary in the oil and gas industry, all of which shall be subject to the
Holder's approval, which shall be provided in the exercise of the Holder's
reasonable discretion based on such supporting documentation from ▇▇▇▇▇▇▇ as the
Holder shall request.
ARTICLE 2
EVENTS OF DEFAULT
2.1 Events of Default. The occurrence of any of the following
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events set forth in this Section 2.1 shall constitute an event of default
("EVENT OF DEFAULT") hereunder:
(a) Failure to Pay. ▇▇▇▇▇▇▇ fails to pay when due any
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installment of principal, interest or other fees hereon in accordance herewith,
or ▇▇▇▇▇▇▇ fails to pay any of the other Obligations (under and as defined in
the Master Security Agreement) when due, and, in any such case, such failure
shall continue for a period of three (3) business days following the date upon
which any such payment was due.
(b) Breach of Covenant. ▇▇▇▇▇▇▇ breaches any covenant or any
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other term or condition of this Note and such breach, if subject to cure,
continues for a period of fifteen (15) days after the occurrence thereof.
(c) Breach of Representations and Warranties. Any
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representation, warranty or statement made or furnished by ▇▇▇▇▇▇▇ in connection
with the transaction contemplated hereby, by the Purchase Agreement or any other
Related Agreement shall at any time be false or misleading on the date as of
which made or deemed made.
(d) Default Under Other Agreements. The occurrence of any
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default (or similar term) in the observance or performance of any other
agreement or condition relating
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to any indebtedness or contingent obligation, in each case in an aggregate
amount of not less than $25,000, of ▇▇▇▇▇▇▇;
(e) Material Adverse Effect. Any change or the occurrence of
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any event which could reasonably be expected to have a Material Adverse Effect;
(f) Bankruptcy. ▇▇▇▇▇▇▇ or any Subsidiary of ▇▇▇▇▇▇▇ shall
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(i) apply for, consent to or suffer to exist the appointment of, or the taking
of possession by, a receiver, custodian, trustee or liquidator of itself or of
all or a substantial part of its property, (ii) make a general assignment for
the benefit of creditors, (iii) commence a voluntary case under the federal
bankruptcy laws (as now or hereafter in effect), (iv) be adjudicated a bankrupt
or insolvent, (v) file a petition seeking to take advantage of any other law
providing for the relief of debtors, (vi) acquiesce to, without challenge within
ten (10) days of the filing thereof, or failure to have dismissed, within thirty
(30) days, any petition filed against it in any involuntary case under such
bankruptcy laws, or (vii) take any action for the purpose of effecting any of
the foregoing;
(g) Judgments. Attachments or levies in excess of $25,000 in
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the aggregate are made upon ▇▇▇▇▇▇▇'▇ assets or a judgment is rendered against
▇▇▇▇▇▇▇'▇ property involving a liability of more than $25,000 which shall not
have been vacated, discharged, stayed or bonded within ten (10) days from the
entry thereof;
(h) Insolvency. ▇▇▇▇▇▇▇ shall admit in writing its
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inability, or be generally unable, to pay its debts as they become due or cease
operations of its present business;
(i) Change of Control. A Change of Control (as defined
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below) shall occur with respect to ▇▇▇▇▇▇▇, unless Holder shall have expressly
consented to such Change of Control in writing. A "CHANGE OF CONTROL" shall
mean any event or circumstance as a result of which (i) any "PERSON" or "GROUP"
(as such terms are defined in Sections 13(d) and 14(d) of the Exchange Act, as
in effect on the date hereof), other than the Holder, is or becomes the
"BENEFICIAL OWNER" (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange
Act), directly or indirectly, of 35% or more on a fully diluted basis of the
then outstanding voting equity interest of ▇▇▇▇▇▇▇ (other than a "PERSON" or
"GROUP" that beneficially owns 35% or more of such outstanding voting equity
interests of ▇▇▇▇▇▇▇ on the date hereof), (ii) the Board of Directors of ▇▇▇▇▇▇▇
shall cease to consist of a majority of ▇▇▇▇▇▇▇'▇ board of directors on the date
hereof (or directors appointed by a majority of the board of directors in effect
immediately prior to such appointment) or (iii) ▇▇▇▇▇▇▇ merges or consolidates
with, or sells all or substantially all of its assets to, any other person or
entity;
(j) Indictment; Proceedings. The indictment or threatened
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indictment of ▇▇▇▇▇▇▇ or any executive officer of ▇▇▇▇▇▇▇ under any criminal
statute, or commencement or threatened commencement of criminal or civil
proceeding against ▇▇▇▇▇▇▇ or any executive officer of ▇▇▇▇▇▇▇ pursuant to which
statute or proceeding penalties or remedies sought or available include
forfeiture of any of the property of ▇▇▇▇▇▇▇; or
(k) The Purchase Agreement and Related Agreements. (i) An
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Event of Default shall occur under and as defined in the Purchase Agreement or
any other Related
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Agreement, (ii) ▇▇▇▇▇▇▇ shall breach any term or provision of the Purchase
Agreement or any other Related Agreement and such breach, if capable of cure,
continues unremedied for a period of ten (10) days after the occurrence thereof,
(iii) ▇▇▇▇▇▇▇ attempts to terminate, challenges the validity of, or its
liability under, the Purchase Agreement or any Related Agreement, (iv) any
proceeding shall be brought to challenge the validity, binding effect of the
Purchase Agreement or any Related Agreement, (v) the Purchase Agreement or any
Related Agreement ceases to be a valid, binding and enforceable obligation of
▇▇▇▇▇▇▇.
2.2 Default Interest. Following the occurrence and during the
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continuance of an Event of Default, ▇▇▇▇▇▇▇ shall pay additional interest on
this Note in an amount equal to two percent (2%) per month, and all outstanding
obligations under this Note, the Purchase Agreement and each other Related
Agreement, including unpaid interest, shall continue to accrue interest at such
additional interest rate from the date of such Event of Default until the date
such Event of Default is cured or waived.
2.3 Default Payment. Following the occurrence and during the
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continuance of an Event of Default, the Holder, at its option, may demand
repayment in full of all obligations and liabilities owing by ▇▇▇▇▇▇▇ to the
Holder under this Note, the Purchase Agreement and/or any other Related
Agreement and/or may elect, in addition to all rights and remedies of the Holder
under the Purchase Agreement and the other Related Agreements and all
obligations and liabilities of ▇▇▇▇▇▇▇ under the Purchase Agreement and the
other Related Agreements, to require ▇▇▇▇▇▇▇ to make a Default Payment ("DEFAULT
PAYMENT"). The Default Payment shall be 130% of the outstanding principal
amount of the Note, plus accrued but unpaid interest, all other fees then
remaining unpaid, and all other amounts payable hereunder. The Default Payment
shall be applied first to any fees due and payable to the Holder pursuant to
this Note, the Purchase Agreement, and/or the other Related Agreements, then to
accrued and unpaid interest due on this Note and then to the outstanding
principal balance of this Note. The Default Payment shall be due and payable
immediately on the date that the Holder has exercised its rights pursuant to
this Section 2.3.
ARTICLE 3
MISCELLANEOUS
3.1 Cumulative Remedies. The remedies under this Note shall be
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cumulative.
3.2 Failure or Indulgence Not Waiver. No failure or delay on the
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part of the Holder hereof in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any rights
or remedies otherwise available.
3.3 Notices. Any notice herein required or permitted to be given
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shall be in writing and shall be deemed effectively given: (a) upon personal
delivery to the party notified, (b) when sent by confirmed telex or facsimile if
sent during normal business hours of the recipient, if not, then on the next
business day, (c) five (5) business days after having been sent by registered or
certified mail, return receipt requested, postage prepaid, or (d) two (2) days
after
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deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. All communications shall be
sent to ▇▇▇▇▇▇▇ at the addresses provided in the Purchase Agreement executed in
connection herewith, and to the Holder at the address provided in the Purchase
Agreement for such Holder, with a copy to [▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq., ▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, facsimile number (▇▇▇) ▇▇▇-▇▇▇▇],
or at such other address as ▇▇▇▇▇▇▇ or the Holder may designate by ten days
advance written notice to the other parties hereto.
3.4 Amendment Provision. The term "NOTE" and all references
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thereto, as used throughout this instrument, shall mean this instrument as
originally executed, or if later amended or supplemented, then as so amended or
supplemented, and any successor instrument as such successor instrument may be
amended or supplemented.
3.5 Assignability. This Note shall be binding upon ▇▇▇▇▇▇▇ and
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its respective successors and assigns, and shall inure to the benefit of the
Holder and its successors and assigns, and may be assigned by the Holder in
accordance with the requirements of the Purchase Agreement. ▇▇▇▇▇▇▇ may not
assign any of its obligations under this Note without the prior written consent
of the Holder, any such purported assignment without such consent being null and
void.
3.6 Cost of Collection. In case of any Event of Default under
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this Note, ▇▇▇▇▇▇▇ shall pay the Holder costs of collection, including
attorneys' fees.
3.7 Governing Law, Jurisdiction and Waiver of Jury Trial.
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(a) THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
(b) GARWOOD HEREBY CONSENTS AND AGREES THAT THE STATE OR
FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE
EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN
GARWOOD, ON THE ONE HAND, AND THE HOLDER, ON THE OTHER HAND, PERTAINING TO THIS
NOTE OR ANY OF THE OTHER RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS NOTE OR ANY OF THE RELATED AGREEMENTS; PROVIDED, THAT ▇▇▇▇▇▇▇
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ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT
LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER
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PROVIDED, THAT NOTHING IN THIS NOTE SHALL BE DEEMED OR OPERATE TO PRECLUDE THE
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HOLDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION
TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY
FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF
THE HOLDER. ▇▇▇▇▇▇▇ EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH
JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND ▇▇▇▇▇▇▇
HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL
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JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
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PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH
ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER
PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO ▇▇▇▇▇▇▇ AT THE
ADDRESS SET FORTH IN THE PURCHASE AGREEMENT AND THAT SERVICE SO MADE SHALL BE
DEEMED COMPLETED UPON THE EARLIER OF ▇▇▇▇▇▇▇'▇ ACTUAL RECEIPT THEREOF OR THREE
(3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.
(c) ▇▇▇▇▇▇▇ DESIRES THAT ITS DISPUTES BE RESOLVED BY A JUDGE
APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF
THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ WAIVES
ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO
RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE
HOLDER AND ▇▇▇▇▇▇▇ ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS NOTE, ANY OTHER
RELATED AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.
3.8 Severability. In the event that any provision of this Note is
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invalid or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any such provision which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision of this
Note.
3.9 Maximum Payments. Nothing contained herein shall be deemed to
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establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate
of interest required to be paid or other charges hereunder exceed the maximum
rate permitted by such law, any payments in excess of such maximum rate shall be
credited against amounts owed by ▇▇▇▇▇▇▇ to the Holder.
3.10 Security Interest and Mortgage. The Holder has been granted
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a security interest (i) in certain assets of ▇▇▇▇▇▇▇ as more fully described in
the Master Security Agreement dated as of the date hereof (as amended, restated
or otherwise modified from time to time), (ii) in the equity interests of
Petrosearch Energy Corp., a Nevada corporation "Petrosearch") in ▇▇▇▇▇▇▇
pursuant to the Stock Pledge Agreement dated as of the date hereof between
Petrosearch and the Holder (as amended, restated or otherwise modified from time
to time), and (iii) in the oil and gas properties of ▇▇▇▇▇▇▇ pursuant to one or
more deeds of trust dated as of the date hereof.
3.11 Construction. Each party acknowledges that its legal counsel
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participated in the preparation of this Note and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.
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3.12 Registered Obligation. This Note is intended to be a
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registered obligation within the meaning of Treasury Regulation Section
1.871-14(c)(1)(i) and ▇▇▇▇▇▇▇ (or their agent) shall register this Note (and
thereafter shall maintain such registration) as to both principal and any stated
interest. Notwithstanding any document, instrument or agreement relating to
this Note to the contrary, transfer of this Note (or the right to any payments
of principal or stated interest thereunder) may only be effected by (i)
surrender of this Note and either the reissuance by ▇▇▇▇▇▇▇ of this Note to the
new holder or the issuance by ▇▇▇▇▇▇▇ of a new instrument to the new holder, or
(ii) transfer through a book entry system maintained by ▇▇▇▇▇▇▇ (or its agent),
within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)(B).
[Balance of page intentionally left blank; signature page follows]
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IN WITNESS WHEREOF, ▇▇▇▇▇▇▇ has caused this Secured Term Note to be
signed in its name effective as of this 1st day of November 2006.
▇▇▇▇▇▇▇ PETROSEARCH, INC.
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇
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Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇
Title: Manager
WITNESS:
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