CREDIT AGREEMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CREDIT AGREEMENT

 

Dated July 30, 2004

 

between

 

U. S. ENERGY CORP.

 

and

 

GEDDES AND COMPANY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CREDIT AGREEMENT

 

 

 

This CREDIT AGREEMENT entered into at Riverton, Wyoming on the 30th day of July, 2004, is by and among U.S. Energy Corp., a Wyoming corporation duly formed and existing under the laws of the State of Wyoming (the “Borrower”) and Geddes and Company, an Arizona corporation, duly formed and existing under the laws of the State of Arizona (the “Lender”).

 

R E C I T A L S

 

A.	The Borrower has requested that the Lender provide a Loan of up to $3,000,000 to the Borrower.

 

B.	The Lender has agreed to make such Loan subject to the terms and conditions of this Agreement.

 

C.	In consideration of the mutual covenants and agreements herein contained and of the loans and commitments hereinafter referred to, the parties hereto agree as follows:

 

ARTICLE I   

 

Definitions

 

Section 1.01       Certain Defined Terms.

 

As used in this Agreement, the following terms have the meanings specified below:

 

·	“ Agreement ” means this Credit Agreement, as the same may from time to time be amended, modified, supplemented or restated.

 

·	“ Collateral ” means the Properties of the Borrower described in Section 4.01 of this Agreement.

 

·	“ Commitment ” means the commitment of the Lender to make the Loan hereunder for an amount up to Three Million Dollars ($3,000,000).

 

·	“ Commitment Fee ” has the meaning assigned such term in Section 2.03(a).

 

·	“ Default ” means any event or condition which constitutes an Event of Default or that upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.

 

·	“ Effective Date” means the date first appearing above.

 

·	“ Event of Default ” has the meaning assigned to such term in Section 10.01.

 

·	“ Initial Funding ” has the meaning assigned such term in Section 2.02.

 

 

 

 

·	“ Loan Documents ” means this Credit Agreement, the Note, the Pledge and Security Agreement and the Warrant Agreement.

 

·	“ Loan ” means the loan made by the Lender to the Borrower pursuant to this Agreement.

 

·	“ Maturity Date ” means the date that is two years after the Effective Date.

 

·	“ Note ” means the Secured Convertible Note of the Borrower described in Section 2.04 and being substantially in the form of Exhibit “A”, together with all amendments, modifications, replacements, extensions and rearrangements thereof.

 

·	“ Pledge and Security Agreement ” means an agreement between the Borrower, Rocky Mountain Gas, Inc., a Wyoming corporation (“RMG”) and Lender in the form of Exhibit “B”, as the same may be amended, modified or supplemented from time to time.

 

·	“ Warrant Agreement ” means that certain Warrant Agreement from RMG to the Lender in the form attached hereto as Exhibit “C”, as the same may be amended, modified or supplemented from time to time.

 

ARTICLE II   

 

Commitment

 

Section 2.01       Loans. Subject to the terms and conditions of this Agreement, the Lender agrees to make Loans to the Borrower in an aggregate principal amount up to Three Million Dollars ($3,000,000), (the “Commitment”). Any amount of the Commitment which has not been borrowed by the Borrower prior to August 1, 2006 (the “Commitment Termination Date”) shall not be available to the Borrower for Loans from and after such Commitment Termination Date. 

 

Section 2.02       Borrowings.

 

Subject to the satisfaction of all conditions precedent by the date of such funding:

 

A.	Initial Funding . On the Effective Date, the Lender shall make a Loan to the Borrower in an amount equal to Borrower’s initial Disbursement Request (the “ Initial Funding ”).

 

B.

Subsequent Funding . Borrower, if in compliance with the terms of the Loan, shall have the right to receive the remaining balance of the Three Million Dollar ($3,000,000) Loan. Borrower shall submit a Disbursement Request to Lender as provided for in Exhibit “1” with respect to each further borrowing. Principal sums repaid or converted under Article 7 during the loan term may not be reborrowed.

 

C.	Minimum Amounts . All borrowings made pursuant to the notices described in B above shall be in amounts of at least $100,000.

 

 

 

 

Section 2.03       Commitment Fee. The Borrower shall pay to Lender at closing a fee of $90,000, which is equal to 3.0% for all amounts committed to be loaned to the Borrower hereunder.

 

Section 2.04       Note. The Loan made by the Lender shall be evidenced by a Secured Convertible Note of the Borrower in substantially the form of Exhibit A as of the date of this Agreement.

 

ARTICLE III

Payments of Principal and Interest

 

 

Section 3.01       Repayment of Loan. Interest on the borrowed outstanding principal shall be payable on the first business day following each quarter ending September, December, March and June, commencing October 1, 2004 and continuing until the entire principal amount of the Note is paid in full.

 

Section 3.02       Interest.

 

 

 

 

B. Interest Rate Computations . All interest hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day).

 

Section 3.03       Prepayments.  The Borrower may prepay all or any portion of the Loan made without premium or penalty.

 

ARTICLE IV

Collateral

 

Section 4.01       Collateral Pool. Collateral for the Loan as provided for by the Pledge and Security Agreement will consist of the following:

 

A.	The Ticaboo Note and the related mortgage; and

 

B.	A 1981 Citation II 550 jet, S/N #550-0264, FAA # N777WY,; and

 

C.	RMG’s working mineral interests in Castle Rock CBM leases; and

 

D.	Four million issued and outstanding shares of Rocky Mountain Gas, Inc. (“RMG”) Common Stock .

 

 

 

 

 

 

ARTICLE V

Mandatory Prepayment

 

Section 5.01       Mandatory Prepayment. Borrower agrees to immediately prepay the balance of the Loan as specified in the Note.

 

ARTICLE VI

Warrants in RMG, Registration and Cashless Exercise

 

Section 6.01       Warrants in RMG. Borrower agrees to have issued in Lender’s name or its designee, warrants to purchase RMG Common Stock in accordance with the Warrant Agreement.

 

 

Section 6.02       Registration. Lender shall have full registration rights on the shares exercised once RMG goes public.

 

Section 6.03       Cashless Exercise. There shall be no cashless exercise except per Section 7.01 of this Agreement.

 

ARTICLE VII

Optional Conversion and Conversion Price

 

Section 7.01       Optional Conversion. Lender shall have the option at any time prior to payment of all amounts due under the Note, to convert all or any portion of the unpaid principal amount of the Note into fully paid and non-assessable shares of common stock of RMG Common Stock.

 

Section 7.02       Conversion Price. The number of shares of RMG Common Stock that Lender shall be entitled to receive upon conversion shall be equal to the number attained by dividing the unpaid principal amount of the Note being converted by the Conversion Price. The “Conversion Price” shall be equal to the Exercise Price (as defined in the Warrant Agreement) as of the date of conversion. Lender shall receive full registration rights on any such shares received upon conversion to the same extent as provided in the Warrant Agreement. If the Lender elects to convert any part of the Note into RMG Common Stock, the Lender shall refund back to USEG the three points paid to Geddes & Company at closing on a prorata basis (i.e., if one million dollars out of the three million dollar loan is converted, only one-third of the three points is to refunded back to USEG).

 

ARTICLE VIII

Conditions Precedent

 

Article 8.01       Initial Funding. The obligations of the Lender to make Loans under the Initial Funding shall not become effective until the date on which each of the following conditions are satisfied.

 

A.	The Lender shall have received all fees and other amounts due and payable

 

 

 

 

on or prior to the Effective Date.

 

B.       The Lender shall have received the duly executed Note payable to the order of the Lender in a principal amount equal to its Commitment dated as of the date hereof.

 

C.       The Lender shall have received from Borrower and RMG duly executed counterparts of the Pledge and Security and Warrant Agreements described on Exhibits B and C, and delivery of any Collateral required by the terms thereof.

 

D. The terms of the Loan Documents have been approved by the Board of Directors of the Borrower and RMG.

 

E.       Lender shall have received an opinion of counsel, in form reasonably acceptable to Lender, confirming the authorization, execution and delivery of the Loan Documents by Borrower and RMG, the enforceability of the Loan Documents, and the validity, priority and perfection of the security interests granted to Lender in the Collateral.

 

 

 

ARTICLE IX

Representations and Warranties

 

The Borrower and Lender represent and warrant that:

Section 9.01       Organization; Powers.

 

A.

Each of the Borrower and RMG is duly organized, validly existing and in good standing under the laws of Wyoming, has all requisite power and authority, and has all material governmental licenses, authorizations, consents and approvals necessary, to own its assets and to carry on its business as now conducted.

 

B.

The Lender is duly organized, validly existing and in good standing under the laws of Arizona, has all requisite power and authority, and has all material governmental licenses, authorizations, consents and approvals necessary, to own its assets and to carry on its business as now conducted and warrants to the Borrower it has the $3,000,000 to loan to Borrower.

 

ARTICLE X

Events of Default; Remedies

 

Section 10.01       Event of Default. One or more of the following events shall constitute an “Event of Default”:

 

 

 

 

A.	The Borrower shall fail to pay any interest due on the borrowings under the Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise.

 

B.	The Borrower shall fail to pay the principal amount due on the Loan when the same shall become due and payable.

 

 

Section 10.02       Remedies. In the case of an Event of Default by Borrower, Lender shall have the right to declare the Note and the Loan then outstanding to be due and payable according to the terms of the Note, and shall have all rights as described in the Note or any other Loan Document.

 

ARTICLE XI

Miscellaneous

 

Section 11.01       Notices.

 

A.       All notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows:

 

1. If to the Borrower or RMG:

 

U. S. Energy Corp. / Rocky Mountain Gas, Inc.

877 North 8th West

Riverton, Wyoming 82501

Attn: Scott Lorimer

 

(Telecopy No. (307) 857-3050);

 

2.	If to the Lender:

 

Geddes and Company

2930 East Camelback Road, Suite 110

Phoenix, Arizona 85016

(Telecopy No. (602) 468-1793).

 

B.       Notices and other communications to the other parties hereunder may be delivered or furnished by electronic communications pursuant to procedures agreed by the parties.

 

 

 

 

Section 11.02       Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that any assignment must be approved in writing by the other party. Such written consent shall not be unreasonably withheld by either party.

 

Section 11.03       Counterparts; Integration; Effectiveness.

 

A.       This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.

 

B. This Agreement and the other Loan Documents constitute the entire contract among the parties relating to the subject matter hereof and thereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof and thereof. This Agreement and the other Loan Documents represent the final agreement among the parties hereto and thereto and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties.

 

Section 11.04       Severability. Any provision of this Agreement or any other Loan Document held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof or thereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision.

 

Section 11.05       Governing Law; Jurisdiction.

 

A.       This Agreement and the Loan Documents (other than the Warrant Agreement) shall be governed by, and construed in accordance with the laws of the State of Arizona.

 

B. Any legal action or proceeding with respect to the Loan Documents (other than the Warrant Agreement) shall be brought in the Courts of the State of Arizona, and each party consents to the jurisdiction of such Courts.

 

Section 11.06       Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.

 

Section 11.07       Condition to Borrower Obligations. The obligations of Borrower and RMG hereunder shall be ineffective until, and are subject to obtaining the approval of the Boards of Directors of Borrower and RMG of the transactions contemplated hereby; this Agreement shall automatically terminate and be of no force and effect unless such approvals are obtained on or before August 6, 2004.

 

 

 

 

The parties hereto have caused this Agreement to be duly executed as of the day and year first above written.

 

 

 

BORROWER :                                           U. S. ENERGY CORP.

 

 

                                         By:        /s/ Keith G. Larsen                              

                                               Name: Keith G. Larsen

                                                 Title: President

 

 

LENDER :                                    GEDDES AND COMPANY

 

                                         By:      /s/ F. Michael Geddes                    

                                         Name:    F. Michael Geddes                        

                                         Title:    President                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXHIBIT “A”

 

SECURED CONVERTIBLE NOTE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NEITHER THIS NOTE NOR THE SHARES OF ROCKY MOUNTAIN GAS, INC. (“RMG”) COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND IF RMG BECOMES A PUBLIC COMPANY, THE SHARES MAY NEITHER BE   OFFERED, SOLD NOR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE HOLDER HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE MAKER THAT SUCH REGISTRATION IS NOT REQUIRED.-

 

 

$3,000,000       July 30, 2004

SECURED CONVERTIBLE NOTE

 

 

FOR   VALUE RECEIVED, U.S. Energy Corp. (the “Maker”) a Wyoming corporation, having its principal place of business at 877 North 8 ^th West, Riverton, Wyoming 82501, hereby promises to pay to the order of Geddes and Company ("Payee") an Arizona corporation, having its address at 2930 East Camelback Road, Suite 110, Phoenix, Arizona 85016, the sum of Three Million Dollars ($3,000,000), or such lesser amount which represents the actual principal amount borrowed in accordance with that certain Credit Agreement ( the “Credit Agreement”) between Maker as Borrower and Payee as Lender of even date with this Note. This Secured Convertible Note (this "Note") is issued pursuant to the Credit Agreement. All capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement.

 

1.

Maturity.  The amount outstanding under this Note will be due and payable at the address of Payee or such other place as Payee may designate on the earlier of: (a) August 1, 2006, or (b) the date upon which Maker’s subsidiary, Rocky Mountain Gas, Inc., becomes a public company (the "Maturity Date"). No advances shall be made by Lender after the Maturity Date.

 

2.

Payment of Interest.  Interest on the borrowed outstanding principal balance under this Note shall be payable on the first business day following each quarter ending September, December, March and June, commencing October 1, 2004 and continuing until the entire principal amount of this Note is paid in full.

 

3.	Interest Rate.  The outstanding principal balance of this Note shall bear interest at a rate per annum equal to Ten Percent (10%).

 

 

 

 

4.	Optional Prepayment.

 

A. Subject to paragraph B below, from and after the date hereof, Maker shall have the privilege at any time and from time to time of prepaying this Note in whole or in part (each, a "Prepayment"), provided that Maker shall send a notice (each, a "Prepayment Notice") to Payee at least five (5) days prior to the date of each such prepayment (each, a "Prepayment Date"). There shall be no premium or penalty in connection with any Prepayment. Each Prepayment shall be applied first against accrued interest, if any, and then against principal outstanding. Each Prepayment Notice shall set forth the Prepayment Date and the amount of the Prepayment, specifying the amount thereof being applied against accrued interest and the amount thereof being applied against principal. The amount of principal repaid by any Prepayment may not be re-borrowed.

 

B. In the event that Maker sends a Prepayment Notice to Payee, Payee may elect prior to the Prepayment Date to convert into common stock of Rocky Mountain Gas, Inc. (“RMG Common Stock”) pursuant to Section 5 hereof, all or part of the amount of principal to be repaid by the proposed Prepayment instead of receiving such prepayment.

 

5.

Optional Conversion.  At any time prior to repayment of all amounts due under the Note, all or any portion of the principal amount of the Note shall be convertible at the option of the Payee into fully paid and non-assessable shares of RMG Common Stock. The number of shares of RMG Common Stock that Payee shall be entitled to receive upon conversion shall be equal to the number attained by dividing the principal amount of the Note being converted by the Conversion Price. The “Conversion Price” shall be equal to the Exercise Price (as defined in the Warrant Agreement) as of the date of conversion.

 

A. In order to exercise the conversion privilege, shall give written notice of conversion to Maker stating Payee's election to convert this Note or the portion thereof in a minimum of $100,000 increments specified in said notice. As promptly as practicable after receipt of the notice, Maker shall issue and shall deliver to Payee a certificate or certificates for the number of full shares of RMG Common Stock issuable upon the conversion of this Note or portion thereof registered in the name of Payee in accordance with the provisions of this Section 5.

 

B. Each conversion shall be deemed to have been effected on the date the conversion notice shall have been received by Maker, as aforesaid, and Payee shall be deemed to have become on said date the holder of record of the shares of Common Stock issuable upon such conversion. No fractional shares of Common Stock shall be issued upon

 

 

 

conversion of this Note. Any amounts so converted shall not be reborrowed.

 

6.

Security.  As security for the repayment of all liabilities arising under this Note, the Maker hereby grants to Payee a security interest in and a lien on all of the Collateral (as that term is defined in the Pledge and Security Agreement). Payee shall have all rights provided to a secured party under the Pledge and Security Agreement and under the Uniform Commercial Code of the State of Arizona. The Maker shall execute and deliver such documentation as Payee may reasonably request to evidence and perfect Payee's security interest granted in this Section 6.

 

7.	Use of Proceeds.  Funds advanced under this Note shall be used for the Maker's and RMG’s acquisition and development of natural gas properties and general corporate purposes consistent with the Maker's business and that of RMG.

 

8.	Covenants.  Maker covenants and agrees that, so long as any indebtedness is outstanding hereunder, it will comply with each of the following covenants (except in any case where Payee has specifically consented otherwise in writing):

 

A. Financial Reporting.  Maker shall furnish to Payee a copy of each financial report submitted on Form 10-K or 10-Q filed with the Securities and Exchange Commission within seven (7) days of such filing.

 

B. Notice of Event of Default. Maker shall furnish to Payee notice of the occurrence of any Event of Default (as defined herein) within five (5) days after it becomes known to an executive officer of Maker.

 

C. Financial Statements . Maker shall furnish to Payee quarterly financial statements, including balance sheets and statements of income, for each of Maker and RMG, which statements shall be annually audited, as soon as practicable after they are prepared for internal use.

 

9.	Event of Default.  For purposes of this Note, the Maker shall be in default hereunder (and an "Event of Default" shall have occurred hereunder) if:

 

A. Maker shall fail to pay when due any payment of principal, interest, fees, costs, expenses or any other sum payable to Payee hereunder or otherwise;

 

B. Maker shall default in the performance of any other agreement or covenant contained herein (other than as provided in subparagraph A above), and such default shall continue uncured for twenty (20) days

 

 

 

after notice thereof to Maker given by Payee, or if an Event of Default shall occur under any other Loan Document;

 

C. Maker: becomes insolvent, bankrupt or generally fails to pay its debts as such debts become due; is adjudicated insolvent or bankrupt; admits in writing its inability to pay its debts; or shall suffer a custodian, receiver or trustee for it or substantially all of its property to be appointed and if appointed without its consent, not be discharged within thirty (30) days; makes an assignment for the benefit of creditors; or suffers proceedings under any law related to bankruptcy, insolvency, liquidation or the reorganization, readjustment or the release of debtors to be instituted against it and if contested by it not dismissed or stayed within ten (10) days; if proceedings under any law related to bankruptcy, insolvency, liquidation, or the reorganization, readjustment or the release of debtors is instituted or commenced by Maker; if any order for relief is entered relating to any of the foregoing proceedings; if Maker shall call a meeting of its creditors with a view to arranging a composition or adjustment of its debts; or if Maker shall by any act or failure to act indicate its consent to, approval of or acquiescence in any of the foregoing;

 

10.

Consequences of Default.  Upon the occurrence of an Event of Default and at any time thereafter, the entire unpaid principal balance of this Note, together with interest accrued thereon and with all other sums due or owed by Maker hereunder, shall become immediately due and payable. In addition, the principal balance and all past-due interest shall thereafter bear interest at the rate of 18% per annum until paid.

 

11.

Remedies not Exclusive.  The remedies of Payee provided herein or otherwise available to Payee at law or in equity shall be cumulative and concurrent, and may be pursued singly, successively and together at the sole discretion of Payee, and may be exercised as often as occasion therefore shall occur; and the failure to exercise any such right or remedy shall in no event be a waiver or release of the same.

 

12.

Notice . All notices required to be given to any of the parties hereunder shall be in writing and shall he deemed to have been sufficiently given for all purposes when presented personally to such party or sent by certified or registered mail, return receipt requested, to such party at its address set forth below:

 

 

 

 

 

If to the Maker:    U.S. Energy Corp.                        

877 North 8th West                  

Riverton, Wyoming 82501            

Attn: Scott Lorimer                  

Fax: 307-857-3050                  

 

If to the Payee:             Geddes and Company.

2930 East Camelback Road, Suite 110 

Phoenix, Arizona 85016

Attn: F. Michael Geddes

Fax: 602-468-1793

 

Such notice shall be deemed to be given when received if delivered personally or five (5) business days after the date mailed. Any notice mailed shall be sent by certified or registered mail. Any notice of any change in such address shall also be given in the manner set forth above. Whenever the giving of notice is required, the giving of such notice may be waived in writing by the party entitled to receive such notice.

 

13.

Severability.  In the event that any provision of this Note is held to be invalid, illegal or unenforceable in any respect or to any extent, such provision shall nevertheless remain valid, legal and enforceable in all such other respects and to such extent as may be permissible. Any such invalidity, illegality or unenforceability shall not affect any other provisions of this Note, but this Note shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.

 

14.	Successors and Assigns.  This Note inures to the benefit of the Payee and binds the Maker, and its respective successors and assigns, and the words "Payee" and "Maker" whenever occurring herein shall be deemed and construed to include such respective successors and assigns.

 

15.	Entire Agreement. This Note embodies the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersedes all prior agreements, understandings and inducements, whether express or implied, oral and written.

 

16.	Modification of Agreement.  This Note may not be modified, altered or amended, except by an agreement in writing signed by both the Maker and the Payee.

 

 

 

 

 

 

17.	Governing Law.  This instrument shall be construed according to and governed by the laws of the State of Arizona.

 

18.

Consent to Jurisdiction and Service of Process. Maker irrevocably appoints each and every officer of Maker as its attorney upon whom may be served any notice, process or pleading in any action or proceeding against it arising out of or in connection with this Note; and Maker hereby consents that any action or proceeding against it be commenced and maintained in any court within the State of Arizona by service of process on any such, officer; and Maker agrees that the courts of the State of Arizona shall have jurisdiction with respect to the subject matter hereof and the person of Maker and the collateral securing Maker's obligations hereunder. Notwithstanding the foregoing, Payee, in its absolute discretion may also initiate proceedings in the courts of any other jurisdiction in which Maker may be found or in which any of its properties or any such collateral may be located.

 

19.

Mandatory Prepayments . Maker shall apply, as Prepayments to the Loan until paid in full, (a) all amounts received by Maker from settlement or enforcement of any judgment entered upon its claims against Nukem, Inc., and (b) all payments or proceeds received by Maker with respect to the disposition or sale of any of the Collateral (whether or not such sale or disposition is permitted by the terms of the P