THE
SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B) AN OPINION OF
COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (II)
UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. NOTWITHSTANDING
THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT
SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD
CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTION 5
HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE MAY BE LESS
THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 5
HEREOF.
SENIOR SECURED
NOTE
November 13,
2008
FOR VALUE RECEIVED, SONTERRA RESOURCES,
INC. (f/k/a River
Capital Group, Inc.), a Delaware
corporation (the “ Company ”), hereby
promises to pay to the order of Longview Marquis Master Fund, L.P.,
a British Virgin Islands limited partnership, or its registered
assigns (the “ Holder ”) the principal
amount of Eight Million Eight Hundred Seventy-Five Thousand Dollars
($8,875,000) when due, whether upon maturity, acceleration,
redemption or otherwise, and to pay interest (“
Interest ”) on the unpaid principal balance
hereof on each Interest Payment Date (as defined in Section 2) and
upon maturity, or earlier upon acceleration or prepayment pursuant
to the terms hereof, at the Applicable Interest Rate (as defined in
Section 2). Interest on this Note payable on each Interest Payment
Date and upon maturity, or earlier upon acceleration or prepayment
pursuant to the terms hereof, shall accrue from the Issuance Date
(as defined in Section 2) and shall be computed on the basis of a
365-day year and actual days elapsed.
(1) Payments of Principal and Interest
. All payments under this Note shall
be made in lawful money of the U.S. (as defined in Section 2) by
wire transfer of immediately available funds to such account as the
Holder may from time to time designate by written notice in
accordance with the provisions of this Note. Interest on the
Principal shall be paid in arrears on each Interest Payment Date
and upon Maturity. The Company has no right, but under certain
circumstances has an obligation, to make payments of Principal of
this Note prior to the Maturity Date (as defined in Section 2),
except as set forth in Section 3 hereof. Whenever any amount
expressed to be due by the terms of this Note is due on any day
that is not a Business Day (as defined in Section 2), the same
shall instead be due on the next succeeding day that is a Business
Day. This Note and all Other Notes (as defined in Section 2) issued
by the Company pursuant to the Securities Purchase Agreement (as
defined in Section 2) on the Closing Date (as defined in the
Securities Purchase Agreement), and all notes issued in exchange or
substitution therefor or replacement thereof are collectively
referred to in this Note as the “ Notes
.”
(2) Certain Defined Terms . Each capitalized term used in this Note, and
not otherwise defined, shall have the meaning ascribed thereto in
the Securities Purchase Agreement, dated as of November 13, 2008,
pursuant to which this Note was originally issued (as such
agreement may be amended, restated, supplemented or otherwise
modified from time to time as provided therein, the “
Securities Purchase Agreement ”). For
purposes of this Note, the following terms shall have the following
meanings:
(a) “ Applicable Interest
Rate ” means the Interest Rate, or, for so long as
an Event of Default shall have occurred and be continuing, the
Default Rate.
(b) “ Bankruptcy Law ”
means Title 11, U.S. Code, or any similar U.S. federal or state law
or law of any applicable foreign government or political
subdivision thereof for the relief of debtors.
(c) “ Business Day ”
means any day other than Saturday, Sunday or other day on which
commercial banks in the city of New York are authorized or required
by law to remain closed.
(d) “ Cash and Cash
Equivalents ” means (I) cash, (II) certificates of
deposit or time deposits, having in each case a tenor of not more
than six (6) months, issued by any U.S. commercial bank or any
branch or agency of a non-U.S. bank licensed to conduct business in
the U.S. having combined capital and surplus of not less than
$250,000,000, and (III) money market funds, provided that
substantially all of the assets of such funds consist of securities
of the type described in clauses (I) or (II) immediately above, all
as determined in accordance with GAAP applied on a consistent
basis.
(e) “ Change of Control
” means (i) the consolidation, merger or other business
combination of the Company with or into another Person (other than
(A) a consolidation, merger or other business combination in which
holders of the Company’s voting power immediately prior to
the transaction continue after the transaction to hold, directly or
indirectly, a majority of the combined voting power of the
surviving entity or entities entitled to vote generally for the
election of a majority of the members of the board of directors (or
their equivalent if other than a corporation) of such entity or
entities, or (B) pursuant to a migratory merger effected solely for
the purpose of changing the jurisdiction of incorporation of the
Company), (ii) the sale or transfer of all or substantially all of
the Company’s assets (including, for the avoidance of doubt,
the sale of all or substantially all of the assets of the
Subsidiaries in the aggregate); (iii) the consummation of a
purchase, tender or exchange offer made to and accepted by the
holders of more than the fifty percent (50%) of the outstanding
shares of Common Stock; (iv) the acquisition by any Person or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the 1934
Act) of the beneficial ownership (within the meaning of Rule 13d-3
promulgated under the 1934 Act) of fifty percent (50%) or more of
the outstanding shares of Common Stock or of the combined voting
power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors; or (v) any
change in the composition of the Board of Directors of the Company
(the “ Board ”) such that the
individuals who, as of the date of the Securities Purchase
Agreement, constituted the Board of the Company (such Board of the
Company being hereinafter referred to as the “
Incumbent Board ”) cease for any reason to
constitute at least a majority of the Board; provided, however,
that any individual who becomes a member of the Board whose
election, or nomination for election by the Company's stockholders,
was approved by a vote of at least a majority of those individuals
who are members of the Board and who were also members of the
Incumbent Board (or deemed to be such pursuant to this proviso)
shall be considered as though such individual were a member of the
Incumbent Board; but, provided, further, that any such individual
whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in
Rule 14a-11 of Regulation 14A promulgated under the 1934 Act) or
other actual or threatened solicitation of proxies or consents by
or on behalf of a Person or group other than the Board shall not be
so considered as a member of the Incumbent Board.
(f) “ Collateral Agent
” shall have the meaning ascribed to such term in the
Security Agreement.
(g) “ Custodian ”
means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
(h) “ Daily Production
Average ” means, for any calendar quarter, the
arithmetic average of the aggregate number of thousands of cubic
feet equivalents (“ Mcfe ”) of natural
gas produced by all of the Real Property of the Company and the FC
Subsidiaries, net to the Working Interests (as defined in the
Conveyances of Limited Overriding Royalty Interests) owned by the
Company and such Subsidiaries in such Real Property, on each of the
days in such calendar quarter.
(i)
“Daily Production Test
Failure ”
means that, as of any date of determination, the Daily Production
Average for the calendar quarter ending on such date is less than
the Required Daily Production Average for such calendar
quarter.
(j) “ Daily Production Test Failure
Percentage ” means, in the event that there is a
Daily Production Test Failure as of any date of determination, an
amount equal to the result of (A) one (1) minus (B) the quotient of
the Daily Production Average for the calendar quarter ended on such
date, divided by the Required Daily Production Average for such
calendar quarter.
(k) “ Default Rate ”
means the per annum interest rate equal to the sum of (i) the
Interest Rate plus (ii) two percent (2.0%) (i.e., 200 basis
points).
(l) “ Dollars ” or
“ $ ” means United States
Dollars.
(m) “ Excluded Taxes ”
means, with respect to the Holder, or any other recipient of
payment to be made by or on account of any obligations of the
Company or any of the Subsidiaries under the Notes, the Securities
Purchase Agreement or under any other Transaction Document, income
or franchise taxes imposed on (or measured by) such
recipient’s net income or gross receipts by the U.S. or such
other jurisdiction under the laws of which such recipient is
organized or its principal offices are located.
(n) “ FC Subsidiaries
” means the domestic Included Subsidiaries that (i) are
directly or indirectly wholly-owned by the Company, (ii) are party
to the Guaranty and the Security Agreement, and (iii) in all of the
assets of which the holders of the Notes have a valid, first
priority, perfected security interest as of the applicable date of
determination.
(o)
“Financial Covenant
Test Failure” means that, as of any date of determination, (A)
there is a Daily Production Test Failure or (B) the PRV Ratio as of
such date is less than the Required PRV Ratio as of such
date.
(p) “ Financial Covenant Test Failure
Amount ” means, in the event that there is a
Financial Covenant Test Failure as of any date of determination, an
amount equal to the sum of:
(i)
the product of (A) the result of
(I) one (1) minus (II) the quotient of the Daily Production Average
for the calendar quarter ended on such date, divided by the
Required Daily Production Average for such calendar quarter
(provided, however, that such result shall not be less than zero
(0)), multiplied by (B) the aggregate outstanding principal amount
of all Notes then outstanding; plus
(ii)
the product of (A) the result of
(I) one (1) minus (II) the quotient of the PRV Ratio as of such
date, divided by the Required PRV Ratio as of such date (provided,
however, that such result shall not be less than zero (0)),
multiplied by (B) the aggregate outstanding principal amount of all
Notes then outstanding.
(q) “ GAAP ” means
U.S. generally accepted accounting principles, as in effect at the
relevant time.
(r) “ Governmental Authority
” means the government of the U.S. or any other nation, or
any political subdivision thereof, whether state, provincial or
local, or any agency, authority, instrumentality, regulatory body,
court, central bank or other entity exercising executive,
legislative, judicial, taxing, regulatory or administration powers
or functions of or pertaining to government over the Company, or
any of their respective properties, assets or
undertakings.
(s) “ Indemnified Taxes
” means all taxes other than Excluded Taxes.
(t) “ Interest Amount
” means, as of any date, with respect to any Principal, all
accrued and unpaid Interest (including any Interest at the Default
Rate) on such Principal through and including such date.
(u) “ Interest Payment Date
” means the last Business Day of each of December 2008, March
2009 and June 2009, and thereafter on the first Business Day of
each calendar month, beginning with August 2009, until this Note
has been repaid in full.
(v) “ Interest Rate ”
means thirteen percent (13.0%) per annum, subject to adjustment as
provided in Section 3(c)(iii).
(w) “ Issuance Date ”
means the original date of issuance of this Note pursuant to the
Securities Purchase Agreement, regardless of any exchange or
replacement hereof.
(x) “ Maturity Date ”
means November 13, 2011, unless such date is not a Business Day, in
which case “Maturity Date” shall mean the first
Business Day following November 13, 2011.
(y) “ Other Notes ”
means all of the senior secured notes, other than this Note, that
have been issued by the Company pursuant to the Securities Purchase
Agreement and all notes issued in exchange or substitution
therefor, addition thereto or replacement thereof.
(z) “ PDNP ” as of any
date of determination, means the total proved developed
non-producing reserves (in Mcfe) of the
Company and the FC Subsidiaries, determined as of such date of
determination in accordance with SEC guidelines from an independent
reserve report prepared in good faith by the Petroleum Engineer in
accordance with industry standards and best practices (an “
Independent Reserve Report ”); provided,
however, that PDNP shall mean zero (0) unless (A) it is based upon
an Independent Reserve Report (or an update thereof prepared (but
not certified) by the Petroleum Engineer, which update includes all
material adjustments to the amounts set forth in the most recent
Independent Reserve Report to reflect the Company’s and the
Subsidiaries’ oil and gas drilling, exploration, development
and production since the date of such Independent Reserve Report (a
“ Reserve Update ”)) that was current
as of a date within 92 days of such date of determination, (B) the
Company has publicly disclosed the PDNP in a Periodic Report as of
a date within 274 days of such date of determination (based on an
Independent Reserve Report that was current as of such date of
determination), (C) the PDNP is based upon the same Independent
Reserve Report or Reserve Update on which the PDP, PUD and Probable
are based as of such date of determination, and (D) if the PDNP is
not based upon an Independent Reserve Report (or a Reserve Update)
that was current as of such date of determination, the Company
reasonably believes, based upon its own analysis conducted in good
faith and reflecting the Company’s and the FC
Subsidiaries’ oil and gas drilling, exploration, development
and production since the date of the Independent Reserve Report (or
Reserve Update) on which the PDNP is based (the “
Recent Production ”) (and has certified to
the Holder in the applicable Officer’s Certificate to the
Holder that it so reasonably believes), that the PDNP is not less
than that disclosed in the Independent Reserve Report (or Reserve
Update) on which the PDNP is based.
(aa) “ PDP ” means the
total proved developed producing reserves (in Mcfe) of the Company
and the FC Subsidiaries, determined in accordance with SEC
guidelines from an Independent Reserve Report; provided, however,
that PDP shall mean zero (0) unless (A) it is based upon an
Independent Reserve Report (or a Reserve Update) that was current
as of a date within 92 days of such date of determination, (B) the
Company has publicly disclosed the PDP in a Periodic Report as of a
date within 274 days of such date of determination (based on an
Independent Reserve Report that was current as of such date of
determination), (C) the PDP is based upon the same Independent
Reserve Report or Reserve Update on which the PDNP, PUD and
Probable are based as of such date of determination, and (D) if the
PDP is not based upon an Independent Reserve Report (or a Reserve
Update) that was current as of such date of determination, the
Company reasonably believes, based upon its own analysis conducted
in good faith and reflecting the Recent Production (and has
certified to the Holder in the applicable Officer’s
Certificate that it so reasonably believes), that the PDP is not
less than that disclosed in the Independent Reserve Report (or
Reserve Update) on which the PDP is based.
(bb) “ Periodic Report
” means a quarterly report on Form 10-Q (or successor
thereto) or an annual report on Form 10-K (or successor thereto),
in the form required to be filed with the SEC.
(cc) “ Person ” means
an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization or
a government or any department or agency thereof or any other legal
entity.
(dd) “ Petroleum Engineer
” means an independent petroleum engineer that is an SPE
(Society of Petroleum Engineers) Certified Petroleum Professional
and is selected and engaged by the Company and approved by the
holders of Notes representing at least two thirds (2/3) of the
aggregate principal amount of the Notes then outstanding, which
approval shall not be unreasonably withheld, conditioned or
delayed.
(ee) “ Prepayment Notice
” means a written notice from the Company to Holder
indicating the Company’s commitment to prepay a specified
amount of Principal, together with the applicable Interest Amount
and Prepayment Premium with respect thereto on the applicable
prepayment date.
(ff) “ Prepayment Premium
” means an amount equal to twenty-five percent (25%) of the
amount of Principal so prepaid or required to be
prepaid.
(gg) “ Principal ”
means the outstanding principal amount of this Note as of any
date.
(hh) “ Probable ” means
the total probable undeveloped reserves (in Mcfe) of the Company
and the FC Subsidiaries, determined in accordance with SEC
guidelines based on an Independent Reserve Report; provided,
however, that Probable shall mean zero (0) unless (A) it is based
upon an Independent Reserve Report (or a Reserve Update) that was
current as of a date within 92 days of such date of determination,
(B) the Company has publicly disclosed the Probable in a Periodic
Report as of a date within 274 days of such date of determination
(based on an Independent Reserve Report that was current as of such
date of determination), (C) the Probable is based upon the same
Independent Reserve Report or Reserve Update on which the PDNP, PDP
and PUD are based as of such date of determination, and (D) if the
Probable is not based upon an Independent Reserve Report (or a
Reserve Update) that was current as of such date of determination,
the Company reasonably believes, based upon its own analysis
conducted in good faith and reflecting the Recent Production (and
has certified in the applicable Officer’s Certificate that it
so reasonably believes), that the Probable is not less than that
disclosed in the Independent Reserve Report (or Reserve Update) on
which the Probable is based.
(ii) “ Pro Rata Financial Covenant
Test Failure Amount ” means, as of the date of any
determination, an amount equal to the sum of (i) the product of (A)
a fraction, of which the numerator is the outstanding Principal as
of such date, and of which the denominator is the aggregate
outstanding principal amount of all Notes as of such date,
multiplied by (B) the Financial Covenant Test Failure Amount, and
(ii) the Interest Amount with respect to such Principal as of the
date such amount is paid to the Holder.
(jj) “ PRV Ratio ”
means, as of any date of determination, the quotient of:
(i) (A) the
product of the aggregate actual PDP and PDNP of the Company’s
and the FC Subsidiaries’ oil and gas properties and interests
in which the holders of the Notes have a valid, first priority,
perfected security interest as of such date of determination (the
“PRV Properties ”), multiplied by (B)
the relevant hub spot price as of such date of determination, and
multiplied by (C) 40%; plus
(ii) the
product of (A) the actual PUD of the PRV Properties, multiplied by
(B) the relevant hub spot price as of such date of determination,
and multiplied by (C) 15%; plus
(iii) the
product of (A) the actual Probable of the PRV Properties,
multiplied by (B) the relevant hub spot price as of such date of
determination and multiplied by (C) 5%; plus
(iv) the
aggregate Cash and Cash Equivalents of the Company and the FC
Subsidiaries, the aggregate hydrocarbon receivables of the Company
and the FC Subsidiaries (net of any provision for uncollectibility
thereof and excluding any such receivables that are impaired or
have been outstanding (and uncollected) for more than 60 days since
the initial booking thereof), and the market value of hedges of the
Company and the FC Subsidiaries, each as of such date of
determination, as set forth in the financial statements included in
the Periodic Report for the fiscal quarter or year ended on such
date of determination; plus
(v) $4,400,000
(representing the deemed liquidation value as of the Issuance Date
of the drilling rigs, trucks and equipment of North Texas, which
was acquired and became a Subsidiary as of the Issuance Date),
adjusted as agreed upon by the Company and the holders of Notes
representing at least two-thirds (2/3) of the aggregate principal
amount outstanding under the Notes as of such date of
determination, to reflect any sales, transfers or other
dispositions of, or any failure of the holders of the Notes to have
a valid, first priority, perfected security interest in, any of
such drilling rigs, trucks and equipment (other than due to the
FNBW Security Interest); minus
(vi) the
aggregate hedge margin collateral of the Company and the
Subsidiaries, the aggregate hydrocarbon payables (including with
respect to royalty payments and net profit interests) of the
Company and the Subsidiaries, and the aggregate accrued production
taxes payable by the Company and the Subsidiaries, each as of such
date of determination, as set forth in the financial statements
included in the Periodic Report for the fiscal quarter or year
ended on such date of determination; and minus
(vii) the
aggregate Indebtedness of the Company and the Subsidiaries due
prior to the Maturity Date (excluding the Notes), as of such date
of determination, as set forth in the financial statements included
in the Periodic Report for the fiscal quarter or year ended on such
date of determination;
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the aggregate
outstanding principal amount of all Notes.
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(kk) “ PUD ” means the
total proved undeveloped reserves (in Mcfe) of the Company and the
FC Subsidiaries, determined in accordance with SEC guidelines based
on an Independent Reserve Report; provided, however, that PUD shall
mean zero (0) unless (A) it is based upon an Independent Reserve
Report (or a Reserve Update) that was current as of a date within
92 days of such date of determination, (B) the Company has publicly
disclosed the PUD in a Periodic Report as of a date within 274 days
of such date of determination (based on an Independent Reserve
Report that was current as of such date of determination), (C) the
PUD is based upon the same Independent Reserve Report or Reserve
Update on which the PDNP, PDP and Probable are based as of such
date of determination, and (D) if the PUD is not based upon an
Independent Reserve Report (or a Reserve Update) that was current
as of such date of determination, the Company reasonably believes,
based upon its own analysis conducted in good faith and reflecting
the Recent Production (and has certified in the applicable
Officer’s Certificate that it so reasonably believes), that
the PUD is not less than that disclosed in the Independent Reserve
Report (or Reserve Update) on which the PUD is based.
(ll) “ Required Daily Production
Average ” means, with respect to any fiscal quarter
ending on or after any date set forth below and prior to the next
date set forth below, the Daily Production Average set
for
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