Exhibit 10.16

 

CONVERTIBLE PROMISSORY NOTE

 

THE OFFER AND SALE OF THIS NOTE AND THE ISSUANCE OF THE SECURITIES ISSUABLE UPON
CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY APPLICABLE STATE SECURITIES
LAWS, AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, OFFERED
OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM
REGISTRATION IS AVAILABLE AND THE TRANSFER, SALE, ASSIGNMENT OR PLEDGE IS MADE
IN STRICT COMPLIANCE WITH SUCH EXEMPTION.

 

$35,000,000

May 25, 2004

 

 

FOR VALUE RECEIVED, the undersigned, BETA OIL & GAS, INC., a Nevada corporation
(“Maker” or the “Company”) hereby promises to pay to PETROHAWK ENERGY, LLC, a
Delaware limited liability company (“Payee”), not later than 2:00 P.M. (Houston,
Texas time), on the date when due, in immediately available funds in Houston,
Texas, at Payee’s offices at 1100 Louisiana, Suite 4400, Houston, Texas  77002
or such other address, given to Maker by Payee, the principal sum of THIRTY FIVE
MILLION AND NO/100 DOLLARS ($35,000,000), together with interest, as hereinafter
described.  Whenever any payment of principal of, or interest on, this Note
shall be due on a day which is not a Business Day, the date for payment thereof
shall be extended to the next succeeding Business Day.  If the date for payment
of principal is extended by operation of law or otherwise, interest thereon
shall be payable for such extended time.

 

This Note has been executed and delivered pursuant to, and is subject to and
governed by, the terms of that certain Securities Purchase Agreement dated as of
December 12, 2003, by and between Maker and Payee (the “Agreement”).  This Note
is the “Note” referred to in the Agreement.  Unless otherwise defined herein or
unless the context hereof otherwise requires, each term used herein with its
initial letter capitalized has the meaning given to such term in the Agreement.

 

Maker reserves the right to prepay without premium or penalty, after thirty (30)
days prior written notice to the Noteholder, the principal amount of the Note,
in whole or in part, at any time after May 25, 2006.

 

Maker promises to pay interest on the outstanding principal balance hereof,
prior to the occurrence of an Event of Default, at a rate per annum equal to
eight percent (8%) per annum (the “Fixed Rate”)  Interest shall accrue on any
amounts past due and owing on the Note from the date due until paid at the rate
of fifteen percent (15%) per annum (the “Default Rate”); provided further, that
in no event shall the rate of interest charged hereunder exceed the Maximum
Lawful Rate.  Interest shall be payable in cash on the

 

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Note as it accrues on June 30, 2004 and continuing on each June 30, 
September 30, December 31 and March 31 thereafter until maturity.

 

Interest shall be computed on the Note on the basis of the number of actual days
elapsed, assuming that each calendar year consisted of 360 days.  The entire
outstanding principal balance of this Note and all accrued but unpaid interest
thereon shall be due and payable in full in a single installment on May 25,
2009.

 

At any time after May 25, 2006, a Noteholder may elect to convert all or any
portion of the amount of principal and accrued but unpaid interest on the Note
as hereinafter provided.

 

Each $2.00 (the “Conversion Price”) of principal and accrued but unpaid interest
on the Note shall be convertible into one share of Common Stock.  The Conversion
Price is subject to adjustment from time to time upon the occurrence of any of
the events enumerated below:

 

1.                                       In the event that the Company shall (a)
declare a dividend on the Common Stock in shares of its capital stock (whether
shares of such Common Stock or of capital stock of any other class of the
Company), (b) split or subdivide the outstanding Common Stock, or (c) combine
the outstanding Common Stock into a smaller number of shares, then (as a result
of an event described in (a), (b) or (c)) the Conversion Price shall be adjusted
to equal the product of the Conversion Price in effect immediately prior to such
event multiplied by a fraction the numerator of which is equal to the number of
shares of Common Stock outstanding on a Fully Diluted Basis immediately prior to
such event and the denominator of which is equal to the number of shares of
Common Stock outstanding on a Fully Diluted Basis immediately after the event.

 

2.                                       In the event of any capital
reorganization of the Company, or of any reclassification of any Common Stock
for which the Note is convertible (other than a subdivision or combination of
outstanding shares of such Common Stock), or in case of the consolidation of the
Company with or the merger of the Company with or into any other corporation or
of the sale of the properties and assets of the Company as, or substantially as,
an entirety to any other entity, each amount of principal and unpaid interest
outstanding of the Note equal to the Conversion Price then in effect shall,
after such capital reorganization, reclassification of such Common Stock,
consolidation, merger or sale be convertible, upon the terms and conditions
specified in this Note and in the Agreement, into the number of shares of stock
or other securities or assets to which a holder of the

 

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number of shares of Common Stock into which amount of principal and interest
payable under the Note is convertible (at the time of such capital
reorganization, reclassification of such Common Stock, consolidation, merger or
sale) would have been entitled upon such capital reorganization,
reclassification of such Common Stock, consolidation, merger or sale; and in any
such case, if necessary, the provisions set forth in this section with respect
to the rights thereafter of such Note shall be appropriately adjusted so as to
be applicable, as nearly as may reasonably be, to any shares of stock or other
securities or assets thereafter deliverable upon the conversion of the Note. 
The Company shall not effect any such consolidation, merger or sale, unless
prior to or simultaneously with the consummation thereof, the successor
corporation (if other than the Company) resulting from such consolidation or
merger or the corporation purchasing such assets or the appropriate corporation
or entity shall assume, by written instrument, the obligation to deliver to the
Noteholder the shares of stock, securities or assets to which, in accordance
with the foregoing provisions, such Noteholder may be entitled pursuant to this
section.

 

3.                                       If any question shall at any time arise
with respect to the Conversion Price or the number of shares issuable upon
conversion of the Note, such question shall be determined by an independent firm
of certified public accountants of recognized national standing selected by the
Noteholder and acceptable to the Company.

 

4.                                       Notwithstanding anything in this
section to the contrary, the Company shall not be permitted to take any action
described in subparagraphs 1 through 3 above, if such action is prohibited under
any other provision of this Note or the Agreement.

 

If a Noteholder elects to convert all or a portion of the outstanding principal
and accrued but unpaid interest under the Note, then the Noteholder shall
deliver the Note to the Company in exchange for a certificate or certificates
for the number of whole Conversion Shares to which the Noteholder is entitled
under the terms hereof.  In the event that the Noteholder has elected to convert
less than all of the outstanding principal and accrued but unpaid principal
under the Note, the Noteholder will also receive an amended and restated note
setting forth the new amount of principal and accrued but unpaid interest.  To
the extent permitted by law, such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such exchange of the
Notes for the Conversion Shares and, if applicable, the amended and restated
note, and the Noteholder shall be treated for all purposes as the record holder
of such shares of Common Stock on such date.

 

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Notwithstanding any other provision of this Note or the Agreement, upon the
occurrence of a Change of Control (other than a Change of Control caused by or
resulting to any material extent from any sales of the Common Stock Shares,
Conversion Shares or Warrant Shares by the Holder or any of its Affiliates), the
entire principal balance of the Note and all accrued but unpaid interest may, at
the election of the Noteholder, be converted into Conversion Shares at the
Conversion Price.

 

No fractional shares or script of Common Stock shall be issued upon conversion
of all or a portion of the outstanding principal and accrued but unpaid interest
under the Note.  In lieu of a fractional share of Common Stock to which the
Holder would otherwise be entitled, the Company shall pay cash equal to the
product of such fraction multiplied by the Per Share Stock Price of one share of
Common Stock on the date of conversion.

 

If one or more of the following events (collectively, “Events of Default” and
individually, an “Event of Default”) shall have occurred and be continuing:

 

(a)                                  the Company shall fail to pay when due any
principal or interest on the Note;

 

(b)                                 any representation, warranty, certification
or statement made or deemed to have been made by the Company in the Agreement or
any of the other Transaction Documents or by the Company or any other Person on
behalf of the Company in any certificate, financial statement or other document
delivered pursuant to the Agreement or any of the other Transaction Documents,
shall prove to have been incorrect in any material respect when made, at the
time of Closing and at the time that the Noteholder proposes to declare an Event
of Default as a result thereof;

 

(c)                                  a default or event which, with the giving
of notice, lapse of time or both could (unless cured or waived) become a
default, shall occur under the terms of any Debt of the Company or any of its
Subsidiaries having a principal balance of $250,000 or more (including, without
limitation, the BOK Debt or any debt intended to replace such debt, the
“Permitted Senior Debt”);

 

(d)                                 the Company or any of its Subsidiaries shall
commence a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its Debts under any
bankruptcy, insolvency or other similar Law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or shall consent
to any such relief or to the appointment of or taking possession by any such
official in an involuntary case or other proceeding commenced against it, or
shall make a general assignment for the benefit of creditors, or shall fail
generally to pay its Debts as they become due, or shall take any corporate
action to authorize any of the foregoing;

 

(e)                                  an involuntary case or other proceeding
shall be commenced against the Company or any of its Subsidiaries seeking
liquidation, reorganization or

 

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other relief with respect to it or its Debts under any bankruptcy, insolvency or
other similar Law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of sixty (60) days; or an
order for relief shall be entered against the Company under the federal
bankruptcy Laws as now or hereafter in effect;

 

(f)                                    one (1) or more judgments or orders for
the payment of money aggregating in excess of $250,000 shall be rendered against
the Company or any of its Subsidiaries and such judgment or order (i) shall
continue unsatisfied and unstayed for a period of thirty (30) days, or (ii) is
not fully paid and satisfied at least ten (10) days prior to the date on which
any of its assets may be lawfully sold to satisfy such judgment or order; or

 

(g)                                 any Change of Control other than a Change of
Control caused by any sales of the Common Stock Shares, Conversion Shares or
Warrant Shares by the Noteholder or any of its Affiliates;

 

(h)                                 the Company without the written consent of
the Noteholder shall issue any debt or note (except the Permitted Senior Debt or
trade payables) which is not by its terms subordinate to this Note.

 

then, so long as any such event is continuing, any Noteholder shall without
notice or demand of any kind (including, without limitation, notice of intention
to accelerate and acceleration) (unless any such notice is expressly provided
for in this Note or the Agreement or in the other Transaction Documents), all of
which are hereby waived, take any and all actions as may be permitted by the
Transaction Documents including, declaring the obligations in respect of the
Note owned by such Noteholder (including all accrued but unpaid interest
thereon) to be, and such obligations shall thereupon become, immediately due and
payable.

 

Upon the occurrence and during the continuance of an Event of Default, and upon
the conditions stated in this Note, the holder hereof may, at its option,
declare the entire unpaid principal of and accrued but unpaid interest on this
Note immediately due and payable (provided that, upon the occurrence of certain
Events of Default, and upon the conditions stated in this Note, such
acceleration shall be automatic), without notice, demand, or presentment, all of
which are hereby waived, and the holder hereof shall have the right to offset
against this Note any sum or sums owed by the holder hereof to Maker.  After the
occurrence of an Event of Default, interest shall accrue on the outstanding
principal balance of this Note and, to the extent permitted by applicable Law,
on accrued but unpaid interest, at the Default Rate.

 

After the occurrence of an Event of Default, all amounts collected or received
by any Noteholder in respect of the Obligations shall be applied first, to the
payment of all proper costs incurred by the Noteholder in connection with the
collection thereof (including reasonable fees, expenses and disbursements of
counsel for the Noteholder),

 

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second, to the payment of all accrued but unpaid interest on the Note, third, to
unpaid principal on the Note, and fourth, to the Company or any other Person
entitled to such proceeds under applicable Law.

 

The Company shall maintain at the offices of the Company, the Note Register for
registration of the Note and transfers thereof.  On the Closing Date, the
Company shall register this Note issued to Payee.  The Company may deem and
treat the registered Noteholder as the absolute owner of the Note registered to
such Holder and (notwithstanding any notation of ownership or other writing on
the Note made by any Person) for the purpose of any exercise thereof or any
distribution to the Noteholder, and for all other purposes.

 

Upon satisfaction of each condition set forth in Article V of the Agreement, the
Company shall register the transfer of any outstanding Note in the Note Register
upon surrender of such Note to the Company at the offices of the Company,
accompanied (if so required by it) by a written instrument or instruments of
transfer in form satisfactory to it, duly executed by the registered Noteholder
or by the duly appointed legal representative thereof.  Upon any such
registration of transfer, a new Note evidencing such transferred Note shall be
issued to the transferee and the surrendered Note shall be canceled.  If less
than the entire principal amount of a Note surrendered for transfer is to be
transferred, a new Note shall be issued to the Noteholder surrendering such Note
evidencing such remaining principal balance.

 

The Note(s) may be exchanged at the option of the Noteholders thereof, when
surrendered to the Company at the offices of the Company, for another Note or
other Notes of like tenor and representing in the aggregate a like number of
Notes.  Notes surrendered for exchange shall be canceled.

 

If any Note shall be mutilated, lost, stolen or destroyed, the Company shall
issue, in exchange and substitution for and upon cancellation of the mutilated
Note, or in lieu of and substitution for the Note lost, stolen or destroyed, a
new Note of like tenor and representing the same outstanding principal, but only
upon receipt of evidence satisfactory to the Company of such loss, theft or
destruction of such Note and, if requested, indemnity satisfactory to it.  No
service charge shall be made for any such substitution, but all expenses and
reasonable charges associated with procuring such indemnity and all stamp, Tax
and other governmental duties that may be imposed in relation thereto shall be
borne by the holder of such Note.

 

If this Note is placed in the hands of an attorney for collection, or if it is
collected through any legal proceedings, Maker agrees to pay the court costs,
reasonable attorneys’ fees, and other costs of collection of the holder hereof.

 

Maker, and each surety, endorser, guarantor, and other party ever liable for
payment of any sums of money payable on this Note, jointly and severally waive
presentment and demand for payment, protest, notice of protest and nonpayment,
and notice of acceleration and the intention to accelerate, and agree that their
liability on this

 

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Note shall not be affected by any renewal or extension in the time of payment
hereof, by any indulgences, or by any release or change in any security for the
payment of this Note, and hereby consent to any and all renewals, extensions,
indulgences, releases, or changes, regardless of the number of such renewals,
extensions, indulgences, releases or changes.

 

THIS NOTE AND THE OTHER TRANSACTION DOCUMENTS COLLECTIVELY REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES.  THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

 

 

 

BETA OIL & GAS, INC.

 

 

 

 

 

 

 

 

By:

/s/ David A.Wilkins

 

 

 

Name: David A.Wilkins

 

 

Title: President and Chief Executive Officer

 

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