Document:

Exhibit 10.51

 

THIRD AMENDMENT TO CREDIT AGREEMENT

 

THIS THIRD

AMENDMENT TO CREDIT AGREEMENT (the “Amendment”) is made and dated as of the

31st day of December, 2002 by and between PAULA FINANCIAL, a Delaware

corporation (the “Borrower”), and BANK OF THE WEST, successor in interest by

merger to United California Bank (the “Lender”).

 

RECITALS

 

A.            Pursuant to that certain Credit

Agreement dated as of March 31, 1997 by and between the Borrower and the Lender

(as amended, extended and replaced from time to time, the “Credit Agreement,”

and with capitalized terms used herein and not otherwise defined used with the

meanings given such terms in the Credit Agreement), the Lender agreed to extend

credit to the Borrower on the terms and subject to the conditions set forth

therein.

 

B.            Pursuant to each of: (1) that

certain First Amendment to Credit Agreement and Waiver dated as of January 30,

2001 (the “First Amendment”), and (2) that certain Second Amendment to Credit

Agreement dated as of December 31, 2001 (the “Second Amendment”) the Borrower

and the Lender agreed to amend the Credit Agreement in certain respects, on the

terms and conditions set forth in the First Amendment and the Second Amendment,

respectively.

 

C.            The Borrower has requested the

Lender to extend the final maturity date for the Term Loan and the Lender has

agreed to do so on the terms and subject to the conditions set forth herein.

 

NOW,

THEREFORE, in consideration of the above Recitals and for other good and

valuable consideration, the receipt and adequacy of which are hereby

acknowledged, the parties hereto hereby agree as follows:

 

AGREEMENT

 

1.             Modification of Amortization

Schedule. The Lender and the Borrower hereby agree that notwithstanding

anything contained in Paragraph 1(b) of the Credit Agreement to the contrary,

the outstanding principal balance of the Term Loan as of December 31, 2002,

which is $ 2,750,500.00*, shall be payable in consecutive quarterly

installments as follows:

 

	

  Payment Date

  	

   

  	

  Required

  Principal Payment

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  
	

  December 31, 2002

  	

   

  	

  $

  	

  325,000.00

  	

   

  	

  paid 12/31/02

  	

   

  
	

  March 31, 2003

  	

   

  	

  $

  	

  325,000.00

  	

   

  	

   

  	

   

  
	

  June 30, 2003

  	

   

  	

  $

  	

  325,000.00

  	

   

  	

   

  	

   

  
	

  September 30, 2003

  	

   

  	

  $

  	

  325,000.00

  	

   

  	

   

  	

   

  
	

  December 31, 2003

  	

   

  	

  $

  	

  325,000.00

  	

   

  	

   

  	

   

  
	

  March 31, 2004

  	

   

  	

  $

  	

  325,000.00

  	

   

  	

   

  	

   

  
	

  June 30, 2004

  	

   

  	

  $

  	

  325,000.00

  	

   

  	

   

  	

   

  
	

  September 30, 2004

  	

   

  	

  $

  	

  325,000.00

  	

   

  	

   

  	

   

  
	

  January 1, 2005

  	

   

  	

  Remaining Principal Balance

  	

   

  	

   

  	

   

  

 

* after 12/31/02 payment

 

 

2.             Applicable Interest Rate.

 

(a)           The Lender and the Borrower agree

that, as of the Effective Date:

 

(1)           All references to

the “Reference Rate” in the Credit Agreement shall hereinafter be deemed to be

references to the “Prime Rate” (as defined below) and all references to

“Reference Rate Loans” shall hereinafter be deemed to be references to “Prime

Rate Loans”.

 

(2)           The definition of the

term “Reference Rate” set forth in Paragraph 9 of the Credit Agreement is

hereby replaced in its entirety with the definition set forth below:

 

“‘Prime Rate’ shall mean the fluctuating per annum rate which is

quoted, published or announced from time to time by the Lender at its chief

executive office as its “Prime Rate”. 

The Prime Rate is a rate set by the Lender based upon various factors

including the Lender’s costs and desired return, general economic conditions,

and other factors, and is used as a reference point for pricing some loans,

which may be priced at, above or below the Prime Rate.”

 

(b)           The Borrower hereby reconfirms that:

 

(1)           The outstanding

principal balance of the Term Loan bears interest at a floating rate per annum

equal to the Prime Rate plus two percent (2%);

 

(2)           The Borrower no

longer has any right to elect that the Term Loan and portions thereof bear

interest at the Applicable COF Rate, the Applicable LIBOR Rate or the

Applicable Eurodollar Rate; and

 

(3)           The Term Loan is

treated for all purposes of the Credit Agreement as a Prime Rate Loan.

 

(4)           Any and all

provisions relating to the COF Rate, the LIBOR Rate and/or the Eurodollar Rate

contained in the Credit Agreement shall have no further application.

 

3.             Reporting Requirements.  To reflect the agreement of the parties

hereto with respect to certain reporting requirements under the Credit

Agreement:

 

(a)           Paragraph 5(a)(10) of the Credit

Agreement is hereby amended to read in their entirely as follows:

 

“(10)       Within sixty (60) days

after the last day of each December, January, and February, and thirty (30)

days after the last day of each other calendar month, consolidated statements

of income and changes in financial position for such calendar month and balance

sheets as of the end of each such calendar month for the Borrower and its

consolidated Subsidiaries, accompanied in each case by a certificate of the

chief financial officer of the Borrower stating that such financial statements

are presented fairly in accordance with GAAP;”

 

(b)           The Borrower hereby agrees that no

later than January 31, 2002, the Borrower shall provide to the Lender

consolidated financial projections for the Borrower for the

 

2

 

fiscal year ending December 31,

2003 in form and substance satisfactory to the Lender, it being agreed and

understood that the failure of the Borrower to do so shall constitute an

immediate Event of Default.

 

4.             Modification of Financial

Covenants.  To reflect the agreement

of the Lender and the Borrower to modify certain of the financial covenants set

forth in the Credit Agreement:

 

(a)           Paragraph 6(o)(3) of the Credit

Agreement is hereby amended by replacing the phrase “INTENTIONALLY OMITTED”

with the following:

 

“(3)         At any time, the Borrower’s

consolidated stockholder’s equity to be less than $7,005,456.00.”

 

(b)           Paragraph 6(o)(1) and 6(o)(2) are

each hereby deleted in their entirety and replaced with the phrase

“INTENTIONALLY OMITTED”.

 

5.             Reaffirmation of Loan Documents.  The Borrower hereby affirms and agrees that

(a) the execution and delivery by the Borrower of and the performance of its

obligations under this Amendment shall not in any manner or to any extent

amend, impair, invalidate or otherwise affect any of the obligations of the

Borrower or the rights of the Lender under the Credit Agreement or any other

Loan Document, including, without limitation, the Stock Pledge Agreement,

except as expressly set forth herein, (b) the term “Obligations” as used in the

Loan Documents includes, without limitation, the Obligations of the Borrower

under the Credit Agreement as amended hereby, including, without limitation,

under the Stock Pledge Agreement, and (c) the Credit Agreement as amended

hereby and the other Loan Documents remain in full force and effect.

 

6.             Release.  The Borrower, on behalf of itself and each

of its successors and assigns, agrees as follows:

 

(a)           The Borrower hereby forever releases,

discharges and acquits the Lender and its parent, subsidiary and affiliate

corporations, and their officers, directors, shareholders, agents,

representatives and employees, and their successors, heirs, and assigns, and

each of them (collectively and severally, the “Releasees”), of and from any and

all of the following (collectively and severally, “Claims”); All claims,

demands, obligations, liabilities, indebtedness, breaches of contract, breaches

of duty or any relationship, acts, omissions, misfeasance, malfeasance, cause

or causes of actions, debts, sums of money, accounts, compensations, contracts,

controversies, promises, damages, costs, losses and expenses, of every type,

kind, nature, description or character, and irrespective of how, why, or by

reason of what facts, whether heretofore, now existing or hereafter arising, or

which could, might, or may be claimed to exist, or whatever kind or name,

whether known or unknown, suspected or unsuspected, liquidated or unliquidated,

each as though fully set forth herein at length, which in any way arise out of,

are connected with or relate to the Credit Agreement and the other Loan

Documents and the transactions contemplated thereby, including, without

limitation, any action or inaction of any of the Releasees.

 

(b)           The Borrower hereby agrees,

represents and warrants that the matters released herein are not limited to

matters which are known or disclosed, and the Borrower hereby waives any and

all rights and benefits which it now has, or in the future may have, conferred

upon

 

3

 

it by virtue of the provisions

of Section 1542 of the Civil Code of the State of California which provides as

follows:

 

A GENERAL

RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE

CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE

TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE

MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

 

In this connection, the

Borrower hereby agrees, represents, and warrants that it realizes and

acknowledges that factual matters now unknown to it may have given or may

hereafter give rise to causes of action, claims, demands, debts, controversies,

damages, costs, losses and expenses which are presently unknown, unanticipated

and unsuspected, and it further agrees, represents and warrants that this

release has been negotiated and agreed upon in light of that realization and

that it nevertheless hereby intends to release, discharge and acquit the

Releasees from any such unknown claims which would be Claims if known on the

date hereof.

 

(c)           The Borrower hereby acknowledges and

agrees that the acceptance of delivery of this Amendment, including, without

limitation, the release set forth in this Paragraph 6, shall not be deemed or

construed as an admission of liability by any Releasee, and each Releasee shall

be automatically be deemed to have expressly denied liability of any nature

whatsoever arising from or related to the subject of this release.

 

(d)           The Borrower hereby represents and

warrants that it has had advice of counsel of its own choosing in negotiations

for and the preparation of this Amendment, that, in particular, it has read

this Paragraph 6, that it has had this release fully explained by such counsel

and that it is fully aware of its contents and legal effect.

 

7.             Amendment Effective Date.

This amendment shall be effective as of the day and year first above written on

the date (the “Amendment Effective Date”) that there has been delivered to

Lender each of the following:

 

(a)           A copy of this Amendment, duly

executed by each of the Lender and the Borrower;

 

(b)           A copy of a Reaffirmation of

Guaranties and Guarantor Subordination Agreements in the form of that attached

hereto as Amendment Exhibit A, duly executed by each of the Guarantors;

 

(c)           A non-refundable amendment fee in the

amount equal to one percent (1%) of the outstanding principal balance of the

Term Loan as of December 31, 2002;

 

(d)           The fees and expenses accrued as of

the Amendment Effective Date of : (1) Morrison & Foerster LLP incurred by

the Lender and payable by the Borrower, and (2) all other fees and expenses

payable by the Borrower to the Lender (it being agreed and understood that

nothing contained herein shall in any way limit the obligation of the Borrower

to pay any fees, costs, and expenses accrued following the Amendment Effective

Date); and

 

(e)           Such corporate resolutions,

incumbency certificates and other authorizing documentation for the Borrower

and the Guarantors as the Lender may request.

 

4

 

 

8.             Representations and Warranties.      The Borrower hereby represents and

warrants to the Lender that at the date hereof and at and as of the Amendment

Effective Date:

 

(a)           The Borrower has the corporate power

and authority and the legal right to execute, deliver and perform this

Amendment and other documents, instruments and agreements required to be

delivered by it hereunder (the “Amendment Documents”) and has taken all

necessary corporate action to authorize the execution, delivery and performance

of the Amendment Documents.  The

Amendment Documents have been duly executed and delivered on behalf of the

Borrower and constitute the legal, valid and binding obligations of the

Borrower, enforceable against the Borrower in accordance with their respective

terms.

 

(b)           The representations and warranties of

the Borrower contained in the Loan Documents are accurate and complete in all

respects, and there has not occurred an Event of Default or Potential Default

which has not been waived pursuant to the First Amendment.

 

(c)           The Guarantors executing the

Reaffirmation of Guaranties and Guarantor Subordination Agreements are all of

the Subsidiaries of the Borrower existing at the date hereof.

 

9.             No Other Amendment.  Except as expressly amended hereby, the Loan

Documents shall remain in full force and effect as written and amended to date.

 

10.           Counterparts.  This Amendment may be executed in any number

of counterparts, each of which when so executed shall be deemed to be an

original and all of which when taken together shall constitute one and the same

agreement.

 

[Signature page following]

 

5

 

IN WITNESS

WHEREOF, the parties hereto have caused this Amendment to be executed as of the

day and year first above written.

 

	

   

  	

  PAULA

  FINANCIAL,  a Delaware corporation

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

  By:

  	

  /s/ Deborah

  S. Maddocks

  	

   

  
	

   

  	

  Name:

  	

  Deborah S.

  Maddocks

  	

   

  
	

   

  	

  Title 

  	

  Vice

  President

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  
	

   

  	

  BANK OF THE

  WEST

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

  By

  	

  /s/ Jerry

  McDermott

  	

   

  
	

   

  	

  Name:

  	

  Jerry

  McDermott

  	

   

  
	

   

  	

  Title

  	

  Vice

  President

  	

   

  
					

 

6

 

SCHEDULE OF EXHIBITS

 

	

  EXHIBIT

  	

   

  	

  DOCUMENT

  
	

   

  	

   

  	

   

  
	

  A

  	

   

  	

   

  	

  Form of

  Reaffirmation of Guaranties and Guarantor Subordination Agreements

  
				

 

7

 

AMENDMENT EXHIBIT A

 

FORM OF:

 

REAFFIRMATION OF

GUARANTIES AND GUARANTOR SUBORDINATION

AGREEMENTS

 

THIS

REAFFIRMATION OF GUARANTIES AND GUARANTOR SUBORDINATION AGREEMENTS (the

“Reaffirmation”) is made and dated as of the 31st day of December, 2002, by the

undersigned (the “Guarantors”) in favor of BANK OF THE WEST, successor in

interest by merger to United California Bank ( the “Lender”).

 

RECITALS

 

A.            Pursuant to that certain Credit

Agreement dated as of March 31, 1997 by and between PAULA FINANCIAL, a Delaware

corporation (the “Borrower”), and the Lender (as amended, extended and replaced

from time to time, the “Credit Agreement,” and with capitalized terms not

otherwise defined herein used with the meanings given such terms in the Credit

Agreement), the Lender agreed to extend credit to the Borrower on the terms and

subject to the conditions set forth therein, including without limitation, the

condition that each of the undersigned execute and deliver to the Lender a

Guaranty and a Guarantor Subordination Agreement.

 

B.            In connection with the execution and

delivery of that certain Third Amendment to Credit Agreement dated concurrently

herewith (the “Third Amendment”) and as a condition to the effectiveness of

such Third Amendment, the undersigned are required to reaffirm the continuing

effectiveness of the Guaranties and Guarantor Subordination Agreements executed

by them.

 

NOW,

THEREFORE, in consideration of the above Recitals and for other good and

valuable consideration, the receipt and adequacy of which are hereby

acknowledged, the undersigned hereby agrees as follows:

 

AGREEMENT

 

1.             Approval of Third Amendment.  Each of the Guarantors hereby confirms that

it has reviewed and approved the Third Amendment.

 

2.             Reaffirmation of Guaranties and

Guarantor Subordination Agreements. 

Each of the Guarantors hereby affirms and agrees that:

 

(a)           The execution and delivery by the

Borrower of the Third Amendment and the performance by the Borrower of its

obligations under the Credit Agreement as amended to thereby, shall not in any

way amend, impair, invalidate or otherwise affect any of the obligations of the

Guarantors under its respective Guaranty and Guarantor Subordination Agreement

or any other document or instrument made or given by it in connection

therewith;

 

(b)           The term “Obligations” as used in

each Guaranty and Guarantor Subordination Agreement include, without

limitation, the “Obligations” of the Borrower under

 

8

 

the Credit Agreement as amended

to date, including, without limitation, pursuant to the Third Amendment;

 

(c)           Each Guaranty and each Guarantor

Subordination Agreement remains in full force and effect; and

 

(d)           Each Guaranty continues to constitute

an absolute and unconditional guaranty of the Obligations of the Borrower as

set forth more particularly therein.

 

3.             Release.  Each of the Guarantors, on behalf of itself

and each of its successors and assigns, agrees as follows:

 

(a)           Each of the Guarantors hereby forever

releases, discharges and acquits the Lender and its parent, subsidiary and

affiliate corporations, and their officers, directors, shareholders, agents,

representatives and employees, and their successors, heirs, and assigns, and

each of them (collectively and severally, the “Releasees”), of and from any and

all of the following (collectively and severally, “Claims”):  All claims, demands, obligations,

liabilities, indebtedness, breaches of contract, breaches of duty or any

relationship, acts, omissions, misfeasance, malfeasance, cause or causes of

actions, debts, sums of money, accounts, compensations, contracts,

controversies, promises, damages, costs, losses and expenses, of every type,

kind, nature, description or character, and irrespective of how, why, or by

reason of what facts, whether heretofore, now existing or hereafter arising, or

which could, might, or may be claimed to exist, or whatever kind or name,

whether known or unknown, suspected or unsuspected, liquidated or unliquidated,

each as though fully set forth herein at length, which in any way arise out of,

are connected with or relate to the Credit Agreement and the other Loan

Documents and the transactions contemplated thereby, including, without

limitation, any action or inaction of any of the Releasees.

 

(b)           Each of the Guarantors hereby agrees,

represents and warrants that the matters released herein are not limited to

matters which are known or disclosed, and each of the Guarantors hereby waives

any and all rights and benefits which it now has, or in the future may have,

conferred upon it by virtue of the provisions of Section 1542 of the Civil Code

of the State of California which provides as follows:

 

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT

KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,

WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE

DEBTOR.

 

In this connection, each of the

Guarantors hereby agrees, represents, and warrants that it realizes and

acknowledges that factual matters now unknown to it may have given or may

hereafter give rise to Claims which are presently unknown, unanticipated and

unsuspected, and it further agrees, represents and warrants that this release

has been negotiated and agreed upon in light of that realization and that it

nevertheless hereby intends to release, discharge and acquit the Releasees from

any such unknown claims which would be Claims if known on the date hereof.

 

(c)           Each of the Guarantors hereby

acknowledges and agrees that the acceptance of delivery of this Amendment,

including, without limitation, the release set forth in this Paragraph 3, shall

not be deemed or construed as an admission of liability by any Releasee, and

each Releasee shall be automatically be deemed to have expressly denied

liability of any nature whatsoever arising from or related to the subject of

this release.

 

9

 

(d)           Each of the Guarantors hereby

represents and warrants that it has had advice of counsel of its own choosing

in negotiations for and the preparation of this Amendment, that, in particular,

it has read this Paragraph 3, that it has had this release fully explained by

such counsel and that it is fully aware of its contents and legal effect.

 

4.             Representations and Warranties.  Each of the Guarantors hereby represents and

warrants to the Lender that:

 

(a)           Such Person has the corporate power

and authority and the legal right to execute, deliver and perform this

Reaffirmation and has taken all necessary corporate action to authorize the

execution, delivery and performance of it;

 

(b)           This Reaffirmation has been duly

executed and delivered on behalf of such Person and constitutes a legal, valid

and binding obligation of such Person, enforceable against such Person in

accordance with its terms subject to the effect of applicable bankruptcy,

insolvency, reorganization, moratorium and other similar laws affecting the

rights of creditors generally and the effect of equitable principles whether

applied in an action at law or a suit in equity; and

 

(c)           Such Person has no claim, by way of

direct claim, counterclaim, offset or otherwise, against the Lender or any of

its directors, officers, affiliates or representatives, arising out of or

relating to the Credit Agreement or the transactions contemplated thereby

including without limitation, under such Person’s Guaranty or Guarantor Subordination

Agreement.

 

5.             Counterparts.  This Reaffirmation may be executed in

counterparts, all of which taken together shall constitute one and the same

agreement.

 

[Signature Pages Following]

 

10

 

IN WITNESS

WHEREOF, each of the Guarantors have caused this Reaffirmation to be executed

as of the day and year first above written.

 

	

   

  	

  PAN AMERICAN

  UNDERWRITERS, INC.,

  a Nevada corporation

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

   

  	

  By:

  	

  /s/ Deborah

  S. Maddocks

  	

   

  
	

   

  	

   

  	

  Name:

  	

  Deborah S.

  Maddocks

  	

   

  
	

   

  	

  Title:

  	

  Vice

  President

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

  PAN AMERICAN

  UNDERWRITERS INSURANCE

  AGENTS & BROKERS, INC.,  an

  Arizona corporation

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

  By

  	

  /s/ Deborah

  S. Maddocks

  	

   

  
	

   

  	

  Name:

  	

  Deborah S.

  Maddocks

  	

   

  
	

   

  	

  Title:

  	

  Vice

  President

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

  AGRI-COMP

  INSURANCE AGENCY, INC.

  an Oregon corporation

  
	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  
	

   

  	

  By:

  	

  /s/ Deborah

  S. Maddocks

  	

   

  
	

   

  	

  Name:

  	

  Deborah S.

  Maddocks

  	

   

  
	

   

  	

  Title:

  	

  Vice

  President

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

  PAN PACIFIC

  BENEFIT ADMINISTRATORS,

  
	

   

  	

  INC., a

  California corporation

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

  By:

  	

  /s/ Deborah

  S. Maddocks

  	

   

  
	

   

  	

  Name:

  	

  Deborah S.

  Maddocks

  	

   

  
	

   

  	

  Title:

  	

  Vice

  President

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

  PAULA

  TRADING COMPANY INSURANCE

  AGENTS & BROKERS, INC., a California

  corporation

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

  By:

  	

  /s/ Deborah

  S. Maddocks

  	

   

  
	

   

  	

  Name:

  	

  Deborah S.

  Maddocks

  	

   

  
	

   

  	

  Title

  	

  Vice

  President

  	

   

  
						

 

11Exhibit 4(b)(1)

 

LOAN MODIFICATION
AGREEMENT

 

Dated Effective As Of

August 31, 2002

 

From

 

GATEWAY PIPELINE
COMPANY AND

GATEWAY PROCESSING
COMPANY,

AS BORROWERS,

 

GATEWAY ENERGY
COMPANY,

AS GUARANTOR

 

To

 

A. STEPHEN KENNEDY,
AS TRUSTEE,

 

AND

 

SOUTHWEST BANK OF
TEXAS, N. A.,

AS LENDER,
BENEFICIARY, MORTGAGEE AND SECURED PARTY

 

 

THIS INSTRUMENT MODIFIES, AMONG OTHER
INSTRUMENTS, A DEED OF TRUST, MORTGAGE, ASSIGNMENT OF PRODUCTION, SECURITY
AGREEMENT AND FINANCING STATEMENT WHICH GRANTS A SECURITY INTEREST BY A UTILITY
PURSUANT TO THE TEXAS BUSINESS AND COMMERCE CODE, SECTION 35.01.

 

THE DEED OF TRUST MODIFIED HEREBY CONTAINS
AFTER-ACQUIRED PROPERTY PROVISIONS AND COVERS FUTURE ADVANCES AND
PROCEEDS.  THE OIL AND GAS INTERESTS,
FIXTURES, OIL AND GAS ACCOUNTS INCLUDED IN THE MORTGAGED PROPERTIES ARE
FINANCED AT THE WELLHEADS OF THE WELLS LOCATED ON THE PROPERTIES DESCRIBED ON EXHIBIT
A THERETO, AND THIS LOAN MODIFICATION AGREEMENT IS TO BE FILED FOR RECORD
IN BOTH THE REAL ESTATE RECORDS AND THE PERSONAL PROPERTY RECORDS.

 

 

 

LOAN
MODIFICATION AGREEMENT

 

	
  THE STATE OF TEXAS

  	
  §

  
	
   

  	
  §

  
	
  COUNTIES OF ELLIS AND

  	
  §

  
	
  MADISON

  	
  §

  

 

Reference is made to: (A) Credit Agreement
dated as of February 21, 2002, (referred to herein as the “Credit Agreement”),
among GATEWAY
PIPELINE COMPANY (“Pipeline”) and GATEWAY PROCESSING COMPANY
(“Processing,” Pipeline and Processing therein and herein collectively referred
to as “Borrowers”), and SOUTHWEST BANK OF TEXAS, N.A., a national
banking association, (therein and herein referred to as “Lender”); (B)
Promissory Note dated February 21, 2002 (“Current Note”) in the original
principal amount of One Million Five Hundred Thousand and No/100 ($
1,500,000.00) which evidences a  line
of credit and term loan established by Lender to Borrowers; and (C) each of the
following documents (collectively referred to in the Credit Agreement and
herein as the “Security Documents”), all of which are dated as of February 21,
2002 and cover collateral that partially secures the Indebtedness (1) Deed of
Trust, Mortgage, Assignment of Production, Security Agreement and Financing
Statement (“Deed of Trust”) recorded in Volume 1634, page 1646 of the Official
Public Records of Ellis County, Texas from Pipeline, as Mortgagor and Debtor,
to A. Stephen Kennedy, as Trustee, and the Lender, as Beneficiary, Mortgagee
and Secured Party, covering the Waxahachie Distribution System as defined in
the Credit Agreement and more particularly described in Exhibit A
attached to the Deed of Trust; (2) Security Agreement and Assignment (“Madisonville
Security Agreement”) from Borrowers, as
Mortgagor and Debtor, to  the Lender, as
Secured Party, covering Madisonville Contracts and other collateral defined in
the Credit Agreement and described in the Madisonville Security Agreement relating to the Madisonville Gathering
System,  a counterpart of which is
attached to Financing Statements (a) delivered by Pipeline filed in the Texas
Secretary of State’s Office under File No. 02-0020294746, and recorded in
Volume 606, page 117 of the Official Public Records of Madison County, Texas
and (b) delivered by Processing filed in the Texas Secretary of State’s Office
under File No. 02-0020294524,  and
recorded in Volume 606, page 103 of the Official Public Records of Madison
County, Texas (3) Security Agreement – Pledge (“Pledge Agreement”) from GATEWAY
ENERGY CORPORATION (“Guarantor”), as Debtor, to the Lender, as
Secured Party, covering collateral defined and described therein relating to
the outstanding capital stock of Borrowers; and (4) Guaranty Agreement
(“Guaranty”) from Guarantor, to the Lender, as Beneficiary, guaranteeing the
payment and performance of the Indebtedness and the Loan Documents. Borrowers
have requested the Lender to modify the terms of the Credit Agreement and the
Current Note, and Lender has agreed to do so on the terms and conditions set
forth in this Loan Modification Agreement and the other Loan Documents executed
in connection herewith.

 

NOW, THEREFORE, for and in
consideration of the mutual covenants and agreements contained herein, and for
other good and valuable consideration, the receipt and sufficiency of all of

 

2

 

which are hereby acknowledged and confirmed,
Lender and Mortgagor do hereby agree as follows:

 

 

1.             Contemporaneously herewith the Borrowers have: (a) paid
Seven Hundred Thousand and No/100ths Dollars ($700,000.00) to the Lender to be
applied against the outstanding principal of the Current Note; and (b)
delivered a promissory note (the “Restated Note”) in the original principal
amount of One Million Five Hundred Thousand and No/100 Dollars ($1,500,000.00)
which extends, modifies, rearranges and renews, but does not release, novate or
discharge, the Current Note and the Indebtedness, among other things, to (i) extend
the date that the Borrowers may request the Lender to make principal advances
to February 28, 2003, (ii) extend the date for the payment the first
installment of principal by Borrowers to March 31, 2003, (iii) extend the
maturity date of all outstanding principal, and accrued but unpaid interest,
under the Restated Note to August 31, 2005, unless earlier accelerated pursuant
to the terms of any of the Loan Documents and (iv) incorporate other
modifications therein set forth.

 

2.             As partial consideration of the renewal, rearrangement,
modification, reinstatement and extension of the Current Note and the
Indebtedness, Pipeline hereby:

 

(a)                                  Acknowledges and confirms (i) the
Indebtedness secured by the Deed of Trust and the Madisonville Security
Agreement is hereby amended to include the Restated Note and any amendments,
restatements, renewals or extensions thereof, (ii) it granted the Madisonville
Mortgage delivered contemporaneously as additional security for the
Indebtedness in recognition of (a) the sale of other assets that directly or
indirectly secured payment of the Indebtedness, and (b) the use of proceeds
from the Indebtedness to construct, mobilize and operate the Madisonville
Gathering  System, (iii)  all liens and security interests granted as
security for any of the Current Note, and the Indebtedness, shall continue to
secure all amounts at anytime evidenced by the Restated Note and any
amendments, restatements, renewals or extensions thereof, and (iv) its
agreement and promise to pay to the order of Lender the original principal
amount stated in the Restated Note, together with interest on such principal
balance from time to time remaining unpaid calculated at the rate and in the
manner as provided for in the Restated Note;

 

(b)                                 Acknowledges and represents that (i) it has good,
valid and indefeasible title to, and the liens and security interests created
and evidenced by the Deed of Trust
and the Madisonville Mortgage are first, prior and perfected and valid and
subsisting liens and security interests covering the entirety of Pipeline’s
interest in, the Waxahachie Distribution System, the Madisonville
Gathering System and the other assets
covered thereby, respectively, (ii) it has good, valid and indefeasible title
to, and the liens and security interests created and evidenced by the
Madisonville Security Agreement are first, prior and perfected and valid and
subsisting liens and security interests covering the entirety of Pipeline’s
interest in, the Madisonville Contracts, (iii) it has received through the
Current Note, and will receive through the Restated

 

3

 

Note, direct or indirect
benefits of equivalent value to the Indebtedness, and (iv) there exist no
offsets, claims or defenses of any kind with respect to the amounts or
obligations evidenced or created by the Restated Note, the Deed
of Trust, the Madisonville Mortgage, the
Madisonville Security Agreement or any of the Loan Documents and in
consideration of the amendment and restatement evidenced hereby, Pipeline
hereby waives any such offset, claim or defense which might exist to the extent
that it has a right to do so;

 

(c)                                  Ratifies, confirms, adopts, renews,
rearranges, modifies, reinstates and extends, but does not novate or discharge,
the obligations evidenced by the Current Note, and the liens, security
interests and obligations created by the Deed of Trust, the Madisonville
Mortgage, the Madisonville Security Agreement and the other Loan Documents; and

 

(d)                                 Irrevocably Mortgages, Grants, Bargains,
Sells, Assigns, Transfers and Conveys (i) the Waxahachie Distribution System,
as more particularly described in the Deed of Trust, unto the Trustee, the
Lender and their successors and assigns forever, to have and to hold in
accordance with the terms and provisions of the Deed of Trust, as amended by
this instrument (ii) Madisonville Gathering System, as more particularly
described in the Madisonville Mortgage unto the Lender and its successors and
assigns forever, and (iii) Madisonville Contracts, as more particularly
described in the Madisonville Security Agreement unto the Lender and its
successors and assigns forever, to have and to hold in accordance with the
respective terms and provisions thereof , as amended by this instrument.

 

3.             As partial consideration of the
renewal, rearrangement, modification, reinstatement and extension of the
Current Note and the Indebtedness, Processing hereby:

 

(a)                                  Acknowledges and confirms (i) the
Indebtedness secured by the Madisonville Security Agreement is hereby amended
to include the Restated Note and any amendments, restatements, renewals or
extensions thereof, (ii) it granted the Madisonville Mortgage delivered
contemporaneously as additional security for the Indebtedness in recognition of
(a) the sale of other assets that directly or indirectly secured payment of the
Indebtedness, and (b) the use of proceeds from the Indebtedness to construct,
mobilize and operate the Madisonville Gathering System, (iii)  all liens and security interests granted as
security for any of the Current Note, and the Indebtedness, shall continue to
secure all amounts at anytime evidenced by the Restated Note and any
amendments, restatements, renewals or extensions thereof, and (iv) its
agreement and promise to pay to the order of Lender the original principal
amount stated in the Restated Note, together with interest on such principal
balance from time to time remaining unpaid calculated at the rate and in the
manner as provided for in the Restated Note;

 

4

 

(b)                                 Acknowledges and represents that (i) it has good,
valid and indefeasible title to, and the liens and security interests created
and evidenced by the Madisonville Mortgage and the Madisonville Security
Agreement are first, prior and perfected and valid and subsisting liens and
security interests covering the entirety of Processing’s interest in, the
Madisonville Gathering System and the Madisonville Contracts, respectively,
(ii) it has received through the Current Note, and will receive through the
Restated Note, direct or indirect benefits of equivalent value to the
Indebtedness, and (iii) there exist no offsets, claims or defenses of any kind
with respect to the amounts or obligations evidenced or created by the Restated
Note, the Madisonville Mortgage, the Madisonville Security Agreement or any of
the Loan Documents and in consideration of the amendment and restatement
evidenced hereby, Processing hereby waives any such offset, claim or defense
which might exist to the extent that it has a right to do so;

 

(c)                                  Ratifies, confirms, adopts, renews,
rearranges, modifies, reinstates and extends, but does not novate or discharge,
the obligations evidenced the Current Note, and the liens, security interests
and obligations created by the Madisonville Mortgage, Madisonville Security
Agreement and the other Loan Documents; and

 

(d)                                 Irrevocably Mortgages, Grants, Bargains,
Sells, Assigns, Transfers and Conveys the Madisonville Gathering System and the
Madisonville Contracts, as more particularly described in the Madisonville
Mortgage and the Madisonville Security Agreement, respectively, unto the
Trustee, the Lender and their successors and assigns forever, to have and to
hold in accordance with the respective terms and provisions of the Madisonville
Mortgage and the Madisonville Security Agreement, as amended by this
instrument.

 

4.             Pipeline and Processing hereby (a) reaffirm all of the
representations and warranties made to Lender in, and at the times of the
execution and delivery of the Deed of Trust, the Madisonville Mortgage, the Madisonville
Security Agreement and the other Loan Documents, and declare same to be true as
of such dates and as of the date hereof except as to circumstances and matters
which have been disclosed by Pipeline and Processing to the Lender in writing
and (b) further warrants and represents that there exists no default (or event
or circumstance which, with the passage of time, will become a default) under
the Loan Documents, except as disclosed by Pipeline and Processing to the
Lender in writing contemporaneously herewith.

 

5.             In addition to other capitalized terms used in the
Credit Agreement, the Deed of Trust, the Madisonville Security
Agreement, the other Loan Documents and herein, the following terms have the
meanings assigned below:

 

(a)                                  “Indebtedness” as defined in the Loan
Documents and herein includes, without

 

5

 

limitation, the Current Note, the Restated Note, the loans evidenced
thereby, and any and all renewals and extensions thereof and the payment and
performance of all amounts, duties and obligations arising under or in
connection with the Loan Documents.

 

(b)                                 “Loan Documents” as collectively referred
to in the Credit Agreement and herein includes, without limitation the Credit
Agreement, the Current Note, the Restated Note, the Security Documents and all
other documents executed by Borrowers and delivered to Lender in connection
therewith.

 

(c)                                  “Madisonville
Mortgage” means deed of trust, mortgage,
assignment, security agreement and financing statement in form and substance acceptable to the Lender, and any amendment, extension, modification,
renewal or supplement thereof, delivered or to be delivered by Processing
hereunder covering the Madisonville Contracts and the Madisonville Gathering
System (i) constructed or to be constructed over and across the Easements as
more particularly described therein, (ii) covering the Mortgaged Properties
more particularly described therein and (ii) recorded or to be recorded in the
Real Property Records of Madison County, Texas.

 

(d)                                 “Maturity Date” as defined in the Credit
Agreement and the other Loan Documents, is hereby amended to be August 31,
2005.

 

(e)                                  “Note” as defined in the Credit Agreement
and the other Loan Documents, is hereby amended to include and refer to the
Restated Note for all relevant purposes.

 

(f)                                    “Security Documents” as defined in the
Credit Agreement and the other Loan Documents, is hereby amended to include
this Loan Modification Agreement and the Madisonville Mortgage for all relevant
purposes.

 

Notwithstanding anything herein or therein to
the contrary, the Borrowers and the Lender agree that any default under the
Restated Note or hereunder shall be deemed a default under the Loan Documents.

 

6.             Section 2 of the Credit Agreement is hereby
amended as necessary to give effect to the extensions, modifications,
rearrangements and renewals set forth in Section 1 of this Loan
Modification Agreement. Except as expressly modified by the Restated Note, this
Loan Modification Agreement or the other Loan Documents executed in connection
therewith, Credit Agreement, the Security Documents and all of the remaining
Loan Documents shall continue in full force and effect as originally executed
and delivered.

 

7.             Borrowers hereby agree to pay upon demand, whether or
not this Loan Modification

 

6

 

Agreement is effective, all costs, and
expenses incurred by Lender incident to the negotiation, preparation, execution
and recordation of this Loan Modification Agreement and the consummation of the
transactions contemplated hereby including, without limitation, all legal fees
and expenses and all recording fees.

 

8.             From time to time, as requested, Borrowers shall execute
and deliver to Lender such other and further documents evidencing and
pertaining to the Indebtedness, the Waxahachie Distribution System, the
Madisonville Mortgage and the Madisonville Contracts as shall be reasonably
requested by Lender so as to evidence or effect the terms and conditions
hereof. Without limiting the generality of the foregoing, and as partial
consideration for the financial accommodations made herein, Borrowers have
executed and delivered the Madisonville Mortgage, and will execute and deliver
such other documents as may be reasonable or necessary, to grant the Lender (or
to the Trustee for the Lender’s benefit) first prior and perfected valid and
subsisting liens and security interests in the entirety of Borrower’s
respective interests in and to the Madisonville Gathering System following its
construction and commencement of operations as additional security for the
payment and performance of the Indebtedness.

 

9.             The provisions of the Restated Note limiting the amount
of interest which may be charged on the indebtedness evidenced thereby shall be
incorporated herein by reference as if set forth fully herein.

 

10.           This Loan Modification Agreement shall be binding upon and
inure to the benefit of Lender and Borrowers and their respective heirs, legal
representatives, successors and assigns.

 

11.           This Loan Modification Agreement may be executed in one or
more counterparts each of which shall constitute but one and the same
instrument.

 

12.           THE LOAN DOCUMENTS, AS MODIFIED HEREBY, REPRESENT THE
FINAL AGREEMENT BETWEEN THE PARTIES AND CONSTITUTE A CREDIT AGREEMENT FOR
PURPOSES OF SECTION 26.02(a) OF THE TEXAS BUSINESS AND COMMERCE CODE.  THE LOAN DOCUMENTS, AS MODIFIED HEREBY, MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.  THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

 

EXECUTED effective as of August
31, 2002.

 

7

 

	
   

  	
  MORTGAGOR:

  
	
  MORTGAGOR’S ADDRESS:

  	
   

  
	
   

  	
   

  
	
  One Allen Center

  	
   

  
	
  500 Dallas Street, Suite 2615

  	
  Gateway Pipeline Company

  
	
  Houston, Texas 77002

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Michael T.
  Fadden, President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Gateway Processing Company

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Michael T.
  Fadden, President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  - BORROWER -

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  LENDER’S ADDRESS:

  	
  LENDER:

  
	
   

  	
   

  	
   

  
	
  P.O. Box 27459

  	
  Southwest Bank Of Texas, N.A.

  
	
  Houston, Texas 77227-7459

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Ken Batson,
  Assistant Vice

  
	
   

  	
   

  	
  President -
  Energy Lending

  

 

8

 

	
  THE STATE OF TEXAS

  	
  §

  
	
   

  	
  §

  
	
  COUNTY OF HARRIS

  	
  §

  

 

This instrument was
acknowledged before me on September    , 2002, by Michael T.
Fadden, President of Gateway Pipeline Company, a Texas corporation, on behalf
of said corporation.

 

	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Notary Public in and for

  	
   

  
	
   

  	
   

  	
  The State of Texas

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  My Commission Expires:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

 

 

	
  THE STATE OF TEXAS

  	
  §

  
	
   

  	
  §

  
	
  COUNTY OF HARRIS

  	
  §

  

 

This instrument was
acknowledged before me on September    , 2002, by Michael T.
Fadden, President of Gateway Processing Company, a Texas corporation, on behalf
of said corporation.

 

 

	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Notary Public in and for

  	
   

  
	
   

  	
   

  	
   

  	
  The State of Texas

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  My Commission Expires:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

9

 

	
  THE STATE OF TEXAS

  	
  §

  
	
   

  	
  §

  
	
  COUNTY OF HARRIS

  	
  §

  

 

This instrument was
acknowledged before me on September    , 2002, by Ken Batson, as
Assistant Vice President – Energy Lending of Southwest Bank of Texas, N.A., a
national banking association, on behalf of said association.

 

 

	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Notary Public in and for

  	
   

  
	
   

  	
   

  	
   

  	
  The State of Texas

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  My Commission Expires:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

AFTER RECORDING, RETURN TO:

Glast, Phillips & Murray, P. C.

815 Walker Street, Suite 1200

Houston, Texas 77002

ATTN: Philip B. Carson, P. C.

 

10

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