Exhibit 10.1
ADVANCING TERM CREDIT AGREEMENT
BETWEEN
BPI ENERGY, INC.,
a Nevada corporation,
as Borrower
AND
GASROCK CAPITAL LLC,
a Delaware limited liability company,
as Lender
Dated as of July 27, 2007
 
ADVANCING TERM LOAN OF UP TO $75,000,000
 

 

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TABLE OF CONTENTS

              Page  
ARTICLE I DEFINITIONS AND REFERENCES
    1  
Section 1.1 Defined Terms
    1  
Section 1.2 Exhibits and Schedules
    17  
Section 1.3 Amendment of Defined Instruments
    17  
Section 1.4 References and Titles
    18  
Section 1.5 Calculations and Determinations
    18    
ARTICLE II THE LOANS
    18  
Section 2.1 The Loans
    18  
Section 2.2 Interest
    21  
Section 2.3 Repayment of the Loans
    22  
Section 2.4 Prepayment of the Loans
    22  
Section 2.5 Commencement of Royalty Interest
    23  
Section 2.6 Application of Receipts
    23  
Section 2.7 Borrower Sub-Account
    25  
Section 2.8 Use of Proceeds
    26  
Section 2.9 Optional Extension of Loan Termination Date
    26  
Section 2.10 Other Operations
    26    
ARTICLE III TAXES AND YIELD PROTECTION
    27  
Section 3.1 Taxes
    27  
Section 3.2 Inability to Determine LIBOR Rate
    28    
ARTICLE IV REPRESENTATIONS AND WARRANTIES
    28  
Section 4.1 Representations and Warranties of Borrower
    28    
ARTICLE V NOTICE OF CERTAIN EVENTS
    34  
Section 5.1 Notice of Default, Event of Default and Other Matters
    34  
Section 5.2 Other Information
    35    
ARTICLE VI SECURITY; ETC.
    35  
Section 6.1 Security; Guaranty
    35  
Section 6.2 Perfection and Protection of Security Interests and Liens
    35  
Section 6.3 Release of Collateral
    36  
Section 6.4 Account Debtors
    36  
Section 6.5 Location; Records
    36  
Section 6.6 Maintenance
    37  
Section 6.7 Dispositions
    37    
ARTICLE VII COVENANTS OF BORROWER
    37  
Section 7.1 Affirmative Covenants
    37  
Section 7.2 Negative Covenants
    46  

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              Page  
ARTICLE VIII FURTHER RIGHTS OF LENDER
    49  
Section 8.1 Maintenance of Security Interests
    49  
Section 8.2 Performance of Obligations
    49  
Section 8.3 Access to Collateral
    49  
Section 8.4 Royalty Interests
    49  
Section 8.5 Set-Off Rights
    50    
ARTICLE IX CLOSING; CONDITIONS TO CLOSING
    51  
Section 9.1 Closing
    51  
Section 9.2 Conditions to Closing
    51  
Section 9.3 Conditions Precedent to Agreement
    52    
ARTICLE X EVENTS OF DEFAULT AND REMEDIES
    54  
Section 10.1 Events of Default
    54  
Section 10.2 Acceleration
    56  
Section 10.3 Remedies
    56  
Section 10.4 Indemnity
    57    
ARTICLE XI MISCELLANEOUS
    57  
Section 11.1 Waivers and Amendments; Acknowledgments and Admissions
    57  
Section 11.2 Assignments; Survival of Agreements; Cumulative Nature
    58  
Section 11.3 Notices
    59  
Section 11.4 Parties in Interest; Transfers
    60  
Section 11.5 Governing Law; Submission to Process
    60  
Section 11.6 Limitation on Interest
    60  
Section 11.7 Termination; Limited Survival
    61  
Section 11.8 Severability
    61  
Section 11.9 Counterparts
    61  
Section 11.1 0Further Assurances
    61  
Section 11.11 Waiver of Jury Trial, Punitive Damages, Etc.
    62  
Section 11.12 Controlling Provision Upon Conflict
    62  
Section 11.13 Patriot Act
    62    
ARTICLE XII ARBITRATION
    62  
Section 12.1 Arbitration
    62    
ARTICLE XIII NOTICE TO BORROWER
    65  

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EXHIBITS

     
Exhibit A
  Property Descriptions
Exhibit B
  Form of Note
Exhibit C
  Form of Property Operating Statement
Exhibit D
  Form of Request for Commitment
Exhibit E
  Form of Cost Certificate
Exhibit F
  Form of Intercreditor Agreement
Exhibit G
  Form of Compliance Certificate

SCHEDULES

     
Schedule 2.1
  Wire Transfer Instructions
Schedule 2.1 (a)
  Committed Initial D&A Operations
Schedule 4.1 (c)(i)
  Shareholders of Borrower
Schedule 4.1 (c)(ii)
  Equity Interest Obligations
Schedule 4.1 (e)
  No Conflicts or Consents
Schedule 4.1 (g)
  Borrower’s Pro Forma Financial Statements
Schedule 4.1 (h)
  Other Obligations and Restrictions
Schedule 4.1 (j)
  Litigation
Schedule 4.1 (k)
  ERISA Plans
Schedule 4.1 (l)
  Names and Places of Business
Schedule 4.1 (m)
  Unpaid Bills
Schedule 4.1 (o)
  Affiliates
Schedule 4.1 (q)
  Compliance with Environmental and Other Laws
Schedule 4.1 (r)
  Equipment Description
Schedule 4.1 (s)
  Purchasers of Hydrocarbons
Schedule 4.1 (t)
  Existing Hydrocarbon Sales Agreements
Schedule 4.1 (u)
  Existing Swap Agreements; Material Contracts
Schedule 4.1 (v)
  Employment Related Agreements
Schedule 7.1 (e)
  Additional Reserve Report Parameters and Guidelines

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ADVANCING TERM CREDIT AGREEMENT
     THIS ADVANCING TERM CREDIT AGREEMENT (“Agreement”) is made and entered into
effective as of July 27, 2007 by and between BPI ENERGY, INC., a Nevada
corporation (“Borrower”), and GASROCK CAPITAL LLC, a Delaware limited liability
company (“Lender”).
     WHEREAS, Borrower has requested that Lender make available, and Lender is
willing to make available to Borrower on the terms and conditions hereinafter
set forth, loans for the payment for the development and, where specifically
noted, the acquisition of certain oil and gas properties and for pipeline
construction projects.
     NOW, THEREFORE, in consideration of the foregoing and the terms, covenants,
provisions and conditions hereinafter set forth in this Agreement, the parties
to this Agreement agree as follows:
ARTICLE I
DEFINITIONS AND REFERENCES
Section 1.1 Defined Terms . As used in this Agreement, each of the following
terms has the meaning given it in this Section 1.1 or in the sections and
subsections referred to below:
     “AAA” is defined in Section 12.1(a).
     “Account Debtor” is defined in Section 6.4.
     “Accounting Procedure” means the accounting procedure attached to and
incorporated in any Operating Agreement.
     “Administration Fee” is defined in Section 7.1(ff).
     “AFE” means Authorization for Expenditures.
     “Affiliate” means, with respect to a specified Person, another Person that
directly, or indirectly through one or more intermediaries, Controls or is
Controlled by or is under common Control with the Person specified.
     “Agreement” means this Advancing Term Credit Agreement, as the same may be
amended, restated, extended or otherwise modified from time to time.
     “Approved Counterparty” means a counterparty to a Permitted Swap Agreement
that is approved by Lender in writing.
     “Arbitration Notice” is defined in Section 12.1(c).
     “Benefit Plans” is defined in Section 4.1(k).
     “Borrower” has the meaning assigned to that term in the preamble of this
Agreement.

 

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     “Borrower Operating Account” means that certain bank account maintained by
Borrower with KeyBank National Association, ABA #041001039, Account
#359681162939.
     “Borrower Sub-Account” is defined in Section 2.7(a).
     “Business Day” means for all purposes, a day other than a Saturday, Sunday
or legal holiday for commercial banks under the laws of the State of Texas or
the laws of the United States of America and, if such day relates to the
determination of the LIBOR Rate, means any such day on which dealings in U.S.
dollar deposits are conducted by and between banks in the London interbank
Eurodollar market.
     “Business Entity” means a company, corporation, limited liability company,
limited partnership, partnership, joint venture, joint stock company, firm,
trust (or trustee thereof), business association, unincorporated organization,
bank or other entity other than a natural person, that has been formed and
exists to conduct any line of business.
     “Change of Control” means, with respect to any Person, an event or series
of events by which the holders of the capital ownership of such Person as of the
date hereof cease to own and control, directly or indirectly, at least fifty-one
percent (51%) of such Person’s capital ownership.
     “Closing” is defined in Section 9.1.
     “Closing Costs” is defined in Section 2.1(a).
     “Closing Date” is defined in Section 9.1.
     “Code” is defined in Section 3.1.
     “Collateral” means all property of any kind which, pursuant to any Loan
Document, is subject to a Lien in favor of Lender or is purported or intended to
be subject to such a Lien, including without limitation, (a) the Properties,
(b) Borrower’s interest in the Hydrocarbons produced therefrom or attributable
thereto, (c) the Equipment (including fixtures) and gathering systems,
(d) Borrower’s interests in the seismic, geological and geophysical data
relating thereto, (e) Borrower’s books and records relating thereto and all
products and proceeds of any of the foregoing, and (f) all of the capital stock
issued by Borrower.
     “Compliance Certificate” means a certificate substantially in the form of
Exhibit G.
     “Control” means the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of a Person, whether
through the ability to exercise voting power, by contract or otherwise. For the
purposes of this definition, and without limiting the generality of the
foregoing, any Person that owns directly or indirectly 10% or more of the Equity
Interests having ordinary voting power for the election of the directors or
other governing body of a Person will be deemed to “control” such other Person.
“Controlling” and “Controlled” have meanings correlative thereto.
     “Cost Certificate” is defined in Section 2.1(d)(iii).

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     “D&A Loan” means, prior to the Drawdown Termination Date, the loan or loans
made or to be made from Lender to Borrower, as evidenced by the Note, to fund
Borrower’s share of the costs and expenses of D&A Operations, including the
Discretionary D&A Loans.
     “D&A Operations” means, prior to the Drawdown Termination Date, the
development and acquisition activities proposed to be undertaken by Borrower or,
in the case of Non-Operated Properties, participated in by Borrower from time to
time, including (a) drilling, sidetracking, deepening, fracturing, refracturing,
completing, recompleting or reworking activities or similar activities to be
conducted on the Properties, (b) maintenance and reclamation of wells and other
fixtures and equipment that are part of the Properties, (c) acquisition and
installation of gathering and compression assets, (d) installation and
construction of pipeline assets, (e) acquisition of any one or more additional
Oil and Gas properties, including undeveloped lease acquisitions, and
(f) geological and geophysical examinations, aerial mapping, test well drilling
and other operations in order to explore an area and evaluate the existing
structural or stratigraphic traps and includes bulldozing, road building,
surveying and all work necessarily connected therewith.
     “Debt Service” means the principal and interest due pursuant to the Note
for any Interest Period.
     “Default” means any event or condition which would, with the giving of any
requisite notices and/or the passage of any requisite periods of time,
constitutes an Event of Default.
     “Default Rate” means the lesser of (a) the Interest Rate, plus four percent
(4%) per annum and (b) the Maximum Rate.
     “Defensible Title” means with respect to the Properties, such title that:
(a) with regard to Leasehold Interests (i) with respect to each well or Unit
located on or pooled with the Leases entitles Borrower to receive, free and
clear of all royalties, overriding royalties and net profits interests (except
the Royalty Interests), or other burdens on or measured by production of
Hydrocarbons, not less than the Net Revenue Interests of Borrower reflected on
Exhibit A for such wells or Units for the productive life of such well or Unit
(subject only to the Permitted Encumbrances); and (ii) with respect to each well
or Unit located on or pooled with the Leases obligates Borrower to bear costs
and expenses relating to the maintenance, development and operation of such well
or Unit in an amount not greater than the Working Interests reflected on
Exhibit A for the productive life of such well or Unit; free and clear of any
Lien (subject only to Permitted Encumbrances) and (b) with regard to Fee
Interests, entitles Borrower to receive production of Hydrocarbons equal to the
undivided fee interest owned by Borrower as reflected on Exhibit A.
     “Delta Properties” means the Properties located in Saline County, Illinois.
     “Deposit Account Control Agreement” means that certain agreement dated of
even date herewith among Borrower, Lender and KeyBank National Association
covering the Borrower Operating Account.
     “Development Operations” means those activities described in parts (a) and
(b) of the definition of D&A Operations.

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     “Direct Taxes” means, without duplication (a) Property Taxes, (b) Severance
Taxes, (c) ad valorem taxes, (d) conservation taxes, and (e) any other taxes of
any kind, excluding only income taxes, margin taxes, gross income taxes, backup
withholding taxes and franchise taxes, imposed on Borrower or any producer in
connection with or as a result of its ownership of interests in the Properties.
     “Discretionary D&A Loans” is defined in Section 2.1(c).
     “Drawdown Termination Date” means the earlier of (a) July 27, 2010, and
(b) the Loan Termination Date then in effect.
     “Engineers” means, unless specifically provided otherwise, an independent
petroleum engineering firm to be mutually acceptable to Borrower and Lender;
provided that any prior acceptance by a party of any independent petroleum
engineering firm does not necessarily denote acceptance by such party of such
firm at any future time or date.
     “Environmental Laws” means any and all Governmental Requirements pertaining
in any way to health, safety the environment or the preservation or reclamation
of natural resources, in effect in any and all jurisdictions in which the
Borrower is conducting or at any time has conducted business, or where any
Property of the Borrower is located, including without limitation, the Oil
Pollution Act of 1990 (“OPA”), as amended, the Clean Air Act, as amended, the
Comprehensive Environmental, Response, Compensation, and Liability Act of 1980
(“CERCLA”), as amended, the Federal Water Pollution Control Act, as amended, the
Occupational Safety and Health Act of 1970, as amended, the Resource
Conservation and Recovery Act of 1976 (“RCRA”), as amended, the Safe Drinking
Water Act, as amended, the Toxic Substances Control Act, as amended, the
Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous
Materials Transportation Act, as amended, and other environmental conservation
or protection Governmental Requirements. The term “oil” shall have the meaning
specified in OPA, the terms “Hazardous Substance” and “release” (or “threatened
release”) have the meanings specified in CERCLA, the terms “solid waste” and
“disposal” (or “disposed”) have the meanings specified in RCRA and the term “oil
and gas waste” shall have the meaning specified in Section 91.1011 of the Texas
Natural Resources Code (“Section 91.1011”); provided, however, that (a) in the
event either OPA, CERCLA, RCRA or Section 91.1011 is amended so as to broaden
the meaning of any term defined thereby, such broader meaning shall apply
subsequent to the effective date of such amendment and (b) to the extent the
laws of the state or other jurisdiction in which any Property of the Borrower is
located establish a meaning for “oil,” “Hazardous Substance,” “release,” “solid
waste,” “disposal” or “oil and gas waste” which is broader than that specified
in either OPA, CERCLA, RCRA or Section 91.1011, such broader meaning shall
apply.
     “Environmental Report” means any Phase I Environmental Site Assessment or
similar or related report and related to the Properties, including any such
report prepared by a qualified “environmental professional,” as such term is
defined by the Environmental Protection Agency.
     “Equipment” means all equipment of Borrower more particularly described in
Schedule 4.1(r), and all other equipment of Borrower, used for or in the
operation of the Properties which may not be described in Schedule 4.1(r), of
every kind and nature whether

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located on the Properties or located elsewhere, including but not limited to all
pipelines, well and lease equipment and surface equipment, casing, tubing,
connections, rods, pipe, machines, other compressors, gathering systems, meters,
motors, pumps, tankage, fixtures, storage and handling equipment and all other
equipment or movable property of any kind and nature and wherever situated now
or hereafter owned by Borrower or in which Borrower may now or hereafter have
any interest (to the extent of such interest), together with all additions and
accessions thereto, all replacements and all accessories and parts therefor, all
logs and records in connection therewith, all rights against suppliers,
warrantors, manufacturers, sellers or others in connection therewith, and
together with all substitutes and replacements for any of the foregoing.
     “Equity Interests” means shares of capital stock, partnership interests,
membership interests in a limited liability company, beneficial interests in a
trust or other equity ownership interests in a Person, and any warrants, options
or other rights entitling the holder thereof to purchase or acquire any such
Equity Interest.
     “ERISA” means the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with all rules and regulations promulgated
with respect thereto.
     “ERISA Affiliate” means each trade or business (whether or not
incorporated) which together with the Borrower would be deemed to be a “single
employer” within the meaning of section 4001(b)(1) of ERISA or subsections (b),
(c), (m) or (o) of section 414 of the Code.
     “ERISA Plan” means any pension benefit plan or multiemployer plan which is
maintained by any Person and which is subject to Title IV of ERISA or ERISA
Section 302 or Code Section 412.
     “ERISA Event” means (a) a “Reportable Event” described in section 4043 of
ERISA and the regulations issued thereunder, (b) the withdrawal of the Borrower
or any ERISA Affiliate from a Plan during a plan year in which it was a
“substantial employer” as defined in section 4001(a)(2) of ERISA, (c) the filing
of a notice of intent to terminate a Plan or the treatment of a Plan amendment
as a termination under section 4041 of ERISA, (d) the institution of proceedings
to terminate a Plan by the PBGC, (e) receipt of a notice of withdrawal liability
pursuant to Section 4202 of ERISA or (f) any other event or condition which
might constitute grounds under section 4042 of ERISA for the termination of, or
the appointment of a trustee to administer, any Plan.
     “Event of Default” is defined in Section 10.1.
     “Existing Swap Agreements” means the Swap Agreements listed on
Schedule 4.1(u).
     “Expenses” means, in connection with the Properties, Borrower’s share of
costs and expenses relating to, without duplication, Operating Expenses, Direct
Taxes (other than Property Taxes), royalties and overriding royalty interests
(in existence as of the date hereof), one-twelfth (1/12th) of the estimated
annual Property Taxes, and associated Swap Settlement Payables.
     “Extended Termination Date” is defined in Section 2.9.

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     “Facility Fees” means the fees owed by Borrower to Lender as consideration,
in part, for Lender’s assistance to Borrower in structuring the transactions
contemplated under this Agreement and the other Loan Documents in an amount
equal to two percent (2.0%) of any Loan each time a Loan is funded.
     “Fee Interest” means a Hydrocarbon Interest arising from ownership relating
to a mineral fee interest.
     “Financial Statements” means the financial statements of Borrower required
to be delivered pursuant to Section 7.1(c) hereof.
     “Fiscal Quarter” means a three-month period ending on April 30, July 31,
October 31 or January 31 of any year.
     “Fiscal Year” means a twelve-month period ending on July 31 of any year.
     “Forward NYMEX Market Prices” means no less than 85% of the then-current
NYMEX futures prices for natural gas or crude oil, as the case may be, for the
applicable month of future production. Lender shall determine such percentage at
or above 85% in its sole reasonable discretion.
     “GAAP” means those generally accepted accounting principles and practices
which are recognized as such by the Financial Accounting Standards Board (or any
generally recognized successor).
     “gas” means and includes, in each case, natural gas, casinghead gas, coal
bed methane gas, coal mine methane gas and all methane gas found in the coal
seams or other strata in communication with the coal.
     “Governing Body” means, in the case of a corporation, its board of
directors, in the case of a limited liability company, its members or its
managers, depending on how the management of such Business Entity is allocated
in its Governing Documentation, in the case of a general partnership or joint
venture, the partners or the joint venturers thereof, respectively, in the case
of a limited partnership, the applicable Governing Body of the general partner
thereof, if such general partner is a Business Entity, and in the case of any
other Business Entity not specified herein, the designees thereof that, pursuant
to the Governing Documentation of such Business Entity, fulfill the
responsibilities typically discharged by a board of directors of a corporation.
     “Governing Documentation” means, in the case of a corporation, its
certificate of incorporation or formation, articles of incorporation and bylaws,
as amended, in the case of a limited liability company, its certificate of
formation, its limited liability company agreement, and its operating agreement
or regulations (or similar documentation as denominated under the laws of the
jurisdiction in which it is formed), in the case of a partnership, joint venture
or a limited partnership, its certificate of formation, and the applicable
partnership agreement or joint venture agreement, and in the case of any other
Business Entity not specifically enumerated herein, the applicable documentation
typically utilized in the jurisdiction where such Business Entity has been
formed for purposes of initially forming such Business Entity according to the
laws of such jurisdiction and thereafter operating and managing such Business
Entity.

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     “Governmental Authority” means the government of the United States of
America, any other nation or any political subdivision thereof, whether state or
local, and any agency, authority, instrumentality, regulatory body, court,
central bank or other entity exercising executive, legislative, judicial,
taxing, regulatory or administrative powers or functions of or pertaining to
government over the Borrower, any of its Properties or the Lender.
     “Governmental Requirement” means any law, statute, code, ordinance, order,
determination, rule, regulation, judgment, decree, injunction, franchise,
permit, certificate, license, authorization or other directive or requirement,
whether now or hereinafter in effect, including, without limitation,
Environmental Laws, energy regulations and occupational, safety and health
standards or controls, of any Governmental Authority.
     “Gross Receipts” means, in relation to and arising from the Properties and
Permitted Swap Agreements, all sums received therefrom by Borrower, including,
but not limited to Swap Settlement Proceeds and proceeds under gas sales
agreements, oil sales agreements, natural gas liquids sales agreements, gas
processing agreements, gas gathering agreements, Operating Agreements, saltwater
disposal agreements, and service agreements, including, but not limited to
receipts pursuant to Accounting Procedures, and any other receipts relating to
or arising from the Properties, other than the proceeds of Collateral governed
separately by Section 2.4(b).
     “Guarantee” shall include any agreement, whether such agreement is on a
contingency basis or otherwise, to purchase, repurchase or otherwise acquire any
Indebtedness or liability of any other Person, or to purchase, sell or lease, as
lessee or lessor, property or services in any such case primarily for the
purpose of enabling another Person to make payment of any such Indebtedness or
liability, or to make any payment (whether as a capital contribution, purchase
of any equity interest or otherwise) to assure a minimum equity, asset base,
working capital or other balance sheet or financial condition, in connection
with Indebtedness or liability of another Person, or to supply funds to or in
any manner invest in another Person in connection with such Person’s
Indebtedness or liability.
     “Guarantor” means BPI Energy Holdings, Inc., a corporation formed under the
laws of the Province of British Columbia, Canada.
     “Guaranty” means a Guaranty of Borrower’s Obligations, executed by
Guarantor, in form and content satisfactory to Lender, as the same may be
modified, amended or supplemented from time to time.
     “Hydrocarbons” means oil, gas, drip gasoline, natural gasoline, condensate,
distillate, liquid hydrocarbons, gaseous hydrocarbons, coal bed methane gas from
coal seams and coal mine methane gas from mine voids, and all products refined
or separated therefrom.
     “Hydrocarbon Interests” means Leasehold Interests, Fee Interests and other
interests in or under oil, gas and other liquid or gaseous hydrocarbon deeds,
leases or farmout agreements (including the Leases) with respect to Hydrocarbons
wherever located, mineral fee interests, overriding royalty and royalty
interests, net profit interests, production payment interests relating to
Hydrocarbons wherever located, including any beneficial, reserved or residual
interest of whatever nature.

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     “Indebtedness” means, as to any Person, without duplication,
(a) obligations of such Person for borrowed money, (b) obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments,
(c) obligations of such Person in respect of the deferred purchase price of
property or services (other than trade payables incurred in the ordinary course
of business on terms customary in the trade), (d) obligations of such Person
under any conditional sale or other title retention agreement(s) relating to
property acquired by such Person, (e) capitalized lease obligations of such
Person, (f) obligations, contingent or otherwise, of such Person in respect of
letters of credit, acceptances or similar extensions of credit, (g) guaranties
by such Person of the type of indebtedness described in clauses (a) through
(f) above, (h) all indebtedness of a third party secured by any Lien on property
owned by such Person, whether or not such indebtedness has been assumed by such
Person, (i) all obligations of such Person, contingent or otherwise, to
purchase, redeem, retire or otherwise acquire for value any Equity Interest of
such Person, (j) off-balance sheet liability retained in connection with asset
securitization programs, synthetic leases, sale and leaseback transactions or
other similar obligations arising with respect to any other transaction which is
the functional equivalent of or takes the place of borrowing but which does not
constitute a liability on the consolidated balance sheet of such Person and its
subsidiaries and (k) net obligations under any derivative contract including any
Swap Agreement, commodity agreement, interest rate agreement or foreign exchange
agreement, excluding any non-cash mark-to-market adjustments.
     “Initial Committed D&A Operations” is defined in Section 2.1(a).
     “Initial Loans” is defined in Section 2.1(a).
     “Initial Termination Date” means July 25, 2008.
     “Intercreditor Agreement” means that certain Intercreditor Agreement among
Borrower, Lender and the Approved Counterparty under the initial Permitted Swap
Agreement and executed and delivered pursuant to Section 6.1 in form attached
hereto as Exhibit F.
     “Interest Period” means each monthly period beginning on (and including)
the Repayment Date in one calendar month and ending on (but not including) the
Repayment Date in the next following calendar month, provided that the first
Interest Period for the Note and Loans shall begin on the date a Loan is first
funded hereunder and ending on the second following Repayment Date.
     “Interest Rate” means the lesser of (a) the Maximum Rate and (b) the
greater of (i) the LIBOR Rate plus the LIBOR Margin, and (ii) from the Closing
Date through the Initial Termination Date, a fixed annual rate of 15%, and
thereafter, a fixed annual rate of 12%.
     “Investment” means, for any Person: (a) the acquisition (whether for cash,
Property, services or securities or otherwise) of Equity Interests of any other
Person or any agreement to make any such acquisition (including, without
limitation, any “short sale” or any sale of any securities at a time when such
securities are not owned by the Person entering into such short sale); (b) the
making of any deposit with, or advance, loan or capital contribution to,
assumption of Indebtedness of, purchase or other acquisition of any other
Indebtedness or equity participation or interest in, or other extension of
credit to, any other Person (including the

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purchase of Property from another Person subject to an understanding or
agreement, contingent or otherwise, to resell such Property to such Person, but
excluding any such advance, loan or extension of credit having a term not
exceeding ninety (90) days representing the purchase price of inventory or
supplies sold by such Person in the ordinary course of business); (c) the
purchase or acquisition (in one or a series of transactions) of Property of
another Person that constitutes a business unit or (d) the entering into of any
guarantee of, or other contingent obligation (including the deposit of any
Equity Interests to be sold) with respect to, Indebtedness or other liability of
any other Person and (without duplication) any amount committed to be advanced,
lent or extended to such Person.
     “JIBs” is defined in Section 7.1(c)(iii).
     “Lease” or “Leases” means, whether one or more, (a) those certain oil, gas,
coal bed methane and/or mineral deeds or leases or farmout agreements set forth
in the description of the Property on Exhibit A and any other interests in such
deeds, leases or farmout agreements, whether now owned or hereafter acquired by
Borrower, and any extension, renewals, corrections, modifications, elections or
amendments of any such deeds or leases or farmout agreements, or (b) other oil,
gas and/or mineral deeds or leases or farmout agreements or other interests
pertaining to the Properties which may now and hereafter be made (or intended or
purported to be made) subject to the lien of any of the Security Documents and
any extension, renewals, corrections, modifications, elections or amendments of
any such deeds or leases or farmout agreements.
     “Leasehold Interest” means a Hydrocarbon Interest arising from ownership
relating to an oil, gas and/or mineral lease.
     “Lender” shall have the meaning assigned to such term in the preamble of
this Agreement, and its successors and assigns.
     “Lender Account” is defined in Section 2.7(a).
     “Letters in Lieu” means those certain letters in lieu of transfer orders,
duly executed by Borrower, in the form reasonably satisfactory to Lender.
     “LIBOR Margin” means (a) from the Closing Date through the Initial
Termination Date, 9% per annum, and (b) thereafter, 6% per annum.
     “LIBOR Rate” means for any day the fluctuating rate of interest equal to
the one-month London interbank offered rate as published in the “Money Rates”
section of The Wall Street Journal as stated on the first Business Day of the
calendar month in which such day lies, provided that in any event, LIBOR Rate
for any non-Business Day will be the LIBOR Rate in effect on the immediately
preceding Business Day, even if such Business Day is in the previous calendar
month. In the event The Wall Street Journal is no longer published or no longer
publishes the LIBOR Rate in its “Money Rates” table, Lender shall choose a
substitute LIBOR Rate that is based upon comparable information subject,
however, to Section 3.2 hereof.
     “Lien” means, with respect to any property or assets, any right or interest
therein of a creditor to secure Indebtedness owed to it or any other arrangement
with such creditor which

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provides for the payment of such Indebtedness out of such property or assets or
which allows it to have such Indebtedness satisfied out of such property or
assets prior to the satisfaction of general creditors of the owner of such
property or assets, including, without limitation, any lien, mortgage, security
interest, pledge, deposit, production payment, rights of a vendor under any
title retention or conditional sale agreement or lease substantially equivalent
thereto, tax lien, mechanic’s or materialman’s lien, or any other charge or
encumbrance for security purposes, whether arising by law or agreement or
otherwise, but excluding any right of offset which arises without agreement in
the ordinary course of business. “Lien” also means any filed financing
statement, any registration of a pledge (such as with an issuer of unregistered
securities), or any other arrangement or action which would serve to perfect a
Lien described in the preceding sentence, regardless of whether such financing
statement is filed, such registration is made, or such arrangement or action is
undertaken before or after such Lien exists.
     “Loan Documents” means this Agreement, the Note, each Royalty Interest
Conveyance, Letters in Lieu, each Mortgage, the Security Agreement, the
Guaranty, the Letters in Lieu, the Notices of Assignment of Proceeds, the
Deposit Account Control Agreement, Permitted Swap Agreements, the Intercreditor
Agreement, each Subordination Agreement and all other security agreements, deeds
of trust, mortgages, chattel mortgages, pledges, guaranties, financing
statements, continuation statements, extension agreements and other agreements
or instruments, in as many counterparts as Lender may require, now, heretofore
or hereafter delivered by Borrower to Lender in connection with this Agreement
or any transaction contemplated hereby to secure or guarantee the payment of any
part of the Obligations.
     “Loan Termination Date” means the earliest of: (a) the later of (i) the
Initial Termination Date, and (ii) if the Loan Termination Date then in effect
is extended pursuant to Section 2.9, the Extended Termination Date, (b) the date
on which all Obligations of Borrower under the Loan Documents (other than the
Royalty Interest Conveyances) have been paid and performed in full and Lender’s
obligation (if any) to advance any Loans has terminated, and (c) the date on
which Lender notifies Borrower of the acceleration of payment of any portion or
all of the Obligations because of the occurrence of an Event of Default.
     “Loan to Value Ratio” means, when determined, the ratio derived by dividing
(a) the aggregate principal amount of the Loans outstanding at that time, by
(b) the PW10 of Borrower’s Proved Developed Producing Reserves in the
Properties, net to Borrower’s interest, and calculated by Lender in connection
with the most recent Reserve Report delivered hereunder (after being adjusted
from time to time to incorporate Lender’s then-current assumptions with respect
to pricing, Expenses and hedges under Permitted Swap Agreements). Lender’s
then-current assumptions will include forward price assumptions consisting of
the Forward NYMEX Market Prices.
     “Loans” means, collectively, the Initial Loans, the Discretionary D&A
Loans, Administrative Fees and the Facility Fees advanced hereunder, and “Loan”
means, individually, any Initial Loan or any D&A Loan as described in
Section 2.1, any Administrative Fee and any Facility Fee advanced hereunder.

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     “Lockbox” means Lender’s lockbox established with the lending institution
where the Lender Account is maintained to which Gross Receipts of Borrower that
are not wire-transferred into the Lender Account will be directed for subsequent
transfer into the Lender Account.
     “Material Adverse Effect” means a material adverse change in, or material
adverse effect on (a) the business, operations, assets, liabilities (actual or
contingent) or condition (financial or otherwise) of the Borrower, (b) the
ability of the Borrower to perform any of its obligations under any Loan
Document to which it is a party, (c) the validity or enforceability of any Loan
Document, or (d) the rights and remedies of or benefits available to Lender
under any Loan Document.
     “Material Contracts” means any agreement or arrangement to which Borrower
is a party or to under which Borrower is bound (other than the Loan Documents)
for which Borrower’s breach or non-performance could be reasonably expected to
have a Material Adverse Effect on the business, operations, properties, assets,
condition (financial or otherwise) of Borrower or the ability of Borrower to
fully and timely perform its Obligations or adversely affect the legality,
validity, binding effect or enforceability of any Loan Document, the contracts
listed on Schedules 4.1(t) and (u) and the Operating Agreements.
     “Maximum Rate” means the maximum non-usurious rate of interest that Lender
is permitted under applicable law to contract for, take, charge, or receive from
Borrower.
     “Mortgage” is defined in Section 6.1.
     “Net Revenue” means, unless specified otherwise, the aggregate amount
calculated as Gross Receipts minus the aggregate amount calculated as Expenses,
for any specified period.
     “Net Revenue Interest” and “NRI” means in relation to Leasehold Interests
(a) with respect to a Unit for which a net revenue interest is stated, that
interest in the applicable Hydrocarbons produced, saved and sold from such
unitized area which is afforded to Borrower by virtue of its ownership of the
Hydrocarbon Interests included in whole or in part in such area after deducting
all burdens against the production therefrom, and (b) with respect to a Well for
which a net revenue interest is stated, that interest in the applicable
Hydrocarbons produced, saved and sold from the Well which is afforded to
Borrower by virtue of its ownership of the Hydrocarbon Interests after deducting
all burdens against the production therefrom.
     “Net Revenue Reimbursement Amount” is defined in Section 2.7(b).
     “Non-Operated Properties” means the Properties (as herein defined) but as
to which Borrower does not serve as Operator.
     “Note” is defined in Section 2.1(d).
     “Notice of Assignment of Proceeds” is defined in Section 6.4.
     “Obligations” means all Indebtedness and all obligations from time to time
owing from Borrower to Lender or any of Lender’s Affiliates under or pursuant to
any of the Loan

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Documents in connection with this Agreement or any transaction contemplated
hereby, including without limitation, all principal, interest, fees, expenses,
costs and indemnities.
     “Oil and Gas Properties” means (a) Hydrocarbon Interests; (b) the
Properties now or hereafter pooled or unitized with Hydrocarbon Interests;
(c) all presently existing or future unitization, pooling agreements and
declarations of pooled units and the units created thereby (including without
limitation all units created under orders, regulations and rules of any
Governmental Authority) which may affect all or any portion of the Hydrocarbon
Interests; (d) all operating agreements, contracts and other agreements,
including production sharing contracts and agreements, which relate to any of
the Hydrocarbon Interests or the production, sale, purchase, exchange or
processing of Hydrocarbons from or attributable to such Hydrocarbon Interests;
(e) all Hydrocarbons in and under and which may be produced and saved or
attributable to the Hydrocarbon Interests, including all oil in tanks, and all
rents, issues, profits, proceeds, products, revenues and other incomes from or
attributable to the Hydrocarbon Interests; (f) all tenements, hereditaments,
appurtenances and Properties in any manner appertaining, belonging, affixed or
incidental to the Hydrocarbon Interests and (g) all Properties, rights, titles,
interests and estates described or referred to above, including any and all
Property, real or personal, now owned or hereinafter acquired and situated upon,
used, held for use or useful in connection with the operating, working or
development of any of such Hydrocarbon Interests or Property (excluding drilling
rigs, automotive equipment, rental equipment or other personal Property which
may be on such premises for the purpose of drilling a well or for other similar
temporary uses) and including any and all oil wells, gas wells, injection wells
or other wells, buildings, structures, fuel separators, liquid extraction
plants, nitrogen removal units, plant compressors, pumps, pumping units, field
gathering systems, tanks and tank batteries, fixtures, valves, fittings,
machinery and parts, engines, boilers, meters, apparatus, equipment, appliances,
tools, implements, cables, wires, towers, casing, tubing and rods, surface
leases, rights-of-way, easements and servitudes together with all additions,
substitutions, replacements, accessions and attachments to any and all of the
foregoing.
     “Operating Agreements” means, whether one or more, operating agreements
relating to the Properties to which Borrower is currently a party or by which
Borrower is currently bound, and operating agreements related to the Properties
to which Borrower hereafter becomes a party or by which Borrower hereafter
becomes bound, which later operating agreements shall be reasonably satisfactory
in form and substance to Lender.
     “Operating Expenses” means (a) in relation to Leasehold Interests,
Borrower’s proportionate share of (i) direct lease operating expenses and well
maintenance expenses (such well maintenance expenses shall be limited to
$25,000.00 per event, net to Borrower’s interest, without Lender’s prior
consent), which arise from Borrower’s Working Interests in the wells that are
subject to the Mortgage, that are billed to Borrower by the Operator or incurred
by Borrower, as Operator, of the Properties and (ii) Borrower’s Working Interest
share of expenses incurred in the repair, maintenance and replacement of damaged
or obsolete Equipment (such equipment repair, maintenance and replacement
expenses shall be limited to $25,000.00 per event, net to Borrower’s interest,
without Lender’s prior consent) and (b) in relation to Fee Interests, Borrower’s
direct operating expenses and well maintenance expenses (such well maintenance
expenses shall be limited to $25,000 per event, without Lender’s prior consent),
which arise from Borrower’s fee interests in the Wells that are subject to the
Mortgage, that are billed to Borrower

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by the Operator or incurred by Borrower, as Operator, of the Properties and
(ii) Borrower’s expenses incurred in the repair, maintenance and replacement of
damaged or obsolete Equipment (such equipment repair, maintenance and
replacement expenses shall be limited to $25,000.00 per event, without Lender’s
prior consent)
     “Operating Report” is defined in Section 7.1(u).
     “Operator” means, with regard to the Properties, Borrower, and any other
operator, including contract operator, as such terms are generally understood in
the oil and gas industry.
     “Pay Rate” means an annual fixed rate equal to 12%.
     “Permitted Encumbrances” means:
     (a) Liens pursuant to any Loan Document;
     (b) Liens for taxes, assessments, or other governmental charges or levies
not yet delinquent or which are being contested in good faith and by appropriate
proceedings diligently conducted, if adequate reserves with respect thereto are
maintained on the books of the applicable Person in accordance with GAAP;
     (c) operators’, non-operators’, vendors’, carriers’, warehousemen’s,
mechanics’, materialmen’s, repairmen’s or other like Liens arising in the
ordinary course of business or which are incident to the exploration,
development, operation, and maintenance of the Properties, not overdue for a
period of more than sixty (60) days or which are disputed in good faith and by
appropriate proceedings diligently conducted, if adequate reserves with respect
thereto are maintained on the books of the applicable Person in accordance with
GAAP;
     (d) Liens in connection with workers’ compensation, unemployment insurance
and other social security legislation as provided by any Governmental
Requirement, other than any Lien imposed by ERISA;
     (e) deposits to secure the performance of trade contracts, statutory
obligations, surety bonds (other than bonds related to judgments or litigation),
performance bonds and other obligations of a like nature incurred in the
ordinary course of business;
     (f) easements, rights-of-way, restrictions, servitudes, permits,
conditions, covenants, exceptions, or reservations and other similar
encumbrances, defects, irregularities, minor imperfections and deficiencies in
title affecting real property which, in the aggregate, are not substantial in
amount, and which do not in any case materially detract from the value of the
property subject thereto or materially interfere with the ordinary conduct of
the business of the applicable Person;
     (g) Liens arising in connection with capital leases or purchase money
obligations approved by Lender; and

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     (h) Liens permitted under Section 6.1 that are granted by Borrower to
counterparties under Permitted Swap Agreements.
     (i) the Leases; and
     (j) Liens on equipment arising under equipment leases or securing
acquisition financing of such equipment.
     “Permitted Swap Agreement” means a Swap Agreement with an Approved
Counterparty on terms and conditions, and in a form reasonably acceptable to
Lender, including a master swap agreement on International Swap Dealers
Association forms and the schedules thereto and any confirmations thereunder
which Borrower enters into with an Approved Counterparty on terms reasonably
acceptable to Lender.
     “Person” means an individual, any Business Entity, estate or executor
thereof, court or governmental unit or any agency or subdivision thereof, or any
other legally recognizable entity.
     “Pledge Agreement” means a pledge agreement (covering, without limitation,
all of the capital stock of Borrower) executed by Guarantor as debtor in favor
of Lender as secured party dated as of the date hereof, in form and content
satisfactory to Lender, as the same may be modified, amended or supplemented
pursuant to the terms of this Agreement.
     “Pro Forma Financial Statements” is defined in Section 4.1(g).
     “Properties” means all Oil and Gas Properties and the other oil and gas
assets of Borrower described in Exhibit A, as Exhibit A may be modified, amended
or supplemented from time to time, including at such times as Lender advances
Discretionary D&A Loans for purposes of acquiring additional Oil and Gas
Properties.
     “Property Operating Statement” means the monthly statement, in the form of
Exhibit C, or another form mutually acceptable to Borrower and Lender (but
containing at a minimum the same requested information) to be prepared and
delivered by Borrower to Lender pursuant to Section 2.6.
     “Property Taxes” means taxes imposed periodically on Borrower by the
applicable Governmental Authority which are based on or measured by the
estimated value (at the time such taxes are assessed) of any Hydrocarbons or
other assets situated within the Properties.
     “Proved Developed Non-Producing Reserves” means Proved Reserves that are
estimated to be recoverable by existing wells that are not yet capable of
producing such reserves without completions or recompletions being conducted
within the existing wellbores thereof.
     “Proved Developed Producing Reserves” means Proved Reserves that are
estimated to be recoverable by existing wells that are then capable of producing
such reserves.
     “Proved Reserves” means the current estimated quantity of Hydrocarbons
which analysis of geologic and engineering data demonstrate with reasonable
certainty to be recoverable in the

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future from known oil and gas reservoirs under existing economic and operating
conditions based on either actual production or conclusive formation tests.
     “Proved Undeveloped Reserves” means Proved Reserves that are estimated to
be recoverable from wells to be drilled in the future.
     “Purchasers of Hydrocarbons” means the Persons listed on Schedule 4.1(s)
and all other Persons who, now or may in the future, purchase Hydrocarbons
attributable or allocable to Borrower’s Hydrocarbon Interests in the Properties.
     “PW10” means the present worth of future net cash flow, discounted to
present value at the simple interest rate of ten percent (10%) per year.
     “Repayment Date” means, prior to the satisfaction of all Obligations, the
last Business Day of each month, commencing with the month of August 2007 and
ending on the Loan Termination Date.
     “Request for Commitment” means a written request, in the form of Exhibit D,
to Lender from Borrower, signed by an authorized representative of Borrower as
specified in the resolutions and incumbency certificate to be delivered pursuant
to Section 9.2(c) hereof, for an advance of funds under a Discretionary D&A
Loan.
     “Reserve Report” is defined in Section 7.1(e).
     “Royalty Interest” means, with respect to each of the Properties, (a) in
relation to Leasehold Interests, a cost-free overriding royalty interest from
Borrower’s Hydrocarbons produced, saved and sold, proportionately reduced to
Borrower’s Working Interest and other Hydrocarbon Interests in Hydrocarbons in,
under and to be produced from or attributable to the Properties and (b) in
relation to Fee Interests, a cost-free royalty interest from Borrower’s
Hydrocarbons produced, saved and sold, from the fee interest in, under and to be
produced from or attributable to the Properties; in each case, conveyed to
Lender pursuant to any Royalty Interest Conveyance, including, but not limited
to, any Royalty Interest to be conveyed pursuant to Section 8.4.
     “Royalty Interest Conveyance” means the Overriding Royalty Interest and
Royalty Interest Conveyance pursuant to which Borrower conveys to Lender the
Royalty Interest from time to time according to the requirements of Section 8.4
below.
     “Royalty Interest Letters in Lieu” means those certain letters in lieu of
transfer orders in relation to any Royalty Interest, duly executed by Borrower,
in the form satisfactory to Lender.
     “Security Agreement” means a security agreement (covering, without
limitation Accounts, Equipment, General Intangibles and Inventory of Borrower as
those terms are defined in the Uniform Commercial Code adopted by the State of
Formation of Borrower) executed by Borrower as debtor in favor of Lender as
secured party dated as of the date hereof, in form and content satisfactory to
Lender, as the same may be modified, amended or supplemented pursuant to the
terms of this Agreement.

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     “Security Documents” means each Mortgage, the Security Agreement, the
Deposit Account Control Agreement, the Pledge Agreement, and all other security
agreements, deeds of trust, mortgages, chattel mortgages, pledges, guaranties,
financing statements, continuation statements, extension agreements and other
agreements or instruments now, heretofore, or hereafter delivered to Lender in
connection with this Agreement or any transaction contemplated hereby to secure
or guarantee the payment of any part of the Obligations, as the same may be
modified, amended or supplemented from time to time pursuant to this Agreement.
     “Severance Taxes” means state taxes imposed by the applicable Governmental
Authority at the time oil or gas is produced from a well which are based on or
measured by the amount or value of such production.
     “State of Formation” means the state in which Borrower is formed as a
Business Entity under the applicable statutes of such state.
     “Subordination Agreement” means an agreement, in form and substance
satisfactory to Lender, executed by the Partners (or Affiliates thereof) of
Borrower subordinating any amounts owed or that may become owing to any of them
by Borrower, to the rights of and obligations owed to Lender under this
Agreement and the other Loan Documents.
     “Subsidiary” means: (a) any Person of which at least a majority of the
outstanding Equity Interests having by the terms thereof ordinary voting power
to elect a majority of the board of directors, manager or other governing body
of such Person (irrespective of whether or not at the time Equity Interests of
any other class or classes of such Person shall have or might have voting power
by reason of the happening of any contingency) is at the time directly or
indirectly owned or controlled by the Borrower or one or more of its
Subsidiaries or by the Borrower and one or more of its Subsidiaries and (b) any
partnership of which the Borrower or any of its Subsidiaries is a general
partner. Unless otherwise indicated herein, each reference to the term
“Subsidiary” shall mean a Subsidiary of the Borrower.
     “Swap Agreement” means (a) any interest rate or currency swap, rate cap,
rate collar, forward agreement and other exchange or rate protection agreements
or any option with respect to any such transaction and (b) any swap agreement,
cap, collar, floor, exchange transaction, forward agreement or exchange or
protection agreement related to Hydrocarbons or any option with respect to such
transaction.
     “Swap Settlement Payables” means any settlement amounts payable by Borrower
under the terms of any executed Permitted Swap Agreement, after giving effect to
any netting provisions of such agreement.
     “Swap Settlement Proceeds” means any settlement amounts paid to Borrower
under the terms of any executed Permitted Swap Agreement, after giving effect to
any netting provisions of such agreement.
     “Tax Claim” means any claim by a taxing authority that Borrower owes or
that Borrower’s interest in any of the Properties is subject to a Lien securing
any amount of taxes of any kind.

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     “Taxes” is defined in Section 3.1(a).
     “Title Documents” means copies of documents and instruments supporting
Borrower’s title in and to some or all of the Properties and any related
reports, abstracts and analyses to be delivered by Borrower to Lender from time
to time.
     “Title Opinions” means those certain title opinions to be delivered by
Borrower to Lender from time to time.
     “Unit” means, in respect of each Well or group of related Wells, Borrower’s
interest in Oil and Gas Properties covering the lands attributed to each such
respective Well or group of related Wells for pooling, unitization and/or
proration purposes, from time to time, whether so attributed to such Well or
group of related Wells in order to comply with the terms of the applicable deed,
oil and gas leases, farmout agreements, coal bed methane leases, pooling or
unitization agreements, unit operating agreements or the like or in order to
comply with the applicable rules and regulations of applicable governmental
authorities related to pooling, unitization, well spacing or the like and,
including without limitation any pooled (compulsory or voluntary) unit,
proration unit, production unit, regulatory unit, field-wide unit, or other
similar designation or allocation of lands to such Well or group of related
Wells; provided, however, that, to the extent lands have not been attributed to
any such Well or group of related Wells either by any such deed or contractual
or regulatory authority, then the applicable Unit will consist of all of
Borrower’s interest in Oil and Gas Properties supporting Borrower’s right to
receive production or proceeds of production from such Well or Wells without
geographic limitations.
     “Well” means a well producing or capable of producing Hydrocarbons,
including those described or referred to in Exhibit A or on any exhibit to any
Security Documents, as such Exhibit A or other exhibit may be modified, amended
or supplemented from time to time.
     “Wire Transfer Instructions” means the instructions described on
Schedule 2.1 relating to the disbursements by Lender of the amounts constituting
the Initial Loans (other than the Facility Fee and the initial Administration
Fee).
     “Working Interest” and “WI” means in relation to Leasehold Interests
(a) with respect to a Unit for which a working interest is stated, Borrower’s
share of the costs of operations conducted thereon, and (b) with respect to a
Well for which a working interest is stated, Borrower’s share of costs of the
operation thereof.
     Section 1.2 Exhibits and Schedules. All exhibits and schedules attached to
this Agreement are incorporated herein by reference and made a part hereof for
all purposes.
     Section 1.3 Amendment of Defined Instruments. Unless the context otherwise
requires or unless otherwise provided herein, the terms defined in this
Agreement which refer to a particular agreement, instrument or document also
refer to and include all renewals, extensions, modifications, amendments and
restatements of such agreement, instrument or document; provided that nothing
contained in this Section shall be construed to authorize any such renewal,
extension, modification, amendment or restatement.

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     Section 1.4 References and Titles. All references in this Agreement to
exhibits, schedules, articles, sections, subsections and other subdivisions
refer to the exhibits, schedules, articles, sections, subsections and other
subdivisions of this Agreement unless otherwise expressly provided. Section and
subdivision headings are for convenience only, do not constitute any part of
such sections or subdivisions and shall be disregarded in construing the
language contained in such sections or subdivisions. The words “this Agreement,”
“this instrument,” “herein,” “hereof,” “hereby,” “hereunder” and words of
similar import refer to this Agreement as a whole and not to any particular
sections or subdivisions unless expressly so limited. The phrases “this section”
and “this subsection” and similar phrases refer only to the sections or
subsections hereof in which such phrases occur. The word “or” is not exclusive,
and the word “including” (in its various forms) means “including without
limitation.” Pronouns in masculine, feminine and neuter genders shall be
construed to include any other gender, and words in the singular form shall be
construed to include the plural and vice versa, unless the context otherwise
requires.
     Section 1.5 Calculations and Determinations. All calculations pursuant to
the Loan Documents of fees and of interest shall be made on the basis of actual
days elapsed (including the first day but excluding the last) and a year of 360
days. Unless otherwise expressly provided herein or Lender otherwise consents in
writing, all Financial Statements and reports to be furnished to Lender under
the Loan Documents shall be prepared and all financial computations and
determinations made pursuant to the Loan Documents, and with respect to the
Financial Statements, shall be made in accordance with GAAP.
ARTICLE II
THE LOANS
     Section 2.1 The Loans . Subject to the terms and conditions under this
Agreement (including the right of Lender to terminate any of its obligations
hereunder upon the occurrence of an Event of Default or a Default), Lender
agrees to make the following Loans to Borrower.
     (a) The Initial Loans. On or after the Closing Date and on or before the
Drawdown Termination Date, Lender agrees to advance to Borrower up to
$10,200,000 (collectively, the “Initial Loans”) to be applied as follows:
     (i) $9,059,566.40 used for D&A Operations described on Schedule 2.1(a)
attached hereto, including reimbursement to Borrower for expenses incurred by
Borrower prior to the disbursement of the Initial Loans in connection with such
D&A Operations (the “Initial Committed D&A Operations”); provided that such
Schedule 2.1(a) may be amended, restated, or supplemented by mutual agreement of
Borrower and Lender;
     (ii) To reimburse Borrower and Lender for, or advance to Borrower or Lender
amounts to pay, certain expenses (including accounting, legal and other similar
fees) actually incurred by Borrower or Lender under Section 7.1(y) in an amount
of up to $516,457.84 (the “Closing Costs”);

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     (iii) To pay a Facility Fee of $177,638.56 in respect of its funding the
Initial Loans; and
     (iv) To pay the initial Administration Fee in the amount of $5,000.
     Upon the funding of the Initial Loans, Lender will concurrently refund to
Borrower the $50,000 expense advance delivered to Lender by Borrower between
May 21, 2007 and the Closing Date.
     (b) Discretionary D&A Loans.
     (i) Prior to the Drawdown Termination Date and subject to the terms of
Section 2.1(c), Lender may, but shall not be obligated to, make additional
advances to Borrower of D&A Loan(s) up to an aggregate of $64,800,000 (less the
aggregate amount of all Facility Fees and Administration Fees) to be used
exclusively for certain D&A Operations proposed by Borrower following Closing,
including reimbursement to Borrower for expenses incurred by Borrower prior to
the disbursement of any such advances in connection with such D&A Operations
(the “Discretionary D&A Loans”).
     (ii) Pursuant to a Request for Commitment, Lender may make, subject to its
sole discretion, advances for Discretionary D&A Loans in an amount determined by
Lender in its sole discretion. Within fifteen (15) days after Lender’s receipt
of a Request for Commitment for a Discretionary D&A Loan listing all applicable
expenditures and all the technical information that Lender may reasonably
require to evaluate the expenditures (including but not limited to a project
overview, a proposed work plan and, at Lender’s request, a third-party
engineering evaluation where applicable) that Borrower desires to make in order
to conduct a D&A Operation, Lender shall notify Borrower in writing whether in
its sole and absolute discretion Lender will make an advance equal to the total
estimated expenditures shown on such Request for Commitment.
     (iii) At the end of each Fiscal Quarter, at Borrower’s written request,
Lender will review the progress of Borrower’s D&A Operations and determine, in
its sole discretion, whether to increase the aggregate amount of Discretionary
D&A Loans.
     (c) All D&A Loans.
     (i) Any Request for Commitment for a Discretionary D&A Loan in relation to
one or more D&A Operations shall be for a minimum of $1,000,000. Each Request
for Commitment shall include (A) the applicable request for an advance of the
additional Facility Fee payable pursuant to Section 7.1(aa), (B) a variance
allowance not to exceed ten percent (10%) of the estimated expenses set forth in
the Request for Commitment (such allowance will be available only to the extent
the actual costs of any D&A Operation exceeds 100% of the estimated costs), and
(C) the AFE(s) applicable to such D&A Operation(s) and such other

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supporting materials sufficient for Lender to assess whether it will grant
approval thereof.
     (ii) If approved, Lender will advance that portion of the Discretionary D&A
Loan necessary to pay Borrower’s share of costs and expenses attributable to
such operations, including reimbursement to Borrower for expenses incurred by
Borrower prior to such disbursement in connection with such operations (not to
exceed the amount requested in the Request for Commitment); provided that
Borrower has provided all information requested by Lender.
     (iii) Any advances to be made by Lender under this Section 2.1(c), if at
all, shall be made on the date specified on the applicable Request for
Commitment or acquisition. Within the earlier of thirty (30) days after
completion of any funded D&A Operation(s), or within ten (10) Business Days
after receipt of sufficient information thereon from the Operator or seller, as
applicable, Borrower shall provide Lender a preliminary cost certificate in the
form attached hereto as Exhibit E (the “Cost Certificate”), duly executed by an
authorized officer of Borrower, setting forth the amount of costs and expenses
that were incurred by Borrower and that have either been paid by Borrower or are
to be paid from the proceeds of advances. Borrower shall not later than 180 days
following the completion of any D&A Operation provide Lender a completed Cost
Certificate, duly executed by an authorized officer of Borrower certifying the
costs and expenses that were incurred by Borrower and paid by Borrower. To the
extent any D&A Loan proceeds remain unused by Borrower subsequent to the
completed D&A Operations for which they were advanced, Borrower may use such
unused funds only for other D&A Operations approved by Lender or to repay any
Obligations in accordance with the terms of this Agreement.
     (iv) Any Request for Commitment shall be made by Borrower for business
opportunities, projects, and/or uses that are described as D&A Operations
subject, without limitation, to the following:
     (A) All statements of costs and estimates provided to Lender shall be
rendered in sufficient detail to give Lender complete and accurate information
as to the purpose for and amount of all items included therein, and Lender shall
be entitled to such additional information regarding such expenditures as Lender
may reasonably request. All such data shall be subject to audit by Lender’s
representatives at any time mutually agreeable to the parties.
     (B) Borrower agrees that, subject to any other conditions expressly set
forth in this Agreement, with respect to any Development Operation consisting of
a new-well drill or any other operation requiring Borrower to expend more than
$25,000, Lender’s funding of such operation is further subject to the
requirement that prior to or contemporaneously with the submission of a Request
for Commitment covering each such operation Borrower shall submit to Lender all
title

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information in its possession or available to it from third parties, with such
information being satisfactory to Lender in its reasonable discretion, relating
to the Hydrocarbon Interests relating to such operations, unless current Title
Documents covering such lands have already been provided under this Agreement,
in either event which confirm that Borrower owns Defensible Title thereto
subject only to a first priority lien under the Mortgage in favor of Lender and
Permitted Encumbrances. If such activity is a D&A Operation that relates to the
acquisition of one or more undeveloped Hydrocarbon Interests, however, Borrower
shall only be required to deliver title materials satisfactory to Lender
covering the lands covered by such Hydrocarbon Interests. If title materials and
data available to Borrower are unsatisfactory to Lender, Lender may, but shall
not be obligated to, advance D&A Loans, provided that, Borrower provides
supplemental title materials within sixty (60) days following the funding of any
D&A Loan that are satisfactory to Lender. Nothing in this Section 2.1(c)(iv)(B)
shall affect Borrower’s obligation to deliver the Title Opinions as set forth in
Section 7.1(x).
     (C) Notwithstanding the foregoing or anything herein to the contrary, in no
event shall Lender be obligated to make the Initial Loans pursuant to
Section 2.1(a) in excess of an aggregate amount of $10,200,000; and in no event
shall Lender be obligated to make any Discretionary D&A Loans approved by Lender
pursuant to Section 2.1(c) in excess of an aggregate amount of $64,800,000
including the aggregate amount of Facility Fees related thereto and
Administration Fees.
     (D) No Default or Event of Default shall have occurred and be continuing,
and no Loan shall be advanced following the Drawdown Termination Date.
     (d) Promissory Note. The Loans described in Section 2.1 and all other
amounts due under this Agreement shall be evidenced by a promissory note in the
face amount of $75,000,000 (the “Note”), in the form of Exhibit B as
appropriately completed. The final maturity date of such Note shall be the Loan
Termination Date and all amounts evidenced by the Note shall be secured by the
Security Documents.
     Section 2.2 Interest.
     (a) Subject to the provisions of subsection (b) below, each Loan shall
accrue interest on the outstanding principal amount thereof at a rate per annum
equal to the Interest Rate and shall be payable as set forth in Section 2.6
hereof.
     (b) If any amount payable by Borrower under any Loan Document is not paid
when due, whether at stated maturity or by acceleration or otherwise, such
amount shall thereafter accrue interest, after as well as before judgment, at
the Default Rate to the fullest extent permitted by applicable laws.
Furthermore, while any Event of Default exists (either before or after
acceleration), Borrower shall pay interest on the principal

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amount of all outstanding Obligations, after as well as before judgment, at the
Default Rate to the fullest extent permitted by applicable laws.
     (c) Interest on each Loan shall be due and payable in arrears on each
Repayment Date applicable thereto and at such other times as may be specified
herein. Interest hereunder shall be due and payable in accordance with the terms
hereof before and after judgment, and before and after the commencement of any
proceeding under any applicable bankruptcy, insolvency or other similar law of
any jurisdiction now or hereafter in effect, including the federal Bankruptcy
Code, as amended from time to time. At Borrower’s request and at Lender’s
consent, granted in its sole discretion, interest which has accrued and is not
paid when due shall be added to and become part of the principal under the Note;
provided, however, the capitalization of such accrued and unpaid interest
pursuant to this sentence will not preclude Lender from declaring or maintaining
an Event of Default or charging interest, after as well as before judgment, at
the Default Rate based on Borrower’s failure to pay such amount to the extent
Lender has such right under any other provision of this Agreement or under any
of the other Loan Documents.
     (d) All computations of interest and all fees for a given period shall be
made by multiplying the applicable annual rate times a fraction the numerator of
which shall be the actual number of days elapsed during such period and the
denominator of which shall be 360. Interest shall accrue on the day on which the
Loan is made, but shall not accrue on the day on which the Loan or such portion
thereof is paid, provided that any Loan that is repaid on the same day on which
it is made shall accrue interest for one day.
     (e) To the extent Debt Service and other Obligations for a particular
Interest Period exceed the amount of Net Revenue swept and applied by Lender
pursuant to Section 2.6, then the percent of Net Revenue swept and applied by
Lender shall at Lender’s option be increased to a percentage (up to 100%)
necessary to sweep a sufficient portion of the Net Revenue to pay (i) all Debt
Service and other Obligations due for that Interest Period plus (ii) all Debt
Service and other Obligations remaining unpaid from any prior Interest Period.
To the extent all payments for such previously unpaid Debt Service and other
Obligations are satisfied, the percent of Net Revenue swept shall be reduced to
the extent provided in Section 2.6. To the extent that the application
provisions under this Section 2.2(e) conflict with those under Section 2.6(b),
Section 2.6(b) controls.
     Section 2.3 Repayment of the Loans.  Borrower shall repay the outstanding
principal amount of the Loans evidenced by the Note plus all accrued and unpaid
interest thereon by the Loan Termination Date. Loans advanced pursuant to this
Agreement and repaid by Borrower, may not be reborrowed.
     Section 2.4 Prepayment of the Loans.
     (a) Voluntary Prepayments. Borrower may prepay the Note, in whole or in
part, any time after the Closing Date; provided that Borrower shall provide
Lender at least three (3) Business Days’ prior written notice of such
prepayment, except in

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connection with Section 2.4(b). If the outstanding principal amount of the Note
is prepaid in full, all fees paid hereunder that may otherwise constitute
interest under applicable law, including the Facility Fees, shall constitute
prepayment penalties.
     (b) Mandatory Prepayment. Except as expressly provided otherwise in
Sections 2.6, 6.5 and 6.7, Borrower shall deliver to Lender one hundred percent
(100%) of the net proceeds of any disposition of Collateral or any issuance of
Subordinated Debt one Business Day after Borrower’s receipt of such net proceeds
and such amounts shall be applied to reduce the outstanding principal amount of
the Note. Borrower shall use 100% of all insurance proceeds to promptly acquire
new or replacement assets which are contemporaneously subjected to a first
priority Lien in favor of Lender on terms satisfactory to Lender and its
counsel, provided, that, if (i) an Event of Default exists when Borrower
receives such proceeds, or (ii) Borrower has not acquired such assets within
ninety (90) days after its receipt of such proceeds, then, in each case,
Borrower shall deliver such proceeds to Lender and such amount shall be applied
to reduce the outstanding principal amount of the Note. In furtherance thereof,
Borrower agrees to promptly execute and deliver to Lender a Mortgage and any
other Security Documents described in Section 6.1 to grant Lender a first
priority lien, subject only to the Permitted Encumbrances, in any such
replacement property, and further agrees that if such property is a replacement
Oil and Gas Property previously subject to a Royalty Interest, to promptly
execute and deliver a Royalty Interest Conveyance to Lender on the Business Day
following Borrower’s acquisition of such property.
     (c) Prepayments Generally. Any principal prepaid pursuant to this
Section 2.4 shall be in addition to, and not in lieu of, all payments otherwise
required to be paid under the Loan Documents at the time of such prepayment.
     Section 2.5 Commencement of Royalty Interest. The Royalty Interest will be
applicable with respect to all Hydrocarbons produced from or attributable to the
Properties from and after the first day of the month of the Closing Date, as
more particularly described in the Royalty Interest Conveyance.
     Section 2.6 Application of Receipts.
     (a) Net Revenue shall be calculated by Lender based on the Property
Operating Statement. Borrower shall prepare and deliver the Property Operating
Statement to Lender once per month, as soon as practical and in any event no
later than the last Business Day of each month. Such Property Operating
Statement shall detail Borrower’s Gross Receipts and Expenses with respect to
such month and for any other such amounts relating to any preceding months that
were not previously accounted for in a Property Operating Statement and shall
also detail the production of Hydrocarbons from the properties as described
therein. Borrower shall deliver the first Property Operating Statement to Lender
no later than the last Business Day of August 2007; provided, however, that this
first Property Operating Statement shall cover the period from Closing Date
through and including the last Business Day of August 2007, and shall reflect
Gross Receipts received and Expenses paid for such period which are related to

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production for all periods prior to and including the last day of July 2007, to
the extent available to Borrower.
     (b) From the Closing Date through the Initial Termination Date,
     (i) accrued and unpaid interest shall be due and payable on each Repayment
Date; provided that (A) the amount of interest that would accrue at a rate equal
to the Pay Rate shall be paid in immediately available funds and all Net Revenue
shall be applied first to pay Expenses and then to pay such interest, and
(B) all additional accrued and unpaid interest shall be capitalized so that it
is added to and becomes part of the principal under the Note, and
     (ii) if the amount of Net Revenue for any month is not sufficient to pay
that portion of the accrued and unpaid interest payable in immediately available
funds, the amount of such excess accrued and unpaid interest shall be
capitalized so that it is added to and becomes part of the principal under the
Note.
     (c) After the Initial Termination Date, effective as of each Repayment Date
and at the end of each Interest Period, Gross Receipts for such Interest Period
shall be applied as follows:
     (i) First, to the amount necessary to pay the Expenses.
     (ii) Second, (A) for the 12 months immediately following the Initial
Termination Date, sixty-five percent (65.0%) of the Net Revenue to Lender for
payment of amounts which are included within Debt Service and other Obligations
to Lender for such Interest Period; and (B) for each calendar month thereafter,
eighty-five percent (85.0%) of the Net Revenue to Lender for payment of amounts
which are included within Debt Service and other Obligations to Lender for such
Interest Period; provided that, upon the occurrence and continuation of an Event
of Default, the percentage of the Net Revenue to be applied for Debt Service and
other Obligations to Lender may be increased to one hundred percent (100%) or
such other amount specified in Section 2.2(e) above for so long as an Event of
Default is continuing. The amount paid to Lender pursuant to this
Section 2.6(c)(ii) shall be applied first to any interest due on the Note, until
all accrued interest is paid in full, and any remaining amounts paid pursuant to
this Section 2.6(c)(ii) shall be applied to remaining outstanding principal
under the Note. If the Property Operating Statement is not received by the
Lender on or before the last Business Day of the month, Borrower irrevocably
authorizes the Lender to apply any necessary portion of Gross Receipts received
by the Lender toward any interest due on the Note, until all accrued interest is
paid in full, superceding the payment priority of Expenses set forth in
Section 2.6(c)(i) above.
     (iii) Third, $5,000 to Lender as the Administration Fee (other than the
initial Administration Fee) to the extent such fee accrues in the current month
the Property Operating Statement is due.

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     (iv) Fourth, so long as no Event of Default shall have occurred and be
continuing, any remaining amounts shall be paid to Borrower by remitting such
sums to the Borrower Operating Account in accordance with Section 2.7(b).
     Section 2.7 Borrower Sub-Account.
     (a) Until all of Borrower’s Obligations have been fully satisfied, Borrower
shall direct and cause all Purchasers of Hydrocarbons, the Operators, all
counterparties under Swap Agreements, all account debtors of Borrower (including
under pipeline transportation contracts), and any other customers of Borrower to
deposit all payments of any nature whatsoever due and owing by such Persons to
Borrower directly into an account maintained by Lender (the “Lender Account”);
provided, however, that Purchasers of Hydrocarbons, with prior notice to Lender,
may make distributions to third-party royalty interest owners and working
interest owners and may withhold Severance Taxes. Lender shall establish a
sub-account (the “Borrower Sub-Account”) on its internal books and records and
shall credit to such Borrower Sub-Account all collected funds which constitute
such payments. After payment of the amounts described in this Section 2.7 and
subject to Section 2.6, Borrower authorizes Lender to debit the Borrower
Sub-Account for the payment of all Obligations hereunder when due and payable.
     (b) As soon as practical after the Borrower delivers to the Lender its
monthly Property Operating Statement, provided that no Event of Default has
occurred and is continuing, and after withholding all distributions that Lender
is entitled to pursuant to Section 2.6(c)(ii) and (iii), Lender will release to
Borrower the funds credited to the Borrower Sub-Account, by remitting to the
Borrower Operating Account the amount payable to Borrower pursuant to
Section 2.6(c)(i) for the payment of Expenses and pursuant to Section 2.6(c)(iv)
(the “Net Revenue Reimbursement Amount”). Borrower shall have the right to use
funds paid over to the Borrower Operating Account as the Net Revenue
Reimbursement Amount for any corporate or business purposes of Borrower.
Borrower will have sixty (60) days after the receipt of such funds to contest
the amounts of funds released, after which time the amounts released will be
deemed conclusively correct absent manifest error, provided Borrower may not
contest any such amounts released for any reason after the Loan Termination
Date. If Borrower desires to contest any such amount it shall do so by providing
Lender written notice with a report analyzing its basis regarding any error.
Lender shall thereafter notify Borrower, within thirty (30) days of receipt of
Borrower’s analysis, if it agrees with or disputes Borrower’s analysis. If
Lender disputes Borrower’s analysis, Lender’s notice shall detail the specific
basis of the dispute and the amount of the dispute. If Lender agrees with
Borrower’s analysis, Lender will disburse any such amounts to Borrower within
fifteen (15) days of the date of Lender’s notice.
     Any amounts deposited into the Lender Account owing to third-party working
interest, overriding royalty interest and royalty interest owners whose
interests in the Properties were created prior to the time such Properties
became subject to any of the Security Documents or to taxing authorities for
production taxes shall be released by Lender to Borrower within three (3)
Business Days after receipt of a certificate from Borrower detailing such
amounts and the party to be paid so that Borrower may return such amounts to
such third-party working interest,

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overriding royalty interest and royalty interest owners and taxing authorities.
Lender shall have the right to undertake audit procedures during normal business
hours and upon reasonable prior notice to periodically confirm that such
payments and all Expenses have been made by Borrower. Lender shall have the
right at its option, but not the obligation, to make payments directly for
Expenses and such other payments directly to the third-party working interest,
overriding royalty interest and royalty interest holders and taxing authorities
upon the occurrence of and during the continuance of an Event of Default
hereunder. Except as provided in this Section 2.7, upon the occurrence of and
during the continuance of an Event of Default, any funds in the Borrower
Sub-Account may be applied, at Lender’s option, against unpaid Obligations, and
the Swap Settlement Payables on a pro rata basis, such Obligations and Swap
Settlement Payables being, in such event, pari passu.
     Section 2.8 Use of Proceeds . Initial Loan proceeds may be used by Borrower
for the purposes described in Section 2.1(a). Discretionary D&A Loan proceeds
may be used by Borrower for the purposes of funding Borrower’s share of costs
and expenses relating to the conduct of the Discretionary D&A Operations
pursuant to Section 2.1(b) and Section 2.1(c), including reimbursement of
expenses previously paid by Borrower for any corporate or business purpose of
Borrower, all as approved by Lender in writing. In no event shall funds from the
Loans be used by Borrower, directly or indirectly, for personal, family,
household or agricultural purposes, or any other purpose not specifically
described in this Section 2.8 or in Section 2.1.
     Section 2.9 Optional Extension of Loan Termination Date
     Lender may in its sole discretion, by notice to Borrower, not later than
90 days prior to the Initial Termination Date, notify Borrower that Lender is
electing to extend the Loan Termination Date then in effect until July 29, 2011
(the “Extended Termination Date”). Notwithstanding the foregoing, the extension
of the Loan Termination Date pursuant to this Section shall not be effective
unless:
     (i) no Default or Event of Default shall have occurred and be continuing on
the date of such extension and after giving effect thereto; and
     (ii) the representations and warranties of Borrower contained in this
Agreement are true and correct in all material respects on and as of the date of
such extension and after giving effect thereto, as though made on and as of such
date (except to the extent that (A) the facts upon which such representation are
based have been changed by the extension of credit hereunder or by subsequent
events and circumstances not constituting violations of the other provisions of
this Agreement, or (B) if any such representation or warranty is expressly
stated to have been made as of a specific date, as of such specific date).
     Section 2.10 Other Operations. Until all Obligations (other than the
obligations under any Royalty Interest Conveyance) have been paid in full and
this Agreement has been terminated, other than the Initial Committed D&A
Operations and the prudent maintenance of existing wells included in the
Collateral, Borrower may not conduct or invest in any development activities,
including, without limitation, drilling, sidetracking, deepening,

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completing, recompleting or reworking operations, without first submitting to
Lender a Request for Commitment to fund such activities.
ARTICLE III
TAXES AND YIELD PROTECTION
     Section 3.1 Taxes.
     (a) Any and all payments by Borrower to or for the account of Lender under
any Loan Document other than the Royalty Interest Conveyance shall be made free
and clear of and without deduction by Borrower for any and all taxes, duties,
levies, imposts, deductions, assessments, fees, withholdings or similar charges,
and all liabilities with respect thereto, other than Direct Taxes, but
excluding, in the case of Lender, taxes imposed on or measured by its income
(except as required by applicable law), and franchise taxes imposed on it (in
lieu of income taxes), by the jurisdiction (or any political subdivision
thereof) under the applicable laws of which Lender is organized or maintains a
lending office (all such non-excluded taxes, duties, levies, imposts,
deductions, assessments, fees, withholdings or similar charges, and liabilities
being hereinafter referred to as “Other Taxes”). To confirm Borrower’s ability
to comply with the foregoing, Lender represents and warrants to Borrower that
Lender is (i) not subject to backup withholding and is otherwise current on its
obligations under the Internal Revenue Code of 1986 (as amended and any
successor statute, the “Code”), and (ii) not a foreign person within the meaning
of the Code or under any laws of any jurisdiction of which Lender is subject,
the effect of which laws would be to require Borrower to withhold taxes from
payments made to or for the account of Lender. If Borrower shall be required by
any applicable laws to deduct any Other Taxes from or in respect of any sum
payable under any Loan Document to Lender, (i) the sum payable shall be
increased as necessary so that, after making all required deductions (including
deductions applicable to additional sums payable under this Section), Lender
receives an amount of principal and interest it would have received had no such
deductions been made, (ii) Borrower shall make such deductions, (iii) Borrower
shall pay the full amount deducted to the relevant taxation authority or other
authority in accordance with applicable laws, and (iv) within thirty days after
the date of such payment, Borrower shall furnish to Lender the original or a
certified copy of a receipt evidencing payment thereof.
     (b) To the extent not duly paid by Borrower, Borrower shall indemnify
Lender within ten (10) days after written demand therefor, for the full amount
of any Other Taxes paid by Lender on or with respect to any payment by or on
account of any obligation of the Borrower hereunder (including Other Taxes
imposed or asserted on or attributable to amounts payable under this
Section 3.1) (“Indemnified Taxes”) and any penalties, interest and reasonable
expenses arising therefrom or with respect thereto, whether or not such
Indemnified Taxes were correctly or legally imposed or asserted by the relevant
Governmental Authority. A certificate of Lender as to the basis of such Other
Taxes and the amount of such payment or liability under this Section 3.1 shall
be delivered to the Borrower and shall be conclusive absent manifest error.

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     (c) In addition, Borrower agrees to pay any and all present or future
stamp, court or documentary taxes and any other excise or property taxes or
charges or similar levies which arise from any payment made under any Loan
Document or from the execution, delivery, performance, enforcement or
registration of, or otherwise with respect to, any Loan Document.
     Section 3.2 Inability to Determine LIBOR Rate. If Lender determines in
connection with any request for a Loan or continuation thereof for any reason
that adequate and reasonable means do not exist for determining the LIBOR Rate,
Lender will promptly so notify Borrower if Lender reasonably determines that
such event or events have any impact on the application of the Interest Rate. In
such event, Lender shall use, as the LIBOR Rate, the average LIBOR Rate for the
two immediately preceding months (for one-month terms) until Lender notifies
Borrower that the circumstances giving rise to such determination no longer
exist.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
     Section 4.1 Representations and Warranties of Borrower. To confirm Lender’s
understanding concerning Borrower and Borrower’s businesses, properties and
obligations, and to induce Lender to enter into this Agreement and to make the
Loans, Borrower represents and warrants to Lender that:
     (a) No Default. No Event of Default or Default has occurred and is
continuing.
     (b) Organization and Good Standing. Borrower is a Business Entity as set
forth in the preamble hereof duly organized and validly existing under the laws
of State of Formation, having all requisite corporate powers necessary to carry
on its businesses and to enter into and consummate the transactions contemplated
by the Loan Documents. Borrower is authorized to do business in all other
jurisdictions wherein the character of the properties owned or held by it or the
nature of the business transacted by it makes such qualification necessary,
except where the failure to so qualify cannot reasonably be expected to have a
Material Adverse Effect. All the information set forth in the Guaranty regarding
Guarantor is true and correct.
     (c) Capitalization: Compliance with Security Laws.
     (i) As of the date hereof, the record holders of the Equity Interests of
Borrower consist exclusively of those Persons listed on Schedule 4.1(c)(i) and
such schedule accurately lists the percentage ownership of each such record
holder in Borrower and all other names which such record holders conduct
business.
     (ii) Except as disclosed on Schedule 4.1(c)(ii), Borrower is not
(A) subject to any agreement under which there may become outstanding, nor are
there currently outstanding, any rights to purchase, or securities convertible
into or exchangeable for, any Equity Interests of Borrower including, but not
limited

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to, options, warrants or rights or (B) under any obligation (contingent or
otherwise) to purchase or otherwise acquire or retire any of its Equity
Interests.
     (iii) Except as contemplated by this Agreement or as disclosed on Schedule
4.1(c)(ii), there are no agreements, understandings, plans or arrangements in
existence which pertain to the distribution rights, voting, sale or transfer of
any Equity Interests of Borrower. Borrower has complied in all material respects
with all applicable federal and state corporate laws. There is no pending or, to
the knowledge of Borrower, threatened litigation against Borrower involving any
federal or state securities law claims against Borrower.
     (d) Authorization. Borrower has taken all actions necessary to authorize
the execution and delivery of the Loan Documents and to authorize the
consummation of the transactions contemplated thereby and the performance of its
obligations thereunder. Borrower is duly authorized to borrow funds hereunder
and generally to conduct all D&A Operations.
     (e) No Conflicts or Consents. Except with regard to Borrower’s obligations
that will be satisfied prior to or contemporaneously with Closing and except as
set forth on Schedule 4.1(e), the execution and delivery by Borrower of the Loan
Documents, the performance of its obligations under the Loan Documents, and the
consummation of the transactions contemplated by the various Loan Documents does
not and will not (i) conflict with any provision of (A) any applicable domestic
or any foreign law, statute, rule or regulation, the violation of which could
reasonably be expected to have a Material Adverse Effect, (B) the Governing
Documents of Borrower, or (C) any agreement, judgment, license, order or permit
applicable to or binding upon Borrower, the violation of which could reasonably
be expected to have a Material Adverse Effect (ii) result in the acceleration of
any Indebtedness owed by Borrower, or (iii) result in or require the creation of
any Lien upon any assets or properties of Borrower, except as expressly
contemplated in the Loan Documents. Except as expressly contemplated in the Loan
Documents and except as has been obtained, no consent, approval, authorization
or order of, and no notice to or filing with, any court or Governmental
Authority or third party is required in connection with the execution, delivery
or performance by Borrower of any Loan Document or to consummate any
transactions contemplated by the Loan Documents. No consents, options, rights of
first refusal or similar rights are outstanding in favor of any Person regarding
the consummation of the transactions contemplated under the various Loan
Documents, or, except for consents, permits and authorizations required to be
obtained or renewed from time to time from Governmental Authorities, conducting
the D&A Operations.
     (f) Enforceable Obligations. This Agreement is, and the other Loan
Documents when executed and delivered by Borrower will be, legal, valid and
binding obligations of Borrower enforceable in accordance with their terms
except as such enforcement may be limited by bankruptcy, insolvency or similar
laws of general application relating to the enforcement of creditors’ rights or
by principles of equity applicable to the enforcement of creditors’ rights
generally. The Mortgage, the UCC-1 Financing Statements relating to the Security
Documents and the Royalty Interest

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Conveyance to be filed or recorded in the various jurisdictions are in proper
form for filing or recordation under the laws of such jurisdictions.
     (g) Pro Forma Financial Statements. Attached as Schedule 4.1(g) are
unaudited, management-prepared pro forma balance sheets of the Guarantor and the
Borrower, in each case, as of the Closing Date (the “Pro Forma Financial
Statements”). The Pro Forma Financial Statements present fairly the pro forma
financial condition of the Guarantor and of the Borrower as of the date thereof
and are in accordance with the projected or actual (as the case may be)
performance and books and records of Guarantor and Borrower.
     (h) Other Obligations and Restrictions. Except as disclosed on Schedule
4.1(h), the Indebtedness under the Loan Documents, and except for Indebtedness
permitted under Section 7.2(f), Borrower does not have any outstanding
Indebtedness. No Tax Claim or other claim for delinquent Property Taxes or
Severance Taxes exists. Borrower is not subject to or restricted by any
franchise, contract, deed, charter restriction or other instrument or
restriction which could reasonably be expected to have a Material Adverse Effect
on Borrower’s financial condition, or Borrower’s ability to timely pay the Note
and the other Obligations and to perform its obligations under the Loan
Documents or conduct the D&A Operations.
     (i) Full Disclosure. The written information delivered by Borrower, or on
behalf of Borrower or any Affiliate of Borrower, to Lender in connection with
the negotiation of this Agreement or in connection with any transaction
contemplated hereby is true and correct in all material respects and does not
contain any untrue statement of a material fact or omit to state any material
fact known to Borrower which is necessary to make the statements contained
herein or therein not misleading as of the date made or deemed made. No facts
are known to Borrower that have not been disclosed to Lender in writing which
could reasonably be expected to have a Material Adverse Effect on Borrower’s
financial condition, or Borrower’s ability to timely pay or perform its
obligations.
     (j) Litigation. Except as disclosed on Schedule 4.1(j), there are no
actions, suits or legal, equitable, arbitrative or administrative proceedings
pending, or to the knowledge of Borrower threatened, against Borrower or
affecting any of the Properties before any federal, state, municipal or other
court, department, commission, body, board, bureau, agency or instrumentality,
domestic or foreign, and there are no outstanding judgments, injunctions, writs,
rulings or orders by any such governmental entity against Borrower or any of the
Properties.
     (k) ERISA Liabilities.
     (i) Schedule 4.1(k) sets out a list of all employee benefit plans and
programs of the Borrower and its ERISA Affiliates which benefit the employees of
the Borrower or its ERISA Affiliates, including but not limited to, plans and
programs providing for pension, retirement, profit-sharing, savings, bonus,
401(k), deferred or incentive compensation, hospitalization, medical, dental,

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vision, pharmaceutical, life or disability insurance, vacation and paid holiday,
termination or severance pay, deferred compensation, restricted stock, stock
option or stock appreciation rights benefit plans (the “Benefit Plans”). Neither
Borrower nor any ERISA Affiliate maintains, has ever maintained or has, or ever
has had or could have any liability with respect to employee benefit plan that
is subject to Title IV of ERISA, a “multiemployer plan” within the meaning of
Section 3(37) of ERISA or any plan subject to Section 302 of ERISA or
Section 412 of the Code. Borrower and its ERISA Affiliates, if any, are in
compliance in all material respects with ERISA and all applicable laws,
including but not limited to the Consolidated Omnibus Budge Reconciliation Act
of 1985, as amended, applicable to any employee benefit plan or program which is
maintained or contributed to by Borrower or its ERISA Affiliate, or to which
Borrower or its ERISA Affiliate has any responsibility or fixed or contingent
liability.
     (ii) Neither Borrower nor any ERISA Affiliate maintains, has ever
maintained (or has ever had any liability with respect to) any plan subject to
Section 302 of ERISA or Section 412 of the Code. Borrower and its ERISA
Affiliates are in compliance in all material respects with ERISA, the Code, and
all applicable laws, including but not limited to the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended, applicable to any Benefit Plan or
any employee benefit plan or program which is maintained or contributed to by
Borrower or its ERISA Affiliate, or to which Borrower or its ERISA Affiliate has
any responsibility or fixed or contingent liability. Each Benefit Plan that is
intended to be tax qualified under Code Section 501 or Code Section 401 has
received a favorable determination letter as to its tax qualified status for all
amendments for which such letter may be received from the Internal Revenue
Service, and no event has occurred that would negatively affect the qualified
status of such plan. There is no prohibited transaction under ERISA or Code
Section 4975 which are not otherwise exempt under ERISA or the Code with respect
to any Benefit Plan.
     (l) Names and Places of Business. Except as set forth on Schedule 4.1(l),
Borrower has not during the preceding three (3) years, been known by or used any
other name. The principal office and principal places of business of Borrower
are set forth on Schedule 4.1(l). Borrower does not now have any other office or
place of business. Except as set forth on Schedule 4.1(l), Borrower is not
engaged in any business or activity other than the acquisition, ownership,
operation and development of properties potentially productive of oil and/or gas
and related activities.
     (m) Unpaid Bills. Except as disclosed on Schedule 4.1(m) and except as
incurred in the ordinary course of business and which are not yet delinquent,
Borrower has no unpaid bills with respect to improvements to any of the
Collateral which may give rise to mechanic’s, materialman’s or other similar
liens arising by operation of applicable law should such bills remain unpaid.
     (n) Title. Subject to Permitted Encumbrances, (i) Borrower will have all
legal and beneficial rights, title and interest in and to all production from or
allocable to its Net

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Revenue Interest and other Hydrocarbon Interests in the Properties and have the
exclusive right to sell the same subject to the Royalty Interest, and
(ii) Borrower will have good and Defensible Title to the Properties, the
Equipment and to its other properties and assets. The Collateral will be owned
by Borrower free and clear of any Lien (other than Permitted Encumbrances).
Borrower’s Working Interests are not greater than, and Borrower’s Net Revenue
Interests are not less than, those stated on Exhibit A attached hereto.
Guarantor is duly authorized to execute and deliver the Guaranty to Lender.
     (o) No Affiliates or Other Owners. Except as disclosed on Schedule 4.1(o),
(i) Borrower does not have any Affiliate or own any Equity Interest in any other
Person, (ii) Borrower is not a member of any joint venture or association of any
type whatsoever and (iii) Borrower is not party to any contract or agreement
with any of its Affiliates. Borrower is not party to any transaction of any kind
with any Affiliate of Borrower other than on fair and reasonable terms
substantially as favorable to Borrower as would be obtainable by Borrower at the
time in a comparable arm’s length transaction with a Person other than an
Affiliate.
     (p) Investment Company. Borrower is not an “investment company” within the
meaning of the Investment Company Act of 1940, as amended.
     (q) Environmental and Other Laws. Except as disclosed on Schedule 4.1(q),
(i) Borrower is conducting its business in material compliance with all
applicable federal, state or local laws, including Environmental Laws, and has
been and is in material compliance with any licenses and permits required under
any such laws which affect or relate to the Collateral; (ii) none of the
operations or properties of Borrower is the subject of federal, state or local
investigation evaluating whether any material remedial action is needed to
respond to a release of any Hazardous Materials into the environment or to the
improper storage or disposal (including storage or disposal at offsite
locations) of any Hazardous Materials; (iii) Borrower has not filed or received
any notice under any federal, state or local law indicating that it is or may be
responsible for the improper release into the environment, or the improper
storage or disposal, of any Hazardous Materials or that any Hazardous Materials
have been improperly released, or are improperly stored or disposed of, upon the
Properties; and (iv) Borrower is not aware of contingent liability under any
Environmental Laws or in connection with the release into the environment, or
the storage or disposal, of any Hazardous Materials, upon the Properties.
     (r) Equipment. Schedule 4.1(r) sets forth all material Equipment owned by
Borrower as of the Closing Date, except for office equipment and fixtures and
other Equipment with market value of less than $10,000, individually.
     (s) Purchasers of Hydrocarbons. All of the Purchasers of Hydrocarbons
produced from or allocated to the Properties, and the most recent address of
each such Persons as shown in Borrower’s records and the contact information for
each such Purchaser of Production, are set forth on Schedule 4.1(s), as
supplemented pursuant to Section 7.1(c)(v).

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     (t) Hydrocarbon Sales and Related Agreements. All existing agreements that
are binding on Borrower or the Properties and that are not terminable upon
thirty (30) days or less notice for the sale, purchase, (including, but not
limited to, calls on production and preferential rights to purchase production)
gathering, transportation, handling, processing, treating and/or storage of
Hydrocarbons are described on Schedule 4.1(t).
     (u) Swap Agreements; Material Contracts. All Existing Swap Agreements or
other hedge agreements to which Borrower is a party or by which Borrower is
bound are described on Schedule 4.1(u). All the volumes, notional or physical,
of the Hydrocarbons hedged under the Existing Swap Agreements and the terms and
the fixed, floating and collar prices and any other applicable prices are set
forth on Schedule 4.1(u). All Material Contracts of Borrower are listed on
Schedule 4.1(u). There have been no amendments to or modifications of the
Material Contracts, except as set forth on Schedule 4.1(u).
     (v) Employees. Except as set forth on Schedule 4.1(v), neither Borrower nor
any ERISA Affiliate is a party to any existing employment agreements, deferred
compensation, stock option, bonus, consulting or retirement agreements or plans,
or other employee benefit plans of any kind, including without limitation any
pension or welfare benefit plans with any employee which are not terminable
at-will. No employees of Borrower are represented by any labor union or
collective bargaining agreement, nor is any union organization effort pending or
threatened against Borrower.
     (w) Operations. Borrower is the operator of record of all the Properties.
     (x) Ownership In Properties. Except through their respective ownership
interests in Borrower, no shareholders or any Affiliates of Borrower own any
interests in the Properties.
     (y) Insolvency. After giving effect to the execution and delivery of the
Loan Documents and the making of the Loans under this Agreement, Borrower will
not be “insolvent,” within the meaning of such term as defined in § 101 of Title
11 of the United States Code, as amended from time to time, or be unable to pay
its debts generally as such debts become due, or have an unreasonably small
capital to engage in any business or transaction, whether current or
contemplated.
     (z) OFAC. Borrower is not (i) a person whose property or interest in
property is blocked or subject to blocking pursuant to Section 1 of Executive
Order 13224 of September 23, 2001 Blocking Property and Prohibiting Transactions
With Persons Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg.
49079 (2001)), (ii) engaged in any dealings or transactions prohibited by
Section 2 of such executive order, or otherwise associated with any such person
in any manner violative of Section 2, or (iii) a Person on the list of Specially
Designated Nationals and Blocked Persons or subject to the limitations or
prohibitions under any other U.S. Department of Treasury’s Office of Foreign
Assets Control regulation or executive order.

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     (aa) Patriot Act. Borrower is in compliance, in all material respects, with
(i) the Trading with the Enemy Act, as amended, and each of the foreign assets
control regulations of the United States Treasury Department (31 CFR, Subtitle
B, Chapter V, as amended) and any other enabling legislation or executive order
relating thereto, and (ii) the Uniting And Strengthening America By Providing
Appropriate Tools Required To Intercept And Obstruct Terrorism (USA Patriot Act
of 2001). No part of the proceeds of the Loans will be used, directly or
indirectly, for any payments to any governmental official or employee, political
party, official of a political party, candidate for political office, or anyone
else acting in an official capacity, in order to obtain, retain or direct
business or obtain any improper advantage, in violation of the United States
Foreign Corrupt Practices Act of 1977, as amended.
ARTICLE V
NOTICE OF CERTAIN EVENTS
     So long as any Obligations are owing to Lender under this Agreement or any
other Loan Documents, Borrower shall deliver to Lender or notify Lender of, as
the case may be, the following items:
     Section 5.1 Notice of Default, Event of Default and Other Matters .
Borrower shall notify Lender within three (3) Business Days after becoming aware
of the existence of any of the following:
     (a) any Default or Event of Default;
     (b) any developments or other information which could reasonably be
expected to have a Material Adverse Effect on the properties, business,
prospects, profits or condition (financial or otherwise) of Borrower or its
ability to perform its Obligations;
     (c) any material dispute (including tax liability disputes) that may arise
between Borrower and any Governmental Authority;
     (d) the commencement of any material litigation or proceeding affecting
Borrower or the Properties (whether by the filing of a complaint, service of
process or by attachment or arrest of any asset);
     (e) any labor dispute or controversy resulting in or likely to result in a
strike or work stoppage against Borrower;
     (f) any proposal by any public authority to acquire any assets or business
of Borrower;
     (g) the location of any Collateral other than at the places indicated in or
as permitted under the Loan Documents;
     (h) any proposed or actual change of the name, identity or structure of
Borrower;

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     (i) any material loss or damage to any of Borrower’s property, business or
operations;
     (j) any potentially material environmental situation, circumstance or
condition that causes or may cause Section 4.l(q) to be false;
     (k) any other matter which has resulted or may reasonably be expected to
result in a material adverse change in the financial condition, operations or
assets of Borrower; or
     (l) Borrower or any ERISA Affiliate having any obligation or liability with
respect to an ERISA Plan or any prohibited transaction as defined in ERISA or
Code Section 4975 with respect to any Benefit Plan or the occurrence of an ERISA
Event that, in any such case, could reasonably be expected to have a Material
Adverse Effect.
     Section 5.2 Other Information. Borrower shall provide such other
information regarding the financial condition of Borrower or any property of
Borrower as Lender reasonably may request from time to time.
ARTICLE VI
SECURITY; ETC.
     Section 6.1 Security; Guaranty. The Obligations will be secured by first
priority (subject only to the Permitted Encumbrances) Liens on the Collateral as
set forth in the various Security Documents concurrently or hereafter delivered,
including, without limitation, each Mortgage, Security Agreement, Financing
Statement and Assignment of Production to be executed by Borrower covering the
Properties (whether one or more, the “Mortgage”), and the Security Agreement,
Pledge Agreement, and the Deposit Account Control Agreement, each in form and
substance reasonably satisfactory to Lender. Lender will permit the counterparty
under a Permitted Swap Agreement to obtain Liens from Borrower covering, all or
a portion of, the Properties that are pari passu with Lender’s first priority
liens; provided, however, Borrower, Lender and such counterparty shall enter
into an Intercreditor Agreement, reasonably satisfactory to Lender. Any time
Borrower obtains any new Property following Closing using any Loan proceeds
hereunder, Borrower agrees to promptly execute and deliver to Lender a Mortgage
and any other Security Documents described in this Section 6.1 to grant Lender a
first priority (subject only to the Permitted Encumbrances) lien in such
Property, and further agrees to promptly execute and deliver an Royalty Interest
Conveyance as required under Sections 8.4. The Obligations will also be secured
by the Guaranty.
     Section 6.2 Perfection and Protection of Security Interests and
Liens. Borrower will from time to time deliver to Lender any security
agreements, financing statements, continuation statements, extension agreements,
amendments, confirmations and other documents, properly completed and executed
(and acknowledged when required) in form and substance reasonably satisfactory
to Lender, which Lender reasonably requests for the purpose of perfecting,
confirming, protecting or establishing the priority of any Liens or other rights
in the Collateral securing any Obligations.

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     Section 6.3 Release of Collateral. Upon the payment and performance in full
by Borrower of all Obligations (other than those arising under the Royalty
Interest Conveyance and indemnity obligations and similar obligations that
survive the termination of the Loan Documents), Lender shall deliver or cause to
be delivered to Borrower, at Borrower’s expense, releases and satisfactions, or
transfers without warranty, of all Collateral, including releases of Deeds of
Trust, financing statements, and other registrations of security with respect to
the Collateral and a release of the Deposit Account Control Agreement, and
Borrower shall deliver to Lender a general release of all of Lender’s
liabilities and obligations including under the Loan Documents (other than those
arising under the Royalty Interest Conveyance, and indemnity obligations and
similar obligations that survive the termination of the Loan Documents) and an
acknowledgment that the same have been terminated.
     Section 6.4 Account Debtors. All account debtors (including any Operator,
Purchasers of Hydrocarbons and counterparties under Permitted Swap Agreements)
relating to the Working Interests, Net Revenue Interests and other Hydrocarbon
Interests in the Properties, under pipeline transportation agreements and
relating to Permitted Swap Agreements (collectively, “Account Debtors”) will
receive notification from Lender (as assignee) and Borrower (as assignor) (the
“Notice of Assignment of Proceeds”) to make payment of all amounts owed from
time to time by the Account Debtor to the Borrower for sales of all production
from or allocable to Borrower’s interest in the Properties and all other Gross
Receipts into the Lockbox or directly into the Lender Account. Borrower shall
use commercially reasonable efforts to obtain and deliver, within thirty
(30) days after the closing, from all Account Debtors, an executed Notice of
Assignment of Proceeds which will instruct the Account Debtors to remit all
proceeds from sales of all production from or allocable to the Net Revenue
Interest in the Properties and all other Gross Receipts into the Lockbox or
directly into the Lender Account. Lender may prohibit Borrower from selling any
Hydrocarbon production to a purchaser that refuses to execute and deliver to
Lender a Notice of Assignment of Proceeds. If Borrower receives any Gross
Receipts, Borrower shall promptly notify Lender and follow Lender’s instructions
regarding submitting such proceeds to the Lockbox or the Lender Account, and,
until received by Lender, Borrower shall hold such proceeds in trust for Lender.
     Section 6.5 Location; Records.
     (a) As long as no Default or Event of Default exists, Borrower may dispose
of Equipment in accordance with the terms of the applicable Operating Agreements
and may dispose of obsolete, broken or worn Equipment, in either case without
Lender’s consent, but upon prior written notice to Lender; provided that the
proceeds of any such disposition shall (i) be used to purchase substantially
similar replacement Equipment or (ii) be delivered to Lender to be applied
pursuant to Section 2.6(c)(ii).
     (b) Except to the extent it is being used or transported in the ordinary
course of business, all Equipment owned by or on behalf of Borrower will be kept
at its current location. Borrower shall be permitted to change the location of
any Equipment if Borrower has given prior written notice of the new location to
Lender and Borrower has taken all actions necessary to maintain the perfection
and priority of any Liens in favor of Lender against such Equipment. Borrower
will at all times hereafter keep correct and accurate records itemizing and
describing the location, kind, and type of all Equipment

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currently owned or hereafter acquired by Borrower, Borrower’s cost therefor, all
of which records shall be available during Borrower’s usual business hours upon
demand of any officer, employee, agent or representative of Lender.
     Section 6.6 Maintenance. Borrower will (a) keep all of its Equipment in
good condition, repair, and working order (ordinary wear and tear excepted),
substantially in accordance with any manufacturer’s manual, if applicable;
(b) not misuse, abuse, waste, destroy or endanger the Equipment; (c) promptly,
or in the case of any loss or damage to the Equipment, make or cause to be made
all repairs, replacements or other improvements to the Equipment that are
sufficient to continue the operation of Borrower’s business; and (d) will not
use any Equipment in violation of any law, statute, ordinance, or legislation or
allow it to be so used.
     Section 6.7 Dispositions. Where Borrower is permitted to dispose of any
Equipment under this Agreement or by consent thereto hereafter given by Lender,
Borrower shall do so in an arm’s length transaction, in good faith and by
obtaining a commercially reasonable price therefor and without impairing the
operating integrity of its remaining Equipment.
ARTICLE VII
COVENANTS OF BORROWER

    Section 7.1 Affirmative Covenants. Borrower warrants, covenants and agrees
that until full and final repayment and performance of the Obligations (other
than Obligations under the Royalty Interest Conveyance, and indemnity
obligations and similar obligations that survive the termination of the Loan
Documents) and the termination of this Agreement, it will comply with the
following covenants, or where such compliance is dependent on the Operator of
any Properties for which Borrower is not the Operator, it will use commercially
reasonable efforts to cause the Operator to comply with the following covenants:

     (a) Payment and Performance. Subject to Section 2.6, Borrower will pay all
amounts due to Lender under the Loan Documents in accordance with the terms
hereof and thereof and will observe, perform and comply with every covenant,
term and condition in the Loan Documents and will use its commercially
reasonable efforts to cause each Affiliate to observe, perform and comply with
every covenant, term and condition in the Loan Documents to which it is a party.
     (b) Compliance with Tax Laws. Borrower shall comply with all federal, state
or local laws and regulations regarding the collection, payment and deposit of
employee income, employment, and social security and sales and use taxes and
royalty payments.
     (c) Books, Financial Statements and Reports. Borrower will at all times
maintain full and accurate books of account and records and a standard system of
accounting and will furnish the following statements and reports to Lender at
Borrower’s expense:
     (i) As soon as available, and in any event within ninety (90) days after
the end of each Fiscal Year, complete consolidated audited financial statements
of Guarantor, prepared in reasonable detail in accordance with GAAP by a
mutually agreeable independent accounting firm (Meaden & Moore, Ltd.). These
financial

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statements shall contain a balance sheet as of the end of such Fiscal Year and
statements of operations, and cash flows, and changes in shareholders’ capital
accounts for such Fiscal Year, subject to changes resulting from normal year-end
adjustments, each setting forth in comparative form the corresponding figures
for the preceding Fiscal Year.
     (ii) As soon as available, and in any event within sixty (60) days after
the end of each Fiscal Quarter, Guarantor’s consolidated balance sheet as of the
end of such Fiscal Quarter and consolidated statements of Guarantor’s earnings
and cash flows for the period from the beginning of the then current Fiscal Year
to the end of such Fiscal Quarter, all in reasonable detail and including
consolidating statements on the Borrower.
     (iii) Within ninety (90) days after the end of each Fiscal Year, a comfort
letter prepared by a mutually agreeable independent accounting firm (Meaden &
Moore, Ltd.) confirming that such firm has, on behalf of Borrower, reviewed the
joint interests billings (“JIBs”), if any, charged to Borrower by the Operator
or by Borrower as the Operator during the prior Fiscal Year and confirmed that
the JIBs presented to Borrower by Operator or by Borrower as the accurately
account for the amounts owed by and to Borrower under the applicable Operating
Agreements during that period.
     (iv) Within three (3) Business Days after receipt by Borrower, copies of
all reports and other information provided by any other Person to Borrower in
connection with the Loan Documents. Borrower may arrange for such reports and
information to be provided directly to Lender by the Person providing the same
to Borrower.
     (v) Within three (3) Business Days after the end of each Fiscal Quarter, a
report setting forth any change in the list of Purchasers of Hydrocarbons listed
on Schedule 4.1(s).
     (vi) Contemporaneously with the financial statements delivered pursuant to
subparts (i) and (ii) above, Borrower shall deliver a Compliance Certificate.
Upon Lender’s written request, Borrower shall deliver the same financial
statements for Borrower which are required under subparts (i) and (ii) for the
Guarantor (in addition to those delivered for the Guarantor).
     (d) Other Information and Inspections.
     (i) Borrower will furnish to Lender any information which Lender may from
time to time reasonably request concerning any covenant, provision or condition
of the Loan Documents or any matter in connection with Borrower’s assets,
business and/or operations. Borrower will permit representatives appointed by
Lender (including independent accountants, agents, attorneys, appraisers and any
other Persons) to visit and inspect, during reasonable business hours and upon
two (2) Business Days written notice, any of Borrower’s property,

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including its books of account, other books and records, and any facilities or
other business assets, and to make extra copies therefrom and photocopies and
photographs thereof, and to write down and record any information such
representatives obtain, and Borrower shall permit Lender or its representatives
to investigate and verify the accuracy of the information furnished to Lender in
connection with the Loan Documents and to discuss all such matters with its
officers, employees and representatives.
     (ii) Lender agrees to maintain the confidentiality of the information
received from Borrower relating to Borrower and its business which is clearly
identified at the time of delivery as confidential (“Confidential Information”).
Information is not confidential if it is available to Lender on a
non-confidential basis prior to disclosure by Borrower.
     (iii) Confidential Information may be disclosed by Lender (or by Lender’s
representatives, including independent accountants, agents, attorneys,
appraisers and any other Persons) to its (A) Affiliates and its Affiliates’
respective partners, directors, officers, employees, agents, advisors and
representatives, (B) to the extent required by applicable laws or regulations or
by any subpoena or similar legal process, and (C) in connection with the
exercise of any remedies hereunder or under any other Loan Document or any
action or proceeding relating to this Agreement or any other Loan Document or
the enforcement of rights hereunder or thereunder.
     (iv) For purposes of this Section, any Person required to maintain the
confidentiality of the Confidential Information as provided in this Section
shall be considered to have complied with its obligation to do so if such Person
has exercised the same degree of care to maintain the confidentiality of such
Information as such Person would accord to its own confidential information.
     (e) Reserve Reports. On or before March 31 of each year (but effective as
of the preceding December 31) and on or before September 30, of each year (but
effective as of the preceding July 31), commencing on March 31, 2008 Borrower,
at its own expense, shall cause the preparation and delivery to Lender of
petroleum engineering reports in a form reasonably satisfactory to Lender
(collectively, the “Reserve Report”). Lender may in its sole discretion also
request at least one additional Reserve Report during the course of each
calendar year, which shall update the last Reserve Report previously delivered
by Borrower with an effective date of no earlier than 90 days prior to the date
of delivery of such additional Reserve Report. Each Reserve Report to be
delivered by Borrower hereunder shall be prepared by an Engineer; provided that,
with regard to the effective March 31, 2008 Reserve Report and thereafter,
Lender approves Schlumberger as the Engineer unless for periods following March,
2008, Lender provides Borrower 60-day prior written notice that Lender does not
consider Schlumberger as a satisfactory Engineer. All Reserve Reports required
by this paragraph shall be prepared at Borrower’s sole expense. Each Reserve
Report provided by Borrower shall set forth updated estimates of Proved Reserves
which are further categorized as Proved Developed Producing Reserves, Proved
Developed Non-Producing Reserves, Proved Undeveloped

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Reserves, and shall also set forth projected production profiles and overall
economics of the Properties. Furthermore, the additional parameters and
guidelines set forth on Schedule 7.1(e) shall also be applied in the preparation
of each Reserve Report provided by Borrower. Each Reserve Report provided by
Borrower will be based on the following assumptions:
     (i) Oil and gas pricing used will be determined by Lender in its sole
discretion, based in part on Forward NYMEX Market Prices reduced by (A) the
historical average basis differential between the pricing employed by
independent third-party over-the-counter counterparties compared to the
prevailing wellhead prices at the production location and (B) any other
adjustments as may be necessary including but not limited to gathering,
transportation, and processing fees.
     (ii) Average lease or other applicable operating expenses and production
taxes will be derived by the Engineer(s) who prepare such report from the
Operator’s best estimate and historical operating expenses, subject to Lender’s
approval.
     (f) Notice of Investigations or Proceedings. Borrower shall give Lender
immediate written notice of any proceeding at law or in equity against Borrower
or any of its Affiliates or affecting any of the Collateral, or any
investigation or proceeding before or by any administrative or governmental
agency.
     (g) Notice of Damage to Collateral. Borrower shall give Lender prompt
written notice of any destruction or substantial damage to any of the Collateral
and of the occurrence of any condition or event which has caused, or may cause,
material loss or depreciation in the value of any Collateral.
     (h) Maintenance of Licenses. Borrower shall maintain all material licenses,
permits, charters and registrations which are required for the conduct of their
businesses.
     (i) Maintenance of Rights. Borrower will maintain, preserve, protect and
keep all of its material contractual and property rights, other than in
connection with the Loan Documents and will not waive, amend or release any such
rights without the prior written consent of Lender, which consent will not be
unreasonably withheld.
     (j) Maintenance of Existence and Qualifications. Borrower will maintain and
preserve its Business Entity existence and its material rights and franchises in
full force and effect and will qualify and/or remain qualified to do business as
a foreign Business Entity in all states or jurisdictions where the failure to do
so could reasonably be expected to have a Material Adverse Effect.
     (k) Payment of Trade Debt. Borrower will (i) timely pay all taxes,
assessments and other governmental charges or levies imposed upon it or upon its
income, profits or property, except those being contested in good faith and by
appropriate proceedings diligently conducted, if adequate reserves with respect
thereto are maintained on the books of Borrower in accordance with GAAP;
(ii) within 60 days after

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the same becomes due pay all Indebtedness (other than the Obligations) owed by
it; and (iii) maintain appropriate accruals and reserves for all of the
foregoing Indebtedness in accordance with GAAP.
    (l) Creditors. Promptly upon Lender’s request, Borrower shall provide Lender
with a statement showing the identity of Borrower’s creditors, the amount due to
each and the date each payment is due thereunder. Borrower shall notify Lender
immediately if Borrower fails to timely make any payment to lessors, suppliers,
vendors, owners of royalty interest, tax authorities or other Persons, where
such nonpayment could result in any Lien against any item of Collateral or
otherwise interfere with or jeopardize performance by Borrower of its
obligations under the Loan Documents.
    (m) Interest. Borrower hereby promises to pay interest to Lender on all
Obligations (including Obligations to pay fees or to reimburse or indemnify
Lender) at the Interest Rate with respect to the principal amount of the Loans
as set forth in Section 2.2 and otherwise as stated in Section 7.1(ee) after
such Obligations become due.
    (n) Compliance with Regulations, Orders and Law. Borrower will conduct its
business and affairs in compliance with all material laws, regulations and
orders applicable thereto, including without limitation, Environmental Laws,
ERISA and the regulations of any state or federal agency which has jurisdiction
over the exploration and production activities to be conducted on any Property.
    (o) Insurance. Borrower shall keep or cause to be kept all of the Collateral
that are fixtures or personal property insured for their current value (or such
coverage as is commercially reasonable and customary within the oil and gas
industry) by insurance companies licensed to do business in the states in which
the Properties are located against loss or damage by fire or other risk usually
insured against by owners or users of similar properties in similar businesses
under extended coverage endorsement and against theft, burglary and pilferage,
together with other insurance covering such other hazards as Lender may from
time to time request, in amounts in accordance with industry standards and from
companies satisfactory to Lender. Borrower shall deliver the policy or policies
of such insurance or certificates of insurance to Lender and such policies and
all proceeds thereof shall be security for all Obligations. All such insurance
shall contain endorsements in form satisfactory to Lender showing Lender as a
loss payee or additional party insured as its interest may appear; provided that
Lender shall not be named as an additional insured or loss payee on the policies
described in this Section 7.1(o) to the extent such policies apply to vehicles
or worker’s compensation. The following types of insurance covering the
Collateral and the interest and liabilities incident to the ownership,
possession and operation thereof shall be secured by Borrower or as applicable,
by the Operator of the Properties, on Borrower’s behalf:
     (i) To the extent Borrower has employees, worker’s compensation insurance
and employer’s liability insurance covering the employees of Borrower engaged in
operations contemplated hereunder in compliance with all applicable state and
federal law and endorsed to provide all states coverage and occupational disease
coverage;

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       (ii) Comprehensive general liability insurance with combined single limit
of not less than $1,000,000 per occurrence, and $2,000,000 in the aggregate and
endorsed to provide coverage for explosion, collapse and underground damage
hazards to property of others, contractual liability, products and completed
operations, and for damage to underground resources, and accidental pollution,
bodily injury and property damage coverage in sufficient amounts to meet
umbrella underlying requirements;
       (iii) Comprehensive automobile liability insurance covering all owned,
hired or non-owned vehicles with a combined single limit of not less than
$500,000 per occurrence;
       (iv) Excess umbrella liability insurance with a combined single limit of
not less than $10,000,000 per occurrence and policy aggregate;
       (v) Worker’s compensation insurance covering all persons employed by
Borrower, the Operator or their respective agents or subcontractors of any tier
in connection with any construction affecting the Collateral, including, without
limitation, all agents and employees of Borrower, the Operator and their
respective subcontractors with respect to whom death or bodily injury claims
could be asserted against Borrower;
       (vi) Pollution control insurance not less than $1,000,000 per occurrence
and $2,000,000 in the aggregate; and
      (vii) If requested by Lender, well control insurance (including coverage
for costs of redrilling) in an amount per occurrence satisfactory to Lender, and
builder’s risk insurance.
     (p) Policy Counterparts or Certificates of Insurance. Borrower shall
deliver to Lender valid counterparts of all insurance policies and all
endorsements thereto (or, at its option, valid certificates of such insurance)
which are required hereunder to be obtained and maintained by Borrower or the
Operator.
     (q) Prudent Operations. Borrower shall prudently develop, or use its
commercially reasonable efforts to cause the Properties to be continuously
operated and maintained to produce the output from or allocable to such Property
over the productive life thereof in a good and workmanlike manner consistent
with prudent operator practices.
     (r) Maintenance of Leases. As to Borrower-operated Properties, Borrower
shall use commercially reasonable efforts as a prudent operator (or use its
commercially reasonable efforts as to Non-Operated Properties) to keep and
perform all of the terms, conditions and covenants of the Leases constituting
Properties which are to be kept and performed by the lessee for the benefit of
the Lender and the holder of the Royalty Interests.

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     (s) Weekly Field Activity and Production Reports. Borrower shall provide
Lender, to the extent possible, by telecopy or e-mail, a weekly report on
Tuesday of each week detailing all drilling, completions and workovers in
relation to capital expenditures for the preceding week with respect to the
Properties and all costs and expenses associated with such activities and
(ii) quantities and types of Hydrocarbons produced from or allocable to each of
the Properties; all of the foregoing to be in form and substance satisfactory to
Lender.
     (t) Monthly Review Conference. At Lender’s request, within fourteen
(14) days after Borrower has submitted to Lender each monthly Property Operating
Statement pursuant to Section 2.6, representatives of Lender and Borrower shall
hold a teleconference at a mutually acceptable time to conduct a monthly review
conference that will focus on, among other things, the data contained in the
most recently submitted Property Operating Statement and such other operational
and financial data and information as Lender may reasonably request.
     (u) Operating Reports. Concurrently with the delivery of the financial
statements delivered in accordance with Section 7.1(c)(i), Borrower shall
provide Lender with a rolling revenue, lease and other operating expense and
capital expenditure forecast by month covering Borrower’s interest in the
Properties for the succeeding 12-month period (“Operating Report”). Such
Operating Reports shall include a brief discussion by Borrower of operating and
financial variances from the prior Operating Report delivered to Lender.
     (v) AFEs. Borrower shall provide Lender with all AFEs, each setting forth
an estimate of work to be done, each of which shall be supported by appropriate
invoices, bids, estimates, contracts or other support, prior to commencing the
activity contemplated by such AFE.
     (w) Hydrocarbon Production Swap Agreements. Borrower will from time to
time, upon three (3) Business Days’ notice by Lender, enter into one or more
Hydrocarbon price swaps pursuant to a Permitted Swap Agreement in form and
substance reasonably satisfactory to Lender (or additional confirmations under
Existing Permitted Swap Agreements), such that volumes equal approximately
seventy five percent (75%) of Borrower’s interest share of the Proved Developed
Producing Reserves scheduled to be produced during the term of this Agreement
(based upon the most recent Reserve Report), but not necessarily beyond the Loan
Termination Date are dedicated to the Permitted Swap Agreements or such other
price risk management program as approved by Lender; provided that, if projected
Net Revenue plus any other applicable revenue applied to Debt Service, is
insufficient to fully amortize the Loans by their stated maturity, Lender may
require that Borrower enter into one or more such swaps for a term or terms that
extend beyond the Loan Termination Date. Borrower and Lender shall make
commercially reasonable efforts to agree upon a swap strategy that will most
accurately reflect the make-up and pricing of the Hydrocarbons produced and sold
by Borrower, but if the parties are unable to agree on the swap strategy,
Borrower shall not be released from its obligation to implement the Permitted
Swap Agreement(s) required by this Section 7.1(w).

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     (x) Post-Closing Title Opinions. Borrower will deliver to Lender, within
sixty (60) days following Closing, Title Opinions that are satisfactory to
Lender covering Hydrocarbon Interests comprising 50% of the PW10 of Borrower’s
Proved Developed Producing Reserves in the Properties and 50% of the PW10 of
Borrower’s other Proved Reserves in the Properties and, within thirty (30) days
following such 60-day period, Title Opinions that are satisfied to Lender
covering Hydrocarbon Interests comprising an additional 30% of the PW10 of
Borrower’s Proved Developed Producing Reserves in the Properties and an
additional 30% of the PW10 of Borrower’s other Proved Reserves in the Properties
(for a combined total of 80% in each case), at each such time showing Defensible
Title to the Properties in Borrower subject only to: (i) a first priority lien
created by the Mortgage in favor of Lender, (ii) the Royalty Interests and
(iii) the Permitted Encumbrances, and otherwise satisfactory in form and
substance to Lender.
     (y) Fees and Expenses Borrower will pay, on or before the Closing Date, all
reasonable third-party and out-of-pocket costs, fees and expenses incurred by
Lender in connection with this Agreement, including, without limitation, all
title, due diligence, environmental, engineering, technical, travel, legal and
related expenses incurred by Lender in connection with this Agreement and the
Loan Documents and the transactions contemplated thereunder (to be financed by
Lender as a portion of the Initial Loan). After the Closing Date, Borrower will,
from time to time, pay or reimburse Lender for all expenses incurred in
connection with the administration, amendment or enforcement of this Agreement,
including, without limitation, any subsequent amendment, mortgage, extension,
release or renewal of any Loan Document or the legal expenses attributable to
the enforcement of the same, all continuing or additional title, due diligence,
environmental, engineering, and technical expenses, all expenses incurred in
connection with division orders, any travel expenses, and all legal and related
expenses incurred by Lender in connection therewith.
     (z) Environmental Compliance. Within sixty (60) days of Closing, Borrower
shall remedy or cause to be remedied all matters set forth in any Environmental
Report and any environmental compliance issues listed on Schedule 4.1(q)
(including the implementation of a spill prevention control and countermeasure
plan at the Delta compression facility) so as to be in compliance with all
applicable Environmental Laws.
     (aa) Facility Fee. Borrower agrees to pay to Lender a Facility Fee in
consideration of Lender’s commitment to make the Loans. Each time Lender
advances a Loan, a Loan in the amount of an additional Facility Fee will be
earned and Borrower shall be deemed to have requested that Lender advance to
Borrower such additional Facility Fee on such date, with such additional
Facility Fee having been contemporaneously paid by Borrower to Lender. Any
portion of the Facility Fee that is determined to be interest in excess of the
maximum non-usurious interest that Lender is permitted under applicable law to
contract for, take, charge, or receive from Borrower shall be automatically
credited to principal amount owing under the Note, effective as of the date such
portion is received by Lender.
     (bb) D&A Operations. Borrower shall submit a Request for Commitment with
the applicable AFE(s) and other supporting materials to Lender for the proposed
D&A

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Operation(s) for which it seeks funding hereunder. With respect to all D&A
Operations that are approved by Lender as set forth in Section 2.1, Borrower
shall conduct all such D&A Operations substantially in accordance with and
within the cost and time parameters specified in the Request for Commitment
specific to those D&A Operations; provided that, Lender is not obligated to
commit funds for D&A Operations except as specifically described in Section 2.1
for any specific D&A Operations, including any associated cost overruns; and
provided further that if Borrower is unable to conduct all such D&A Operations
within the amounts funded as the D&A Loans plus the variance allowance, both as
described in the specified Request for Commitment, Borrower shall use its own
capital (or any unused surplus of any prior D&A Loan to the extent permitted
hereunder) to conduct and complete all such D&A Operations. Borrower’s intent,
willingness and ability to conduct each of the D&A Operations and the actual
implementation of such D&A Operations is a material inducement to Lender’s entry
into this Agreement, in the absence of which Lender would not have done so. Time
is of the essence in the proposal and conduct by Borrower of each of the D&A
Operations approved by Lender.
     (cc) Protection Against Drainage. Until the Obligations have been fully and
finally paid and performed, (i) to the extent that Properties are operated by
Borrower, Borrower shall act as a prudent operator in an effort to identify and
prevent the occurrence of any drainage of Hydrocarbons from the Properties and
(ii) to the extent that Properties are not operated by Borrower, Borrower shall,
or use commercially reasonable efforts to cause the Operator to, utilize its
property and contractual rights as a prudent owner in an effort to identify and
prevent the occurrence of any drainage of Hydrocarbons from the Properties,
other than in the ordinary course of operations in accordance with industry
practice and procedure.
     (dd) Expenditures Related to Initial Loans. On or before ten (10) days
following Lender’s issuance of advances under the Initial Loans, Borrower will
deliver to Lender a report which provides an itemized and detailed description
of the expenditures paid to be paid and/or for which Borrower was reimbursed
with the Initial Loan proceeds, together with all relevant documentation
evidencing such expenditures.
     (ee) Interest on Lender’s Third Party Costs, Expenses and Fees. All
third-party costs, fees and expenses incurred by Lender for which Borrower is
obligated to pay or reimburse Lender pursuant to the provisions of this
Agreement which are not paid on or before the Closing Date in accordance with
Section 7.1(y) shall be payable within fifteen (15) days after Borrower’s
receipt of an invoice therefor from either Lender or its third-party consultants
or vendors, and if not paid within fifteen (15) days after Borrower’s receipt of
such invoice, Borrower shall pay interest, after as well as before judgment, at
the Default Rate from the date payable until paid on all such amounts.
     (ff) Administration Fee. At Closing, and on the first day of each Fiscal
Quarter, Borrower shall pay to Lender an administration fee in the amount of
$5,000 (“Administration Fee”). The initial Administration Fee shall be deemed
advanced by Lender to Borrower on the Closing Date as part of the Initial Loan
and paid by Borrower to Lender contemporaneously therewith, and each subsequent
Administration Fee shall

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be paid by Borrower to Lender pursuant to Section 2.6. Each Administrative Fee
shall be used by Lender for incidental administrative matters on behalf of
Borrower and any such fees shall not be reimbursable to Borrower. If such fees
exceed $5,000 during any Fiscal Quarter, such expenses shall be payable by
Borrower to Lender pursuant to Section 7.1(y).
     (gg) Further Assurances. Borrower agrees, upon request of Lender and at
Borrower’s expense, to furnish to Lender such information, to execute and
deliver to Lender such documents, and to do such other acts and things, all as
Lender may reasonably request.
     Section 7.2 Negative Covenants. Borrower warrants, covenants and agrees
that until the full and final repayment and performance of the Obligations
(other than Obligations under the Royalty Interest Conveyance, and indemnity
obligations and similar obligations that survive the termination of the Loan
Documents) and the termination of each of the Loan Documents (other than the
Royalty Interest Conveyance):
     (a) Limitation on Sales of Collateral. Borrower will not sell, transfer,
lease, exchange, alienate or otherwise dispose of any Collateral or any interest
therein except for: (i) sales of Hydrocarbon production in the ordinary course
of business, (ii) dispositions expressly permitted by other provisions of this
Agreement, including under Section 6.5, and (iii) dispositions to which Lender
has granted its express written consent.
     (b) Limitation on Distributions. Borrower shall not, either directly or
indirectly, make any distribution, pay any compensation, or make any advances to
any of its shareholders; provided that nothing in this subpart (b) shall prevent
or prohibit Borrower from making payments (i) permitted by Section 7.2(e) to
officers, directors and employees who are also shareholders of Borrower, or
(ii) professional fees to Borrower’s legal counsel.
     (c) Limitation on Credit Extensions. Borrower will not extend credit, make
advances or make loans to any Person other than in the ordinary course of
business, unless approved by Lender in writing.
     (d) Certain Contracts; Amendments; ERISA Plans. Without Lender’s prior
written approval, Borrower will not amend or permit any amendment to any
contract or lease which releases, qualifies, limits, makes contingent or
otherwise detrimentally affects the rights and benefits of Lender under or
acquired pursuant to any Loan Documents. Borrower will not, and will not permit
any ERISA Affiliate to, incur any fixed or contingent obligation to contribute
to any ERISA Plan. Without Lender’s approval, no material modification of any
Benefit Plan will be made and no new Benefit Plan will be established, except in
the ordinary course of business. Without Lender’s prior written approval,
Borrower will not (i) amend or modify any term of, or cancel or terminate, any
Material Contract in any manner that would have a material adverse effect on
Lender or (ii) enter into any Swap Agreement, except for Permitted Swap
Agreements.

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     (e) Compensation. Borrower shall not, directly or indirectly, enter into
any employment agreement or other arrangement with or for the benefit of an
officer, director or employee of Borrower other than reasonable compensation for
services as an officer, director, employee or third-party provider of services.
     (f) Debt. Except for Indebtedness arising in connection with Permitted
Encumbrances or as otherwise expressly provided in Schedule 4.1(h) or this
Section 7.2(f) (and subject to any Subordination Agreement), Borrower shall not
(i) create, incur, assume or suffer to exist any Indebtedness, except
(A) Obligations to Lender hereunder, (B) Indebtedness incurred under any
Permitted Swap Agreement, and (C) trade payables incurred in the ordinary course
of Borrower’s business, or (ii) sell, discount or factor its accounts,
instruments, intangibles, leases or chattel paper; provided, however, Borrower
may incur Indebtedness not to exceed $25,000 per transaction and an aggregate
amount not to exceed $75,000 at any time outstanding with regard to direct costs
and expenses incurred in the operation of the Properties.
     (g) Guarantees. Except as expressly provided herein, Borrower shall not
assume, guaranty, or endorse or otherwise become directly or contingently liable
in connection with any other liability of any other Person except for the
indemnification contained herein and customary indemnification to directors,
managers, officers and employees and normal and customary provisions in
contracts entered into in the ordinary course of business in connection with
operating the Oil and Gas Properties.
     (h) Mergers and Acquisitions. Borrower shall not (i) merge into or
consolidate with another Person or sell, lease or otherwise dispose of all or
substantially all of its assets, or (ii) acquire or commit or agree to acquire
any of the stock, securities or material assets of any other Person other than
(A) as disclosed in writing to, and approved by, Lender, not unreasonably
withheld, in connection with Borrower’s acquisition of any of the Properties,
(B) any assets directly for use on the Properties in the ordinary course of
business, or (C) those acquisitions permitted as D&A Operations.
     (i) Cancellation of Claims. Borrower shall not cancel any claim or
Indebtedness owed to Borrower in excess of $15,000 in the aggregate during any
Fiscal Year during the term of this Agreement, except for reasonable
consideration and in the ordinary course of its business.
     (j) Defaults. Borrower shall not default under any material lease,
mortgage, deed of trust or lien on real estate owned or leased by Borrower
including any default that would result in a Default or an Event of Default.
     (k) Security Interests and Liens. Borrower shall not permit any Lien to
exist or consent to the filing of any instrument creating any Lien on any of the
Collateral other than the Liens created by the Loan Documents granted herein and
Permitted Encumbrances.
     (l) Creation of Subsidiary. Borrower shall not (i) create any direct or
indirect subsidiary or divest itself of any material assets by transferring them
to any future

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subsidiary or by entering into a partnership, joint venture or similar
arrangement, (ii) make any material change in its capital structures, or
(iii) enter into any management contract permitting a third party any management
rights with respect to Borrower’s business.
     (m) Certain Changes. Unless Borrower gives Lender ten (10) Business Days
prior written notice, Borrower shall not transfer its principal office or its
registered offices from its current location or change its name.
     (n) Loan Documents. Borrower shall not alter, amend or cause the alteration
or amendment of any of the Loan Documents without the prior written consent of
Lender.
     (o) Amendments to Formation Documents and Material Contracts. Borrower
shall not adopt any amendment, modification or waiver of any provision of its
(i) Governing Documents or (ii) Material Contracts that could reasonably be
expected to have a material adverse effect on Lender or on Borrower’s ability to
perform its obligations hereunder.
     (p) Investments. Without Lender’s prior written consent, Borrower will not
make, or suffer to exist, any Investment except (i) Investments in overnight
funds, certificates of deposit and/or other obligations of (A) national banks,
(B) any trust company having capital, surplus and undivided profits of at least
$100,000,000, (C) issuers of commercial paper rated not less than A-1 by
Standard & Poors or P-1 by Moody’s Investors Service at the time of purchase by
Borrower and/or (D) obligations of the United States government or any agency
thereof, and (ii) the current, but not additional, Investments in Subsidiaries
in existence as of the date hereof.
     (q) Change of Operator. Borrower shall not resign as Operator of the
Properties and shall not take any action to appoint, replace or remove any
Operator of any of the Non-Operated Properties without Lender’s prior written
consent or instructions.
     (r) Affiliate Transactions. Borrower shall not enter into any transactions
with any Affiliate of Borrower, except with Lender’s prior written approval and
then only to the extent the terms of any such transaction are fair and
reasonable (at least as favorable as would be obtainable by Borrower at the time
in a comparable arm’s length transaction with a Person other than an Affiliate).
     (s) Ratios. Borrower shall not permit at any time (i) its current
liabilities (excluding from the calculation of current liabilities the Loans and
any required mark-to-market of unliquidated commodity-hedge contracts required
under FASB 133) to exceed its current assets (excluding from the calculation of
current assets any required mark-to-market of unliquidated commodity-hedge
contracts required under FASB 133), calculated in accordance with GAAP, and
(ii) its Loan to Value Ratio to be greater than (A) 1.0 to 1.0 for the period
commencing on September 30, 2008 (based on the Reserve Report dated effective
July 31, 2008) through and including, March 31, 2010 (based on the Reserve
Report dated effective December 31, 2009), or (B) 0.7 to 1.0 at any time
thereafter.

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     (t) Swap Agreements. Borrower shall not enter into any Swap Agreement other
than (i) with an Approved Counterparty, and (ii) with the consent of Lender.
ARTICLE VIII
FURTHER RIGHTS OF LENDER
     Section 8.1 Maintenance of Security Interests. Borrower authorizes Lender
to execute alone any financing statement or other documents or instruments that
Lender may reasonably require under Section 6.2 to perfect, protect or establish
any Lien hereunder or under any Security Documents and further authorizes Lender
to sign Borrower’s name on the same. Borrower hereby authorizes Lender, during
the continuance of any Event of Default, to appoint such Person or Persons as
Lender may designate as its agent and attorney-in-fact to endorse the name of
Borrower on any checks, notes, drafts or other forms of payment or security that
may come into the possession of either Lender or any Affiliate of Lender, to
sign Borrower’s name on invoices or bills of lading, drafts against customers,
notices of assignment, letters in lieu, verifications and schedules and,
generally, to do all things necessary to carry out this Agreement and the
Security Documents. The powers granted herein, being coupled with an interest,
are irrevocable during the term hereof or so long as any obligations are due and
owing to Lender. Neither Lender nor the agent and attorney-in-fact shall be
liable for any act or omission, error in judgment or mistake of law so long as
the same is not malicious or grossly negligent. Upon payment and performance of
all Obligations of Borrower to Lender (other than Obligations under the Royalty
Interest Conveyance and indemnity obligations and similar obligations that
survive the termination of the Loan Documents), such power of attorney shall
terminate without any required action by Lender or Borrower.
     Section 8.2 Performance of Obligations. In the event that Borrower fails to
purchase or maintain insurance in accordance with the requirements of this
Agreement, or to pay any tax, assessment, government charge or levy, except as
the same may be otherwise permitted hereunder, or in the event that any Lien
prohibited hereby shall not be paid in full or discharged, or in the event that
Borrower shall fail to perform or comply with any other covenant, promise or
Obligation to Lender hereunder or under any Loan Document, Lender may, but shall
not be required to, perform, pay, satisfy, discharge or bond the same for the
account of Borrower, and all funds so paid by Lender, including, without
limitation, reasonable attorneys’ fees and disbursements, shall be treated as an
additional Obligation of Borrower to Lender hereunder and under the Loan
Documents.
     Section 8.3 Access to Collateral. In addition to Lender’s rights under
Section 7.1(d), upon the occurrence and during the continuance of an Event of
Default, Lender may (a) enter Borrower’s premises during normal standard
business hours; and (b) until it completes the enforcement of its rights in the
Equipment or other Collateral subject to its Lien and the sale or other
disposition of any property subject thereto, take possession of such premises
without charge, rent or payment therefor, or place custodians in control
thereof, remain on such premises and use the same and any of Borrower’s
Equipment and other Collateral for the purpose of completing any work in
process, preparing any Collateral for disposing of or collecting any Collateral.
     Section 8.4 Royalty Interests.

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     (a) At Closing, Borrower shall execute and deliver to Lender a Royalty
Interest Conveyance granting to Lender:
     (i) an overriding royalty interest in and to the Leasehold Interests
described on Exhibit A equal to one percent (1.0%) of 8/8ths, proportionately
reduced to Borrower’s Working Interest;
     (ii) a royalty interest in and to the Fee Interests more particularly
described on Exhibit A equal to one percent (1.0%) of 8/8ths of such interests;
and
     (iii) a royalty interest or overriding royalty interest, as applicable, in
the Wells described on Exhibit A (and related Units) equal to an additional four
percent (4.0%) of 8/8ths of such interests (for Leasehold Interests,
proportionately reduced to Borrower’s Working Interest).
     (b) After the Closing Date and thereafter so long as the Obligations remain
outstanding (other than the obligations under any Royalty Interest Conveyance),
Borrower shall grant to Lender a royalty interest or overriding royalty
interest, as applicable, in and to each Well (and related Unit) situated on (or
pooled or unitized with) any Leasehold Interests or Fee Interests whether or not
described on Exhibit A, which Well (and related Unit) is acquired, drilled, or
worked-over (or otherwise subject to a D&A Operation) after the Closing Date,
equal to four percent (4.0%) of 8/8ths of such interests (for Leasehold
Interests, proportionately reduced to Borrower’s Working Interest); provided
that, Borrower is not required to make such grant if (i) Borrower has submitted
to Lender a Request for Commitment in respect of such Well (or related Unit),
(ii) Lender has declined such request, and (iii) such Well is drilled and
completed within 6 months after such request is declined. If Lender is entitled
to receive a royalty interest or an overriding royalty interest in any Well
under this clause (b), and such Well is situated on a Leasehold Interest or a
Fee Interest in which Lender has not been granted a royalty interest or an
overriding interest under either clauses (a)(i), (a)(ii), or (c), as applicable,
then Borrower shall grant to Lender the royalty interest or overriding royalty
interest required under clause (c).
     (c) After the Initial Termination Date and thereafter so long as the
Obligations remain outstanding (other than the obligations under any Royalty
Interest Conveyance), Borrower shall grant to Lender a royalty interest in and
to Fee Interests and an overriding royalty interest in and to Leasehold
Interests covering such interests, in each case, acquired after the Closing Date
equal to one percent (1.0%) of 8/8ths (for Leasehold Interests, proportionately
reduced to Borrower’s Working Interest).

      Section 8.5 Set-Off Rights. Upon the occurrence and during the continuance
of an Event of Default, Lender shall have the right to set-off and apply against
the Obligations in such manner as Lender may determine, any and all deposits
(general or special, time or demand, provisional or final) or other sums at any
time credited by or owing from Lender or any depositary to Borrower whether or
not the Obligations are then due, except for any amounts owing to third-party
Working Interest and royalty interest owners of which Lender shall have

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been notified. As further security for the Obligations, Borrower hereby grants
to Lender a security interest in all money, instruments, and other property of
Borrower now or hereafter held by Lender, including, without limitation,
property held in safekeeping. In addition to Lender’s right of set-off and as
further security for the Obligations, Borrower hereby grants to Lender a
security interest and lien in all deposits (general or special, time or demand,
provisional or final) and other accounts of Borrower now or hereafter on deposit
with or held by Lender or any depositary and all other sums at any time credited
by or owing from Lender or any depositary to Borrower. The rights and remedies
of Lender hereunder are in addition to other rights and remedies (including,
without limitation, other rights of set-off) which Lender may have.

ARTICLE IX
CLOSING; CONDITIONS TO CLOSING
     Section 9.1 Closing. Subject to the conditions set forth in this Agreement,
the closing shall occur at a mutually agreeable time on or before July 27, 2007
(the “Closing”). The date the Closing actually occurs is hereby called the
“Closing Date.” The Closing shall be held at the offices of Lender’s counsel in
Houston, Texas, or at such other place as Borrower and Lender may agree in
writing.
     Section 9.2 Conditions to Closing. As conditions precedent to the making of
the Initial Loan hereunder and to the making of any other Loans, Lender shall
have obtained approval of its management and its lenders, and Borrower shall
deliver to Lender the following items duly executed (where required) and in form
and substance satisfactory to Lender and its counsel:
     (a) the Note and multiple counterparts of this Agreement;
     (b) the Royalty Interest Conveyance(s), Mortgage, Security Agreement,
Guaranty, Letters in Lieu, Royalty Interest Letters in Lieu and the other Loan
Documents and in as many counterparts as Lender may require;
     (c) a certificate of the secretary or assistant secretary of Borrower dated
the Closing Date, certifying (i) the incumbency of its officers executing this
Agreement, the Loan Documents and any other documents required hereby,
(ii) resolutions adopted by the Governing Body of Borrower authorizing
Borrower’s execution and delivery of this Agreement, the Note, the Security
Documents, the other Loan Documents and all other documents and instruments
contemplated by this Agreement to which they are parties;
     (d) a certificate of an officer of Borrower dated the Closing Date,
certifying the truth and accuracy of the representations and warranties of
Borrower set forth in this Agreement and the other Loan Documents and Borrower’s
performance and compliance with all agreements and covenants required by this
Agreement to be performed or complied with prior to the making of the Loans;
     (e) a certificate of an officer of Borrower dated the Closing Date,
certifying the truth and accuracy of the following lists to be provided by
Borrower: (i) a list of all mechanics’ and materialmen’s liens (and other
similar liens), and liens under operating and similar agreements, to the extent
the same relate to expenses incurred in the ordinary

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course of business; (ii) a list of statutory liens for taxes which are not yet
delinquent; and (iii) a list of all outstanding Indebtedness of Borrower and
other outstanding Indebtedness of Borrower individually in excess of $10,000;
     (f) the Governing Documents of Borrower, all certified by an officer of
Borrower;
     (g) certificates, as of the most recent dates practicable, of the Secretary
of State of Formation attesting to Borrower’s existence, and of each state in
which Borrower is qualified to do business as a Business Entity specified in the
preamble hereof, attesting to such qualification;
     (h) certificates, as of the most recent dates practicable, of the Governing
Authority in the State of Formation attesting to Borrower’s good standing;
     (i) the written opinions of Borrower’s counsel and special local counsel,
dated the Closing Date and addressed to Lender;
     (j) evidence that Borrower has obtained or caused to be obtained insurance
in accordance with Sections 7.1(o) and (p);
     (k) title materials satisfactory to Lender establishing that Borrower owns
or has acquired Defensible Title to the Properties, subject only to Permitted
Encumbrances and that neither the Properties nor Borrower is subject to ongoing
or threatened litigation;
     (l) the Pro Forma Financial Statements of Borrower as of the Closing Date;
     (m) the results of a Uniform Commercial Code search showing all financing
statements and other documents or instruments on file against Borrower from the
Secretary of State of Formation;
     (n) with regard to any D&A Loans, evidence satisfactory to Lender that all
conditions and requirements set forth in Section 2.1 have been satisfied;
     (o) a Permitted Swap Agreement under which volumes equal approximately
seventy five percent (75%) of Borrower’s interest share of the Proved Developed
Producing Reserves scheduled to be produced during the term of the Permitted
Swap Agreement (based upon the most recent Reserve Report),with a tenor of at
least 2 years, and a price not less than $7.00 per mmbtu; and
     (p) such other documents and instruments as Lender may reasonably request.
     Section 9.3 Conditions Precedent to Agreement. Lender shall not make any
Loans available unless the following conditions precedent have been satisfied.
     (a) There is no continuing Event of Default, Default or Tax Claim;

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     (b) Borrower’s representations and warranties made in any Loan Document
shall be true and correct as if made on the date of such Loan (except to the
extent that (i) the facts upon which such representation are based have been
changed by the extension of credit hereunder or by subsequent events and
circumstances not constituting violations of the other provisions of this
Agreement, or (ii) if any such representation or warranty is expressly stated to
have been made as of a specific date, as of such specific date);
     (c) Borrower shall not be in default under the terms of the Loan Documents
which are required to be performed or complied with by it on or prior to the
date of such Loans;
     (d) With respect to all Loans, no law, regulation, order, judgment or
decree of any governmental authority is in effect or pending which shall enjoin,
prohibit or restrain such Loan or impose, or result in the imposition of, any
adverse condition upon Lender;
     (e) With respect to all Loans, Lender shall have received all documents and
instruments which Lender has then reasonably requested as to, (i) the accuracy
and validity of or compliance with all representations, warranties and covenants
made by any Person in any Loan Document, (ii) the satisfaction of all conditions
contained herein or therein, and (iii) all other matters pertaining hereto and
thereto. All such additional documents and instruments shall be satisfactory to
Lender in form, substance, and date;
     (f) Lender shall have received satisfactory due diligence analysis
including, but not limited to, financial and operational data, title and
environmental review, data regarding litigation matters, all such data to be
provided by Borrower;
     (g) Lender shall have received satisfactory information regarding existing
operating agreements and all existing gas sales and oil sales agreements which
will include, for gas sales on a well-by-well basis, where applicable,
transportation costs, gathering costs, processing costs, gas stream heating
content, then-current market prices for gas of similar quality and copies of
existing sales agreements and for oil sales, individual well specific gravity of
produced oil, transportation costs, sulfur content, purchase bonuses,
then-current market prices for oil of similar quality, and copies of existing
sales agreements;
     (h) Lender shall have received a fully executed and notarized Royalty
Interest Conveyance for each Royalty Interest Lender is entitled to receive and
Borrower is obligated to grant, under Section 8.4; and
     (i) No event, which has had (or could reasonably be expected to have) a
Material Adverse Effect, shall have occurred.

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ARTICLE X
EVENTS OF DEFAULT AND REMEDIES
     Section 10.1 Events of Default. Each of the following events constitutes an
Event of Default under this Agreement:
     (a) Borrower fails to pay any Obligation for principal or interest owing
under the Note when the same is due and payable, whether at a date for the
payment of an installment or at a date fixed for prepayment thereof;
     (b) After the Initial Termination Date, Projected Net Revenue attributable
to Proved Reserves based on any of the Reserve Reports to be delivered to Lender
after the Closing Date (after being adjusted to incorporate Lender’s
then-current assumptions with respect to pricing (including forward price
assumptions of Forward NYMEX Market Prices), Expenses, discount rates and hedges
under Permitted Swap Agreements) is insufficient to fully amortize the Loans by
the last day of the 48 month period after the effective date of any such Reserve
Report and Borrowers are unable to demonstrate to Lender’s reasonable
satisfaction that Borrowers are able to fully satisfy the Obligations through a
sale of the Borrowers’ assets or all of the Equity Interest in the Borrowers;
     (c) Any Loan Document at any time ceases to be valid, binding and
enforceable against Borrower for any reason other than its release or
subordination made with the consent of Lender; the Guaranty at any time ceases
to be valid, binding and enforceable against Guarantor for any reason or
Guarantor defaults under the Guaranty; or Borrower, Guarantor or any other
obligor asserts that any Loan Document to which it is a party is not valid,
binding and enforceable against any such party;
     (d) Borrower fails to (i) duly observe, perform or comply with any covenant
set forth in Section 7.2 or (ii) enter into the Permitted Swap Agreement as set
forth in Section 2.7 and said failure to enter into the Permitted Swap Agreement
continues for a period of three (3) Business Days after receipt of notice
thereof by Borrower;
     (e) Any “Event of Default” (as defined in any Security Document) (other
than an event which is referred to in subsections (a) through (c) above) occurs
under the Security Document, and the same is not remedied within the applicable
period of grace (if any) provided in such Security Document;
     (f) Borrower fails (other than as referred to in subsections (a) through
(d) above) to duly observe, perform or comply with any covenant, agreement,
condition or provision of any Loan Document, and such failure is not remedied
within thirty (30) days of the time at which Borrower receives notice from
Lender;
     (g) Any representation or warranty previously, presently or hereafter made
in writing by or on behalf of Borrower or Guarantor in connection with any Loan
Document shall prove to have been false or incorrect in any material respect on
any date on or as of which made;

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     (h) Other than with respect to a Permitted Encumbrance, any Lien for
$100,000 or more, other than the Liens held by Lender against the Property or
any portion thereof, or any Lien resulting from a Tax Claim or otherwise, for
$100,000 or more is asserted against Borrower and such assertion is not
withdrawn, formally disputed in good faith, or otherwise disposed of within
thirty days (30) thereafter;
     (i) Subject to Permitted Encumbrances, Lender shall at any time not have a
perfected first priority Lien on all or any part of the Collateral;
     (j) The Working Interest and/or Net Revenue Interest on the Properties is
decreased from those set forth in Exhibit A without the prior written consent of
Lender;
     (k) Borrower:
     (i) has entered against it a judgment, decree or order for relief by a
court of competent jurisdiction in an involuntary proceeding commenced under any
applicable bankruptcy, insolvency or other similar law of any jurisdiction now
or hereafter in effect, including the federal Bankruptcy Code, as from time to
time amended, or has any such proceeding commenced against it and any such
judgment, decree, order or proceeding shall not have been dismissed within sixty
(60) days; or
     (ii) commences a voluntary case under any applicable bankruptcy, insolvency
or similar law now or hereafter in effect, including the federal Bankruptcy
Code, as from time to time amended; or applies for or consents to the entry of
an order for relief in an involuntary case under any such law; or makes a
general assignment for the benefit of creditors; or fails generally to pay (or
admits in writing its inability to pay) Indebtedness as such Indebtedness
becomes due; or takes action to authorize any of the foregoing; or
     (iii) suffers the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
all or a substantial part of its assets or of any part of the Collateral in a
proceeding brought against or initiated by it, or such appointment or taking
possession is at any time consented to, requested by or acquiesced to by it and
any such appointment shall not have been dismissed within sixty (60) days; or
     (iv) suffers the entry against it of a final judgment for the payment of
money in excess of $100,000, unless the same is discharged within sixty
(60) days after the date of entry thereof or an appeal or appropriate proceeding
for review thereof is taken within such period and a stay of execution pending
such appeal is obtained; or
     (v) suffers a writ or warrant of attachment or any similar process to be
issued by any court against all or any substantial part of its assets or any
part of the Collateral, and such writ or warrant of attachment or any similar
process is not stayed or released within sixty (60) days after the entry or levy
thereof or after any stay is vacated or set aside; or

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     (vi) fails to pay any Indebtedness in excess of $100,000 (other than the
Obligations) or any interest or premium thereon, when due (whether at scheduled
maturity or by acceleration, demand or otherwise) and such failure shall
continue after the applicable grace period, if any, specified in the agreement
or instrument relating to any such Indebtedness or any other event shall occur
and shall continue after the applicable grace period, if any, specified in such
agreement or instrument, if the effect of such default or event is to accelerate
or to permit the acceleration of, the maturity of such Indebtedness (in excess
of $100,000), or if, as the result of such a default, any such Indebtedness (in
excess of $100,000) shall be declared to be due and payable, or is required to
be prepaid, prior to the stated maturity thereof; or
     (vii) fails to perform its obligations under the Royalty Interest
Conveyance, or any Permitted Swap Agreement and such failure continues beyond
any applicable grace period set forth therein; or
     (l) a Change of Control occurs with regard to Borrower; or James G. Azlein
or James E. Craddock ceases to be materially involved in the management of
Borrower and another Person acceptable to Lender does not replace such Person
within ninety (90) days.
     Section 10.2 Acceleration.
     (a) Automatic Acceleration. Upon the occurrence of an Event of Default
described in Section 10.1(k)(i), (k)(ii) or (k)(iii), all of the Obligations
shall thereupon be immediately due and payable, without demand, presentment,
notice of demand or of dishonor and nonpayment, protest, notice of protest,
notice of intention to accelerate, declaration or notice of acceleration, or any
other notice or declaration of any kind, all of which are hereby expressly
waived by Borrower and each obligor, if any, that at any time ratifies or
approves this Agreement, as a guarantor or otherwise. After any acceleration
under this subsection, any obligation of Lender to make any further Loans or
advances of any kind under any Loan Document shall be permanently terminated.
     (b) Other Acceleration. Upon the occurrence and during the continuance of
any Event of Default not described in the preceding Section 10.2(a), Lender may
at any time and from time to time and without notice to Borrower, declare any or
all of the Obligations immediately due and payable, and all such Obligations
shall thereupon be immediately due and payable, without demand, presentment,
notice of demand or of dishonor and nonpayment, protest, notice of protest,
notice of intention to accelerate, declaration or notice of acceleration, or any
other notice or declaration of any kind, all of which are hereby expressly
waived by Borrower.
     Section 10.3 Remedies. If any Event of Default shall occur and be
continuing, Lender’s obligation to make any Loan(s) shall be suspended, and
Lender may protect and enforce its rights under the Loan Documents by any
appropriate proceedings, including proceedings for specific performance of any
covenant or agreement contained in any Loan Document, and Lender may enforce the
payment of any Obligations due or enforce any other

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legal or equitable right. All rights, remedies and powers conferred upon Lender
under the Loan Documents shall be deemed cumulative and not exclusive of any
other rights, remedies or powers available under the Loan Documents or at law or
in equity. If any Default shall occur and be continuing, Lender’s obligation to
make any Loans shall be suspended, so long as any such Default or resulting
Event of Default is continuing.
     Section 10.4 Indemnity. BORROWER AGREES TO INDEMNIFY LENDER, UPON DEMAND,
FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, CLAIMS, LOSSES, DAMAGES,
PENALTIES, FINES, ACTIONS, JUDGMENTS, SUITS, SETTLEMENTS, COSTS, EXPENSES OR
DISBURSEMENTS (INCLUDING REASONABLE FEES OF ATTORNEYS, EXPERTS AND ADVISORS) OF
ANY KIND OR NATURE WHATSOEVER (IN THIS SECTION 10.4 COLLECTIVELY CALLED
“LIABILITIES AND COSTS”) WHICH TO ANY EXTENT (IN WHOLE OR IN PART) MAY BE
IMPOSED ON, INCURRED BY OR ASSERTED AGAINST LENDER GROWING OUT OF, RESULTING
FROM OR IN ANY OTHER WAY ASSOCIATED WITH ANY OF THE COLLATERAL, THE LOAN
DOCUMENTS OR THE TRANSACTIONS AND EVENTS INCLUDING, WITHOUT LIMITATION, THE
ENFORCEMENT OR DEFENSE THEREOF AT ANY TIME ASSOCIATED THEREWITH OR CONTEMPLATED
THEREIN (INCLUDING ANY VIOLATION OR NONCOMPLIANCE WITH ANY ENVIRONMENTAL LAWS BY
ANY PERSON OR ANY LIABILITIES OR DUTIES OF ANY PERSON WITH RESPECT TO HAZARDOUS
MATERIALS FOUND IN OR RELEASED INTO THE ENVIRONMENT). THE FOREGOING
INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND COSTS ARE IN ANY
WAY OR TO ANY EXTENT CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR
OMISSION OF ANY KIND BY LENDER PROVIDED ONLY THAT NO PERSON SHALL BE ENTITLED
UNDER THIS SECTION 10.4 TO RECEIVE INDEMNIFICATION FOR THAT PORTION, IF ANY, OF
ANY LIABILITIES AND COSTS WHICH IS CAUSED BY LENDER’S GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT. AS USED IN THIS SECTION 10.4, THE TERM “LENDER” SHALL REFER
NOT ONLY TO THE PERSON DESIGNATED AS SUCH IN SECTION 1.1, BUT ALSO TO ITS
LENDERS AND MEMBERS AND, WITH RESPECT TO EACH OF THE FOREGOING, EACH DIRECTOR,
OFFICER, AGENT, ATTORNEY, EMPLOYEE, REPRESENTATIVE AND AFFILIATE OF SUCH PERSON.
ARTICLE XI
MISCELLANEOUS
     Section 11.1 Waivers and Amendments; Acknowledgments and Admissions.
     (a) Waivers and Amendments. No failure or delay (whether by course of
conduct or otherwise) by Lender in exercising any right, power or remedy which
Lender may have under any of the Loan Documents shall operate as a waiver
thereof or of any other right, power or remedy, nor shall any single or partial
exercise by Lender of any such right, power or remedy preclude any other or
further exercise thereof or of any other right, power or remedy. No waiver of
any provision of any Loan Document and no consent to any departure therefrom
shall ever be effective unless it is in writing and signed by Lender, and then
such waiver or consent shall be effective only in the specific instances and for
the purposes for which given and to the extent specified in such writing.

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No notice to or demand on Borrower shall in any case of itself entitle Borrower
to any other or further notice or demand in similar or other circumstances. No
modification or amendment of or supplement to this Agreement or the other Loan
Documents shall be valid or effective unless the same is in writing and signed
by the party against whom it is sought to be enforced.
     (b) Acknowledgments and Admissions. Borrower hereby represents, warrants
and acknowledges that (i) it has been advised by counsel in the negotiation,
execution and delivery of the Loan Documents to which it is a party, (ii) it has
made independent decisions to enter into this Agreement and the other Loan
Documents to which it is a party, without reliance on any representation,
warranty, covenant or undertaking by Lender, whether written, oral or implicit,
other than as expressly set out in this Agreement or in another Loan Document
delivered on or after the date hereof, (iii) there are no representations,
warranties, covenants, undertakings or agreements by Lender to Borrower as to
the Loan Documents except as expressly set out in this Agreement or in another
Loan Document delivered on or after the date hereof, (iv) Lender owes no
fiduciary duty to Borrower with respect to any Loan Document or the transactions
contemplated thereby, (v) the relationship pursuant to the Loan Documents
between Borrower, on one hand, and Lender, on the other hand, is and shall be
solely that of debtor and creditor, respectively, (vi) no partnership or joint
venture exists with respect to the Loan Documents between Borrower and Lender,
(vii) should an Event of Default or Default occur or exist Lender will, subject
to the terms hereof, determine in its sole discretion and for its own reasons
what remedies and actions it will or will not exercise or take at that time,
(viii) without limiting any of the foregoing, Borrower is not relying upon any
representation or covenant by Lender, or any representative thereof, and no such
representation or covenant has been made, that Lender will, at the time of an
Event of Default or Default, or at any other time, waive, negotiate, discuss or
take or refrain from taking any action permitted under the Loan Documents with
respect to any such Event of Default or Default or any other provision of the
Loan Documents, and (ix) Lender has relied upon the truthfulness of the
acknowledgments in this Section 11.1(b) in deciding to execute and deliver this
Agreement and to make the Loans.
     Section 11.2 Assignments; Survival of Agreements; Cumulative Nature. Lender
may assign and/or transfer a portion or all of its rights and privileges under
the Loan Documents at any time and from time to time, including, but not limited
to, any collateral assignment to secure any indebtedness of Lender to any other
Person. In connection with any assignment or transfer by Lender, Lender is
hereby authorized to provide any information provided to Lender by Borrower or
provided by any other Person at Borrower’s request or authorization. Any
assignee of any of Lender’s rights under any of the Loan Documents shall be
subrogated to any related rights and remedies that Lender may exercise against
Borrower. All of the various representations, warranties, covenants and
agreements of Borrower in the Loan Documents shall survive the execution and
delivery of this Agreement and the other Loan Documents and the performance
hereof and thereof, including the making or granting of the Loans and the
delivery of the Note and the other Loan Documents, and shall further survive
until all of the Obligations (other than Obligations under the Royalty Interest
Conveyance, and indemnity obligations and similar obligations that survive the
termination of the Loan Documents) are paid in full to Lender and all of
Lender’s obligations to Borrower are terminated. The representations, warranties
and

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covenants made by Borrower in the Loan Documents, and the rights, powers and
privileges granted to Lender in the Loan Documents, are cumulative, and, except
for expressly specified waivers and consents, no Loan Document shall be
construed in the context of another to diminish, nullify or otherwise reduce the
benefit to Lender of any such representation, warranty, covenant, right, power
or privilege. In particular and without limitation, no exception set out in this
Agreement to any representation, warranty or covenant herein contained shall
apply to any similar representation, warranty or covenant contained in any other
Loan Document, and each such similar representation, warranty or covenant shall
be subject only to those exceptions which are expressly made applicable to it by
the terms of the various Loan Documents.
     Section 11.3 Notices. All notices, requests, consents, demands and other
communications required or permitted under any Loan Document shall be in
writing, unless otherwise specifically provided in such Loan Document, and shall
be deemed sufficiently given or furnished to a Person if delivered by personal
delivery, by telecopy, by delivery service with proof of delivery or by
registered or certified United States mail, postage prepaid, to the address or
telecopy number for such Person set forth below (unless changed by similar
notice in writing given by the particular Person whose address is to be
changed). Any such notice or communication shall be deemed to have been given
(a) in the case of personal delivery or delivery service, as of the date of
delivery at the address and in the manner provided herein, (b) in the case of
telecopy, upon receipt, or (c) in the case of registered or certified United
States mail three (3) Business Days after deposit in the mail.
     For delivery to Borrower:
BPI Energy, Inc.
Attn: James G. Azlein, President
30775 Bainbridge Road, Suite 280
Solon, Ohio 44139
Telephone: (440) 248-4200
Telecopy: (440) 248-4240
     with a copy to:
Thompson Hine LLP
Attn: David J. Naftzinger
3900 Key Center, 127 Public Square
Cleveland, Ohio 44114-1291
Telephone: (216) 566-5625
Telecopy: (216) 566-5800
     For delivery to Lender:
GasRock Capital LLC
Attn: Marshall Lynn Bass
1301 McKinney St., Suite 2800
Houston, Texas 77010
Telephone: (713) 300-1400
Telecopy: (713) 300-1401

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     with a copy to:
Porter & Hedges, L.L.P.
Attn: Ephraim del Pozo
1000 Main Street, 36th Floor
Houston, Texas 77002
Telephone: (713) 226-6660
Telecopy: (713) 226-6260
     Section 11.4 Parties in Interest; Transfers. All grants, covenants and
agreements contained in the Loan Documents shall bind and inure to the benefit
of the parties thereto and their respective successors and permitted assigns;
provided, however, that Borrower shall not assign or transfer any of its rights
or delegate any of its duties or obligations under any Loan Document without the
prior written consent of Lender. Nothing expressed or referred to in this
Agreement shall be construed to give any Person other than the parties to this
Agreement any legal or equitable right, remedy, or claim under or with respect
to this Agreement or any provision of this Agreement. This Agreement and all of
its provisions and conditions are for the sole and exclusive benefit of the
parties to this Agreement and their successors and permitted assigns.
     Section 11.5 Governing Law; Submission to Process. Except to the extent
that the law of another jurisdiction is expressly elected in a Loan Document or
mandatorily applies, the Loan Documents shall be deemed contracts and
instruments made under the laws of the State of Texas and shall be construed and
enforced in accordance with and governed by the laws of the State of Texas,
without regard to principles of conflicts of law. This Agreement has been
entered into in Houston, Texas and shall be performable for all purposes in
Harris County, Texas. Subject to the provisions of Article XII, courts within
the State of Texas shall have jurisdiction over any and all disputes between
Borrower and Lender, whether in law or equity, including, but not limited to,
any and all disputes arising out of or relating to this Agreement or any other
Loan Document; and venue in any such dispute whether in federal or state court
shall be laid in Harris County, Texas.
     Section 11.6 Limitation on Interest. Lender, Borrower and any other parties
to any Loan Documents intend to contract in strict compliance with applicable
usury law from time to time in effect. In furtherance thereof, the parties
stipulate and agree that none of the terms and provisions contained in the Loan
Documents shall ever be construed to create a contract to pay, for the use,
forbearance or detention of money, interest in excess of the maximum amount of
interest permitted to be charged by applicable law from time to time in effect.
Borrower nor any present or future guarantors, endorsers or other Persons
hereafter becoming liable for payment of any Obligation shall ever be liable for
unearned interest thereon or shall ever be required to pay interest thereon in
excess of the maximum amount that may be lawfully charged under applicable law
from time to time in effect, and the provisions of this Section 11.6 shall
control over all other provisions of the Loan Documents which may be in conflict
or apparent conflict herewith. Lender expressly disavows any intention to charge
or collect excessive unearned interest or finance charges in the event the
maturity of any Obligation is accelerated. If (a) the maturity of

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any Obligation is accelerated for any reason, (b) any Obligation is prepaid and
as a result any amounts held to constitute interest are determined to be in
excess of the legal maximum, or (c) Lender or any other holder of any or all of
the Obligations shall otherwise collect fees or other moneys which are
determined to constitute interest (including any payment of the Facility Fee)
which would otherwise increase the interest on any or all of the Obligations to
an amount in excess of that permitted to be charged by applicable law then in
effect, then all such sums determined to constitute interest in excess of such
legal limit shall, without penalty, be promptly applied to reduce the then
outstanding principal of the related Obligations or, at Lender’s or such
holder’s option, promptly returned to Borrower or the other payor thereof upon
such determination. In determining whether or not the interest paid or payable
under any specific circumstance exceeds the maximum amount permitted under
applicable law, Lender and Borrower (and any other payors thereof) shall to the
greatest extent permitted under applicable law, (w) characterization of any
Facility Fee as a commitment fee due and payable prior to the date of this
Agreement as consideration for its commitment to make a Loan, (x) characterize
any non-principal payment as an expense, fee or premium rather than as interest,
(y) exclude voluntary prepayments and the effects thereof, and (z) amortize,
prorate, allocate and spread the total amount of interest throughout the entire
contemplated term of the instruments evidencing the Obligations in accordance
with the amounts outstanding from time to time thereunder and the maximum legal
rate of interest from time to time in effect under applicable law in order to
lawfully charge the maximum amount of interest permitted under applicable law.
     Section 11.7 Termination; Limited Survival. In their sole and absolute
discretion, Borrower and Lender may each, at any time that no Obligations are
owing, elect in a notice delivered to the other to terminate this Agreement.
Upon receipt of such a notice, if no Obligations are then owing (other than
Obligations under the Royalty Interest Conveyance and indemnity obligations and
similar obligations that survive the termination of the Loan Documents), this
Agreement and all other Loan Documents shall thereupon be terminated and the
parties thereto released from any prospective obligations thereunder.
Notwithstanding the foregoing or anything herein to the contrary, any waivers or
admissions made by Borrower or Lender in any Loan Documents, and any obligations
which any Person may have to indemnify or compensate Lender shall survive any
termination of this Agreement or any other Loan Document. At the request and
expense of Borrower, Lender shall prepare and execute all necessary instruments
to reflect and effect such termination of the Loan Documents; provided, however,
that nothing in this Section 11.7 shall affect any and all continuing rights,
validity and enforceability of the Royalty Interests.
     Section 11.8 Severability. If any term or provision of any Loan Document
shall be determined to be illegal or unenforceable, all other terms and
provisions of the Loan Documents shall nevertheless remain effective and shall
be enforced to the fullest extent permitted by applicable law.
     Section 11.9 Counterparts. This Agreement may be separately executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to constitute one and the same
Agreement.
     Section 11.10 Further Assurances. The parties agree (a) to furnish upon
request to each other such information, (b) to execute and deliver to each other
such documents, and (c) to

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do such other acts and things, all as the other party may reasonably request for
the purpose of carrying out the intent of this Agreement and the Loan Documents.
     Section 11.11 Waiver of Jury Trial, Punitive Damages, Etc. BORROWER AND
LENDER HEREBY (a) KNOWINGLY, VOLUNTARILY, INTENTIONALLY AND IRREVOCABLY WAIVE,
TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY RIGHT THEY MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR DIRECTLY OR INDIRECTLY AT ANY
TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN DOCUMENTS OR ANY
TRANSACTION CONTEMPLATED THEREBY OR ASSOCIATED THEREWITH, BEFORE OR AFTER
MATURITY; (b) IRREVOCABLY WAIVE, TO THE MAXIMUM EXTENT PERMITTED BY LAW ANY
RIGHT THEY MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL,
EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR DAMAGES OTHER THAN, OR IN
ADDITION TO, ACTUAL DAMAGES; (c) CERTIFY THAT NO PARTY HERETO NOR ANY
REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED,
EXPRESSLY OR OTHERWISE OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (d) ACKNOWLEDGES THAT IT
HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND THE
TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION 11.11.
     Section 11.12 Controlling Provision Upon Conflict. Except as may be
expressly provided otherwise herein, in the event of a conflict between the
provisions of this Agreement and those of any other Loan Document or any other
instrument referred to herein or executed in connection with this Agreement, the
provisions of this Agreement shall control.
     Section 11.13 Patriot Act. The Lender hereby notifies the Borrower that if
Lender is subject to the USA Patriot Act of 2001 (31 U.S.C. 5318 et seq.),
pursuant to Section 326 thereof, it is required to obtain, verify and record
information that identifies the Borrower, including the name and address of
Borrower and other information allowing such Lender to identify the Borrower in
accordance with such act.
ARTICLE XII
ARBITRATION
     Section 12.1 Arbitration.
     (a) Borrower and Lender and any other obligor party (the “parties”) will
attempt in good faith to resolve any controversy, claim or dispute arising out
of or relating to this Agreement, including contract and tort disputes, the Loan
Documents or Collateral promptly by negotiations between themselves. The
negotiation process may be started by the giving of written notice by any party
to the other parties in accordance with the terms of Section 11.3, and the
parties agree to negotiate in good faith, and select an independent mediator to
facilitate the negotiations and conduct up to eight consecutive hours of
mediated negotiations in Houston, Texas within 30 days after the notice is first

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sent. If, within 10 days after the initial notice, the parties are not able to
agree upon a mediator, the party originally giving the notice shall promptly
notify American Arbitration Association (“AAA”), 1331 Lamar, Suite 1180,
Houston, Texas 77010, (713) 739-1302. AAA will promptly designate a mediator who
is independent and impartial, and AAA’s decision about the identity of the
mediator will be final and binding.
     (b) No arbitration may be commenced by any party unless and until a
negotiation complying with the foregoing paragraph has been completed, and no
litigation or other proceeding may ever be instituted at any time in any court
for the purpose of adjudicating, interpreting or, except as may be set forth in
Section 12.1(h), enforcing any rights or obligations of the parties hereto or
any rights or obligations relating to the subject matter hereof, whether or not
covered by the express terms of this Agreement, or for the purpose of
adjudicating a breach or determination of the validity of this Agreement, or for
the purpose of appealing any decision of an arbitrator.
     (c) If a controversy, claim or dispute is not resolved after completion of
the negotiation process described above, then, upon notice by any party to the
other parties (an “Arbitration Notice”) and to AAA, the controversy, claim or
dispute shall be submitted to an arbitration panel for binding arbitration in
Houston, Texas, in accordance with AAA’s Commercial Arbitration Rules (the
“Rules”). The parties agree that they will faithfully observe this Agreement and
the Rules and that they will abide by and perform any award rendered by the
arbitration panel. The arbitration shall be governed by the Federal Arbitration
Act, 9 U.S.C. Section 1-16 (or by the same principles enunciated by such Act in
the event it may not be technically applicable). The statutes of limitations,
estoppel, waiver, laches and similar doctrines which would otherwise be
applicable in an action brought by a party shall be applicable in any
arbitration proceeding and the commencement of an arbitration proceeding shall
be deemed the commencement of an action for these purposes. The award or
judgment of the arbitration panel shall be final and binding on all parties and
judgment upon the award or judgment of the arbitration panel may be entered and
enforced by any court having jurisdiction. The parties agree to execute a
stipulated judgment in accordance with the award of the arbitration panel to be
filed in any court having jurisdiction. If any party becomes the subject of a
bankruptcy, receivership or other similar proceeding under the laws of the
United States of America, any state or commonwealth or any other nation or
political subdivision thereof, then, to the extent permitted or not prohibited
by applicable law, any factual or substantive legal issues arising in or during
the pendency of any such proceeding shall be subject to all of the foregoing
mandatory mediation and arbitration provisions and shall be resolved in
accordance therewith. The agreements contained herein have been given for
valuable consideration, are coupled with an interest and are not intended to be
executory contracts. The fees and expenses of the arbitration panel will be
shared by all parties engaged in the claim, dispute or controversy on a basis
determined to be fair and equitable by the arbitrator, taking into account the
relative fault of each party, the relative credibility and merit of all claims
and defenses made by each party and the cooperation, speed and efficiency of
each party in conducting the arbitration proceedings and complying with the
Rules and with orders and requests of the arbitrator.

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     (d) Promptly after the Arbitration Notice is given, each party will select
an independent and impartial arbitrator who will in turn select an independent
and impartial third arbitrator (each such arbitrator must be experienced in or
have extensive familiarity with the oil and gas industry). If the arbitrators
selected by the parties are unable to agree on a third arbitrator, then one of
the parties shall notify AAA and AAA shall select the third arbitrator with oil
and gas industry experience or familiarity. The decision of AAA with respect to
the selection of the arbitrator will be final and binding in such case. Such
three arbitrators will constitute the arbitration panel.
     (e) Within 10 days after the selection of the arbitration panel, the
parties and their counsel will appear before the arbitration panel at a place
and time in Houston, Texas, as may be designated by the arbitration panel for
the purpose of each party making a one hour or less presentation and summary of
the case. Thereafter, the arbitration panel will set dates and times for
additional hearings until the proceeding is concluded. Additionally, the
arbitration panel shall establish a schedule for and limits on the amount of
discovery to be requested and performed by the parties during the arbitration
proceedings. The parties shall strictly comply with the schedule and limits set
by the arbitrators, and any request for variance therefrom must be approved by
the arbitrators. The desire and goal of the parties is, and the arbitration
panel will be advised that its goal should be, to conduct and conclude the
arbitration proceeding as expeditiously as possible. If any party or his counsel
fails to appear at any scheduled hearing, the arbitration panel shall be
entitled to reach a decision based on the evidence which has been presented to
it by the parties who did appear. Any arbitral award may be confirmed by a Texas
state court.
     (f) Any arbitral award may be enforced in the courts of the state of Texas
or of the United States of America for the Southern District of Texas, and, by
execution and delivery of this Agreement, the parties hereby accept for
themselves and in respect of their property, generally and unconditionally, the
nonexclusive jurisdiction of the aforesaid courts for said purpose and the
parties hereby irrevocably waive to the fullest extent permitted by law any
objection, including without limitation, any objection to the laying of venue or
based on the grounds of forum non conveniens, which they may now or hereafter
have to the bringing of any such action or proceeding in such respective
jurisdictions.
     (g) The arbitration panel will have no authority to award punitive or other
damages not measured by the prevailing party’s actual damages and may not, in
any event, make any ruling, finding, or award that does not conform to the terms
and conditions of this Agreement.
     (h) For the avoidance of doubt, and notwithstanding anything to the
contrary in Section 12.1, the provisions of this Section 12.1 relating to
arbitration or mediation of disputes shall not apply to (i) litigation that is
instituted for the sole purpose of either: (A) compelling a party to submit to
arbitration in accordance with the provisions of this Section 12.1, or
(B) obtaining enforcement of any award or judgment of the arbitrator(s) issued
pursuant to this Section 12.1, (ii) Lender’s enforcement of any nonjudicial
rights or remedies under this Agreement or any of the Security Documents arising
out of an

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Event of Default, including but not limited to, taking or disposing of
Collateral without judicial process pursuant to Article 9 of the Uniform
Commercial Code as adopted in the state whose laws govern lender’s security
interest in the Collateral or pursuant to the real property code or applicable
statutes of the state or states where the Properties are located, (iii)
obtaining injunctive relief or a temporary restraining order, including a power
of sale, or (iv) obtaining a writ of attachment; provided that no such act shall
constitute a waiver of this arbitration provision or be prohibited by this
arbitration provision.
ARTICLE XIII
NOTICE TO BORROWER
THIS WRITTEN CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS BETWEEN THE PARTIES
REPRESENT THE FINAL EXPRESSION OF THE AGREEMENTS BETWEEN THE PARTIES. THIS
WRITTEN CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS BETWEEN THE PARTIES 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.
THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS SUPERCEDE THAT CERTAIN TERM
SHEET DATED ON OR ABOUT MAY 21, 2007, EXECUTED BY BORROWER AND LENDER.
(Signatures on the following page)

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     IN WITNESS WHEREOF, this Agreement is executed as of the date first written
above.

                  BORROWER:    
 
                BPI ENERGY, INC.,
a Nevada corporation    
 
           
 
  By:   /s/ James G. Azlein    
 
           
 
      James G. Azlein
President    
 
                LENDER:    
 
                GASROCK CAPITAL LLC,
a Delaware limited liability company    
 
           
 
  By:   /s/ Marshall Lynn Bass    
 
           
 
      Marshall Lynn Bass
Principal    

Signature Page to Advancing Term Credit Agreement