EXECUTION COPY

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TERM LOAN AGREEMENT
 
Dated as of April 2, 2007

 
among

 
THE EXPLORATION COMPANY OF DELAWARE, INC., as Borrower,
 
and
 
OUTPUT ACQUISITION CORP.,
TXCO ENERGY CORP.,
and
TEXAS TAR SANDS INC.,
as Original Guarantors,
 
The Several Lenders
from Time to Time Parties Hereto,

 
BANK OF MONTREAL,
as Administrative Agent,
 
and
 
BMO CAPITAL MARKETS CORP.,
as Arranger
 

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TABLE OF CONTENTS

     
Page
Article I DEFINITIONS
 
1
1.1
Certain Defined Terms
 
1
1.2
Other Interpretive Provisions
 
23
1.3
Accounting Principles
 
24
Article II THE CREDIT
 
24
2.1
Amounts and Terms of the Loans
 
24
2.2
Maturity Date
 
25
2.3
Conversion and Continuation Elections
 
25
2.4
Optional Prepayments
 
26
2.5
[Intentionally Omitted.]
 
27
2.6
Repayment
 
27
2.7
Interest
 
27
2.8
Fees
 
28
2.9
Computation of Fees and Interest
 
28
2.10
Payments by the Company; Loan Pro Rata
 
28
2.11
Payments by the Lenders to the Administrative Agent
 
29
2.12
Sharing of Payments, Etc
 
30
Article III TAXES, YIELD PROTECTION AND ILLEGALITY
 
30
3.1
Taxes
 
30
3.2
Illegality
 
32
3.3
Increased Costs and Reduction of Return
 
32
3.4
Funding Losses
 
33
3.5
Inability to Determine Rates
 
33
3.6
Certificates of Lenders
 
34
3.7
Substitution of Lenders
 
34
3.8
Survival
 
34
Article IV SECURITY
 
34
4.1
The Security
 
34
4.2
Agreement to Deliver Security Documents
 
34
4.3
Perfection and Protection of Security Interests and Liens
 
35
4.4
Offset
 
35
4.5
Guaranty
 
35
4.6
Maximum Liability
 
36
4.7
Production Proceeds
 
36
Article V CONDITIONS PRECEDENT
 
37
5.1
Conditions of the Effective Date
 
38
5.2
[Intentionally Omitted.]
 
40
Article VI REPRESENTATIONS AND WARRANTIES
 
40
6.1
Organization, Existence and Power
 
40
6.2
Corporate Authorization; No Contravention
 
40

 
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6.3
Governmental Authorization
 
41
6.4
Binding Effect
 
41
6.5
Litigation
 
41
6.6
No Default
 
41
6.7
ERISA Compliance
 
41
6.8
Use of Proceeds; Margin Regulations
 
42
6.9
Title to Properties
 
42
6.10
Oil and Gas Reserves
 
42
6.11
Reserve Report
 
43
6.12
Gas Imbalances
 
43
6.13
Taxes
 
43
6.14
Financial Statements and Condition
 
44
6.15
Environmental Matters
 
44
6.16
Regulated Entities
 
44
6.17
No Burdensome Restrictions
 
44
6.18
Copyrights, Patents, Trademarks and Licenses, etc
 
44
6.19
Subsidiaries
 
45
6.20
Insurance
 
45
6.21
Full Disclosure
 
45
6.22
Solvency
 
45
6.23
Labor Matters
 
45
6.24
Midstream Contracts
 
46
6.25
Derivative Contracts
 
46
6.26
Exempt Subsidiaries; TTSI
 
46
6.27
[Intentionally Omitted.]
 
46
6.28
Output Acquisition Documents
 
46
6.29
Security Documents
 
46
Article VII AFFIRMATIVE COVENANTS
 
47
7.1
Financial Statements
 
47
7.2
Certificates; Other Production and Reserve Information
 
48
7.3
Notices
 
49
7.4
Preservation of Company Existence, Etc
 
50
7.5
Maintenance of Property
 
50
7.6
Insurance
 
50
7.7
Payment of Obligations
 
51
7.8
Compliance with Laws
 
51
7.9
Compliance with ERISA
 
51
7.10
Inspection of Property and Books and Records
 
51
7.11
Environmental Laws
 
52
7.12
New Subsidiary Guarantors
 
52
7.13
Use of Proceeds
 
52
7.14
Further Assurances
 
52
7.15
Output Acquisition
 
53
Article VIII NEGATIVE COVENANTS
 
53
8.1
Limitation on Liens
 
53
8.2
Disposition of Assets
 
56

 
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8.3
Consolidations and Mergers
 
57
8.4
Loans and Investments
 
58
8.5
Limitation on Indebtedness
 
59
8.6
Transactions with Affiliates
 
60
8.7
Margin Stock
 
61
8.8
Contingent Obligations
 
61
8.9
Restricted Payments
 
61
8.10
Derivative Contracts
 
62
8.11
Sale Leasebacks
 
64
8.12
Consolidated Leverage Ratio
 
64
8.13
Current Ratio
 
64
8.14
Minimum Interest Coverage Ratio
 
64
8.15
Minimum PV 10 to Consolidated Total Debt Ratio
 
64
8.16
Change in Business
 
64
8.17
Accounting Changes
 
64
8.18
Certain Contracts; Amendments; Multiemployer ERISA Plans
 
64
8.19
Midstream Contracts
 
65
8.20
First Lien Credit Agreement
 
65
8.21
Limitation on Amendments to Output Acquisition Documents
 
65
8.22
Forward Sales, Production Payments, Etc
 
65
8.23
Use of Proceeds
 
66
Article IX EVENTS OF DEFAULT
 
66
9.1
Event of Default
 
66
9.2
Remedies
 
68
9.3
Rights Not Exclusive
 
69
Article X THE ADMINISTRATIVE AGENT
 
69
10.1
Appointment and Authorization; Limitation of Agency
 
69
10.2
Delegation of Duties
 
69
10.3
Liability of Administrative Agent
 
69
10.4
Reliance by Administrative Agent
 
70
10.5
Notice of Default
 
70
10.6
Credit Decision
 
70
10.7
Indemnification
 
71
10.8
Administrative Agent in Individual Capacity
 
71
10.9
Successor Administrative Agent
 
72
10.10
Withholding Tax
 
72
10.11
Arranger; Syndication Agent
 
74
10.12
Release of Collateral
 
74
Article XI MISCELLANEOUS
 
74
11.1
Amendments and Waivers
 
75
11.2
Notices
 
75
11.3
No Waiver; Cumulative Remedies
 
76
11.4
Costs and Expenses
 
76
11.5
Indemnity
 
77
11.6
Payments Set Aside
 
77

 
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11.7
Successors and Assigns
 
78
11.8
Assignments, Participations, etc
 
78
11.9
Interest
 
82
11.10
Indemnity and Subrogation
 
82
11.11
Automatic Debits of Fees
 
83
11.12
Notification of Addresses, Lending Offices, Etc
 
83
11.13
Counterparts
 
83
11.14
Severability
 
83
11.15
No Third Parties Benefited
 
83
11.16
Governing Law, Jurisdiction
 
84
11.17
Submission To Jurisdiction; Waivers
 
84
11.18
Entire Agreement
 
84
11.19
NO ORAL AGREEMENTS
 
84
11.20
Accounting Changes
 
84
11.21
WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC
 
85
11.22
Intercreditor Agreement
 
85
11.23
USA PATRIOT Act
 
85
11.24
Acknowledgments
 
85
11.25
Survival of Representations and Warranties
 
86
11.26
Release of Collateral and Guarantee Obligations.
 
86

 
SCHEDULES
     
Schedule 1.1(a)
Commitments and Pro Rata Shares
   
Schedule 6.5
Litigation
   
Schedule 6.7
ERISA Compliance
   
Schedule 6.14(a)
Material Indebtedness
   
Schedule 6.15
Environmental Matters
   
Schedule 6.17
Burdensome Restrictions
   
Schedule 6.19
Subsidiaries and Minority Interests
   
Schedule 6.24
Midstream Contracts
   
Schedule 6.25
Existing Derivative Contracts
   
Schedule 6.28
Material Output Acquisition Documents
   
Schedule 6.29(a)-1
Security Agreement UCC Filing Jurisdictions
   
Schedule 6.29(a)-2
UCC Financing Statement to be Terminated
   
Schedule 6.29(b)
Mortgage Filing Jurisdictions
   
Schedule 8.1
Permitted Liens
   
Schedule 8.6
Transactions with Affiliates
           
EXHIBITS
     
Exhibit A
Form of Notice of Borrowing
   
Exhibit B
Form of Notice of Conversion/Continuation
   
Exhibit C
Form of Compliance Certificate
   
Exhibit D
Form of Security Agreement
   

 
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Exhibit E
Form of Assignment and Acceptance
   
Exhibit F
Form of Note
   
Exhibit G
Form of Guaranty Agreement
   
Exhibit H
Form of Intercreditor Agreement
   

 
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TERM LOAN AGREEMENT
 
This TERM LOAN AGREEMENT (this “Agreement”) is entered into as of April 2, 2007,
among THE EXPLORATION COMPANY OF DELAWARE, INC., a Delaware corporation (the
“Company”); OUTPUT ACQUISITION CORP., a Texas corporation (“Merger Sub”); TXCO
ENERGY CORP., a Texas corporation (“TXCOE”); TEXAS TAR SANDS INC., a Texas
corporation (“TTSI”); each of the financial institutions which is or which may
from time to time become a signatory hereto (individually, a “Lender” and
collectively, the “Lenders”); and BANK OF MONTREAL, a Canadian chartered bank
acting through certain of its United States branches and agencies, including its
Chicago, Illinois branch, as administrative agent for the Lenders (in such
capacity, together with its successors in such capacity, the “Administrative
Agent”), and BMO CAPITAL MARKETS CORP., as arranger (in such capacity, the
“Arranger”).
 
RECITALS
 
WHEREAS, the Company has entered into the Output Acquisition Documents (defined
below), and desires to consummate the Output Acquisition (defined below)
contemplated thereby, and, in connection therewith, has requested that the
Lenders make term loans to the Company in an aggregate principal amount of
$80,000,000; and
 
WHEREAS, the Lenders are willing to make such term loans to the Company on the
terms and conditions set forth in this Agreement.
 
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained herein and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:
 
ARTICLE I

 
DEFINITIONS
 
1.1 Certain Defined Terms. The following terms have the following meanings:
 
“Adjusted Base Rate” shall mean, for any day and any Base Rate Loan, an interest
rate per annum equal to the greater of (a) the Federal Funds Rate for such day
plus one-half of one percent (0.5%) and (b) the Base Rate for such day; such
rate to be computed on the basis of a year of 365 or 366 days, as the case may
be, and actual days elapsed (including the first day but excluding the last day)
during the period for which payable, but in no event shall such rate at any time
exceed the Highest Lawful Rate.
 
“Administrative Agent” has the meaning specified in the preamble hereto.
 
“Administrative Agent-Related Persons” means Administrative Agent, its
Affiliates, and the officers, directors, employees, agents and attorneys-in-fact
of the Administrative Agent and its Affiliates.
 
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“Administrative Questionnaire” has the meaning specified in Section 11.8(a).
 
“Affected Lender” has the meaning specified in Section 3.7.
 
“Affiliate” means, as to any Person, any other Person which, directly or
indirectly, is in control of, is controlled by, or is under common control with,
such Person. A Person shall be deemed to control another Person if the
controlling Person possesses, directly or indirectly, the power to direct or
cause the direction of the management and policies of the other Person, whether
through the ownership of voting securities, by contract, or otherwise.
 
“Agent-Related Persons” means with respect to each Agent, such Agent, its
Affiliates, and each of the officers, directors, employees, agents and
attorneys-in-fact of it and its Affiliates.
 
“Agents” means, collectively, Bank of Montreal, in its capacity as the
Administrative Agent and BMO Capital Markets Corp., in its capacity as Arranger.
 
“Agent’s Payment Office” means the address set forth on the signature pages
hereto in relation to the Administrative Agent, or such other address as the
Administrative Agent may from time to time specify.
 
“Aggregate Exposure” means, with respect to any Lender at any time, an amount
equal to (a) if at such time the Commitments have not been reduced to zero, the
sum of the aggregate unpaid principal amount of the Loans of such Lender and the
aggregate amount of such Lender’s Commitments at such time and (b) if at such
time the Commitments have been reduced to zero, the sum of the aggregate unpaid
principal amount of the Loans of such Lender.
 
“Agreement” means this Term Loan Agreement, as amended, amended and restated,
supplemented or otherwise modified from time to time pursuant to the terms
hereof and the Intercreditor Agreement.
 
“Applicable Margin” means, with respect to any Base Rate Loan or LIBO Rate Loan
on any day, an amount equal to the percentage for such day under the Pricing
Grid for such type of Loan.
 
“Applicable Percentage” means eighty percent (80%).
 
“Arranger” has the meaning specified in the preamble hereto.
 
“Assignee” has the meaning specified in Section 11.8(a).
 
“Assignment and Acceptance” has the meaning specified in Section 11.8(a).
 
“Attorney Costs” means and includes all reasonable fees and disbursements of any
law firm or other external counsel.
 
“Available Borrowing Base” means, at the particular time in question, the
Borrowing Base (as defined in the First Lien Credit Agreement) in effect at such
time minus the applicable Effective Amount (as defined in the First Lien Credit
Agreement) at such time.
 
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“Bankruptcy Code” means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C.
§101, et seq.).
 
“Base Rate” means, for any day, the rate of interest in effect for such day as
publicly announced from time to time by Administrative Agent at its Chicago,
Illinois office as its “base rate” for Dollar loans made in the United States.
(The “base rate” is a rate set by Administrative Agent based upon various
factors including costs and desired return, general economic conditions and
other factors, and is used as a reference point for pricing some loans, which
may be priced at, above, or below such announced rate.) Any change in the base
rate announced by Administrative Agent shall take effect at the opening of
business on the day specified in the public announcement of such change.
 
“Base Rate Loan” means a Loan that bears interest based at the Adjusted Base
Rate, plus the Applicable Margin.
 
“Borrowing Base Period” has the meaning ascribed thereto in the First Lien
Credit Agreement.
 
“Business Day” means any day other than a Saturday, Sunday or other day on which
commercial banks in Chicago, Illinois are authorized or required by law to close
and, if the applicable Business Day relates to any LIBO Rate Loan, means such a
day on which dealings are carried on in the applicable offshore dollar interbank
market.
 
“Capital Adequacy Regulation” means any guideline, request or directive of any
central bank or other Governmental Authority, or any other law, rule or
regulation, whether or not having the force of law, in each case, regarding
capital adequacy of any bank or of any corporation controlling a bank.
 
“Capital Lease” means, when used with respect to any Person, any lease in
respect of which the obligations of such Person constitute Capitalized Lease
Obligations.
 
“Capital Stock” means any and all shares, interests, participations or other
equivalents (however designated) of capital stock of a corporation, any and all
equivalent ownership interests in a Person (other than a corporation) and any
and all warrants, rights or options to purchase any of the foregoing.
 
“Capitalized Lease Obligations” means, when used with respect to any Person,
without duplication, all obligations of such Person to pay rent or other amounts
under any lease of (or other arrangement conveying the right to use) Property,
or a combination thereof, which obligations shall have been or should be, in
accordance with GAAP, capitalized on the books of such Person.
 
“Cash Equivalents” means: (a) securities issued or fully guaranteed or insured
by the United States Government or any agency thereof and backed by the full
faith and credit of the United States having maturities of not more than 12
months from the date of acquisition; (b) certificates of deposit, time deposits,
Eurodollar time deposits, or bankers’ acceptances having in each case a tenor of
not more than 12 months from the date of acquisition issued by and demand
deposits with any U.S. commercial bank or any branch or agency of a non-U.S.
commercial bank licensed to conduct business in the U.S. having combined capital
and surplus of not less than $500,000,000 whose long term securities are rated
at least A (or then equivalent grade) by S&P and A2 (or then equivalent grade)
by Moody’s at the time of acquisition; (c) commercial paper of an issuer rated
at least A-1 by S&P or P-1 by Moody’s at the time of acquisition, and in either
case having a tenor of not more than 12 months; (d) repurchase agreements with a
term of not more than seven days for underlying securities of the types
described in clauses (a) and (b) above; and (e) money market mutual or similar
funds having assets in excess of $100,000,000.
 
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“Change of Control” means (a) a purchase or acquisition, directly or indirectly,
by any “person” or “group” within the meaning of Section 13(d)(3) and 14(d)(2)
of the Exchange Act (a “Group”), of “beneficial ownership” (as such term is
defined in Rule 13d-3 under the Exchange Act) of securities of the Company
which, together with any securities owned beneficially by any “affiliates” or
“associates” of such Group (as such terms are defined in Rule 12b-2 under the
Exchange Act), shall represent more than thirty percent (30%) of the combined
voting power of the Company’s securities which are entitled to vote generally in
the election of directors and which are outstanding on the date immediately
prior to the date of such purchase or acquisition or (b) the first day on which
a majority of the Board of Directors of the Company are not Continuing Directors
(as herein defined). As herein defined, “Continuing Directors” means any member
of the Board of Directors of the Company who (x) is a member of such Board of
Directors as of the Effective Date or (y) was nominated for election or elected
to such Board of Directors with the affirmative vote of a majority of the
Continuing Directors who were members of such Board of Directors at the time of
such nomination or election.
 
“Code” means the Internal Revenue Code of 1986 and the regulations promulgated
thereunder.
 
“Collateral” means all Property which is subject to a Lien in favor of the
Administrative Agent or which under the terms of any Security Document is
purported to be subject to such Lien.
 
“Commitment” means as to each Lender, such Lender’s obligation to make, on the
Effective Date, Loans to the Company in an aggregate principal amount not to
exceed the amount set forth opposite the name of such Lender on Schedule 1.1(a)
hereto under the heading “Commitment”, or if such Lender is a party to an
Assignment and Acceptance, the amount set forth on the most recent Assignment
and Acceptance of such Lender, as that amount may be reduced or terminated
pursuant to this Agreement.
 
“Commitment Letter” means the commitment letter dated February 13, 2007 by and
among the Company, BMO Capital Markets Corp. and Bank of Montreal.
 
“Company” means The Exploration Company of Delaware, Inc. a Delaware
corporation.
 
“Company Audited Financial Statements” means the Company’s consolidated
financial statements as of and for the years ended December 31, 2006, 2005 and
2004, together with the unqualified independent auditors’ report and opinion of
Akin, Doherty, Klein & Feuge, P.C. thereon.
 
“Company Materials” has the meaning specified in Section 7.1(d).
 
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“Compliance Certificate” means a certificate substantially in the form of
Exhibit “C”.
 
“Consolidated EBITDAX” means with respect to the Company and its Subsidiaries on
a consolidated basis for any fiscal period, without duplication, (a)
Consolidated Net Income plus (b) depreciation, depletion, amortization,
adjustments resulting from the application of FAS 123R, FAS 133 and FAS 143 and
other non-cash losses or charges reducing Consolidated Net Income plus (c)
Consolidated Interest Expense plus (d) income tax expense plus (e) exploration
expenses minus (f) any other non-cash items increasing Consolidated Net Income
plus or minus, respectively (g) other extraordinary or non-recurring losses or
gains (cash or non-cash) to the extent taken into account by the Company in any
public disclosures of its “EBITDAX” or “consolidated EBITDAX” for the relevant
period. For purposes of Sections 8.12 and 8.14, Consolidated EBITDAX shall be
calculated (x) to give pro forma effect to the Output Acquisition, other
Corporate Acquisitions and other acquisitions and Dispositions and related
financing transactions as if such transaction(s) had been consummated on the
first day of the relevant period of calculation and (y) based on (i) four times
Consolidated EBITDAX for the first Fiscal Quarter following the Effective Date,
(ii) two times Consolidated EBITDAX for the first two Fiscal Quarters following
the Effective Date, (iii) four-thirds times Consolidated EBITDAX for the first
three Fiscal Quarters following the Effective Date and (iv) thereafter,
Consolidated EBITDAX on a rolling four quarter basis.
 
“Consolidated Interest Expense” means, with respect to the Company and its
Subsidiaries on a consolidated basis for any fiscal period, total interest
expenses (including that portion attributable to Capitalized Lease Obligations
and capitalized interest) of the Company and its Subsidiaries in such fiscal
period which are classified as interest expense on the consolidated financial
statements of the Company and its Subsidiaries, all as determined in conformity
with GAAP. For purposes of Sections 8.12 and 8.14, Consolidated Interest Expense
shall be calculated (x) to give pro forma effect to the Output Acquisition,
other Corporate Acquisitions and other acquisitions and Dispositions and related
financing transactions and other acquisitions and related financing
transaction(s) as if such transactions had been consummated on the first day of
the relevant period of calculation and (y) based on (i) four times Consolidated
Interest Expense for the first Fiscal Quarter following the Effective Date, (ii)
two times Consolidated Interest Expense for the first two Fiscal Quarters
following the Effective Date, (iii) four-thirds times Consolidated Interest
Expense for the first three Fiscal Quarters following the Effective Date and
(iv) thereafter, Consolidated Interest Expense on a rolling four quarter basis.
 
“Consolidated Leverage Ratio” means as at the last day of any period of four
consecutive fiscal quarters of the Company, commencing with the Fiscal Quarter
ended June 30, 2007 as the last quarter in the initial period of four
consecutive fiscal quarters contemplated hereby, the ratio of (a) Consolidated
Total Debt to (b) Consolidated EBITDAX for such period.
 
“Consolidated Net Income” means, with respect to the Company and its
Subsidiaries on a consolidated basis, for any fiscal period, the net income (or
net loss) of the Company and its Subsidiaries for such period determined in
accordance with GAAP, but excluding the effects of the application of FAS 133
and 143.
 
“Consolidated Total Debt” means, at any date, the aggregate principal amount
(without duplication) of all Indebtedness under clauses (a), (b), (c), (d), (f),
(g) and (i) of such definition of the Company and its Subsidiaries at such date,
determined on a consolidated basis in accordance with GAAP.
 
5

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“Contingent Obligation” means, as to any Person, without duplication, any direct
or indirect liability of that Person with or without recourse, (a) with respect
to any Indebtedness, dividend, letter of credit or other similar obligation (the
“primary obligations”) of another Person (the “primary obligor”), including any
obligation of that Person (i) to purchase, repurchase or otherwise acquire such
primary obligations or any security therefor, (ii) to advance or provide funds
for the payment or discharge of any such primary obligation, or to maintain
working capital or equity capital of the primary obligor or otherwise to
maintain the net worth or solvency or any balance sheet item, level of income or
financial condition of the primary obligor, (iii) to purchase Property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation, or (iv) otherwise to assure or hold harmless the holder
of any such primary obligation against loss in respect thereof (each, a
“Guaranty Obligation”); (b) with respect to any Surety Instrument issued for the
account of that Person or as to which that Person is otherwise liable for
reimbursement of drawings or payments; (c) to purchase any materials, supplies
or other Property from, or to obtain the services of, another Person if the
relevant contract or other related document or obligation requires that payment
for such materials, supplies or other Property, or for such services, shall be
made regardless of whether delivery of such materials, supplies or other
Property is ever made or tendered, or such services are ever performed or
tendered, or (d) in respect of any Derivative Contract. The amount of any
Contingent Obligation shall, in the case of Guaranty Obligations, be deemed
equal to the lesser of (i) the stated maximum amount, if any, of such Contingent
Obligation and (ii) the maximum stated or determinable amount of the primary
obligation in respect of which such Guaranty Obligation is made or, if not
stated or if indeterminable, the maximum reasonably anticipated liability in
respect thereof, and in the case of other Contingent Obligations, shall be equal
to the lesser of (i) the stated maximum amount, if any, of such Contingent
Obligation and (ii) the maximum reasonably anticipated liability in respect
thereof.
 
“Contractual Obligation” means, as to any Person, any provision of any security
issued by such Person or of any agreement, undertaking, contract, indenture,
mortgage, deed of trust or other instrument, document or agreement to which such
Person is a party or by which it or any of its Property is bound.
 
“Conversion/Continuation Date” means any date on which, under Section 2.3, the
Company (a) converts Loans of one Interest Rate Type to another Interest Rate
Type, or (b) continues as Loans of the same Interest Rate Type, but with a new
Interest Period, Loans having Interest Periods expiring on such date.
 
“Corporate Acquisition” means any transaction or series of related transactions
for the purpose of or resulting, directly or indirectly, in (a) the acquisition
of all or substantially all of the assets of a Person, or of any business or
division of a Person, (b) the acquisition of in excess of 50% of the Capital
Stock of a corporation (or similar entity), which stock has ordinary voting
power for the election of the members of such entity’s board of directors or
persons exercising similar functions (other than stock having such power only by
reason of the happening of a contingency), or the acquisition of in excess of
50% of the Capital Stock of any Person not a corporation, which acquisition
gives the acquiring Person the power to direct or cause the direction of the
management and policies of such Person or (c) a merger or consolidation or any
other combination with another Person (other than a Person that is a Guarantor,
if the Company or a Guarantor is the surviving Person).
 
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“Credit Extension” means and includes the making, conversion or continuation of
any Loan hereunder.
 
“Current Assets” means, for any Person, all assets of such Person that, in
accordance with GAAP, would be included as current assets on a balance sheet as
of a date of calculation; provided, however, an amount equal to the Available
Borrowing Base shall be included as current assets.
 
“Current Liabilities” means, for any Person, all liabilities of such Person
that, in accordance with GAAP, would be included as current liabilities on a
balance sheet as of the date of calculation; provided, however, the current
portion of the Loans which are not past due may be excluded from Current
Liabilities.
 
“Default” means any event or circumstance which, with the giving of notice, the
lapse of time, or both, would (if not cured or otherwise remedied during such
time) constitute an Event of Default.
 
“Default Rate” has the meaning specified in Section 2.7(c).
 
“Derivative Contract” means all futures contracts, forward contracts, swap, put,
cap or collar contracts, option contracts, hedging contracts or other derivative
contracts or similar agreements covering oil and gas commodities or prices or
financial, monetary or interest rate instruments.
 
“Disposition” has the meaning specified in Section 8.2.
 
“Disqualified Stock” means, as to any Person, any Capital Stock of such Person
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or otherwise (including upon the occurrence of
an event) requires the payment of dividends (other than dividends payable solely
in Capital Stock which does not otherwise constitute Disqualified Stock) or
matures or is required to be redeemed (pursuant to any sinking fund obligation
or otherwise) or is convertible into or exchangeable for Indebtedness or is
redeemable at the option of the holder thereof, in whole or in part, at any time
on or prior to the date six months after the Maturity Date.
 
“Dollars”, “dollars” and “$” each mean lawful money of the United States.
 
“Effective Amount” means on any date, the aggregate outstanding principal amount
of all Loans after giving effect to any prepayments or repayments of such Loans
occurring on such date.
 
“Effective Date” means the date on which the Effective Time occurs.
 
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“Effective Time” means the time as of which all conditions precedent set forth
in Section 5.1 are satisfied or waived by all Lenders.
 
“Environmental Claims” means all material claims by any Governmental Authority
or other Person alleging potential liability or responsibility for violation of
any Environmental Law, or for release or injury to the environment.
 
“Environmental Laws” means all federal, state or local laws, statutes, common
law duties, rules, regulations, ordinances and codes, together with all
administrative orders, requests, licenses, authorizations and permits of, and
agreements with, any Governmental Authorities, in each case relating to
environmental and, as they relate to environmental protection, health, and
safety matters.
 
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended,
and regulations promulgated thereunder.
 
“ERISA Affiliate” means any trade or business (whether or not incorporated)
under common control with the Company within the meaning of Section 414(b) or
(c) of the Code (and Sections 414(m) and (o) of the Code for purposes of
provisions relating to Section 412 of the Code).
 
“ERISA Event” means (a) a Reportable Event with respect to a Pension Plan; (b) a
withdrawal by the Company or any ERISA Affiliate from a Pension Plan subject to
Section 4063 of ERISA during a plan year in which it was a substantial employer
(as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which
is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete
or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer
Plan or notification that a Multiemployer Plan is in reorganization; (d) the
filing of a notice of intent to terminate (other than pursuant to Section
4041(b) of ERISA), the treatment of a Plan amendment as a termination under
Section 4041(c) or 4041A of ERISA, or the commencement of proceedings by the
PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or
condition which might reasonably be expected to constitute grounds under Section
4042 of ERISA for the termination of, or the appointment of a trustee to
administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any
liability under Title IV of ERISA, other than PBGC premiums due but not
delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate.
 
“Eurodollar Reserve Percentage” has the meaning specified in the definition of
“LIBO Rate”.
 
“Event of Default” means any of the events or circumstances specified in Section
9.1.
 
“Exchange Act” means the Securities Exchange Act of 1934.
 
“Exempt Subsidiary” means (a) any of the following existing Subsidiaries: Eagle
Pass Well Service, L.L.C., TXCO Drilling Corp., PPL Operating Inc., Maverick Gas
Marketing, Ltd., Maverick Dimmit Pipeline, Ltd. or Paloma Pipeline, L.P.; and
(b) any Subsidiary formed or acquired after the Effective Date that owns no
Hydrocarbon Interests.
 
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“Existing Derivative Contracts” means the contracts listed on Schedule 6.25
hereto.
 
“FAS 123R” means Financial Accounting Statement 123R promulgated by the
Financial Accounting Standards Board.
 
“FAS 133” means Financial Accounting Statement 133 promulgated by the Financial
Accounting Standards Board.
 
“FAS 143” means Financial Accounting Statement 143 promulgated by the Financial
Accounting Standards Board.
 
“Federal Funds Rate” means, for any day, the rate set forth in the weekly
statistical release designated as H.15(519), or any successor publication,
published by the Federal Reserve Bank of New York (including any such successor,
“H.15(519)”) on the preceding Business Day opposite the caption “Federal Funds
(Effective)”; or, if for any relevant day such rate is not so published on any
such preceding Business Day, the rate for such day will be the arithmetic mean
as determined by the Administrative Agent of the rates for the last transaction
in overnight Federal funds arranged prior to 9:00 a.m. (New York, New York time)
on that day by each of three leading brokers of Federal funds transactions in
New York, New York selected by the Administrative Agent.
 
“Fee Letter Agreement” means the letter agreement dated February 13, 2007 among
BMO Capital Markets Corp., Bank of Montreal and the Company.
 
“First Lien Credit Agent” means the Administrative Agent (as defined in the
First Lien Credit Agreement).
 
“First Lien Credit Agreement” means the Amended and Restated Credit Agreement
among the Loan Parties, the First Lien Credit Agent and BMO Capital Markets
Corp., as arranger, and the other lenders from time to time party thereto dated
as of the Effective Date, as amended, amended and restated, restated,
supplemented or otherwise modified in accordance with the terms hereof.
 
“First Lien Credit Documents” means the “Loan Documents” (as defined in the
First Lien Credit Agreement).
 
“First Lien Credit Lenders” means the “Lenders” (as defined in the First Lien
Credit Agreement).
 
“First Lien Loans” means the loans to be made from time to time under and in
accordance with the First Lien Credit Documents.
 
“First Lien Obligations” has the meaning ascribed thereto in the Intercreditor
Agreement.
 
“First Lien Secured Parties” means the “Secured Parties” (as defined in the
First Lien Credit Agreement).
 
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“First Liens” has the meaning specified in Section 7.14(b).
 
“Fiscal Quarter” means each of the three-month periods coinciding with the
fiscal quarters adopted by the Company for financial reporting purposes.
 
“Foreign Lender” means any Lender that is organized under the laws of a
jurisdiction other than the United States of America, any State thereof or the
District of Columbia.
 
“FRB” means the Board of Governors of the Federal Reserve System, and any
Governmental Authority succeeding to any of its principal functions.
 
“GAAP” means generally accepted accounting principles set forth from time to
time in the opinions and pronouncements of the Accounting Principles Board and
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the U.S. accounting
profession).
 
“Governmental Authority” means any nation or government, any state or other
political subdivision thereof, any central bank (or similar monetary or
regulatory authority) thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
and any corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
 
“Granting Lender” has the meaning specified in Section 11.8(d).
 
“Guarantor” means (a) each of the Original Guarantors, (b) from and after the
Output Closing Time, OPEX upon the execution and delivery by OPEX of the
Guaranty, and (c) any new Subsidiary which is required to execute the Guaranty
under Section 7.12 upon the execution and delivery by such Person of the
Guaranty.
 
“Guaranty” means the Guaranty Agreement, substantially in the form of Exhibit
“G” hereto executed by each Guarantor in favor of the Administrative Agent and
the Lenders, as the same may be amended, amended and restated, supplemented or
otherwise modified from time to time pursuant to the terms hereof (including, in
the case of any Subsidiary required to execute the Guaranty pursuant to Section
7.12, by execution and delivery of a joinder thereto in the form of Annex 1
thereto).
 
“Guaranty Obligation” has the meaning specified in the definition of “Contingent
Obligation.”
 
“Highest Lawful Rate” means, as of a particular date, the maximum nonusurious
interest rate that under applicable federal and state law may then be contracted
for, charged or received by the Lenders in connection with the Obligations.
 
“Hydrocarbon Interests” means leasehold and other real property interests in or
under oil, gas and other liquid or gaseous hydrocarbon leases, mineral fee
interests, overriding royalty and royalty interests, net profit interests,
production payment interests relating to oil, gas or other liquid or gaseous
hydrocarbons wherever located including any reserved or residual interest of
whatever nature, covering lands in or offshore the continental United States.
 
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“Indebtedness” of any Person means, without duplication, (a) all indebtedness
for borrowed money; (b) all obligations issued, undertaken or assumed as the
deferred purchase price of Property or services (other than trade payables
entered into in the ordinary course of business on ordinary terms and not past
due for more than 90 days after the due date thereof, other than those trade
payables disputed in good faith); (c) all non-contingent reimbursement or
payment obligations with respect to Surety Instruments; (d) all obligations
evidenced by notes, bonds, debentures or similar instruments, including
obligations so evidenced incurred in connection with the acquisition of
Property, assets or businesses; (e) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to Property acquired by the Person (even
though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such Property)
including, without limitation, production payments, net profit interests and
other Hydrocarbon Interests subject to repayment out of future Oil and Gas
production; (f) all obligations with respect to Capital Leases; (g) all
non-contingent net obligations with respect to Derivative Contracts; (h) gas
imbalances or obligations under take-or-pay or prepayment contracts with respect
to any of the Oil and Gas Properties which would require the Company or any of
its Subsidiaries to deliver Oil and Gas from any of the Oil and Gas Properties
at some future time without then or thereafter receiving full payment therefor;
(i) all indebtedness referred to in clauses (a) through (g) above secured by (or
for which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien upon or in Property (including accounts
and contracts rights) owned by such Person, even though such Person has not
assumed or become liable for the payment of such Indebtedness; and (j) all
Guaranty Obligations in respect of indebtedness or obligations of others of the
kinds referred to in clauses (a) through (g) above.
 
“Indemnified Liabilities” has the meaning specified in Section 11.5.
 
“Indemnified Person” has the meaning specified in Section 11.5.
 
“Independent Auditor” has the meaning specified in Section 7.1(a).
 
“Independent Engineer” has the meaning specified in Section 7.2(c).
 
“Initial Reserve Report” has the meaning specified in Section 6.11.
 
“Insolvency Proceeding” means (a) any case, action or proceeding relating to
bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution,
winding-up or relief of debtors, or (b) any general assignment for the benefit
of creditors, composition, marshaling of assets for creditors, or other, similar
arrangement in respect of its creditors generally or any substantial portion of
its creditors; undertaken under U.S. Federal, state or foreign law, including
the Bankruptcy Code.
 
“Intercreditor Agreement” means that certain Intercreditor Agreement dated as of
the Effective Date among the Loan Parties, the First Lien Credit Agent, as first
lien collateral agent, and the Administrative Agent, as second lien collateral
agent in the form of Exhibit “H” hereto, as amended, amended and restated,
restated, supplemented or otherwise modified from time to time pursuant to the
terms hereof and thereof.
 
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“Interest Payment Date” (a) as to any Base Rate Loan, means July 2, 2007 and the
first Business Day following the end of each Fiscal Quarter ending thereafter
prior to the Termination Date and each date on which such a Base Rate Loan is
converted into another Interest Rate Type of Loan, and (b) as to any LIBO Rate
Loan, the last day of the Interest Period applicable to such Loan; provided,
however, that if any Interest Period for an LIBO Rate Loan exceeds three months,
the date that falls three months after the beginning of such Interest Period is
also an Interest Payment Date.
 
“Interest Period” means, as to any LIBO Rate Loan, the period commencing on the
Effective Date or on the Conversion/Continuation Date on which such Loan is
converted into or continued as a LIBO Rate Loan, and ending on the date one week
(if determined by the Administrative Agent to be available), or one, two, three
or six months thereafter (or such greater number of months as may be requested
by the Company and determined by the Administrative Agent to be available) as
selected by the Company in its Notice of Borrowing or Notice of
Conversion/Continuation; provided, however, that: (a) if any Interest Period
would otherwise end on a day that is not a Business Day, that Interest Period
shall be extended to the following Business Day unless, in the case of an LIBO
Rate Loan, the result of such extension would be to carry such Interest Period
into another calendar month, in which event such Interest Period shall end on
the preceding Business Day; (b) any Interest Period pertaining to a LIBO Rate
Loan that begins on the last Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month at the end
of such Interest Period) shall end on the last Business Day of the calendar
month at the end of such Interest Period; and (c) no Interest Period for any
Loan shall extend beyond the Termination Date.
 
“Interest Rate Type” means, with respect to any Loan, the interest rate, being
either the Base Rate or the LIBO Rate forming the basis upon which interest is
charged against such Loan hereunder.
 
“IRS” means the Internal Revenue Service, and any Governmental Authority
succeeding to any of its principal functions under the Code.
 
“Lenders” has the meaning specified in the preamble hereto.
 
“Lending Office” means, as to any Lender, the office or offices of such Lender
specified as its “Lending Office” or “Domestic Lending Office” or “Offshore
Lending Office,” as the case may be, on the signature pages hereof, or such
other office or offices as such Lender may from time to time notify the Company
and the Administrative Agent.
 
“Letter of Credit” has the meaning ascribed thereto in the First Lien Credit
Agreement.
 
“LIBO Rate” means, for any Interest Period, with respect to LIBO Rate Loans, the
rate of interest per annum (rounded upward to the next 1/16th of 1%) determined
by the Administrative Agent as follows:
 
LIBO Rate =
LIBOR
   
1.00 - Eurodollar Reserve Percentage
       
where,
“Eurodollar Reserve Percentage” means for any day for any Interest Period the
maximum reserve percentage (expressed as a decimal, rounded upward to the next
1/100th of 1%) in effect on such day to which the Administrative Agent or any
Lender is subject under regulations issued from time to time by the FRB for
determining the maximum reserve requirement (including any emergency,
supplemental or other marginal reserve requirement) with respect to Eurocurrency
funding (currently referred to as “Eurocurrency liabilities”); and

 
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“LIBOR” means relative to any Interest Period for LIBO Rate Loans:
 
(a) the rate per annum equal to the rate determined by the Administrative Agent
to be the offered rate that appears on the page, currently page 3750, of the
Telerate screen (or any successor thereto or substitute therefor) that displays
an average British Bankers Association Interest Settlement Rate for deposits in
Dollars (for delivery on the first day of such Interest Period) with a term
equivalent to such Interest Period, determined as of approximately 11:00 a.m.
(London time) two Business Days prior to the first day of such Interest Period,
or
 
(b) if the rate referenced in the preceding clause (a) does not appear on such
page or service or such page or service shall not be available, the rate per
annum equal to the rate determined by the Administrative Agent to be the offered
rate on such other page or other service that displays an average British
Bankers Association Interest Settlement Rate for deposits in Dollars (for
delivery on the first day of such Interest Period) with a term equivalent to
such Interest Period, determined as of approximately 11:00 a.m. (London time)
two Business Days prior to the first day of such Interest Period, or
 
(c) if the rates referenced in the preceding clauses (a) and (b) are not
available, the rate per annum determined by the Administrative Agent as the rate
of interest at which deposits in Dollars for delivery on the first day of such
Interest Period in same day funds in the approximate amount of the LIBO Rate
Loan being made, continued or converted by Bank of Montreal and with a term
equivalent to such Interest Period would be offered by Bank of Montreal’s London
Branch to major banks in the London interbank eurodollar market at their request
at approximately 4:00 p.m. (London time) two Business Days prior to the first
day of such Interest Period.
 
The LIBO Rate shall be adjusted automatically as to all LIBO Rate Loans then
outstanding as of the effective date of any change in the Eurodollar Reserve
Percentage.
 
“LIBO Rate Loan” means a Loan that bears interest based on the LIBO Rate plus
the Applicable Margin.
 
“Lien” means any security interest, mortgage, deed of trust, pledge,
hypothecation, assignment, charge or deposit arrangement, encumbrance, lien
(statutory or other) or preferential arrangement of any kind or nature
whatsoever in respect of any Property (including those created by, arising under
or evidenced by any conditional sale or other title retention agreement and the
interest of a lessor under a Capital Lease), any financing lease having
substantially the same economic effect as any of the foregoing, and any
contingent or other agreement to provide any of the foregoing, but not including
(a) the interest of a lessor under a lease on Oil and Gas Properties or (b) the
interest of a lessor under an Operating Lease.
 
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“Liquidity” means, with respect to the Company and the Guarantors on a
consolidated basis, the sum of (a) their unrestricted cash and unrestricted Cash
Equivalents plus (b) the Available Borrowing Base.
 
“Loan Documents” means this Agreement, the Notes, each Guaranty, the Security
Documents, the Fee Letter Agreement, the Commitment Letter and all other
documents delivered to the Administrative Agent or any Lender in connection
herewith.
 
“Loans” has the meaning specified in Section 2.1(a).
 
“Loan Parties” means the Company and each Guarantor.
 
“Margin Stock” means “margin stock” as such term is defined in Regulation T, U
or X of the FRB.
 
“Material Adverse Effect” means (a) a material adverse change in, or a material
adverse effect upon, (i) the Output Acquisition or (ii) the operations,
business, properties or financial condition of the Company and its Subsidiaries,
taken as a whole excluding events, developments or circumstances generally
affecting the industry in which the Company and its Subsidiaries operate or
arising from changes in general business or economic conditions, so long as the
foregoing do not disproportionately adversely affect the Company and its
Subsidiaries, taken as a whole; (b) a material impairment of the ability of the
Company or any Guarantor to perform under any material Loan Document; or (c) a
material adverse effect upon the legality, validity, binding effect or
enforceability against the Company or any Guarantor of any material Loan
Document.
 
“Maturity Date” means the fifth anniversary of the Effective Date.
 
“Merger Sub” means Output Acquisition Corp., a Texas corporation.
 
“Midstream Contracts” means (a) the Firm Transportation Service Agreement by and
between Maverick-Dimmit Pipeline, Ltd. and TXCOE dated April 1, 2007 and (b) the
Marketing Services Agreement by and between Maverick Gas Marketing, Ltd. and
TXCOE dated April 1, 2007.
 
“Moody’s” means Moody’s Investors Service, Inc.
 
“Mortgaged Properties” means such Oil and Gas Properties upon which the Company
and the Guarantors have granted the Administrative Agent for the benefit of the
Lenders a valid, second Lien pursuant to the Mortgages, subject to Permitted
Liens.
 
“Mortgages” means the Mortgages, Deeds of Trust, Security Agreements, Financing
Statements and Assignments of Production from the Company and TXCOE, and, from
and after the Effective Time, Merger Sub and OPEX, in favor of the
Administrative Agent, for the benefit of the Secured Parties, covering the Oil
and Gas Properties of the Company and the Guarantors party thereto and all
supplements, assignments, assumptions, amendments and restatements thereto (or
any agreement in substitution therefor) that are executed and delivered to the
Administrative Agent for benefit of the Lenders pursuant to Article IV of this
Agreement.
 
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“Multiemployer Plan” means a “multiemployer plan”, within the meaning of Section
4001(a)(3) of ERISA, to which the Company or any ERISA Affiliate makes, is
making, or is obligated to make contributions or, during the preceding three
calendar years, has made, or been obligated to make, contributions.
 
“Net Cash Proceeds” means in connection with any Disposition or any Recovery
Event, all proceeds thereof in the form of cash and Cash Equivalents of such
Disposition or Recovery Event, net of (i) amounts required by the First Lien
Credit Agreement to be applied to the repayment of the First Lien Obligations or
the cash collateralization of outstanding Letters of Credit, (ii) reasonable and
customary Attorney Costs, accountants’ fees, investment banking fees, (iii)
amounts required to be applied to the repayment of Indebtedness secured by a
Lien expressly permitted hereunder on any Property which is the subject of such
Disposition or Recovery Event, (iv) other reasonable and customary fees and
expenses actually incurred in connection therewith (including survey costs,
title insurance premiums, search and recording charges) and (v) net of taxes
paid or reasonably estimated to be payable as a result thereof (after taking
into account any available tax credits or deductions and any tax sharing
arrangements).
 
“Net Present Value” means the PV 10 Value of the Oil and Gas Properties and
adjusted at the date of determination (on the same basis as the most recent
Reserve Report previously delivered pursuant to Section 6.11 or Section 7.2(c)
was prepared) for Dispositions and purchases of Hydrocarbon Interests occurring
since the date of such report. The Net Present Value shall be calculated by the
Company as of each date of determination.
 
“Net Proceeds of Production” means the amounts attributable to the Company’s and
the Guarantors’ interest in the proceeds received from the sale of Oil and Gas
produced from Mortgaged Properties after deduction of (a) royalties existing as
of the effective date on which the Company or the applicable Guarantor first
mortgaged its interests in such Mortgaged Properties in favor of the Lenders or
their predecessors; (b) third party (including any Exempt Subsidiary) pipeline
and transportation charges; (c) production, ad valorem and severance taxes
chargeable against such production; (d) marketing costs; (e) overriding
royalties existing as of the effective date on which the Company or the
applicable Guarantor first mortgaged its interests in such Mortgaged Properties
in favor of the Lenders or their predecessors; (f) other interests in and
measured by production burdening the Mortgaged Properties existing as of the
effective date on which the Company or the applicable Guarantor first mortgaged
its interests in such Mortgaged Properties in favor of the Lenders or their
predecessors; and (g) the current portion of direct operating or production
costs which is allocable to such interest in such Mortgaged Properties.
 
“Non-Recourse Debt” means Indebtedness of Exempt Subsidiaries (a) as to which
neither the Company nor any Guarantor (i) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (ii) is directly or indirectly liable as a guarantor or
otherwise, or (iii) constitutes the lender with respect to such Indebtedness;
and (b) no default with respect to which (including any rights that the holders
thereof may have to take enforcement action against an Exempt Subsidiary) would
permit upon notice, lapse of time or both any holder of any other Indebtedness
of the Company or any Guarantor to declare a default on such other Indebtedness
or cause the payment thereof to be accelerated or payable prior to its stated
maturity date.
 
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“Notes” means the promissory notes, whether one or more, specified in Section
2.1(d), substantially in the same form as Exhibit “F”, including any amendments,
amendments and restatements, modifications, renewals or replacements of such
promissory notes.
 
“Notice of Borrowing” means a notice in substantially the form of Exhibit “A”.
 
“Notice of Conversion/Continuation” means a notice in substantially the form of
Exhibit ”B”.
 
“NYMEX” means the New York Mercantile Exchange.
 
“Obligations” means the unpaid principal of and interest (including interest
accruing at the then applicable rate provided herein after the maturity of the
Loans and interest accruing at the then applicable rate provided herein after
the filing of any petition for an Insolvency Proceeding, or the commencement of
any Insolvency Proceeding, whether or not a claim for post-filing or
post-petition interest is allowed in such proceeding) on the Loans and all other
advances, debts, liabilities, obligations, covenants and duties arising under
any Loan Document owing by the Company or any Guarantor to any Lender, the
Administrative Agent, any Qualifying Derivative Contract Counterparty or any
Indemnified Person, whether direct or indirect (including those acquired by
assignment), absolute or contingent, due or to become due, now existing or
hereafter arising, whether on account of principal, interest, reimbursement
obligations, fees, indemnities, costs, expenses (including all reasonable fees,
charges and disbursements of counsel in accordance with Section 11.4) or
otherwise.
 
“Oil and Gas” means petroleum, natural gas and other related hydrocarbons or
minerals or any of them and all other substances produced or extracted in
association therewith.
 
“Oil and Gas Liens” means (a) Liens arising under oil and gas leases, overriding
royalty agreements, net profits agreements, royalty trust agreements, farm-out
agreements, division orders, contracts for the sale, purchase, exchange,
transportation, gathering or processing of Oil and Gas, unitizations and pooling
designations, declarations, orders and agreements, development agreements,
operating agreements, production sales contracts, area of mutual interest
agreements, gas balancing or deferred production agreements, injection,
repressuring and recycling agreements, salt water or other disposal agreements,
seismic or geophysical permits or agreements, and other agreements that are
customary in the oil and gas business and are entered into by the Company in the
ordinary course of business; provided, however, in all instances that such Liens
are limited to the assets that are the subject of the relevant agreement; and
(b) Liens on pipelines or pipeline facilities that arise by operation of law.
 
“Oil and Gas Properties” means Hydrocarbon Interests now or hereafter owned by
the Company and the Guarantors and contracts executed in connection therewith
and all tenements, hereditaments, appurtenances, and properties belonging,
affixed or incidental to such Hydrocarbon Interests, including, without
limitation, any and all Property, now owned by the Company and the Guarantors
and situated upon or to be situated upon, and used, built for use, or useful in
connection with the operating, working or developing of such Hydrocarbon
Interests, including, without limitation, any and all Oil and Gas wells,
buildings, structures, field separators, liquid extractors, plant compressors,
pumps, pumping units, field gathering systems, tanks and tank batteries,
fixtures, valves, fittings, machinery and parts, engines, boilers, apparatus,
equipment, appliances, tools, implements, cables, wires, towers, taping, tubing
and rods, surface leases, rights of way, easements and servitudes, and all
additions, substitutions, replacements for, fixtures and attachments to any and
all of the foregoing owned directly or indirectly by the Company and the
Guarantors.
 
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“Operating Lease” means an operating lease determined in accordance with GAAP.
 
“OPEX” means OPEX Energy, LLC a Texas limited liability company, which is a
wholly owned Subsidiary of Output.
 
“Organization Documents” means, for any corporation, the certificate or articles
of incorporation, the bylaws, any certificate of determination or instrument
relating to the rights of preferred shareholders of such corporation and any
shareholder rights agreement and for any limited liability company means the
limited liability company agreement, and all other documents, filings and
instruments necessary to create and constitute such company, or for any limited
partnership means the original agreement of limited partnership as amended from
time to time.
 
“Original Guarantor” means any of TXCOE, TTSI or Merger Sub, each of which is a
wholly owned Subsidiary.
 
“Originating Lender” has the meaning specified in Section 11.8(f). 
 
“Other Taxes” means any present or future stamp or documentary taxes or any
other excise or property taxes, charges or similar levies which arise from any
payment made hereunder or from the execution, delivery or registration of, or
otherwise with respect to, this Agreement or any other Loan Documents.
 
“Output” means Output Exploration, LLC, a Delaware limited liability company.
 
“Output Acquisition” means the proposed acquisition by the Company of all of the
outstanding Capital Stock of Output pursuant to the Output Acquisition Agreement
for an aggregate cash purchase price not to exceed $100,000,000 in cash and
common stock of the Company, subject to usual and customary adjustments for
transactions of such nature.
 
“Output Acquisition Agreement” means the Agreement and Plan of Merger dated
effective as of February 20, 2007 by and among the Company, Merger Sub and
Output, as amended, amended and restated, supplemented, replaced or otherwise
modified from time to time in accordance with this Agreement.
 
“Output Acquisition Documents” means, collectively, the Output Acquisition
Agreement and all schedules, exhibits, annexes and amendments thereto and all
side letters and agreements affecting the terms thereof or entered into in
connection therewith, in each case, as amended, amended and restated,
supplemented or otherwise modified from time to time.
 
“Output Closing Time” means the time as of which all conditions precedent set
forth in Section 5.2 of the First Lien Credit Agreement are satisfied or waived
by all Lenders.
 
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“Output Reserve Report” has the meaning specified in Section 6.11.
 
“Participant” has the meaning specified in Section 11.8(f).
 
“PBGC” means the Pension Benefit Guaranty Corporation, or any Governmental
Authority succeeding to any of its principal functions under ERISA.
 
“Pension Plan” means a pension plan (as defined in Section 3(2) of ERISA)
subject to Title IV of ERISA, other than a Multiemployer Plan, which the Company
or any of its Subsidiaries sponsors, maintains, or to which it makes, is making,
or is obligated to make contributions, or in the case of a multiple employer
plan (as described in Section 4064(a) of ERISA) has made contributions at any
time during the immediately preceding five plan years.
 
“Permitted Indebtedness” has the meaning specified in Section 8.5.
 
“Permitted Liens” means the collective reference to (i) in the case of
Collateral other than Pledged Stock, Liens permitted by Section 8.1 and (ii) in
the case of Collateral consisting of Pledged Stock, (A) Liens permitted by
Sections 8.1(b) and (j) and (B) non-consensual Liens permitted by Section 8.1 to
the extent arising by operation of law.
 
“Permitted Refinancing” means any modification, refinancing, refunding, renewal
or extension of Indebtedness; provided, however, that (a) the principal amount
thereof does not exceed the principal amount of the Indebtedness so modified,
refinanced, refunded, renewed or extended except by an amount equal to unpaid
accrued interest and premium thereon plus other reasonable amounts paid, and
fees and expenses reasonably incurred, in connection therewith, (b) such
modification, refinancing, refunding, renewal or extension has a final maturity
date equal to or later than the final maturity date of the Indebtedness being
modified, refinanced, refunded, renewed or extended, (c) if the Indebtedness
being modified, refinanced, refunded, renewed or extended is subordinated in
right of payment to the Obligations, such modification, refinancing, renewal or
extension is subordinated in right of payment to the Obligations on terms at
least as favorable to the Lenders as those contained in the documentation
governing the original Indebtedness, taken as a whole and (d) the terms and
conditions of any such modified, refinanced, refunded, renewed or extended
Indebtedness are not materially less favorable to the Loan Parties or the
Lenders than the terms and conditions of the Indebtedness being modified,
refinanced, refunded, renewed or extended, taken as a whole.
 
“Person” means an individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated association,
joint venture or Governmental Authority.
 
“Plan” means an employee benefit plan (as defined in Section 3(3) of ERISA)
which is subject to ERISA, other than a Multiemployer Plan.
 
“Platform” has the meaning specified in Section 7.1(d).
 
“Pledged Stock” means “Pledged Stock” as such term is defined in the Security
Agreement.
 
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“Premium” has the meaning specified in Section 2.4(b).
 
“Pricing Grid” means the annualized rates (stated in terms of basis points
(“bps”)) set forth below which shall be computed as of each day during the term
hereof for the Applicable Margin as follows:
 
Applicable Margin
Base Rate Loan
(bps)
 
LIBO Rate Loan
(bps)
350 bps
 
450 bps

“Principal Business” means the business of the exploration for, and development,
acquisition, production, and upstream marketing and transportation of Oil and
Gas.
 
“Projected Oil and Gas Production” means the projected production of oil or gas
(measured by volume unit or BTU equivalent, not sales price) for the term of the
contracts or a particular half-year, as applicable, from Oil and Gas Properties
and interests owned by the Company and the Guarantors that have attributable to
them Proved Developed Producing Reserves, as such production is projected in the
most recent Reserve Report delivered pursuant to Section 7.2(c), after deducting
projected production from any Oil and Gas Properties sold or under contract for
sale that had been included in such report and after adding projected production
from any Oil and Gas Properties or Hydrocarbon Interests that had not been
reflected in such report but that are reflected in a separate or supplemental
reports prepared on the same basis as the reports delivered pursuant to Section
7.2(c) above and otherwise are satisfactory to the Administrative Agent.
 
“Pro Rata Share” means, as to any Lender at any time, the percentage equivalent
(expressed as a decimal, rounded to the ninth decimal place) at such time of
such Lender’s Aggregate Exposure divided by the combined Aggregate Exposure of
all Lenders.
 
“Property” means any interest in any kind of property or asset, whether real,
personal or mixed, tangible or intangible.
 
“Proved Developed Producing Reserves” means those Oil and Gas Properties
designated as proved developed producing (in accordance with the Definitions for
Oil and Gas Reserves approved by the Board of Directors of the Society of
Petroleum Engineers, Inc. from time to time) in the Reserve Report.
 
“Proved Reserves” means those Oil and Gas Properties designated as proved (in
accordance with the Definitions for Oil and Gas Reserves approved by the Board
of Directors of the Society of Petroleum Engineers, Inc. from time to time) in
the Reserve Report.
 
“Public Lender” has the meaning specified in Section 7.1(d).
 
“PV 10 Value” means, as of any date of determination, the present value of
future cash flows from Proved Reserves included in the Company’s and the
Guarantors’ Oil and Gas Properties as set forth in the most recent Reserve
Report delivered pursuant to Section 6.11 or 7.2(c), utilizing the average of
the Three-Year Strip Price for crude oil (WTI Cushing) and natural gas (Henry
Hub), quoted on the NYMEX (or its successor) and utilizing a 10% discount rate.
The PV-10 Value shall be adjusted to give effect to the Company’s and the
Guarantors’ Derivative Contracts for the purpose of hedging prices of Oil and
Gas and any Oil and Gas sales contracts not cancellable on 90 or fewer days’
notice. The PV 10 Value shall be calculated by the Company as of each date of
determination.
 
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“Qualifying Derivative Contract” means any Derivative Contract between any Loan
Party and any Qualifying Derivative Contract Counterparty.
 
“Qualifying Derivative Contract Counterparty” means, with respect to a
Qualifying Derivative Contract, any Person that was a Lender or an Affiliate
thereof at the time such Qualifying Derivative Contract was originally entered
into.
 
“Qualifying Preferred Stock” shall mean, as applied to the Capital Stock of any
Person, the Capital Stock of any class or classes (however designated) that is
preferred with respect to the payment of dividends, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person;
provided, however, that such stock (x) neither matures, nor provides for
mandatory redemption, or redemption at the holder’s option, prior to October 31,
2011 and (y) is not convertible into or exchangeable for Indebtedness or
Disqualified Stock.
 
“Quarterly Status Report” means a status report prepared quarterly by the
Company in form, scope and content acceptable to the Administrative Agent for
such quarter then ended (a) describing the Company’s position regarding its
Derivative Contracts including, as of the last Business Day of such quarter, a
summary of its hedging positions under its Derivative Contracts, including the
type, term, price, effective date and notional principal amount or volumes (in
total and as a percentage of the Company’s total anticipated production), “mark
to market” and margin calculations, the hedged price(s), interest rate(s) or
exchange rate(s), as applicable, and any collateral therefor and credit support
agreements relating thereto and the counterparty to each Derivative Contract,
and (b) containing a table that demonstrates the Company’s compliance with the
requirements set forth in Section 8.10.
 
“Recovery Event” means any settlement of or payment in respect of any Property
of the Company or any Guarantor arising from a casualty insurance claim or any
condemnation proceeding in an amount in excess of $1,000,000.
 
“Register” means a register for the recordation of the names and addresses of
the Lenders and the Commitments thereof, and the principal amount of the Loans
owing to such Lender from time to time.
 
“Related Funds” has the meaning specified in Section 11.8(a).
 
“Replacement Lender” has the meaning specified in Section 3.7.
 
“Reportable Event” means any of the events set forth in Section 4043(b) of ERISA
or the regulations thereunder, other than any such event for which the 30-day
notice requirement under ERISA has been waived in regulations issued by the
PBGC.
 
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“Required Lenders” means, at any time, subject to Section 11.1, the
Administrative Agent and the Lenders holding more than 50% of the sum of the
Effective Amount at such time or, if there is no Effective Amount at such time,
the Administrative Agent and the Lenders holding more than 50% of the aggregate
Commitments at such time.
 
“Requirement of Law” means, as to any Person, any law (statutory or common),
treaty, rule or regulation or determination of an arbitrator or of a
Governmental Authority, in each case applicable to or binding upon the Person or
any of its Property or to which the Person or any of its Property is subject.
 
“Reserve Report” means (a) the Initial Reserve Report, (b) the Output Reserve
Report and (c) each subsequent report delivered pursuant to Section 7.2(c), each
of which shall be a report, in form, scope and content acceptable to the
Administrative Agent, covering Proved Reserves attributable to the Company’s and
the Guarantors’ Oil and Gas Properties and setting forth with respect thereto,
(i) the total quantity of Proved Reserves (separately classified as to
producing, shut in, behind pipe, and undeveloped), (ii) the estimated future net
revenues and cumulative estimated future net revenues, (iii) the present
discounted value of future net revenues, and (iv) such other information and
data with respect to the Proved Reserves as the Administrative Agent may
reasonably request.
 
“Responsible Officer” means, with respect to any Person, the chief executive
officer, president, chief financial officer or treasurer of the Person.
 
“Restricted Payments” has the meaning specified in Section 8.9.
 
“S&P” means Standard & Poor’s Rating Services.
 
“SEC” means the Securities and Exchange Commission, or any Governmental
Authority succeeding to any of its principal functions.
 
“Secured Parties” has the meaning ascribed thereto in the Security Agreement.
 
“Security Agreement” means the Security Agreement in substantially the form of
Exhibit “D” executed by the Company and each Guarantor pledging to the
Administrative Agent for benefit of the Secured Parties all of the Collateral of
the Company and each Guarantor, as the same may be amended, amended and
restated, supplemented or otherwise modified from time to time pursuant to the
terms hereof (including, in the case of any Subsidiary required to execute the
Security Agreement pursuant to Section 7.12, by execution and delivery of a
joinder thereto in the form of Annex 2 thereto).
 
“Security Documents” means the Intercreditor Agreement, the Mortgages, the
Security Agreement, and related financing statements as the same may be amended
from time to time and any and all other instruments now or hereafter executed in
connection with or as security for the payment of the Indebtedness.
 
“Solvent” means, as to any Person at any time, that (a) the fair value of all of
the Property of such Person is greater than the amount of such Person’s
liabilities (including disputed, contingent and unliquidated liabilities) as
such value is established and liabilities evaluated for purposes of Section
101(32) of the Bankruptcy Code; (b) the present fair salable value of all of the
Property of such Person is not less than the amount that will be required to pay
the probable liability of such Person on its debts as they become absolute and
matured; (c) such Person does not intend to, and does not believe that it will,
incur debts or liabilities beyond such Person’s ability to pay as such debts and
liabilities mature; and (d) such Person is not engaged in business or a
transaction, and is not about to engage in business or a transaction, for which
such Person’s Property would constitute unreasonably small capital.
 
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“SPC” has the meaning specified in Section 11.8(d).
 
“Special Damages” has the meaning specified in Section 11.21.
 
“Subsidiary” of a Person means any corporation, association, partnership, joint
venture or other business entity of which more than 50% of the voting stock or
other equity interests (in the case of Persons other than corporations), is
owned or controlled directly or indirectly, at the relevant time, by the Person,
or one or more of the Subsidiaries of the Person, or a combination thereof. From
and after the Output Closing Time, references herein to a “Subsidiary” of the
Company shall include OPEX. Unless the context otherwise clearly requires,
references herein to a “Subsidiary” refer to a Subsidiary of the Company.
 
“Surety Instruments” means all letters of credit (including standby), banker’s
acceptances, bank guaranties, shipside bonds, surety bonds, performance bonds
(including plugging and abandonment bonds) and similar instruments.
 
“Syndication Agent” has the meaning specified in the preamble hereto.
 
“Taxes” means any and all present or future taxes, levies, imposts, deductions,
charges or withholdings that arise from any payment made hereunder, and all
liabilities with respect thereto, excluding, in the case of the Administrative
Agent, any Lender or any other recipient of any payment made or to be made by or
on account of any obligation of the Company hereunder, (a) such taxes (including
income or franchise taxes) imposed on or measured by its net income, gross
receipts, taxable margin (as determined under Chapter 171 of the Texas Tax Code)
or capital by the United States of America, or by the jurisdiction (or any
political subdivision thereof) under the laws of which it is organized or in
which its principal office is located or in which it maintains a lending office
or conducts business (other than solely by reason of the transactions evidenced
hereby or the taking of any action contemplated by the Loan Documents) or is
otherwise located, (b) any branch profits taxes imposed by the United States or
any similar tax imposed by any other jurisdiction (or any political subdivision
thereof) in which the Administrative Agent, any Lender or any other recipient of
any payment made or to be made by or on account of any obligation of the Company
hereunder or the Company is organized or in which its principal office is
located or in which it maintains a lending office, conducts business (other than
solely by reason of the transactions evidenced hereby or the taking of any
action contemplated by the Loan Documents)or is otherwise located, and (c) any
withholding tax that is attributable to a Lender’s failure to comply with
Section 10.10.
 
“Termination Date” means the earlier of (a) the Maturity Date and (b) the date
on which all Obligations (other than those to Qualified Derivative Contract
Counterparties in respect of Qualified Derivative Contracts) have been satisfied
and all Commitments have terminated, in each case in accordance with the
provisions of this Agreement.
 
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“Three-Year Strip Price” shall mean, as of any date of determination, (a) for
the 36-month period commencing with the month immediately following the month in
which the date of determination occurs, the monthly futures contract prices for
crude oil and natural gas for the 36 succeeding months as quoted on the
applicable commodities exchange as contemplated in the definition of “PV-10
Value” and (b) for periods after such 36-month period, the average of such
quoted prices for the period from and including the 25th month in such 36-month
period through the 36th month in such period.
 
“Transaction Documents” means, collectively, the Loan Documents and the Output
Acquisition Documents.
 
“TTSI” means Texas Tar Sands Inc., a Texas corporation.
 
“TXCOE” means TXCO Energy Corp., a Texas corporation.
 
“UCC” means the Uniform Commercial Code as adopted and in effect in any
applicable jurisdiction.
 
“Unfunded Pension Liability” means the excess of a Plan’s benefit liabilities
under Section 4001(a)(16) of ERISA, over the current value of that Plan’s
assets, determined in accordance with the assumptions used for funding the
Pension Plan pursuant to Section 412 of the Code for the applicable plan year.
 
“United States” and “U.S.” each means the United States of America.
 
“Utilization Percentage” means, at any time, the percentage obtained by dividing
(a) the Effective Amount (as defined in the First Lien Credit Agreement) at such
time by (b) the Borrowing Base (as defined in the First Lien Credit Agreement)
at such time.
 
1.2 Other Interpretive Provisions. The meanings of defined terms are equally
applicable to the singular and plural forms of the defined terms. Unless
otherwise specified or the context clearly requires otherwise, the words
“hereof”, “herein”, “hereunder” and similar words refer to this Agreement as a
whole and not to any particular provision of this Agreement; and subsection,
Section, Schedule and Exhibit references are to this Agreement. The term
“documents” includes any and all instruments, documents, agreements,
certificates, indentures, notices and other writings, however evidenced. The
term “including” is not limiting and means “including without limitation.” The
term “or” has, except where otherwise indicated, the inclusive meaning
represented by the phrase “and/or”. In the computation of periods of time from a
specified date to a later specified date, the word “from” means “from and
including”; the words “to” and “until” each mean “to but excluding”, and the
word “through” means “to and including.” Unless otherwise expressly provided
herein, (a) references to agreements (including this Agreement) and other
contractual instruments shall be deemed to include all subsequent amendments and
other modifications thereto, but only to the extent such amendments and other
modifications are not prohibited by the terms of any Loan Document, and (b)
references to any statute or regulation are to be construed as including all
statutory and regulatory provisions consolidating, amending, replacing,
supplementing or interpreting the statute or regulation. The recitals, captions
and headings of this Agreement are for convenience of reference only and shall
not affect the interpretation of this Agreement. This Agreement and other Loan
Documents may use several different limitations, tests or measurements to
regulate the same or similar matters. All such limitations, tests and
measurements are cumulative and shall each be performed in accordance with their
terms. This Agreement and the other Loan Documents are the result of
negotiations among and have been reviewed by counsel to the Administrative
Agent, the Company and the other parties, and are the products of all parties.
Accordingly, they shall not be construed against the Lenders or the
Administrative Agent merely because of the Administrative Agent’s or Lenders’
involvement in their preparation. The terms “Lenders”, “Administrative Agent”,
“First Lien Credit Lenders” and “First Lien Credit Agent” include their
respective permitted successors.
 
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1.3 Accounting Principles.
 
(a) Unless the context otherwise clearly requires, all accounting terms not
expressly defined herein shall be construed, and all financial computations
required under this Agreement shall be made, in accordance with GAAP,
consistently applied. References to “consolidated”, when it precedes any
accounting term, means such term as it would apply to the Company and its
Subsidiaries on a consolidated basis, determined in accordance with GAAP.
 
(b) References herein to “fiscal year” refer to such fiscal period of the
Company.
 
ARTICLE II

 
THE CREDIT
 
2.1 Amounts and Terms of the Loans.
 
(a) Each Lender severally agrees, on the terms and conditions set forth herein,
to make term loans to the Company on the Effective Date (together with any
conversions or continuations thereof, “Loans”), so long as, as of the time at
which the requested Loan is to be made and after giving effect thereto, (i) the
aggregate amount of all Loans by such Lender at such time does not exceed such
Lender’s Pro Rata Share of the aggregate amount of Loans of all Lenders at such
time, and (ii) the aggregate amount of such Lender’s Loans does not exceed such
Lender’s Commitment. Principal amounts paid on account of the Loans may not be
reborrowed.
 
(b) The Commitment of each Lender shall be permanently reduced on the date of
funding of the Loans pursuant to Section 2.1(a) by the principal amount of the
Loans funded. Such Commitment reductions shall be made for the account of the
Lenders pro rata in accordance with their respective Pro Rata Shares.
 
(c) Provided the applicable conditions in Article V are met, each Lender will
make the amount of its Pro Rata Share of the Loans available to the
Administrative Agent for the account of the Company at the Agent’s Payment
Office by 12:00 p.m. (Chicago, Illinois time) on the Effective Date in funds
immediately available to the Administrative Agent. The proceeds of all such
Loans will then be made available to the Company by the Administrative Agent by
wire transfer to the account(s) specified by the Company in the Notice of
Borrowing.
 
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(d) The Company agrees that upon the request to the Administrative Agent by any
Lender, the Company will promptly execute and deliver to such Lender a
promissory note of the Company evidencing the Loans of such Lender,
substantially in the form of Exhibit “F”(a “Note”), with appropriate insertions
as to date and principal amount; provided, however, that delivery of Notes shall
not be a condition precedent to the occurrence of the Effective Date or the
making of the Loans on the Effective Date. The amount of principal owing on any
Lender’s Note, if any, at any given time shall be the aggregate amount of all
Loans theretofore made by such Lender minus all payments of principal
theretofore received by such Lender on such Note. Interest on each Note shall
accrue and be due and payable as provided herein and therein.
 
2.2 Maturity Date. The Loans of each Lender shall mature on the Maturity Date.
 
2.3 Conversion and Continuation Elections.
 
(a) Prior to the Termination Date, the Company may, upon irrevocable written
notice to the Administrative Agent in accordance with Section 2.3(b) (i) elect,
as of any Business Day in the case of Base Rate Loans, or as of the last day of
the applicable Interest Period in the case of LIBO Rate Loans, to convert any
such Loans into Loans of any other Interest Rate Type; or (ii) elect as of the
last day of the applicable Interest Period, to continue any Loans having
Interest Periods expiring on such day; provided, however, that if at any time a
LIBO Rate Loan is reduced, by payment, prepayment, or conversion of part thereof
to less than $1,000,000, such LIBO Rate Loan shall automatically convert into a
Base Rate Loan.
 
(b) The Company shall deliver a Notice of Conversion/Continuation to be received
by the Administrative Agent not later than 11:00 a.m. (Chicago, Illinois time)
(i) at least three Business Days in advance of the Conversion/Continuation Date,
if the Loans are to be converted into or continued as LIBO Rate Loans; and (ii)
on the Conversion/Continuation Date, if the Loans are to be converted into Base
Rate Loans, specifying: (A) the proposed Conversion/Continuation Date; (B) the
aggregate amount of Loans to be converted or continued; (C) the Interest Rate
Type of Loans resulting from the proposed conversion or continuation; and (D)
other than in the case of conversions into Base Rate Loans, the duration of the
requested Interest Period.
 
(c) If, upon the expiration of any Interest Period applicable to LIBO Rate
Loans, the Company has failed to select in a timely manner a new Interest Period
to be applicable to LIBO Rate Loans, or if any Default or Event of Default then
exists, the Company shall be deemed to have elected to convert such LIBO Rate
Loans into Base Rate Loans effective as of the expiration date of such Interest
Period.
 
(d) The Administrative Agent will promptly notify each Lender of its receipt of
a Notice of Conversion/Continuation, or, if no timely notice is provided by the
Company, the Administrative Agent will promptly notify each Lender of the
details of any automatic conversion. All conversions and continuations shall be
made ratably according to the respective Lender’s Pro Rata Share of outstanding
principal amounts of the Loans with respect to which the notice was given.
 
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(e) The number of tranches outstanding of LIBO Rate Loans, whether under a
conversion or continuation, shall not exceed eight (8) at any one time.
 
2.4 Optional Prepayments.
 
(a) Subject to Section 3.4, the Company may, at any time or from time to time,
subject to the concurrent payment of the Premium:
 
(i) prepay Base Rate Loans upon irrevocable notice to the Administrative Agent
not fewer than one (1) Business Day prior to such prepayment, ratably as to each
Lender, in whole or in part, in aggregate minimum principal amounts of $100,000
or integral multiples thereof (unless the Effective Amount is less than
$100,000, in which case such prepayments shall be equal to the aggregate unpaid
principal amount of the Loans) plus all interest and expenses then outstanding
on such Base Rate Loans, and
 
(ii) prepay LIBO Rate Loans upon irrevocable notice to the Administrative Agent
not fewer than three (3) Business Days prior to such prepayment, ratably as to
each Lender, in whole or in part, in aggregate minimum principal amounts of
$500,000 or integral multiples thereof (unless the Effective Amount is less than
$500,000, in which case such prepayments shall be equal to the aggregate unpaid
principal amount of the Loans), plus all interest and expenses then outstanding
on such LIBO Rate Loans. 
 
Notwithstanding the forgoing, no payment shall be made pursuant to this Section
2.4 if (x) after giving effect to such payment, such payment would cause the
Utilization Percentage to exceed 75% or (y) an Event of Default (as defined in
the First Lien Credit Agreement) has occurred and is continuing under the First
Lien Credit Agreement.
 
Such notice of prepayment shall specify the date and amount of such prepayment
and the Interest Rate Type(s) of Loans to be prepaid. Notwithstanding anything
to the contrary set forth in this Section 2.4, any notice of prepayment
delivered by the Company may state that such notice is conditioned upon the
effectiveness of other financing arrangements, in which case such notice may be
revoked by the Company if such condition is not satisfied, but subject to the
Company’s reimbursement obligations pursuant to Section 3.4 with respect to any
funding losses incurred by any Lender as a result of such revocation.
 
The Administrative Agent will promptly notify each Lender of its receipt of any
such notice, and of such Lender’s Pro Rata Share of such prepayment. The payment
amount specified in such notice shall be due and payable on the date specified
therein, together with accrued interest to each such date on the amount prepaid,
the applicable Premium, and any amounts required pursuant to Section 3.4.
 
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(b) For purposes hereof, the “Premium” shall be a cash amount equal to the
percentages of principal amount of the Loans being prepaid set forth below:
 

If prepaid after the Effective Date, but prior to the first anniversary of the
Effective Date    
1.0
%
If prepaid on or after the first anniversary of the Effective Date    
0.0
%

 
2.5 [Intentionally Omitted.].
 
2.6 Repayment.
 
(a) The Company shall repay to the Administrative Agent for the benefit of the
Lenders the outstanding principal balance of the Loans (and the outstanding
principal of the Loans shall be due and payable) on the Maturity Date or on such
date on which the Loans become due and payable pursuant to Section 2.4 or
Article IX.
 
(b) Each Lender shall maintain in accordance with its usual practice an account
or accounts evidencing Indebtedness of the Company to such Lender resulting from
each Loan of such Lender from time to time, including the amounts of principal
and interest payable and paid to such Lender from time to time under this
Agreement.
 
(c) The Administrative Agent, on behalf of the Company, shall maintain the
Register, and a subaccount therein for each Lender, in which shall be recorded
(i) the amount of each Loan made hereunder, (ii) the amount of any principal or
interest due and payable or to become due and payable from the Company to each
Lender hereunder and (iii) both the amount of any sum received by the
Administrative Agent hereunder from the Company and each Lender’s share thereof.
The Register shall be available for inspection by each Loan Party, the
Administrative Agent and any Lender at any reasonable time and from time to time
upon reasonable prior notice.
 
(d) The entries made in the Register and the accounts of each Lender maintained
pursuant to Section 2.6(b) shall, to the extent permitted by applicable law, be
prima facie evidence of the existence and amounts of the obligations of the
Company therein recorded; provided, however, that the failure of any Lender or
the Administrative Agent to maintain the Register or any such account, or any
error therein, shall not in any manner affect the obligation of the Company to
repay (with applicable interest) the Loans made to the Company by such Lender in
accordance with the terms of this Agreement or the Company’s entitlement to
credit for any payment of principal or interest on the Loans.
 
2.7 Interest.
 
(a) Each Loan shall bear interest on the principal amount thereof from the
Effective Date or date of conversion or continuation pursuant to Section 2.3, as
the case may be, at a rate per annum equal to the lesser of (i) the LIBO Rate or
the Adjusted Base Rate, as the case may be, plus the Applicable Margin and (ii)
the Highest Lawful Rate.
 
(b) Interest on each Loan shall be paid in arrears on each Interest Payment
Date. Interest shall also be paid on the date of any prepayment of Loans under
Section 2.4 for the portion of the Loans so prepaid and upon payment (including
prepayment) in full thereof and, during the existence of any Event of Default,
interest shall be paid on demand of the Administrative Agent.
 
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(c) Notwithstanding paragraph (a) of this Section 2.7, while any Event of
Default under Section 9.1(a) or (b) exists or after acceleration, the Company
shall pay interest (after as well as before entry of judgment thereon to the
extent permitted by law) on the principal amount of all outstanding Loans, at a
rate per annum equal to the lesser of (i) the Highest Lawful Rate and (ii) the
rate otherwise applicable plus two percent (2%) (“Default Rate”).
 
2.8 Fees. The Company will pay fees to the parties and in the amounts specified
in the Fee Letter Agreement.
 
2.9 Computation of Fees and Interest.
 
(a) All computations of interest for Base Rate Loans shall be made on the basis
of a year of 365 or 366 days, as the case may be, and actual days elapsed. All
other computations of fees and interest shall be made on the basis of a 360-day
year and actual days elapsed (which results in more interest being paid than if
computed on the basis of a 365 day year). Interest and fees shall accrue during
each period during which interest or such fees are computed from the first day
thereof to the last day thereof.
 
(b) Each determination of an interest rate by the Administrative Agent shall be
conclusive and binding on the Company and the Lenders in the absence of manifest
error. 
 
2.10 Payments by the Company; Loan Pro Rata.
 
(a) All payments to be made by the Company shall be made without set off,
recoupment or counterclaim. Except as otherwise expressly provided herein, all
payments by the Company shall be made to the Administrative Agent for the
account of the Lenders at the Agent’s Payment Office, and shall be made in
dollars and in immediately available funds, no later than 12:00 p.m. (Chicago,
Illinois time) on the date specified herein. Except to the extent otherwise
expressly provided herein, (i) each payment by the Company of fees shall be made
for the account of the Lenders pro rata in accordance with their respective Pro
Rata Shares, (ii) each payment of principal of Loans shall be made for the
account of the Lenders pro rata in accordance with their respective outstanding
principal amount of such Loans, and (iii) each payment of interest on Loans
shall be made for the account of the Lenders pro rata in accordance with their
respective shares of the aggregate amount of interest due and payable to the
Lenders. The Administrative Agent will promptly distribute to each Lender its
applicable share of such payment in like funds as received. Any payment received
by the Administrative Agent later than 12:00 p.m. (Chicago, Illinois time) shall
be deemed to have been received on the following Business Day and any applicable
interest or fee shall continue to accrue.
 
(b) Subject to the provisions set forth in the definition of “Interest Period”
herein, whenever any payment is due on a day other than a Business Day, such
payment shall be made on the following Business Day, and such extension of time
shall in such case be included in the computation of interest or fees, as the
case may be.
 
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(c) Unless the Administrative Agent receives notice from the Company prior to
the date on which any payment is due to the Lenders that the Company will not
make such payment in full as and when required, the Administrative Agent may
assume that the Company has made such payment in full to the Administrative
Agent on such date in immediately available funds and the Administrative Agent
may (but shall not be so required), in reliance upon such assumption, distribute
to each Lender on such due date an amount equal to the amount then due such
Lender. If and to the extent the Company has not made such payment in full to
the Administrative Agent, each Lender shall repay to the Administrative Agent on
demand such amount distributed to such Lender, together with interest thereon at
the Federal Funds Rate for each day from the date such amount is distributed to
such Lender until the date repaid.
 
(d) Except to the extent otherwise expressly provided herein, the Loans
hereunder shall be from the Lenders pro rata in accordance with their respective
Pro Rata Shares.
 
(e) Notwithstanding anything to the contrary contained herein, after the
occurrence and during the continuance of any Event of Default, each payment in
respect of principal or interest on the Loans, each payment in respect of fees
payable hereunder and any proceeds of Collateral, and Net Cash Proceeds received
by the Administrative Agent and not required to be turned over to the First Lien
Credit Agent pursuant to the Intercreditor Agreement shall be applied in the
following order:
 
(i) first, to the payment or reimbursement of the Administrative Agent for all
costs, expenses, disbursements and losses incurred by the Administrative Agent
and which the Company is required to pay or reimburse pursuant to the Loan
Documents;
 
(ii) second, to the payment or reimbursement of the Lenders for all costs,
expenses, disbursements and losses incurred by such Persons and which any Loan
Party is required to pay or reimburse pursuant to the Loan Documents;
 
(iii) third, to the payment or prepayment to the Lenders of all Obligations; and
 
(iv) fourth, to whomsoever shall be legally entitled thereto.
 
If any Lender owes payments to the Administrative Agent hereunder, any amounts
otherwise distributable under this Section 2.10(e) to such Lender shall be
deemed to belong to the Administrative Agent to the extent of such unpaid
payments, and the Administrative Agent shall apply such amounts to make such
unpaid payments rather than distribute such amounts to such Lender. All
distributions of amounts described in paragraphs second and third above shall be
made by the Administrative Agent to each Lender based on its Pro Rata Share.
 
2.11 Payments by the Lenders to the Administrative Agent.
 
(a) Unless the Administrative Agent receives notice from a Lender on or prior to
12:00 pm (Chicago, Illinois time) on the Effective Date that such Lender will
not make available as and when required hereunder to the Administrative Agent
for the account of the Company the amount of that Lender’s Pro Rata Share of the
Loans, the Administrative Agent may assume that each Lender has made such amount
available to the Administrative Agent in immediately available funds on the
Effective Date and the Administrative Agent may (but shall not be so required),
in reliance upon such assumption, make available to the Company on such date a
corresponding amount. If and to the extent any Lender shall not have made its
full amount available to the Administrative Agent in immediately available funds
and the Administrative Agent in such circumstances has made available to the
Company such amount, that Lender shall on the Business Day following the
Effective Date make such amount available to the Administrative Agent, together
with interest at the Federal Funds Rate for each day during such period. A
notice of the Administrative Agent submitted to any Lender with respect to
amounts owing under this Section 2.11(a) shall be conclusive, absent manifest
error. If such amount is so made available, such payment to the Administrative
Agent shall constitute such Lender’s Loan on the Effective Date for all purposes
of this Agreement. If such amount is not made available to the Administrative
Agent on the Business Day following the Effective Date, the Administrative Agent
will notify the Company of such failure to fund and, upon demand by the
Administrative Agent, the Company shall pay such amount to the Administrative
Agent for the Administrative Agent’s account, together with interest thereon for
each day elapsed since the Effective Date, at a rate per annum equal to the
interest rate applicable at the time to the Loans.
 
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(b) The failure of any Lender to make any Loan on the Effective Date shall not
relieve any other Lender of any obligation hereunder to make a Loan on the
Effective Date, but no Lender shall be responsible for the failure of any other
Lender to make the Loan to be made by such other Lender on the Effective Date.
 
2.12 Sharing of Payments, Etc. If any Lender shall obtain on account of the
Obligations held by it any payment (whether voluntary, involuntary, through the
exercise of any right of set off, or otherwise) or receive any collateral in
respect thereof in excess of the amount such Lender was entitled to receive
pursuant to the terms hereof, such Lender shall immediately (a) notify the
Administrative Agent of such fact, and (b) purchase from the other Lenders such
participations in the Loans made by them as shall be necessary to cause such
purchasing Lender to share the excess payment according to the terms hereof;
provided, however, that if all or any portion of such excess payment is
thereafter recovered from the purchasing Lender, such purchase shall to that
extent be rescinded and each other Lender shall repay to the purchasing Lender
the purchase price paid therefor, together with an amount equal to such paying
Lender’s ratable share (according to the proportion of (i) the amount of such
paying Lender’s required repayment to (ii) the total amount so recovered from
the purchasing Lender) of any interest or other amount paid or payable by the
purchasing Lender in respect of the total amount so recovered. The Company
agrees that any Lender so purchasing a participation from another Lender may, to
the fullest extent permitted by law, exercise all of its rights of payment
(including the right of set off) with respect to such participation as fully as
if such Lender were the direct creditor of the Company in the amount of such
participation. The Administrative Agent will keep records (which shall be
conclusive and binding in the absence of manifest error) of participations
purchased under this Section 2.12 and will in each case notify the Lenders
following any such purchases or repayments.
 
ARTICLE III

 
TAXES, YIELD PROTECTION AND ILLEGALITY
 
3.1 Taxes.
 
(a) Except as otherwise provided in Section 3.1(c) and Section 10.10, any and
all payments by the Company to each Lender or the Administrative Agent under
this Agreement and any other Loan Document shall be made free and clear of, and
without deduction or withholding for any Taxes. In addition, the Company shall
pay all Other Taxes to the relevant Governmental Authority in accordance with
applicable law.
 
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(b) Subject to Section 3.1(f), the Company agrees to indemnify and hold harmless
each Lender and the Administrative Agent for the full amount of Taxes or Other
Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts
payable under this Section 3.1) paid by the Lender or the Administrative Agent
and any penalties, interest, additions to Tax and reasonable expenses arising
therefrom or with respect thereto, whether or not such Taxes or Other Taxes were
correctly or legally asserted. Payment under this indemnification shall be made
within 30 days after the date the affected Lender or the Administrative Agent
makes written demand therefor with reasonable detail as to the particular
imposition; provided, however, that neither the Administrative Agent nor any
Lender shall be entitled to receive any payment with respect to Taxes or Other
Taxes that are incurred or accrued more than 180 days prior to the date the
Administrative Agent or Lender (as the case may be) gives notice and demand
thereof to the Company.
 
(c) If the Company shall be required by law to deduct or withhold any Taxes or
Other Taxes from or in respect of any amount payable hereunder to any Lender or
the Administrative Agent, then: (i) the sum payable shall be increased as
necessary so that after making all required deductions and withholdings
(including deductions and withholdings applicable to additional sums payable
under this Section 3.1), such Lender or the Administrative Agent, as the case
may be, receives an amount equal to the sum it would have received had no such
deductions or withholdings been made; (ii) the Company shall make such
deductions and withholdings; and (iii) the Company shall pay the full amount
deducted or withheld to the relevant taxing authority or other authority in
accordance with applicable law.
 
(d) As soon as practicable after the date of any payment by the Company of Taxes
or Other Taxes under Section 3.1(c) above, the Company shall furnish the
Administrative Agent the original or a certified copy of any receipt issued by
such taxing authority or other authority evidencing payment thereof, a copy of
any return reporting such payment or other evidence of such payment as the
Administrative Agent may reasonably request.
 
(e) Each Lender shall use its reasonable efforts (consistent with legal and
regulatory restrictions) to select a jurisdiction for its Lending Office or
change the jurisdiction of its Lending Office so as to avoid the imposition of
any Taxes or Other Taxes, or to eliminate or reduce any additional payment under
this Section 3.1 or to avoid the obligation to deduct or withhold for taxes
under Section 10.10 by the Company if such selection or change in the judgment
of such Lender is not materially disadvantageous to such Lender.
 
(f) No Lender that is required to comply with Section 10.10 shall be entitled to
any indemnification under this Section 3.1 if the obligation with respect to
which indemnification is sought would not have arisen but for a failure of the
affected Lender to comply with such Section 10.10.
 
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(g) If the Administrative Agent or a Lender determines that it has received a
refund of any Taxes or Other Taxes as to which it has been indemnified by the
Company or with respect to which the Company has paid additional amounts
pursuant to this Section 3.1, it shall pay over such refund to the Company (but
only to the extent of indemnity payments made, or additional amounts paid, by
the Company under this Section 3.1 with respect to the Taxes or Other Taxes
giving rise to such refund), without interest (other than any interest paid by
the relevant Governmental Authority with respect to such refund); provided,
however, that the Company, upon the reasonable request of the Administrative
Agent or such Lender, agrees to repay the amount paid over to the Company (plus
any penalties, interest or other charges imposed by the relevant Governmental
Authority) to the Administrative Agent or such Lender in the event the
Administrative Agent or such Lender is required to repay such refund to such
Governmental Authority.
 
3.2 Illegality.
 
(a) If any Lender determines that the introduction of any Requirement of Law, or
any change in any Requirement of Law, or in the interpretation or administration
of any Requirement of Law, has made it unlawful, or that any central bank or
other Governmental Authority has asserted that it is unlawful, for any Lender or
its applicable Lending Office to make LIBO Rate Loans, then, on notice thereof
by the Lender to the Company through the Administrative Agent, any obligation of
that Lender to make LIBO Rate Loans shall be suspended until such Lender
notifies the Administrative Agent and the Company that the circumstances giving
rise to such determination no longer exist.
 
(b) If a Lender determines that it is unlawful to maintain any LIBO Rate Loan,
the Company shall, upon its receipt of notice of such fact and demand from such
Lender (with a copy to the Administrative Agent), prepay in full such LIBO Rate
Loans of that Lender then outstanding, together with interest accrued thereon
and amounts required under Section 3.4, either on the last day of the Interest
Period thereof, if the Lender may lawfully continue to maintain such LIBO Rate
Loans to such day, or immediately, if the Lender may not lawfully continue to
maintain such LIBO Rate Loan. If the Company is required to so prepay any LIBO
Rate Loan, then concurrently with such prepayment, the Company shall borrow from
the affected Lender, in the amount of such repayment, a Base Rate Loan.
 
(c) If the obligation of any Lender to make or maintain LIBO Rate Loans has been
so terminated or suspended, all Loans which would otherwise be made by the
Lender as LIBO Rate Loans shall be instead Base Rate Loans.
 
(d) Before giving any notice to the Administrative Agent under this Section 3.2,
the affected Lender shall designate a different Lending Office with respect to
its LIBO Rate Loans if such designation will avoid the need for giving such
notice or making such demand and will not, in the judgment of such Lender, be
illegal or otherwise disadvantageous to such Lender.
 
3.3 Increased Costs and Reduction of Return.
 
(a) If any Lender determines that, due to either (i) the introduction of or any
change (other than any change by way of imposition of or increase in reserve
requirements included in the calculation of the LIBO Rate) in or in the
interpretation of any law or regulation or (ii) the compliance by that Lender
with any guideline or request from any central bank or other Governmental
Authority (whether or not having the force of law), there shall be any increase
in the cost to such Lender of agreeing to make or making, funding or maintaining
any LIBO Rate Loans, then the Company shall be liable for, and shall from time
to time, upon demand (with a copy of such demand to be sent to the
Administrative Agent), pay to the Administrative Agent for the account of such
Lender, additional amounts as are sufficient to compensate such Lender for such
increased costs.
 
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(b) If any Lender shall have determined that (i) the introduction of any Capital
Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii)
any change in the interpretation or administration of any Capital Adequacy
Regulation by any central bank or other Governmental Authority charged with the
interpretation or administration thereof, or (iv) compliance by such Lender (or
its Lending Office) or any Affiliate controlling such Lender with any Capital
Adequacy Regulation, affects or would affect the amount of capital required or
expected to be maintained by such Lender or any Affiliate controlling such
Lender and (taking into consideration such Lender’s or such Affiliate’s policies
with respect to capital adequacy and such Lender’s desired return on capital)
further determines that the amount of such capital is increased as a consequence
of its Commitment, Loans, other Credit Extensions, or Obligations under this
Agreement, then, upon demand of such Lender to the Company through the
Administrative Agent, the Company shall pay to such Lender, from time to time as
specified by such Lender, additional amounts sufficient to compensate such
Lender for such increase.
 
3.4 Funding Losses. The Company shall reimburse each Lender and hold each Lender
harmless from any loss or expense which such Lender may sustain or incur as a
consequence of (a) the failure of the Company to make on a timely basis any
payment of principal of any LIBO Rate Loan; (b) the failure of the Company to
continue a LIBO Rate Loan or to convert a Base Rate Loan to a LIBO Rate Loan
after the Company has given (or is deemed to have given) a Notice of
Conversion/Continuation (including by reason of the failure to satisfy any
condition precedent thereto); (c) the failure of the Company to make any
prepayment in accordance with any notice delivered under Section 2.4 (whether
pursuant to a permitted revocation of notice of prepayment or otherwise); (d)
the prepayment (including pursuant to Section 2.4) or other payment (including
after acceleration thereof) of a LIBO Rate Loan on a day that is not the last
day of the relevant Interest Period; or (e) the automatic conversion under
Section 2.3 of any LIBO Rate Loan to a Base Rate Loan on a day that is not the
last day of the relevant Interest Period; including any such loss or expense
arising from the liquidation or reemployment of funds obtained by it to maintain
its LIBO Rate Loans or from fees payable to terminate the deposits from which
such funds were obtained. For purposes of calculating amounts payable by the
Company to the Lenders under this Section 3.4 and under Section 3.3(a), each
LIBO Rate Loan made by a Lender (and each related reserve, special deposit or
similar requirement) shall be conclusively deemed to have been funded at the
LIBOR used in determining the LIBO Rate for such LIBO Rate Loan by a matching
deposit or other borrowing in the interbank eurodollar market for a comparable
amount and for a comparable period, whether or not such LIBO Rate Loan is in
fact so funded.
 
3.5 Inability to Determine Rates. If the Administrative Agent determines that
for any reason adequate and reasonable means do not exist for determining the
LIBO Rate for any requested Interest Period with respect to a proposed LIBO Rate
Loan, or that the LIBO Rate applicable pursuant to Section 2.7(b) for any
requested Interest Period with respect to a proposed LIBO Rate Loan does not
adequately and fairly reflect the cost to the Lenders of funding such Loan, the
Administrative Agent will promptly so notify the Company and each Lender.
Thereafter, the obligation of the Lenders to make or maintain LIBO Rate Loans
hereunder shall be suspended until the Administrative Agent upon the instruction
of the Lenders revokes such notice in writing. Upon receipt of such notice, the
Company may revoke any Notice of Conversion/Continuation then submitted by it.
If the Company does not revoke such notice, the Lenders shall make, convert or
continue the Loans, as proposed by the Company, in the amount specified in the
applicable notice submitted by the Company, but such Loans shall be made,
converted or continued as Base Rate Loans instead of LIBO Rate Loans.
 
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3.6 Certificates of Lenders. Any Lender claiming reimbursement or compensation
under this Article III shall deliver to the Company (with a copy to the
Administrative Agent) a certificate setting forth in reasonable detail the
amount payable to such Lender hereunder and such certificate shall be conclusive
and binding on the Company in the absence of manifest error; provided, however,
that such Lender shall only be entitled to collect amounts incurred within 180
days prior to such notice.
 
3.7 Substitution of Lenders. Upon (i) the receipt by the Company from any Lender
of a claim for compensation under this Article III, (ii) the refusal of any
Lender to execute any amendment, waiver or consent requiring the consent of all
Lenders or all affected Lenders as to which Required Lenders have otherwise
agreed or (iii) the occurrence and during the continuation of default by a
Lender with respect to funding its Commitment (such Lender, an “Affected
Lender”), the Company may: (a) obtain a replacement bank or financial
institution reasonably satisfactory to the Administrative Agent to acquire and
assume all or a ratable part of all of such Affected Lender’s Loans (a
“Replacement Lender”); or (b) request one more of the other Lenders to acquire
and assume all or part of such Affected Lender’s Loans, but none of the Lenders
shall have any obligation to do so. Any such designation of a Replacement Lender
under clause (a) shall be subject to the prior written consent of the
Administrative Agent, which consent shall not be unreasonably withheld.
 
3.8 Survival. The agreements and obligations of the Company in this Article III
shall survive the payment of all other Obligations.
 
ARTICLE IV
 
SECURITY
 
4.1 The Security. The Obligations will be secured by the Security Documents.
 
4.2 Agreement to Deliver Security Documents. The Company shall, and shall cause
the Guarantors to, deliver, to further secure the Obligations whenever requested
by the Administrative Agent in its sole and absolute discretion, deeds of trust,
mortgages, chattel mortgages, security agreements, pledge agreements, financing
statements and other Security Documents in form and substance satisfactory to
the Administrative Agent for the purpose of granting, confirming, and perfecting
second priority Liens or security interests in the Collateral. The Company shall
deliver and shall cause the Guarantors to deliver whenever reasonably requested
by the Administrative Agent, title opinions or other evidence of title
reasonably satisfactory to the Administrative Agent with respect to the
Mortgaged Properties designated by the Administrative Agent, based upon abstract
or record examinations reasonably acceptable to the Administrative Agent and (a)
evidencing that the Company or a Guarantor, as applicable, has good and
indefeasible title to the Mortgaged Properties, free and clear of all Liens
except Permitted Liens, (b) confirming that such Mortgaged Properties are
subject to Security Documents securing the Obligations that constitute and
create legal, valid and duly perfected second priority deed of trust or mortgage
Liens in such Mortgaged Properties and interests, and assignments of and
security interests in the Oil and Gas attributable to such Mortgaged Properties
comprised of Oil and Gas Properties and interests and the proceeds thereof, in
each case subject only to Permitted Liens, and (c) covering such other matters
as the Administrative Agent may reasonably request.
 
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4.3 Perfection and Protection of Security Interests and Liens. The Company
shall, and shall cause the Guarantors to, from time to time deliver to the
Administrative Agent any financing statements, amendment, assignment and
continuation statements, extension agreements and other documents, properly
completed and executed (and acknowledged when required) by the Company or a
Guarantor, as applicable, in form and substance reasonably satisfactory to the
Administrative Agent, which the Administrative Agent reasonably requests for the
purpose of perfecting, confirming, or protecting any Liens or other rights in
Collateral securing any Obligations.
 
4.4 Offset. To secure the repayment of the Obligations, the Company hereby
grants the Administrative Agent and each Lender a security interest, a Lien, and
a right of offset, each of which shall be in addition to all other interests,
Liens, and rights of the Administrative Agent and the Lenders at common law,
under the Loan Documents, or otherwise, and each of which shall be upon and
against (a) any and all moneys, securities or other Property (and the proceeds
therefrom) of the Company now or hereafter held or received by or in transit to
the Administrative Agent or any Lender from or for the account of the Company,
whether for safekeeping, custody, pledge, transmission, collection or otherwise,
(b) any and all deposits (general or special, time or demand, provisional or
final) of the Company with the Administrative Agent or any Lender, and (c) any
other credits and claims of the Company at any time existing against the
Administrative Agent or any Lender, including claims under certificates of
deposit. Each Lender agrees to notify the Company and the Administrative Agent
promptly after any such offset and application made by such Lender. During the
existence of any Event of Default, the Administrative Agent or any Lender is
hereby authorized to foreclose upon, offset, appropriate, and apply, at any time
and from time to time, without notice to the Company, any and all items
hereinabove referred to against the Obligations then due and payable.
 
4.5 Guaranty.
 
(a) Each Original Guarantor has executed and delivered to the Administrative
Agent, and each Subsidiary of the Company created, acquired or coming into
existence after the date hereof that is required under Section 7.12 to become a
Guarantor (including OPEX) shall execute and deliver to the Administrative
Agent, a Guaranty setting forth therein an absolute and unconditional guaranty
of the timely repayment of, and the due and punctual performance of the
Obligations of the Company hereunder. The Company will cause each such
Subsidiary to deliver to the Administrative Agent, simultaneously with its
delivery of such a Guaranty, written evidence reasonably satisfactory to the
Administrative Agent and its counsel that such Subsidiary has taken all
corporate, limited liability company or partnership action necessary to duly
approve and authorize its execution, delivery and performance of such Guaranty
and any Security Documents and other documents which it is required to execute.
 
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(b) Guaranty Representations. To induce the Lenders and the Administrative Agent
to enter into this Agreement, the Company and each Guarantor represents and
warrants to each such person, (i) in the case of the Original Guarantors, as of
and after giving effect to the making of the Loans at the Effective Time, and
(ii) in the case of OPEX after giving effect to the Output Acquisition and the
making of the Loans at the Output Closing Time, as of the Output Closing Time:
 
(i) Benefit to Guarantors. The board of directors, manager or general partner,
where applicable, of each Guarantor has determined that such Guarantor’s
execution, delivery and performance of this Agreement may reasonably be expected
to directly or indirectly benefit such Guarantor and is in the best interests of
such Guarantor.
 
(ii) Reasonable Consideration for Guaranties. The direct or indirect value of
the consideration received and to be received by such Guarantor in connection
herewith is reasonably worth at least as much as the liability and obligations
of each Guarantor hereunder and its Guaranty, and the incurrence of such
liability and obligations in return for such consideration may reasonably be
expected to benefit such Guarantor, directly or indirectly.
 
(iii) No Insolvencies. Neither the Company nor any Guarantor is “insolvent”
(that is, the sum of such Person’s absolute and contingent liabilities,
including the Obligations, does not exceed the fair value of such Person’s
assets, including any rights of contribution, reimbursement or indemnity). Each
of the Company and each Guarantor has capital which is not unreasonably small
for the businesses in which such Person is engaged and intends to be engaged.
None of the Company nor any Guarantor has incurred (whether hereby or
otherwise), nor does the Company or Guarantor intend to incur or believe that it
will incur, liabilities which will be beyond its ability to pay as such
liabilities mature.
 
4.6 Maximum Liability. If and to the extent required in order for the
obligations of any Guarantor to be enforceable under applicable federal, state
and other laws relating to the insolvency of debtors, the maximum liability of
such Guarantor hereunder shall be limited to the greatest amount which can
lawfully be guaranteed by such Guarantor under such laws, after giving effect to
any rights of contribution, reimbursement and subrogation arising under the
Guaranty.
 
4.7 Production Proceeds. Notwithstanding that, by the terms of the various
Security Documents, the Company and the Guarantors are and will be assigning to
the Administrative Agent all of the Net Proceeds of Production accruing to the
Mortgaged Properties covered thereby, so long as no Event of Default has
occurred and is continuing, the Administrative Agent, on behalf of the Lenders,
grants each of the Company and the Guarantors a revocable license to continue to
receive from the purchasers of production all such Net Proceeds of Production,
subject, however, to the Liens created under the Security Documents, which Liens
are hereby affirmed and ratified. During the continuance of an Event of Default
described under Sections 9.1(g) or (h), this license shall be automatically
revoked, and during the continuance of any other Event of Default, this license
shall be revocable in the sole discretion of the Administrative Agent, by notice
to the Company, and the Administrative Agent may exercise all rights and
remedies granted under the Security Documents, including the right to obtain
possession of all Net Proceeds of Production then held by the Company and the
Guarantors or to receive directly from the purchasers of production all other
Net Proceeds of Production. In no case shall any failure, whether purposeful or
inadvertent, by the Administrative Agent to collect directly any such Net
Proceeds of Production constitute in any way a waiver, remission or release of
any of its rights under the Security Documents, nor shall any release of any Net
Proceeds of Production by the Administrative Agent to the Company and the
Guarantors constitute a waiver, remission, or release of any other Net Proceeds
of Production or of any rights of the Administrative Agent to collect other Net
Proceeds of Production thereafter.
 
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ARTICLE V

 
CONDITIONS PRECEDENT
 
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5.1 Conditions of the Effective Date. The effectiveness of this Agreement is
subject to the condition that on or before April 2, 2007 the Administrative
Agent shall have received all of the following, in form and substance
satisfactory to the Administrative Agent (or, in the case of clauses (g), (i) or
(r), the conditions specified therein shall have been satisfied):
 
(a) Credit Agreement and Related Documents. This Agreement, the Notes, the
Guaranty and the Security Documents, duly executed and delivered by each of the
Company and the Original Guarantors (as applicable);
 
(b) First Lien Credit Documents. Evidence that (i) each of the First Lien Credit
Documents has been duly executed and delivered by each of the parties thereto;
and (ii) the Intercreditor Agreement has been duly executed and delivered by
each of the parties thereto other than the Administrative Agent;
 
(c) Resolutions; Incumbency; Organization Documents. (i) Resolutions of the
board of directors of the Company and the sole director of each Original
Guarantor authorizing the transactions contemplated hereby, certified as of the
Effective Time by the Secretary or an Assistant Secretary of such Person; (ii)
Certificates of the Secretary or an Assistant Secretary of the Company and the
Secretary or an Assistant Secretary of each Original Guarantor certifying the
names and true signatures of the officers of such Person authorized to execute,
deliver and perform, as applicable, this Agreement, the Security Documents, the
Guaranty, and all other Loan Documents to be delivered by it hereunder; and
(iii) the Organization Documents of the Company and of each Original Guarantor
as in effect on the Effective Time, certified by the Secretary or Assistant
Secretary of the such Person as of the Effective Time; 
 
(d) Good Standing. A good standing certificate for the Company and each Original
Guarantor from its state of incorporation or formation, and evidencing its
qualification to do business in (i) Texas for the Company and the Original
Guarantors and (ii) in each other jurisdiction where its ownership, lease or
operation of Properties or the conduct of its business requires such
qualification, in each case as of a recent date;
 
(e) Payment of Fees. Evidence of payment by the Company of all accrued and
unpaid fees, costs and expenses owed pursuant to the Existing Company Credit
Agreement (as defined in the First Lien Credit Agreement), the First Lien Credit
Agreement and under this Agreement, including the Fee Letter Agreement, in each
case to the extent then due and payable at the Effective Time, including any
such costs, fees and expenses arising under or referenced in Sections 2.8 and
11.4;
 
(f) [Intentionally omitted.]
 
(g) [Intentionally omitted.]
 
(h) [Intentionally omitted.]
 
(i) [Intentionally omitted.]
 
(j) Insurance Certificates. Insurance certificates in form and substance
reasonably satisfactory to the Administrative Agent, from the Company’s
insurance carriers reflecting the current insurance policies required under
Section 7.6 including any necessary endorsements to reflect the Administrative
Agent as loss payee for the ratable benefit of the Lenders, with the right to
receive (absent a payment default) at least 30 days prior notice of cancellation
of any such policy;
 
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(k) Other Documents. Such other approvals, opinions, documents or materials as
the Administrative Agent may reasonably request, including those in connection
with the Output Acquisition; 
 
(l) Opinions of Counsel. An opinion of Fulbright & Jaworski LLP covering such
matters with respect to the Company, the Original Guarantors and OPEX as the
Administrative Agent may reasonably require dated as of the Effective Time; (b)
Gordon Arata McCollam Duplantis & Eagan LLP with respect to matters of Louisiana
law in form and substance reasonably satisfactory to the Administrative Agent
and (c) Conner & Winters with respect to matters of Oklahoma law in form and
substance reasonably satisfactory to the Administrative Agent;
 
(m) Output Acquisition. (i) Evidence that all conditions precedent under the
Output Acquisition Agreement other than performance of the Company’s funding
obligations under Section 2.4(c) thereof have been satisfied or waived by all
parties thereto; and (ii) true and correct copies (in a form reasonably
satisfactory to the Administrative Agent), certified as to authenticity by a
Responsible Officer of the Company, of the Output Acquisition Documents;
 
(n) Reserve Reports. The Initial Reserve Report and the Output Reserve Report; 
 
(o) Lien Searches. Evidence of the results of a recent lien search in each of
the jurisdictions in which UCC financing statements or other filings or
recordations should be made to evidence or perfect security interests in any
assets of the Company, each Original Guarantor, or OPEX, and such search shall
reveal no Liens on any of the Property of the Company, any Original Guarantor,
Output or OPEX, except for Permitted Liens;
 
(p) [Intentionally omitted.] 
 
(q) Filings, Registrations and Recordings. Each document (including, without
limitation, any UCC financing statement) required by the Security Documents or
under law or reasonably requested by the Administrative Agent to be filed,
registered or recorded in order to create in favor of the Administrative Agent,
for the benefit of the Lenders, a second priority perfected Lien on the
Collateral described in any Security Document to which the Company or any
Original Guarantor is (or, upon consummation of the Output Acquisition, to which
OPEX will be) a party, prior and superior in right to any other Person (other
than with respect to Permitted Liens (other than Liens described in Section
8.1(j)), shall have been filed, registered or recorded or shall have been
delivered to the Administrative Agent in proper form for filing, registration or
recordation;
 
(r) Approvals. All government and third party approvals (including any consents)
necessary in connection with the Output Acquisition, the continuing operations
of the Company and its Subsidiaries and the transactions contemplated by the
Transaction Documents shall have been obtained and be in full force and effect,
and all applicable waiting periods shall have expired without any action being
taken or threatened by any competent authority which would restrain, prevent or
otherwise impose adverse conditions on the Output Acquisition or the financing
contemplated hereby;
 
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(s) Solvency. A certificate from a Responsible Officer of the Company certifying
that, on a consolidated basis, the Company and its Subsidiaries (i) as of the
Effective Time, are, and (ii) after giving effect to the transactions
contemplated hereby, including the Output Acquisition, will be, Solvent;
 
(t) Pledged Stock; Stock Powers; Acknowledgment and Consent; Pledged Notes. The
First Lien Credit Agent, on behalf of itself, for the benefit of the First Lien
Secured Parties, and as agent and bailee for the Administrative Agent, for the
benefit of the Secured Parties, shall have received the certificates
representing the shares of Capital Stock of the Original Guarantors pledged
pursuant to the Security Agreement, together with an undated stock power for
each such certificate executed in blank by a duly authorized officer of the
pledgor thereof; and
 
(u) Notice of Borrowing. The Administrative Agent shall have received a Notice
of Borrowing in the form of Exhibit A with respect to the Credit Extensions
hereunder contemplated by Section 2.1.
 
5.2 [Intentionally Omitted.].
 
ARTICLE VI

 
REPRESENTATIONS AND WARRANTIES
 
To induce the Lenders and the Administrative Agent to enter into this Agreement,
the Company and each Guarantor represents and warrants to each such Person:
 
6.1 Organization, Existence and Power. Each of the Company and its Subsidiaries:
(a) is duly organized, validly existing and in good standing under the laws of
the jurisdiction of its formation; (b) has (i) the power and authority and (ii)
all material governmental licenses, authorizations, consents and approvals, in
each case, to own its assets, carry on its business and to execute, deliver, and
perform its obligations under the Transaction Documents; (c) is duly qualified
as a foreign corporation, limited partnership or limited liability company and
is licensed and in good standing under the laws of each jurisdiction where its
ownership, lease or operation of Property or the conduct of its business
requires such qualification or license; and (d) is in compliance in all material
respects with all Requirements of Law, except, in the case of clauses (b)(ii),
(c) and (d), where failure to do so would not reasonably be expected to have a
Material Adverse Effect.
 
6.2 Corporate Authorization; No Contravention. The execution, delivery and
performance by the Company and the Guarantors of this Agreement and each other
Transaction Document to which such Person is a party have been duly authorized
by all necessary organizational action, and do not and will not: (a) contravene
the terms of any of that Person’s Organization Documents; (b) contravene the
First Lien Credit Agreement; (c) conflict with or result in any breach or
contravention of, or the creation of any Lien under, any document evidencing any
material Contractual Obligation to which such Person is a party that would be
prior to the Liens granted to the Administrative Agent for the benefit of the
Lenders, except to the extent such breach or contravention (but not creation of
Liens) would not reasonably be expected to have a Material Adverse Effect, or
any order, injunction, writ or decree of any Governmental Authority to which
such Person or its Property is subject; or (d) violate in any material respect
any Requirement of Law.
 
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6.3 Governmental Authorization. No approval, consent, exemption, authorization,
or other action by, or notice to, or filing with, any Governmental Authority is
necessary in connection with the execution, delivery or performance by, or
enforcement against, the Company or any of the Guarantors of this Agreement or
any other Transaction Document to which it is a party, except for the filing of
a Certificate of Merger with the Secretary of State of the State of Delaware
with respect to the Output Acquisition, filings necessary to obtain and maintain
perfection of Liens, routine filings related to the Company and the operation of
its business, such filings as may be necessary in connection with the Lenders’
exercise of remedies hereunder and such other approvals, consents, exemptions,
authorizations, actions or filings, the failure of which to obtain would not
reasonably be expected to have a Material Adverse Effect.
 
6.4 Binding Effect. This Agreement and each other Transaction Document to which
the Company or any Guarantor is a party constitute the legal, valid and binding
obligations of the Company and each Guarantor to the extent it is a party
thereto, enforceable against such Person in accordance with their respective
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws affecting the enforcement of creditors’ rights
generally or by equitable principles relating to enforceability.
 
6.5 Litigation. Unless specifically disclosed in Schedule 6.5 attached hereto,
there are no actions, suits, proceedings, claims or disputes pending, or to the
knowledge of the Company, threatened or contemplated, at law, in equity, in
arbitration or before any Governmental Authority, against the Company or its
Subsidiaries or any of their respective Properties which (i) as of the Effective
Date purport to affect or pertain to this Agreement or any other Transaction
Document, or any of the transactions contemplated hereby or thereby; or (ii)
would reasonably be expected to have a Material Adverse Effect. No injunction,
writ, temporary restraining order or any order of any nature has been issued by
any court or other Governmental Authority purporting to enjoin or restrain the
execution, delivery or performance of this Agreement or any other Transaction
Document, or directing that the transactions provided for herein or therein not
be consummated as herein or therein provided.
 
6.6 No Default. Neither the Company nor any Subsidiary is in default under or
with respect to any other Contractual Obligation in any respect which,
individually or together with all such defaults, would reasonably be expected to
have a Material Adverse Effect.
 
6.7 ERISA Compliance. Except as specifically disclosed in Schedule 6.7:
 
(a) Each Plan of the Company is in compliance in all material respects with the
applicable provisions of ERISA, the Code and other federal or state law. Each
Plan that is intended to be qualified under Code Section 401(a) is either (i) a
prototype plan entitled to rely on the opinion letter issued by the IRS as to
the qualified status of such plan under Section 401 of the Code to the extent
provided in Revenue Procedure 2005-16, or (ii) the recipient of, or has made or
will make timely application for, a determination letter from the IRS to the
effect that such Plan is qualified, and the plans and trusts related thereto are
exempt from federal income Taxes under Sections 401(a) and 501(a), respectively,
of the Code. To the knowledge of the Company, nothing has occurred which would
cause the loss of such qualification. The Company and each ERISA Affiliate have
made all required contributions to any Plan subject to Section 412 of the Code,
and no application for a funding waiver or an extension of any amortization
period pursuant to Section 412 of the Code has been made with respect to any
Plan.
 
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(b) There are no pending or, to the knowledge of the Company, threatened claims,
actions or lawsuits, or actions by any Governmental Authority, with respect to
any Plan of the Company which has resulted or would reasonably be expected to
result in a Material Adverse Effect. There has been no prohibited transaction or
violation of the fiduciary responsibility rules with respect to any such Plan
which has resulted or could reasonably be expected to result in a Material
Adverse Effect.
 
(c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no
Pension Plan of the Company has any Unfunded Pension Liability; (iii) neither
the Company nor any ERISA Affiliate has incurred, or reasonably expects to
incur, any liability under Title IV of ERISA with respect to any Pension Plan
(other than premiums due and not delinquent under Section 4007 of ERISA); (iv)
neither the Company nor any ERISA Affiliate has incurred, or reasonably expects
to incur, any liability (and no event has occurred which, with the giving of
notice under Section 4219 of ERISA, would result in such liability) under
Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v)
neither the Company nor any ERISA Affiliate has engaged in a transaction that
could be subject to Section 4069 or 4212(c) of ERISA.
 
6.8 Use of Proceeds; Margin Regulations. The proceeds of the Loans shall be used
solely for the purposes set forth in and permitted by Section 7.13. Neither the
Company nor any Subsidiary is generally engaged in the business of purchasing or
selling Margin Stock or extending credit for the purpose of purchasing or
carrying Margin Stock.
 
6.9 Title to Properties. The Company and each Guarantor (a) have good and
indefeasible title to the Mortgaged Properties subject to no Liens, except
Permitted Liens, and, except for such defects in title as would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect and (b) have good and indefeasible title to, or valid leasehold
interests in, all other Property necessary in the ordinary conduct of their
respective businesses.
 
6.10 Oil and Gas Reserves. The Company and each Guarantor is and will hereafter
be, in all material respects, the owner of the Oil and Gas that it purports to
own from time to time in and under its Oil and Gas Properties, together with the
right to produce the same. The Oil and Gas Properties are not subject to any
Lien other than as set forth in the financial statements referred to in Section
6.14, as disclosed in such financial statements to the Lenders in writing prior
to the Effective Time and Permitted Liens. All Oil and Gas has been and will
hereafter be produced, sold and delivered by the Company and the Guarantors in
accordance in all material respects with all applicable laws and regulations of
every Governmental Authority except such laws and regulations, the failure to
comply with which could not reasonably be expected to have a Material Adverse
Effect; each of the Company and the Guarantors has complied in all material
respects (from the time of acquisition by the Company or a Subsidiary) and will
hereafter comply in all material respects with all material terms of each oil,
gas and mineral lease comprising its Oil and Gas Properties; and all such oil,
gas and mineral leases under which the Company or a Guarantor is a lessee or
co-lessee have been and will hereafter be maintained in full force and effect;
provided, however, that nothing in this Section 6.10 shall prevent the Company
or any Guarantor from disposing of any Property in accordance with Section 8.2.
To the knowledge of the Company and the Guarantors, all of the Hydrocarbon
Interests comprising its Oil and Gas Properties are and will hereafter be
enforceable in all material respects in accordance with their terms, except as
such may be modified by applicable bankruptcy law or an order of a court in
equity and except to the extent the failure to be enforceable could not
reasonably be expected to have a Material Adverse Effect.
 
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6.11 Reserve Report. The Company has heretofore delivered to the Administrative
Agent a true and complete copy of (i) a report dated effective as of December
31, 2006, prepared by DeGolyer and MacNaughton and a report dated effective as
of December 31, 2006 prepared by William M. Cobb & Associates, Inc.
(collectively, the “Initial Reserve Report”) covering certain of the Company’s
Oil and Gas Properties and (ii) a report dated effective as of October 1, 2006
prepared by the Company covering certain Oil and Gas Properties of Output and
OPEX (the “Output Reserve Report”). To the knowledge of the Company, (w) the
assumptions stated or used in the preparation of each Reserve Report are
reasonable as of the date thereof, (x) all information furnished by the Company
or any Guarantor to the Independent Engineer for use in the preparation of any
Reserve Report was accurate in all material respects, (y) there has been no
material adverse change in the amount of the estimated Proved Reserves shown in
any Reserve Report since the date thereof, except for changes which have
occurred as a result of production in the ordinary course of business, and (z)
each Reserve Report does not, in any case, omit any material statement or
information necessary to cause the same not to be materially misleading to the
Lenders.
 
6.12 Gas Imbalances. Except as disclosed to the Administrative Agent in writing
prior to the Effective Time, there are no gas imbalances, take or pay or other
prepayments with respect to any of the Oil and Gas Properties in excess of
$2,000,000 in the aggregate that would require the Company or any Guarantor to
deliver Oil and Gas produced from any of the Oil and Gas Properties at some
future time without then or thereafter receiving full payment therefor.
 
6.13 Taxes. The Company and its Subsidiaries have filed all federal Tax returns
and reports required to be filed, and have paid all federal Taxes, assessments,
fees and other governmental charges levied or imposed upon them or their
Properties, income or assets otherwise due and payable, except those which are
being contested in good faith by appropriate proceedings and for which adequate
reserves have been provided in accordance with GAAP. The Company and its
Subsidiaries have filed all material state and other non-federal Tax returns and
reports required to be filed, and have paid all state and other non-federal
Taxes, assessments, fees and other governmental charges levied or imposed upon
them or their Properties, income or assets prior to delinquency thereof, except
those (a) which are not overdue by more than 30 days and (b) which are being
contested in good faith by appropriate proceedings and for which adequate
reserves have been provided in accordance with GAAP. To the Company’s knowledge,
there is no proposed Tax assessment against the Company or any Subsidiary that
would, if made, reasonably be expected to have a Material Adverse Effect.
 
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6.14 Financial Statements and Condition.
 
(a) The Company Audited Financial Statements and the Company’s unaudited
consolidated financial statements for the nine months ended September 30, 2006
incorporated in the Company’s Form 10-Q filed with the SEC on November 9, 2006
(i) were prepared in accordance with GAAP consistently applied throughout the
periods covered thereby, except as otherwise expressly noted therein; (ii)
fairly present in all material respects the consolidated financial condition of
the Company and its Subsidiaries, as of the dates thereof and results of
operations for the periods covered thereby (subject, in the case of the
Company’s unaudited consolidated financial statements referred to above, to
normal year-end audit adjustments and the absence of footnotes); and (iii)
except as specifically disclosed in Schedule 6.14(a) or in the case of the
Company and its Subsidiaries, in the Company Audited Financial Statements or the
Company’s unaudited consolidated financial statements referred to above, the
Company and its Subsidiaries do not have any material Indebtedness or other
material liabilities, direct or contingent, as of the date hereof, including
liabilities for Taxes, material commitments or Contingent Obligations.
 
(b) During the period from December 31, 2006 to and including the date hereof
there has been no Disposition by the Company or any Subsidiaries of any material
part of its business or Property, other than Dispositions permitted by Section
8.2(a), (b), (c), (d) or (e).
 
6.15 Environmental Matters. Each of the Company and its Subsidiaries is in
compliance with all Environmental Laws and there exist no Environmental Claims
on or with respect to its respective business, operations and Properties, except
as specifically disclosed in Schedule 6.15 or such non-compliance with
Environmental Laws, or Environmental Claims as would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
 
6.16 Regulated Entities. None of the Company, the Guarantors, any Person
controlling the Company, or any Guarantor, is an “investment company” within the
meaning of the Investment Company Act of 1940. None of the Company, any Person
controlling the Company or any Subsidiary, is subject to regulation under the
Federal Power Act, the Interstate Commerce Act, any state public utilities code,
or any other federal or state statute or regulation limiting its ability to
incur Indebtedness.
 
6.17 No Burdensome Restrictions. Except as set forth on Schedule 6.17, neither
the Company nor any Subsidiary is a party to or bound by any Contractual
Obligation, or subject to any restriction in any Organization Document, or any
Requirement of Law, which would reasonably be expected to have a Material
Adverse Effect.
 
6.18 Copyrights, Patents, Trademarks and Licenses, etc. The Company and each
Subsidiary own or are licensed or otherwise have the right to use all of the
material patents, trademarks, service marks, trade names, copyrights,
contractual franchises, authorizations and other rights that are reasonably
necessary for the operation of their respective businesses, without material
conflict with the rights of any other Person. To the knowledge of the Company,
no slogan or other advertising device, product, process, method, substance, part
or other material now employed, or now contemplated to be employed, by the
Company or any Subsidiary infringes upon any rights held by any other Person,
except to the extent such infringement could not reasonably be expected to have
a Material Adverse Effect. Except as specifically disclosed in Schedule 6.5, no
claim or litigation regarding any of the foregoing is pending or, to the
knowledge of the Company, threatened, and no patent, invention, device,
application, principle or any statute, law, rule, regulation, standard or code
is pending or, to the knowledge of the Company, proposed, which, in either case,
would reasonably be expected to have a Material Adverse Effect.
 
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6.19 Subsidiaries. As of the Effective Time and, after giving effect to the
Output Acquisition as of the Output Closing Time, the Company has no Subsidiary
other than those specifically disclosed in part (a) of Schedule 6.19 hereto and
has no material equity investments in any other Person other than those
specifically disclosed in part (b) of Schedule 6.19. The capitalization of each
Subsidiary and the ownership of its Capital Stock is set forth on Schedule 6.19
hereto.
 
6.20 Insurance. The Properties of the Company and each Subsidiary are insured
with financially sound and reputable insurance companies that are not Affiliates
of the Company, in such amounts, with such deductibles and covering such risks
as are customarily carried by companies engaged in similar businesses and owning
similar Properties in localities where the Company or such Subsidiary operates,
except where the failure to do so could not reasonably be expected to have a
Material Adverse Effect.
 
6.21 Full Disclosure. None of the representations or warranties made by the
Company or any Guarantor in the Loan Documents as of the date such
representations and warranties are made or deemed made, and none of the
statements contained in any exhibit, report, written statement or certificate
furnished by or on behalf of the Company or any Guarantor in connection with the
Loan Documents, taken as whole, contains any untrue statement of a material fact
known to the Company or omits any material fact known to the Company required to
be stated therein or necessary to make the statements made therein, in light of
the circumstances under which they are made, not materially misleading as of the
time when made or delivered.
 
6.22 Solvency. The Company and its Subsidiaries, taken as a whole are, and after
giving effect to (a) the Output Acquisition and the incurrence of all
Indebtedness and obligations being incurred in connection herewith and
therewith, and (b) all rights of contribution of such Person against other Loan
Parties under the Guaranty, at law, in equity or otherwise, will be and will
continue to be, Solvent.
 
6.23 Labor Matters. Except to the extent such matters do not to constitute a
Material Adverse Effect, (a) no actual or threatened strikes, labor disputes,
slowdowns, walkouts, work stoppages, or other concerted interruptions of
operations that involve any employees employed at any time in connection with
the business activities or operations at the Property of the Company or any
Subsidiary exist, (b) hours worked by and payment made to the employees of the
Company have not been in violation of the Fair Labor Standards Act or any other
applicable laws pertaining to labor matters, (c) all payments due from the
Company or any Subsidiary for employee health and welfare insurance, including,
without limitation, workers compensation insurance, have been paid or accrued as
a liability on its books, and (d) the business activities and operations of the
Company and each Subsidiary are in compliance with the Occupational Safety and
Health Act and other applicable health and safety laws.
 
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6.24 Midstream Contracts. As of the Effective Date, the Company’s and the
Guarantors’ marketing, gathering, transportation, processing and treating
facilities and equipment, together with the Midstream Contracts, and any other
marketing, gathering, transportation, processing and treating contracts in
effect among, inter alia, the Company, any Guarantor and any other Person, are,
except as set forth on Schedule 6.24, sufficient to market, gather, transport,
process or treat, as applicable, reasonably anticipated volumes of production of
Oil and Gas from the Company’s and the Guarantors’ Oil and Gas Properties. Any
such contracts with Affiliates are disclosed on Schedule 6.24 hereto.
 
6.25 Derivative Contracts. Neither the Company nor any Subsidiary is party to
any Derivative Contract other than (a) as of the Effective Time, the Existing
Derivative Contracts or (b) after the Effective Time, Derivative Contracts
permitted by Section 8.10.
 
6.26 Exempt Subsidiaries; TTSI. Neither any Exempt Subsidiary nor TTSI owns any
Hydrocarbon Interests with which Proved Reserves are associated.
 
6.27 [Intentionally Omitted.]

 
6.28 Output Acquisition Documents. Following the execution and delivery of the
Output Acquisition Documents listed on Schedule 6.28, such documents will
constitute all of the material agreements, instruments and undertakings with
Output or its Affiliates to which the Company or any of its Subsidiaries is
bound or by which such Person or any of its Property is bound or affected
relating to the Output Acquisition (other than agreements, instruments or
undertakings of Output and its Subsidiary existing prior to the completion of
the Output Acquisition).
 
6.29 Security Documents.
 
(a) The Security Agreement is effective to create in favor of the Administrative
Agent, for the benefit of the Secured Parties, a legal, valid, binding and
enforceable security interest in the Collateral described therein and proceeds
and products thereof. In the case of the Pledged Stock described in the Security
Agreement, when any stock certificates representing such Pledged Stock are
delivered to the First Lien Credit Agent, as agent and bailee for the
Administrative Agent, and in the case of the other Collateral described in the
Security Agreement which may be perfected by filing a financing statement, when
financing statements in appropriate form are filed in the offices specified on
Schedule 6.29(a)-1 (which financing statements may be filed by the
Administrative Agent) and such other filings as are specified on Schedule 3 to
the Security Agreement have been completed (all of which filings may be filed by
the Administrative Agent), the Security Agreement shall constitute a fully
perfected Lien on, and security interest in, all right, title and interest of
the Loan Parties in such Collateral and the proceeds and products thereof, as
security for the Obligations, in each case prior and superior in right to any
other Person (except Permitted Liens). Schedule 6.29(a)-2 lists each UCC
financing statement that (i) names any Loan Party as debtor and (ii) will be
terminated on or prior to the Effective Time or the Output Closing Time (as
applicable).
 
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(b) Each of the Mortgages is effective to create in favor of the Administrative
Agent, for the benefit of the Secured Parties, a legal, valid, binding and
enforceable Lien on the Mortgaged Properties described therein and proceeds and
products thereof; and when the Mortgages are filed in the offices specified on
Schedule 6.29(b) (in the case of Mortgages to be executed and delivered on the
Effective Date or the Output Closing Time (as applicable)) or in the recording
office designated by the Company (in the case of any Mortgage to be executed and
delivered pursuant to Section 7.14(b)), each Mortgage shall constitute a fully
perfected Lien on, and security interest in, all right, title and interest of
the Loan Parties in the Mortgaged Properties described therein and the proceeds
and products thereof, as security for the Obligations, in each case prior and
superior in right to any other Person (other than Persons holding Liens or other
encumbrances or rights permitted by the relevant Mortgage).
 
ARTICLE VII

 
AFFIRMATIVE COVENANTS
 
So long as any Lender shall have any Commitment hereunder, or any Loan or other
Obligation shall remain unpaid or unsatisfied:
 
7.1 Financial Statements. The Company and each Guarantor shall, and shall cause
each of its Subsidiaries to deliver to the Administrative Agent who will deliver
to each Lender:
 
(a) as soon as available, but not later than March 31, 2007 and not later than
90 days after the end of each fiscal year ending thereafter, a copy of the
annual audited consolidated balance sheet of the Company and its Subsidiaries as
at December 31, 2006 and as at the end of such year ending thereafter,
respectively, and the related consolidated statements of operations and retained
earnings, comprehensive income and cash flows for such year, setting forth in
each case in comparative form the figures for the previous fiscal year; the
Company’s financial statements shall be accompanied by the unqualified opinion
(or, if qualified, of a non-material nature (e.g. FASB changes of accounting
principles) or nothing indicative of going concern or material misrepresentation
nature) and a copy of the management letter of Akin, Doherty, Klein & Feuge P.C.
or other independent public accounting firm acceptable to the Administrative
Agent (the “Independent Auditor”), which report shall state that such
consolidated financial statements present fairly in all material respects the
consolidated financial position of the Company and its Subsidiaries at the end
of such periods and the results of their operations and their cash flows for the
periods indicated in conformity with GAAP; and
 
(b) as soon as available, but not later than 60 days after the close of each of
the first three Fiscal Quarters in any fiscal year, a copy of the unaudited
consolidated balance sheet of the Company as of the end of such quarter and the
related consolidated statements of operations and retained earnings,
comprehensive income and cash flows for the period commencing on the first day
and ending on the last day of such period, setting forth in each case in
comprehensive form the figures for the comparable period in the previous fiscal
year and certified by a Responsible Officer as fairly presenting in all material
respects, in accordance with GAAP (subject to normal year-end audit adjustments
and the absence of footnotes), the consolidated financial position of the
Company and its Subsidiaries at the end of such periods and the results of their
operations and their cash flows.
 
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(c) Documents required to be delivered pursuant to Section 7.1(a) or Section
7.1(b) may be delivered electronically and if so delivered, shall be deemed to
have been delivered on the date (i) on which the Company posts such documents,
or provides a link thereto on the Company’s website on the Internet and (ii) on
which such documents are posted on the Company’s behalf on an Internet or
intranet website, if any, to which each Lender and the Administrative Agent have
access (whether a commercial, third-party website or whether sponsored by the
Administrative Agent); provided, however, that (x) the Company shall deliver
paper copies of such documents to the Administrative Agent or any Lender that
requests the Company to deliver such paper copies until a written request to
cease delivering paper copies is given by the Administrative Agent or such
Lender and (y) the Company shall notify the Administrative Agent and each Lender
(by telecopier or electronic mail) of the posting of any such documents and
provide to the Administrative Agent by electronic mail electronic versions
(i.e., soft copies) of such documents. Notwithstanding anything contained
herein, in every instance the Company shall be required to provide paper copies
of the Compliance Certificates required by Section 7.2(b) to the Administrative
Agent.
 
(d) The Company hereby acknowledges that (i) the Administrative Agent will make
available to the Lenders materials and/or information provided by or on behalf
of the Company hereunder (collectively, “Company Materials”) by posting the
Company Materials on IntraLinks or another similar electronic system (the
“Platform”) and (ii) certain of the Lenders may be “public-side” Lenders (i.e.,
Lenders that do not wish to receive material non-public information with respect
to the Company or its securities) (each, a “Public Lender”). The Company hereby
agrees that (w) all Company Materials that are to be made available to Public
Lenders shall be clearly and conspicuously marked “PUBLIC” which, at a minimum,
shall mean that the word “PUBLIC” shall appear prominently on the first page
thereof; (x) by marking Company Materials “PUBLIC,” the Company shall be deemed
to have authorized the Administrative Agent and the Lenders to treat such
Company Materials as either publicly available information or not material
information (although it may be sensitive and proprietary) with respect to the
Company or its securities for purposes of United States Federal and state
securities laws; (y) all Company Materials marked “PUBLIC” are permitted to be
made available through a portion of the Platform designated “Public Investor”;
and (z) the Administrative Agent shall be entitled to treat Company’s Materials
that are not marked “PUBLIC” as being suitable only for posting on a portion of
the Platform not designated “Public Investor.”
 
7.2 Certificates; Other Production and Reserve Information. The Company shall
furnish to the Administrative Agent and each Lender:
 
(a) as soon as available, but not later than 60 days after the close of each of
the first three Fiscal Quarters in any fiscal year and not later than 90 days
after the close of each Fiscal Year, a Quarterly Status Report in a form
reasonably acceptable to the Lenders, as of the last day of the immediately
preceding quarter;
 
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(b) concurrently with the delivery of the financial statements referred to in
Sections 7.1(a) and (b), and the reports referred to in Section 7.2(a), a
Compliance Certificate executed by a Responsible Officer;
 
(c) on or before (i) April 1 of each year during the term of this Agreement, a
Reserve Report effective as of January 1 of such year prepared by DeGolyer and
MacNaughton, William M. Cobb & Associates, Inc., Netherland Sewell & Associates,
Inc., or other independent petroleum engineer acceptable to the Administrative
Agent (the “Independent Engineer”) and (ii) October 1 of each year during the
term of this Agreement, a Reserve Report effective as of July 1 of such year
prepared by the Company in substantially the same form as the January 1 Reserve
Report and certified by a Responsible Officer as true and correct in all
material respects, in each case in form reasonably acceptable to the
Administrative Agent;
 
(d) promptly upon the request of the Administrative Agent, at the request of any
Lender, copies of all geological, engineering and related data contained in the
Company’s files or readily accessible to the Company relating to its and the
Guarantors’ Oil and Gas Properties as may reasonably be requested;
 
(e) [Intentionally omitted];
 
(f) promptly upon its completion in each fiscal year of the Company commencing
with the 2007 fiscal year through and including the 2010 fiscal year, and not
later than the date of delivery of the annual financial statements for the prior
fiscal year, a copy of the annual budget of the Company and its Subsidiaries on
a consolidated basis for such fiscal year, projecting total Oil and Gas revenue,
total revenue, total operating costs and expenses, Consolidated Net Income,
Consolidated Interest Expense, Consolidated EBITDAX and total capital
expenditures, by fiscal quarter; it being understood that such projections are
not to be viewed as facts, that actual results may vary and that such variances
may be material;
 
(g) copies of all Derivative Contracts then in effect not later than January 1
and July 1 of each year beginning July 2, 2007; and
 
(h) promptly, such additional information regarding the business, financial or
corporate affairs of the Company or any Subsidiary as the Administrative Agent,
at the request of any Lender, may from time to time reasonably request.
 
7.3 Notices. The Company shall promptly notify the Administrative Agent and each
Lender in writing:
 
(a) of the occurrence of any Default or Event of Default;
 
(b) of any matter that has resulted or may reasonably be expected to result in a
Material Adverse Effect, including arising out of or resulting from (i) a
material breach or non performance of, or any default under, a Contractual
Obligation of the Company or any Subsidiary or any allegation thereof; (ii) any
material dispute, litigation, investigation, proceeding or suspension between
the Company or any Subsidiary and any Governmental Authority; or (iii) the
commencement of, or any material development in, any material litigation or
proceeding affecting the Company or any Subsidiary, including pursuant to any
applicable Environmental Laws; and
 
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(c) of the formation or acquisition of any Subsidiary (other than Output or
OPEX).
 
Each notice under this Section 7.3 shall be accompanied by a written statement
by a Responsible Officer setting forth details of the occurrence referred to
therein, and, in the case of notices delivered pursuant to Sections 7.3(a) or
(b), stating what action the Company or any affected Subsidiary proposes to take
with respect thereto and at what time. Each notice under Section 7.3(a) shall
describe with particularity any and all clauses or provisions of this Agreement
or other Loan Document that have been (or foreseeably will be) breached or
violated.
 
7.4 Preservation of Company Existence, Etc. The Company and each Guarantor
shall, and shall cause each of its respective Subsidiaries to:
 
(a) preserve and maintain in full force and effect its legal existence, and
maintain its good standing under the laws of its state or jurisdiction of
formation, except in a transaction permitted by Section 8.3 or where the failure
to do so could not reasonably be expected to have a Material Adverse Effect;
 
(b) preserve and maintain in full force and effect all governmental rights,
privileges, qualifications, permits, licenses and franchises necessary or
desirable in the normal conduct of its business except where the failure to do
so could not reasonably be expected to have a Material Adverse Effect;
 
(c) use reasonable efforts, in the ordinary course of business, to preserve its
business organization and goodwill except where the failure to do so could not
reasonably be expected to have a Material Adverse Effect; and
 
(d) preserve or renew all of its registered patents, trademarks, trade names and
service marks, the non preservation of which would reasonably be expected to
have a Material Adverse Effect.
 
7.5 Maintenance of Property. The Company and each Guarantor shall, and shall
cause each of its respective Subsidiaries to, maintain and preserve all its
Property which is used or useful in its business in good working order and
condition, ordinary wear and tear excepted and to use the standard of care
typical in the industry in the operation and maintenance of its facilities,
except where the failure to do so would not reasonably be expected to have a
Material Adverse Effect; provided, however, that nothing in this Section 7.5
shall prevent the Company or any Guarantor from making any Disposition permitted
by Section 8.2.
 
7.6 Insurance. The Company and each Guarantor shall, and shall cause each of its
respective Subsidiaries to, maintain, with financially sound and reputable
independent insurers, insurance with respect to its Properties and business
against loss or damage of the kinds customarily insured against by Persons
engaged in the same or similar business, of such types and in such amounts as
are customarily carried under similar circumstances by such other Persons except
where the failure to do so would not reasonably be expected to have a Material
Adverse Effect.
 
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7.7 Payment of Obligations. Unless being contested in good faith by appropriate
proceedings and adequate reserves in accordance with GAAP are being maintained
by the Company or such Subsidiary, the Company and each Guarantor shall, and
shall cause each of its respective Subsidiaries to, pay and discharge prior to
delinquency, all their respective obligations and liabilities, including: (a)
all Tax liabilities, assessments and governmental charges or levies upon it or
its Properties or assets; (b) all lawful claims which, if unpaid, would by law
become a Lien upon its Property; and (c) all Indebtedness, as and when due and
payable, but subject to any subordination provisions contained in any instrument
or agreement evidencing such Indebtedness; except, in each case, where the
failure to do so would not reasonably be expected to have a Material Adverse
Effect.
 
7.8 Compliance with Laws. The Company and each Guarantor shall, and shall cause
each of its respective Subsidiaries to, comply in all material respects with all
Requirements of Law of any Governmental Authority having jurisdiction over it or
its business (including the Federal Fair Labor Standards Act), including with
respect to the transactions contemplated by the Output Acquisition, except (a)
such as may be contested in good faith or as to which a bona fide dispute may
exist or (b) where the failure to do so would not reasonably be expected to have
a Material Adverse Effect.
 
7.9 Compliance with ERISA. The Company and each Guarantor shall, and shall cause
each of its ERISA Affiliates to: (a) maintain each Plan of the Company in
compliance in all material respects with the applicable provisions of ERISA, the
Code and other federal or state law; (b) cause each such Plan which is qualified
under Section 401(a) of the Code to maintain such qualification; and (c) make
all required contributions to any such Plan subject to Section 412 of the Code.
 
7.10 Inspection of Property and Books and Records. The Company and each
Guarantor shall, and shall cause each of its respective Subsidiaries to,
maintain proper books of record and account, in which full, true and correct
entries in conformity with GAAP consistently applied shall be made of all
financial transactions and matters involving the assets and business of the
Company and such Subsidiary. The Company and each Guarantor shall permit
representatives and independent contractors of the Administrative Agent or any
Lender to visit and inspect any of their respective Properties, to examine their
respective corporate, financial and operating records, and make copies thereof
or abstracts therefrom, and to discuss their respective affairs, finances and
accounts with their respective managers, directors, officers, and independent
public accountants, all at the expense of the Company and at such reasonable
times during normal business hours and as often as may be reasonably desired,
upon reasonable advance notice to the Company; provided, however, that,
excluding any such visits and inspections during the continuance of an Event of
Default, only the Administrative Agent, on behalf of the Lenders, may exercise
the rights under this Section 7.10 and such exercise shall not occur more
frequently than once per fiscal year; provided further, however, when an Event
of Default exists the Administrative Agent or any Lender may do any of the
foregoing at the expense of the Company at any time during normal business hours
and without advance notice.
 
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7.11 Environmental Laws. The Company and each Guarantor shall, and shall cause
each of its respective Subsidiaries to, conduct its respective operations and
keep and maintain their respective Properties in compliance with all
Environmental Laws, except where the failure to do so would not reasonably be
expected to have a Material Adverse Effect.
 
7.12 New Subsidiary Guarantors. If, at any time after the Output Closing Time,
there exists any Subsidiary that is not either a Guarantor or an Exempt
Subsidiary, then the Company and each Guarantor shall, on the date any such
Subsidiary is acquired or formed, (a) cause each such Subsidiary to execute and
deliver a joinder to the Guaranty to the Administrative Agent, (b) pledge or
cause to be pledged to the Administrative Agent for the benefit of the Lenders
all of the outstanding Capital Stock thereof pursuant to a Security Document
satisfactory to the Administrative Agent, to be held by the First Lien Credit
Agent on behalf of itself, for the benefit of the First Lien Secured Parties,
and the Administrative Agent, for the benefit of the Secured Parties, and (c)
cause such Subsidiary to execute and deliver such Security Documents as may be
required pursuant to Sections 4.2, 4.5(a) or 7.14(b). Upon the execution and
delivery by any Subsidiary of a joinder to the Guaranty, such Subsidiary shall
automatically and immediately, and without any further action on the part of any
Person, (i) become a Guarantor for all purposes of this Agreement and (ii) be
deemed to have made the representations and warranties, as applied to and
including such new Subsidiary, set forth in this Agreement.
 
7.13 Use of Proceeds. The Company and each Guarantor shall, and shall cause each
of its respective Subsidiaries to, use the proceeds of the Loans only for the
following purposes: at the Output Closing Time, together with proceeds of the
First Lien Loans, to fund the Company’s payment obligations under Section 2.4 of
the Output Acquisition Agreement (other than fees and expenses incurred in
connection with the Output Acquisition) in an aggregate amount not to exceed
$96,000,000, subject to usual and customary adjustments for transactions of such
nature.
 
7.14 Further Assurances.
 
(a) The Company and each Guarantor shall promptly (and in no event later than 20
days (or such late date as may be agreed by the Administrative Agent) after
becoming aware of the need therefor) cure any defects in the creation and
issuance of the Notes and the execution and delivery of this Agreement, the
Security Documents or any other instruments referred to or mentioned herein or
therein. The Company and the Guarantors shall, at the Company’s expense,
promptly (and in no event later than 20 days (or such late date as may be agreed
by the Administrative Agent) after becoming aware of the need therefor) do all
acts and things, and execute and file or record, all instruments reasonably
requested by the Administrative Agent, to establish, perfect, maintain and
continue the perfected security interest of the Lenders in or the Lien of the
Lenders on the Mortgaged Properties. 
 
(b) The Company shall promptly (and in no event later than ten Business Days
after the need arises) execute and cause its Subsidiaries that are Guarantors to
execute such additional Security Documents in form and substance reasonably
satisfactory to Administrative Agent, granting to Administrative Agent fully
perfected Liens on Oil and Gas Properties that are not then part of the
Mortgaged Properties, subject only to the Liens securing the Collateral in
respect of the First Lien Credit Documents (the “First Liens”) and other
Permitted Liens, sufficient to cause the Mortgaged Properties to include at all
times eighty-five percent (85%) of the Net Present Value of the Proved Reserves
and at least ninety percent (90%) of the Net Present Value of the Proved
Developed Producing Reserves, in each case as set forth in the most recent
Reserve Report. In addition, the Company and each Guarantor shall furnish to the
Administrative Agent title due diligence in form satisfactory to the
Administrative Agent and will furnish all other documents and information
relating to such Mortgaged Properties as the Administrative Agent may reasonably
request. The Company shall pay the reasonable out-of-pocket costs and expenses
of all filings and recordings and all searches reasonably deemed necessary by
the Administrative Agent to establish and determine the validity and the
priority of the Liens created or intended to be created by the Security
Documents; and the Company and each Guarantor shall satisfy all other claims and
charges which in the reasonable opinion of the Administrative Agent might
prejudice, impair or otherwise affect any of the Mortgaged Properties or the
Lenders’ Lien thereon.
 
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(c) With respect to any Collateral (whether tangible or intangible, but
excluding titled vehicles or other Collateral with respect to which a security
interest cannot be perfected by the filing of a financing statement under the
UCC) acquired after the Effective Date by the Company or any Guarantor as to
which the Administrative Agent, for the benefit of the Secured Parties, does not
otherwise have a fully perfected Lien subject only to the First Liens, promptly
(and in no event later than twenty (20) days (or such later date as may be
agreed by the Administrative Agent) after becoming aware of the need therefor)
take all actions necessary or advisable to grant to the Administrative Agent,
for the benefit of the Secured Parties, fully perfected second priority security
interest in such Collateral, subject only to the First Liens and other Permitted
Liens, including without limitation, the filing of UCC financing statements in
such jurisdictions as may be required by the Security Documents or by law or as
may be reasonably requested by the Administrative Agent; provided, however,
notwithstanding the foregoing, Property will be excluded from the Collateral in
circumstances where the Administrative Agent and the Company agree that the cost
of obtaining a security interest in such Property is excessive in relation to
the value afforded thereby, or if the granting of a security interest in such
Property would be prohibited by contract (other than any non-assignment of
payment intangibles provision that is unenforceable under the UCC) or any
applicable Requirement of Law.
 
7.15 Output Acquisition. The Company shall cause the Output Acquisition to be
consummated substantially on the terms described in the Output Acquisition
Agreement.
 
ARTICLE VIII

 
NEGATIVE COVENANTS
 
So long as any Lender shall have any Commitment hereunder, or any Loan or other
Obligation shall remain unpaid or unsatisfied:
 
8.1 Limitation on Liens. The Company and each Guarantor shall not, and shall not
permit any of its respective Subsidiaries to, directly or indirectly, make,
create, incur, assume or suffer to exist any Lien upon or with respect to any
part of its Property, whether now owned or hereafter acquired, other than the
following:
 
(a) any Lien on Property of the Company or any Subsidiary as set forth in
Schedule 8.1 and any modifications, replacements, renewals or extensions
thereof; provided, however, that (i) the Lien does not extend to any additional
Property other than (A) after-acquired Property that is affixed or incorporated
into the Property covered by such Lien or financed by Indebtedness permitted
under Section 8.5, and (B) proceeds and products thereof and (ii) the
modification, replacement, renewal, extension or refinancing of the obligations
secured or benefited by such Liens (if such obligations constitute Indebtedness)
is permitted by Section 8.5;
 
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(b) any Lien created under any Loan Document;
 
(c) Liens for Taxes, fees, assessments or other governmental charges which are
not delinquent or remain payable without penalty, or to the extent that non
payment thereof is permitted by Section 7.7;
 
(d) carriers’, warehousemen’s, mechanics’, landlords’, materialmen’s,
repairmen’s or other similar Liens arising in the ordinary course of business
(whether by law or by contract) which (i) are not delinquent, (ii) remain
payable without penalty, (iii) are being contested in good faith and by
appropriate proceedings, which proceedings have the effect of preventing the
forfeiture or sale of the Property subject thereto or (iv) the failure of which
to pay could not reasonably be expected to have a Material Adverse Effect;
 
(e) Liens consisting of (i) pledges or deposits required in the ordinary course
of business in connection with workers’ compensation, unemployment insurance and
other social security legislation; (ii) pledges and deposits in the ordinary
course of business not exceeding $625,000 in the aggregate securing insurance
premiums or reimbursement obligations under insurance policies, in each case
payable to insurance carriers that provide insurance to the Company or any of
its Subsidiaries; or (iii) obligations in respect of letters of credit or bank
guarantees that have been posted by the Company or any of its Subsidiaries to
support the payments of the items set forth in clauses (i) and (ii) of this
Section 8.1;
 
(f) easements, rights of way, restrictions, defects or other exceptions to title
and other similar encumbrances incurred in the ordinary course of business
which, in the aggregate, are not material in amount, are not incurred to secure
Indebtedness, and which do not in any case materially detract from the value of
the Property subject thereto or interfere with the ordinary conduct of the
businesses of the Company, the Guarantors and their respective Subsidiaries; 
 
(g) Liens on the Property of the Company, any Guarantor or any Subsidiary of
such Person securing (i) the non-delinquent performance of bids, trade contracts
(other than for borrowed money), leases or statutory obligations, (ii)
Contingent Obligations on surety, performance and appeal bonds, and (iii) other
non-delinquent obligations of a like nature; in each case, incurred in the
ordinary course of business;
 
(h) Liens arising solely by virtue of any statutory or common law provision
relating to banker’s liens, rights of set-off or similar rights and remedies as
to deposit accounts or other funds maintained with a creditor depository
institution or under any deposit account agreement entered into in the ordinary
course of business; provided, however, that (i) such deposit account is not a
dedicated cash collateral account and is not subject to restrictions against
access by the Company, (ii) the Company (or applicable Subsidiary) maintains
(subject to such right of set off) dominion and control over such account(s),
and (iii) such deposit account is not intended by the Company, any Guarantor or
any Subsidiary to provide cash collateral to the depository institution;
 
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(i) Oil and Gas Liens to secure obligations which are not delinquent and which
do not in any case materially detract from the value of the Oil and Gas Property
subject thereto; 
 
(j) Liens on the Collateral securing the First Lien Obligations; provided,
however, that such Liens are subject to the Intercreditor Agreement;
 
(k) Liens on Property of Exempt Subsidiaries securing Non-Recourse Debt
permitted to be incurred under Section 8.5(d);
 
(l) Liens securing judgments for the payment of money not constituting an Event
of Default;
 
(m) Liens securing purchase money Indebtedness and Capitalized Leases permitted
hereunder; provided, however, that such Liens do not at any time encumber any
Property other than the Property (including after-acquired Property) financed by
such Indebtedness and the proceeds and the products thereof and accessions
thereto; and provided further, however, that individual financings of assets
provided by one lender may be cross collateralized to other financings of
equipment provided by such lender; 
 
(n) (i) leases, licenses, subleases or sublicenses granted to other Persons in
the ordinary course of business which do not (A) interfere in any material
respect with the business of the Company or any of its Subsidiaries or (B)
secure any Indebtedness for borrowed money or (ii) the rights reserved or vested
in any Person by the terms of any lease, license, franchise, grant or permit
held by the Company or any of its Subsidiaries or by a statutory provision, to
terminate any such lease, license, franchise, grant or permit, or to require
annual or periodic payments as a condition to the continuance thereof;
 
(o) Liens (i) in favor of the seller of any Property to be acquired in an
investment permitted pursuant to Sections 8.4 to be applied against the purchase
price for such investment, (ii) consisting of an agreement to Dispose of any
Property in a Disposition permitted under Section 8.2, in each case, solely to
the extent such investment or Disposition, as the case may be, would have been
permitted on the date of the creation of such Lien and (iii) earnest money
deposits made by the Company or any of its Subsidiaries in connection with any
letter of intent or purchase agreement permitted hereunder;
 
(p) Liens existing on the Property of any Person that becomes a Subsidiary, in
each case after the date hereof (other than Liens on the Capital Stock of any
Person that becomes a Subsidiary) and any modifications, replacements, renewals
or extensions thereof; provided, however, that (i) such Lien does not extend to
or cover any other Property (other than the proceeds or products thereof and
after-acquired Property subjected to a Lien pursuant to terms existing at the
time of such acquisition, it being understood that such requirement shall not be
permitted to apply to any Property to which such requirement would not have
applied but for such acquisition), and (ii) the Indebtedness secured thereby
(or, as applicable, any modifications, replacements, renewals or extensions
thereof) is permitted under Section 8.5;
 
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(q) Liens arising from precautionary UCC financing statement filings regarding
leases entered into by the Company or any of its Subsidiaries in the ordinary
course of business;
 
(r) Liens arising out of conditional sale, title retention, consignment or
similar arrangements for sale of goods entered into by the Company or any of its
Subsidiaries in the ordinary course of business not prohibited by this
Agreement;
 
(s) Permitted Encumbrances (as defined in the Mortgages);
 
(t) Liens in favor of the Company securing investments permitted under Section
8.4(i); or
 
(u) other Liens securing Indebtedness or other obligations (other than First
Liens) outstanding in an aggregate principal amount not to exceed the lesser of:
(i) the difference between $12,500,000 minus the aggregate principal amount then
outstanding of all Indebtedness secured by Liens permitted under Sections 8.1(m)
and 8.1(p) and (ii) $6,250,000.
 
8.2 Disposition of Assets. The Company and each Guarantor shall not, and shall
not permit any of its respective Subsidiaries that are Guarantors to, directly
or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of
(whether in one or a series of transactions) (collectively, “Dispositions”) any
Property (including accounts and notes receivable, with or without recourse),
except:
 
(a) Dispositions permitted under Sections 8.3, 8.4, or 8.9 and Liens permitted
by Section 8.1; 
 
(b) Dispositions of inventory (including produced Oil and Gas) in the ordinary
course of business;
 
(c) Dispositions among the Company and wholly-owned Subsidiaries that are
Guarantors; 
 
(d) obsolete, used, worn out or surplus equipment in the ordinary course of
business; 
 
(e) Dispositions of accounts and notes receivable in the ordinary course of
business consistent with past practices; 
 
(f) Dispositions of interests in Oil and Gas Properties, or portions thereof,
that are sold for fair cash consideration (considering any net production
proceeds from the effective date of any such Disposition to the closing thereof
that are credited against the purchase price payable at such closing as Net Cash
Proceeds received by the Company or such Guarantor); provided, however, that the
aggregate sales prices (as of the effective date of each particular Disposition)
for Dispositions made pursuant to this Section 8.2(f) during any Borrowing Base
Period shall not exceed 5% of the present value of the future cash flows from
Proved Reserves included in the Oil and Gas Properties as set forth in the most
recent Reserve Report delivered pursuant to Section 6.11 or 7.2(c);
 
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(g) the abandonment of any well or forfeiture, surrender or release by the
Company or any Guarantor of any lease in the ordinary course of business which
is not materially disadvantageous in any way to the Lenders and which, in the
Company’s or such Guarantor’s opinion, is in the best interest of the Company or
such Guarantor;
 
(h) Dispositions of Property other than Hydrocarbon Interests to the extent that
(i) such Property is exchanged for credit against the purchase price of similar
replacement Property or (ii) the proceeds of such Disposition are promptly
applied to the purchase price of such replacement Property;
 
(i) Dispositions of Cash Equivalents;
 
(j) farm-out agreements or participation agreements, or leases, subleases,
licenses or sublicenses of Property (including real Property and intellectual
Property but excluding Oil and Gas Properties with which Proved Reserves are
associated) in the ordinary course of business and which do not materially
interfere with the business of the Company and its Subsidiaries;
 
(k) transfers of Property subject to Recovery Events upon receipt of the Net
Cash Proceeds of such Recovery Event; or
 
(l) other Dispositions of Property by the Company and the Guarantors (other than
Oil and Gas Properties); provided, however, that (i) at the time of such
Disposition, no Event of Default shall exist or would result from such
Disposition, (ii) the aggregate book value of all Property Disposed of in
reliance on this Section 8.2(l) shall not exceed $3,750,000 and (iii) the sale
price for such Property (if in excess of $375,000) shall be paid to the Company
or such Guarantor for not less than 75% cash or Cash Equivalent consideration.
 
8.3 Consolidations and Mergers. The Company and each Guarantor shall not,
directly or indirectly, merge, consolidate with or into, or convey, transfer,
lease or otherwise dispose of (whether in one transaction or in a series of
transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) to or in favor of any Person, except:
 
(a) any Guarantor may merge with the Company or another Guarantor; provided,
however, that the Company shall be the continuing or surviving Person in the
case of a merger involving the Company; 
 
(b) any Subsidiary that is not a Guarantor may merge with the Company or a
Guarantor; provided, however, that the Company or such Guarantor shall be the
continuing or surviving Person;
 
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(c) the Company and its Subsidiaries may consummate the Output Acquisition;
 
(d) a merger, dissolution, liquidation, consolidation or Disposition, the
purpose of which is to effect a Disposition permitted pursuant to Section 8.2;
or
 
(e) the Company or any Guarantor may complete Corporate Acquisitions permitted
under Section 8.4.
 
8.4 Loans and Investments. The Company and each Guarantor shall not, directly or
indirectly, purchase or acquire, or make any commitment therefor, any Capital
Stock or any obligations or other securities of, or any interest in, any Person,
or make any Corporate Acquisitions, or make any advance, loan, extension of
credit or capital contribution to or any other investment in, any Person,
including any Affiliate of the Company, except for:
 
(a) investments in Cash Equivalents; 
 
(b) extensions of credit in the nature of accounts receivable or notes
receivable arising from the sale or lease of goods or services in the ordinary
course of business; 
 
(c) investments in Guarantors that are directly or indirectly wholly-owned
Subsidiaries of the Company;
 
(d) investments in Derivative Contracts permitted under Section 8.10;
 
(e) investments resulting from transactions specifically permitted under Section
8.3; 
 
(f) investments with third parties that are (i) customary in the oil and gas
business, (ii) made in the ordinary course of the Company’s business, and (iii)
made in the form of or pursuant to purchase agreements, operating agreements,
processing agreements, farm-in agreements, farm-out agreements, joint venture
agreements, development agreements, unitization agreements, pooling agreements,
joint bidding agreements, service contracts and other similar agreements, that
do not, in any case, (x) constitute an investment in any state law partnership
or other Person (that is not a Guarantor) or (y) involve the Disposition of any
Mortgaged Property covering Proved Reserves not otherwise permitted under the
Loan Documents;
 
(g) advances by the Company to any of its employees (other than corporate
officers) in the ordinary course of business which do not exceed $375,000 at any
time outstanding in the aggregate to all such employees; 
 
(h) acquisitions of Hydrocarbon Interests and related assets in the ordinary
course of business;
 
(i) (i) with respect to loans or advances by the Company to Exempt Subsidiaries
existing at the Effective Date, the conversion of such loans or advances to
Capital Stock of the debtor Exempt Subsidiary, or the contribution thereof to
the capital of such Exempt Subsidiary and (ii) in addition to the investments
permitted by the foregoing clause (i), provided that there shall not have
occurred and be continuing an Event of Default hereunder, and no Event of
Default would result therefrom, after the Effective Date, the making by the
Company or a Guarantor of (A) direct loans and advances to Exempt Subsidiaries
to support working capital needs not to exceed an aggregate balance of
$1,200,000 at any time outstanding and (B) other investments in Exempt
Subsidiaries not to exceed an aggregate amount of $1,200,000 on a cumulative
basis; 
 
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(j) (i) the Output Acquisition and (ii) provided that there shall not have
occurred and be continuing an Event of Default hereunder, and no Event of
Default would result therefrom (and subject to compliance with Section 7.12,
where applicable), other Corporate Acquisitions by the Company of Persons
substantially all of the Property of which is comprised of domestic Proved
Reserves, including Hydrocarbon Interests in the federal Outer Continental Shelf
or associated gathering, processing, or pipeline assets.
 
(k) investments consisting of Liens, Dispositions, fundamental changes,
Indebtedness, and Restricted Payments permitted by Sections 8.1, 8.2, 8.3, 8.5
and 8.9, respectively;
 
(l) promissory notes and other noncash consideration received in connection with
Dispositions permitted by Section 8.2 (other than Sections 8.2(f) or (k));
 
(m) investments in the ordinary course of business consisting of endorsements
for collection or deposit;
 
(n) investments (including debt obligations and Capital Stock) received in
connection with the bankruptcy or reorganization of any Person and in settlement
of obligations of, or other disputes with, such Persons arising in the ordinary
course of business; or
 
(o) guarantees by the Company or any Subsidiary of leases (other than Capital
Lease Obligations) or of other obligations that do not constitute Indebtedness,
in each case entered into in the ordinary course of business.
 
8.5 Limitation on Indebtedness. The Company and each Guarantor shall not, and
shall not permit any of its respective Subsidiaries to, directly or indirectly,
create, incur, assume, suffer to exist, or otherwise become or remain liable
with respect to, any Indebtedness, except (collectively, “Permitted
Indebtedness”):
 
(a) Indebtedness incurred pursuant to this Agreement; 
 
(b) Indebtedness incurred pursuant to the First Lien Credit Agreement;
 
(c) Indebtedness consisting of Contingent Obligations permitted pursuant to
Section 8.8; 
 
(d) Non-Recourse Debt not to exceed $25,000,000 in an aggregate principal amount
at any time outstanding;
 
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(e) Indebtedness consisting of gas imbalances or obligations in respect of take
or pay or other prepayments not exceeding the amount specified in Section 6.12;
 
(f) Indebtedness in respect of Derivative Contracts permitted under Section
8.10;
 
(g) guarantees by the Company and the Guarantors in respect of Indebtedness of
the Company and such Guarantors otherwise permitted hereunder; provided,
however, that if the Indebtedness being guaranteed is subordinated to the
Obligations, such guarantee shall be subordinated to the guarantee of the
Obligations;
 
(h) Indebtedness of (i) of any Loan Party owing to any other Loan Party, or (ii)
any Subsidiary that is not a Loan Party owing to (A) any Subsidiary that is not
a Loan Party or (B) a Loan Party in respect of an investment permitted under
Section 8.4(i);
 
(i) Indebtedness (other than for borrowed money, purchase money Indebtedness or
obligations with respect to Capital Leases) subject to Liens permitted under
Section 8.1;
 
(j) Capital Leases and purchase money obligations (including obligations in
respect of mortgage, industrial revenue bond, industrial development bond, and
similar financings) to finance the purchase, repair or improvement of fixed or
capital assets and any Permitted Refinancing thereof; provided, however, that
the aggregate amount of all Indebtedness at any one time outstanding described
in Sections 8.5(j), (l), (m) and (n) shall not exceed $12,500,000;
 
(k) Indebtedness incurred by the Company or its Subsidiaries in a Disposition
under agreements providing for indemnification, the adjustment of the purchase
price or similar adjustments;
 
(l) Indebtedness in respect of netting services, overdraft protections and
similar arrangements in each case in connection with cash management and deposit
accounts; provided, however, that the aggregate amount of all Indebtedness at
any one time outstanding described in Sections 8.5(j), (l), (m) and (n) shall
not exceed $12,500,000;
 
(m) Indebtedness consisting of the financing of insurance premiums; provided,
however, that the aggregate amount of all Indebtedness at any one time
outstanding described in Sections 8.5(j), (l), (m) and (n) shall not exceed
$12,500,000; or
 
(n) in addition to the Indebtedness otherwise permitted under this Section 8.5,
Indebtedness described in the definition thereof of the Loan Parties not to
exceed at any time outstanding, together with Indebtedness outstanding at such
time described in Sections 8.5(j), (l) or (m), $12,500,000 in aggregate
principal amount.
 
8.6 Transactions with Affiliates. Except as set forth on Schedule 8.6, the
Company and each Guarantor shall not, and shall not permit any of its respective
Subsidiaries to, directly or indirectly, enter into any transaction with or make
any payment or transfer to any Affiliate of the Company or its stockholders,
except transactions (a) among the Loan Parties, (b) in the ordinary course of
business and upon fair and reasonable terms no less favorable to the Company,
such Guarantor or such Subsidiary than would obtain in a comparable arm’s length
transaction with a Person not an Affiliate of the Company, such Guarantor or
such Subsidiary, (c) customary fees payable to any directors of the Company and
reimbursement of reasonable out of pocket costs of the directors of the Company,
(d) employment and severance arrangements between the Company or its
Subsidiaries and their respective officers, consultants and employees in the
ordinary course of business, (e) the payment of customary fees and indemnities
to directors, officers and employees of the Company and the Subsidiaries in the
ordinary course of business or (f) to the extent permitted under Sections 8.4,
8.5 and 8.9.
 
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8.7 Margin Stock. The Company and each Guarantor shall not, and shall not permit
any of its respective Subsidiaries to, directly or indirectly, suffer or permit
any Subsidiary to, use any portion of the proceeds of the Loans to (i) purchase
or carry Margin Stock, (ii) repay or otherwise refinance Indebtedness of the
Company or others incurred to purchase or carry Margin Stock, (iii) extend
credit for the purpose of purchasing or carrying any Margin Stock, or (iv)
acquire any security in any transaction that is subject to Section 13 or 15(d)
of the Exchange Act.
 
8.8 Contingent Obligations. The Company and each Guarantor shall not, and shall
not permit any of its respective Subsidiaries to, directly or indirectly,
create, incur, assume or suffer to exist any Contingent Obligations except:
 
(a) endorsements for collection or deposit in the ordinary course of business;
 
(b) Derivative Contracts permitted under Section 8.10 hereof; 
 
(c) obligations under plugging bonds, performance bonds and fidelity bonds
issued for the account of the Company or its Subsidiaries, obligations to
indemnify or make whole any surety and similar agreements incurred in the
ordinary course of business; 
 
(d) this Agreement and each Guaranty;
 
(e) Guaranty Obligations permitted under Section 8.5 or obligations in respect
of letters of credit or bank guarantees permitted under Section 8.1(e);
 
(f) Contingent Obligations consisting of gas imbalances or obligations in
respect of take or pay or other prepayments not to exceed the amount specified
in Section 6.12; or
 
(g) guarantees of leases (other than Capital Leases) or of other obligations
that do not constitute Indebtedness, in each case entered into in the ordinary
course of business.
 
8.9 Restricted Payments. The Company and each Guarantor shall not, directly or
indirectly, (a) purchase, redeem or otherwise acquire for value any Capital
Stock, now or hereafter outstanding from its members, partners or stockholders
(other than from its members, partners or stockholders that are Loan Parties;
provided, however, that (i) to the extent constituting Restricted Payments, the
Company and the Guarantors may enter into transactions expressly permitted by
Section 8.3; (ii) the Company may effect repurchases of Capital Stock deemed to
occur upon exercise of stock options or warrants if such Capital Stock represent
a portion of the exercise price of such options or warrants; (iii) the Company
may make repurchases of Capital Stock necessary to enable the Company to pay
federal withholding Taxes incurred by an employee upon the vesting of restricted
Capital Stock granted to such employee in connection with a stock incentive
plan; or (iv) the Company and any of the Guarantors may pay for the repurchase,
retirement or other acquisition or retirement for value of Capital Stock of the
Company held by any future, present or former director, officer, member of
management employee or consultant of the Company or any of its Subsidiaries (or
the estate, family members, spouse or former spouse of any of the foregoing);
provided, however, that the aggregate amount of Restricted Payments made under
this clause (iv) does not exceed in any calendar year $375,000 (with unused
amounts in any calendar year being carried over to the two succeeding calendar
years); or (b) declare or pay any distribution, dividend or return capital to
its members, partners or stockholders (other than to its members, partners or
stockholders that are Loan Parties), or make any distribution of cash or
Property to its members, partners or stockholders (other than members, partners
or stockholders that are Loan Parties; provided, however, that (i) the Company
may declare and make dividend payments or other distributions payable solely in
the Capital Stock (other than Disqualified Capital Stock) of the Company; (ii)
the Company may make cash payments in lieu of issuing fractional shares in
connection with the exercise of warrants, options or other securities
convertible into or exchangeable for Capital Stock of the Company; or (iii) in
addition to the foregoing Restricted Payments, the Company may make additional
Restricted Payments to holders of any Qualifying Preferred Stock in an aggregate
annual amount not to exceed $7,000,000 (collectively “Restricted Payments”).
 
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8.10 Derivative Contracts.
 
(a) The Company and each Guarantor shall not, directly or indirectly, enter into
or in any manner be liable on any Derivative Contract except:
 
(i) Derivative Contracts entered into with the purpose and effect of fixing
prices on oil or gas expected to be produced by such Person; provided, however,
that at all times (i) no such contract shall be for speculative purposes; (ii)
as of any date (the “Calculation Date”) no such contract, when aggregated with
all Derivative Contracts permitted under this Section 8.10(a)(i), but excluding
Derivative Contracts described in clause (v) of this Section 8.10(a)(i), shall
cover a notional volume in excess of the Applicable Percentage of the total
Projected Oil and Gas Production to be produced in any month from the Proved
Developed Producing Reserves reflected in the most recent Reserve Report; (iii)
each such contract (excluding Derivative Contracts offered by a national
commodity exchange) shall be with the Administrative Agent, or any of the
Lenders (or Affiliate of a Lender), the First Lien Credit Agent or any First
Lien Lender (or Affiliate of a First Lien Lender), or with a counterparty or
have a Guarantor of the obligation of the counterparty which, at the time the
contract is made, has long-term obligations rated BBB+ or Baa1 or better,
respectively, by S&P or Moody’s; (iv) no such contract requires the Company to
put up money, Property, letters of credit or other security against the event of
its non-performance prior to actual default by the Company in performing its
obligations thereunder, except Liens in favor of the Administrative Agent for
the benefit of the Lenders under the Security Documents, or the First Liens; and
(v) with respect to Derivative Contracts under which the Company’s or a
Guarantor’s only interest is a “put” right or which is a commodity price hedge
by means of a price “floor” (A) there exists no deferred obligation to pay the
related premium or other purchase price and (B) all such contracts are with
Qualifying Derivative Contract Counterparties.
 
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(ii) The Existing Derivative Contracts; provided, however, that no Existing
Derivative Contract may be amended, restated, supplemented or otherwise modified
or extended without the prior written consent of the Administrative Agent unless
such modified Derivative Contract satisfies the requirements set forth in clause
(i) or clause (ii) of this Section 8.10(a); or
 
(iii) Derivative Contracts entered into with the purpose and effect of fixing
interest rates on a principal amount of Indebtedness of the Company that is
accruing interest at a variable rate; provided, however, that (i) no such
contract shall be for speculative purposes; (ii) the floating rate index of each
such contract generally matches the index used to determine the floating rates
of interest on the corresponding Indebtedness of the Company to be hedged by
such contract; (iii) no such contract requires the Company to put up money,
Property, letters of credit, or other security against the event of its
non-performance prior to actual default by the Company in performing its
obligations thereunder; (iv) the aggregate notional amount of the Derivative
Contracts shall not exceed fifty percent (50%) of the Borrowing Base (as defined
in the First Lien Credit Agreement) during any Borrowing Base Period (as defined
in the First Lien Credit Agreement); and (v) each such contract shall be with a
Lender (or an Affiliate of a Lender) or with a counterparty or have a guarantor
of the obligation of the counterparty who, at the time the contract is made, has
long-term obligations rated BBB+ or Baa1 or better, respectively, by S&P or
Moody’s.
 
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(b) In the event the Company enters into a Derivative Contract with any Lender,
the Contingent Obligation evidenced under such Derivative Contract shall not be
applied against such Lender’s Commitment nor against the Effective Amount. The
benefits of the Security Documents and of the provisions of the Loan Documents
relating to the Collateral shall also extend to and be available on a pro rata
basis to each Qualifying Derivative Contract Counterparty in respect to all
Obligations with respect to the related Qualifying Derivative Contract.
 
8.11 Sale Leasebacks. The Company and each Guarantor shall not, and shall not
permit any of its respective Subsidiaries to, directly or indirectly, become
liable, directly or by way of any Guaranty Obligation, with respect to any lease
of any Property (whether real, personal or mixed) whether now owned or hereafter
acquired, (a) which the Company or such Guarantor or Subsidiary has sold or
transferred or is to sell or transfer to any other Person or (b) which the
Company or such Guarantor or Subsidiary intends to use for substantially the
same purposes as any other Property which has been or is to be sold or
transferred by the Company or such Guarantor or Subsidiary to any other Person
in connection with such lease.
 
8.12 Consolidated Leverage Ratio. As of the last day of any Fiscal Quarter, the
Company shall not permit the Consolidated Leverage Ratio to exceed 3.50 to
1.00. 
 
8.13 Current Ratio. As of the last day of any Fiscal Quarter, the Company shall
not permit the ratio of Current Assets to Current Liabilities to be less than
1.00 to 1.00; provided, however, that for purposes of such ratio, adjustments
required by FAS 133 and 143 that affect the calculation of Current Assets or
Current Liabilities shall be excluded from current assets and current
liabilities, respectively.
 
8.14 Minimum Interest Coverage Ratio. The Company shall not permit the ratio of
Consolidated EBITDAX for any period commencing with the period ended June 30,
2007 to Consolidated Interest Expense for such period to be less than 2.00 to
1.00.
 
8.15 Minimum PV 10 to Consolidated Total Debt Ratio. The Company shall not
permit the ratio of Net Present Value to Consolidated Total Debt at the end of
any fiscal quarter to be less than 1.50 to 1.00. 
 
8.16 Change in Business. The Company and each Guarantor shall not, and shall not
permit any of its respective Subsidiaries to, directly or indirectly, engage in
any business or activity other than the Principal Business and businesses
ancillary or reasonably related thereto.
 
8.17 Accounting Changes. The Company and each Guarantor shall not, and shall not
permit any of its respective Subsidiaries to, directly or indirectly, make any
significant change in accounting treatment or reporting practices, except as
required by GAAP, or change the fiscal year of the Company or of any Guarantor
or Subsidiary.
 
8.18 Certain Contracts; Amendments; Multiemployer ERISA Plans. Except for the
restrictions expressly set forth in the Loan Documents and the First Lien Credit
Documents, the Company and each Guarantor shall not, directly or indirectly,
enter into, create, or otherwise allow to exist any contract or other consensual
restriction on the ability of any Guarantor to: (a) pay dividends or make other
distributions to the Company or another Guarantor, (b) redeem its Capital Stock
held by the Company or another Guarantor, (c) repay Indebtedness owing by it to
the Company or another Guarantor, or (d) transfer any of its Property to the
Company or another Guarantor. The Company and each Guarantor shall not, and
shall not permit any ERISA Affiliate to, incur any obligation to contribute to
any Multiemployer Plan.
 
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8.19 Midstream Contracts. The Company and each Guarantor shall not, directly or
indirectly;
 
(a) amend, supplement or otherwise modify any material term or condition
(pursuant to a waiver granted by or to such Person or otherwise) or fail to
enforce strictly the terms and conditions of the indemnities and rights
furnished to the Company or any Guarantor pursuant to the Midstream Contracts,
in each case, such that after giving effect thereto such terms, conditions,
indemnities and rights shall be materially less favorable to the interests of
the Loan Parties or the Lenders with respect thereto; or
 
(b) otherwise amend, supplement or otherwise modify or fail to enforce the terms
and conditions of the Midstream Contracts except to the extent that any such
amendment, supplement or modification or failure to enforce could not reasonably
expected to have a Material Adverse Effect.
 
8.20 First Lien Credit Agreement. The Company and each Guarantor shall not,
directly or indirectly: (a) amend or modify any of the terms or provisions of
the First Lien Credit Agreement, except as permitted by Section 5.3(a) of the
Intercreditor Agreement; (b) cause, or purport to cause, the Liens securing the
Obligations to cease to be Permitted Liens as defined therein; or (c) grant any
Lien for the benefit of the lenders thereunder, except to the extent permitted
hereunder or required by the Intercreditor Agreement.
 
8.21 Limitation on Amendments to Output Acquisition Documents. The Company shall
not, directly or indirectly:
 
(a) amend, supplement or otherwise modify any material term or condition
(pursuant to a waiver granted by or to such Person or otherwise) or fail to
enforce strictly the terms and conditions of the indemnities and rights
furnished to the Company or any of its Subsidiaries pursuant to the Output
Acquisition Documents such that after giving effect thereto such terms,
conditions, indemnities or rights shall be materially less favorable to the
interests of the Loan Parties or the Lenders with respect thereto; or 
 
(b) otherwise amend, supplement or otherwise modify or fail to enforce the terms
and conditions of the Output Acquisition Documents except to the extent that any
such amendment, supplement or modification or failure to enforce could not
reasonably be expected to have a Material Adverse Effect.
 
8.22 Forward Sales, Production Payments, Etc. The Company and each Guarantor
shall not, directly or indirectly:
 
(a) enter into any forward sales transaction or agreement with respect to
physical deliveries of Oil and Gas outside the ordinary course of business as
conducted prior to the Effective Time; or
 
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(b) sell or convey any production payment, term overriding interest, net profits
interest or any similar interest (except for overriding royalty or net profits
interests granted to employees or consultants of the Company in the ordinary
course of business in connection with the generation of prospects or the
development of Oil and Gas Properties).
 
8.23 Use of Proceeds. The Company and each Guarantor shall not, and shall not
permit any of its respective Subsidiaries to, directly or indirectly, use or
permit the use of all or any portion of the Loans for any purpose other than
those set forth in Section 7.13.
 
ARTICLE IX

 
EVENTS OF DEFAULT
 
9.1 Event of Default. Any of the following shall constitute an “Event of
Default”:
 
(a) Principal Non Payment. The Company fails to pay, when and as required to be
paid herein, any amount of scheduled principal payment of any Loan of this
Agreement; 
 
(b) Interest and Expense Non-Payment. Any Loan Party fails to pay, when and as
required to be paid herein, any interest due on any Interest Payment Date, any
other payments for fees, expenses, or other amount payable hereunder or under
any other Loan Document within three Business Days after the same becomes due
and payable; 
 
(c) Representation or Warranty. Any representation or warranty by the Company or
any Guarantor made or deemed made herein, in any other Loan Document, or which
is contained in any certificate, document or financial or other statement by the
Company, any Guarantor or any Responsible Officer, furnished at any time under
this Agreement, or in or under any other Loan Document, is incorrect in any
material respect on or as of the date made or deemed made; 
 
(d) Specific Defaults. Any Loan Party fails to perform or observe any term,
covenant or agreement contained in Section 7.13 or in Article VIII; 
 
(e) Other Defaults. The Company or any Guarantor fails to perform or observe any
other term or covenant contained in this Agreement or any other Loan Document,
and such default shall continue unremedied for a period of 30 days, in all other
cases after the earlier of (i) the date upon which a Responsible Officer knew or
reasonably should have known of such default and (ii) the date upon which
written notice thereof is given to the Company by the Administrative Agent or
any Lender; 
 
(f) Cross Default. (i) Subject to clause (iii) of this paragraph, the Company,
any Guarantor or any other Subsidiary (A) fails to make any payment of more than
$5,000,000 in respect of any Indebtedness or Contingent Obligation when due
(whether by scheduled maturity, required prepayment, acceleration, demand, or
otherwise) and such failure continues after the applicable grace or notice
period, if any, specified in the relevant document on the date of such failure
and, in the case of any such failure by an Exempt Subsidiary, such failure
results in a Material Adverse Effect or (B) fails after the applicable grace or
notice period, if any, specified in the relevant document on the date of such
failure to perform or observe any other condition or covenant, or any other
event shall occur or condition exist, under any agreement or instrument relating
to any such Indebtedness or Contingent Obligation having an aggregate principal
amount of more than $5,000,000 if the effect of such failure, event or condition
is to cause, or to permit the holder or holders of such Indebtedness or
beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on
behalf of such holder or holders or beneficiary or beneficiaries) to cause such
Indebtedness to be declared to be due and payable prior to its stated maturity,
or such Contingent Obligation to become payable or cash collateral in respect
thereof to be demanded and, in the case of any such failure by an Exempt
Subsidiary, such failure results in a Material Adverse Effect; (ii) subject to
clause (iii) of this paragraph, any Indebtedness or Contingent Obligation of the
Company, any Guarantor or any other Subsidiary in excess of $5,000,000 shall be
declared due and payable prior to its stated maturity or cash collateral is
demanded in respect of such Contingent Obligation; or (iii) with respect to the
Indebtedness or Contingent Obligation under any First Lien Credit Documents, (x)
an “Event of Default” (as defined in any First Lien Credit Document) shall have
occurred and shall continue and (y) the First Lien Credit Agent shall have
exercised its remedies pursuant to Section 9.2 of the First Lien Credit
Agreement;
 
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(g) Insolvency; Voluntary Proceedings. The Company, any Guarantor or any other
Subsidiary (i) generally fails to pay, or admits in writing its inability to
pay, its debts as they become due, subject to applicable grace periods, if any,
whether at stated maturity or otherwise; (ii) commences any Insolvency
Proceeding with respect to itself; or (iii) takes any action to effectuate or
authorize any of the foregoing and, in the case of any of the foregoing
occurring with respect to an Exempt Subsidiary (other than Maverick-Dimmit
Pipeline, Ltd.), a Material Adverse Effect results therefrom; 
 
(h) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is
commenced or filed against the Company, any Guarantor, or any other Subsidiary,
or any writ, judgment, warrant of attachment, execution or similar process, is
issued or levied against all or a substantial part of the Company’s, any
Guarantor’s or any other Subsidiary’s Property, and any such proceeding or
petition shall not be dismissed or stayed, or such writ, judgment, warrant of
attachment, execution or similar process shall not be released, vacated or fully
bonded within 60 days after commencement, filing or levy; (ii) the Company, any
Guarantor or any other Subsidiary files an answer admitting the material
allegations of a petition against it in any Insolvency Proceeding, or an order
for relief (or similar order under non-U.S. law) is ordered in any Insolvency
Proceeding; or (iii) the Company, any Guarantor or any other Subsidiary consents
to the appointment of a receiver, trustee, custodian, conservator, liquidator,
mortgagee in possession (or agent therefor), or other similar Person for itself
or a substantial portion of its Property or business, and, in the case of any of
the foregoing occurring with respect to an Exempt Subsidiary (other than
Maverick-Dimmit Pipeline, Ltd.), a Material Adverse Effect results therefrom; 
 
(i) Monetary Judgments. One or more non-interlocutory judgments,
non-interlocutory orders, decrees or arbitration awards is entered against the
Company or any Guarantor or any other Subsidiary involving in the aggregate a
liability (to the extent not covered by independent third-party insurance as to
which the insurer has not denied coverage) as to any single or related series of
transactions, incidents or conditions, of $5,000,000 or more, and the same shall
remain unsatisfied, unvacated and unstayed pending appeal for a period of 60
consecutive days after the entry thereof; 
 
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(j) Change of Control. There occurs any Change of Control; 
 
(k) Guaranty Default. A Guaranty ceases to be in full force and effect, or such
Guarantor contests in any manner the validity or enforceability thereof or
denies that it has any further liability or obligation thereunder other than as
a result of payment in full of the Obligations; 
 
(l) Enforceability or Perfection of Loan Documents. (i) Any Loan Document shall,
at any time after its execution and delivery and for any reason, cease to be in
full force and effect or shall be declared to be null and void, the validity or
enforceability thereof shall be contested by any Person party thereto (other
than the Administrative Agent or any Lender) or any such Person party thereto
(other than the Administrative Agent or any Lender) shall deny that it has any
or further liability or obligation thereunder; or (ii) any Lien created under
any Loan Document shall fail to constitute a fully perfected Lien, subject only
to Permitted Liens, and such failure shall continue for at least 30 days after
the earlier of (A) the date upon which a Responsible Officer knew or reasonably
should have known of such default or (B) the date upon which written notice
thereof is given to the Company by the Administrative Agent or any Lender; or
 
(m) ERISA. Either (i) any “accumulated funding deficiency” (as defined in
Section 412(a) of the Code) in excess of $2,000,000 exists with respect to any
ERISA Plan, whether or not waived by the Secretary of the Treasury or his
delegate, or (ii) the Company or any ERISA Affiliate institutes steps to
terminate any ERISA Plan and the then current value of such ERISA Plan’s benefit
liabilities exceeds the then current value of such ERISA Plan’s assets available
for the payment of such benefit liabilities by more than $2,000,000.
 
9.2 Remedies. If any Event of Default occurs and is continuing, the
Administrative Agent shall, at the request of, or may, with the consent of, the
Required Lenders:
 
(a) declare the Commitment, if any, of each Lender to make Loans to be
terminated, or declare all or any part of the unpaid principal of the Loans, all
interest accrued and unpaid thereon and all other amounts payable under the Loan
Documents to be immediately due and payable, whereupon the same shall become
immediately due and payable, without presentment, demand, protest, notice of
intention to accelerate, notice of acceleration, or any other notice of any
kind, all of which are hereby expressly waived by the Company and each
Guarantor; and
 
(b) exercise on behalf of itself and the Lenders all rights and remedies
available to it and the Lenders under the Loan Documents or applicable law;
provided, however, that upon the occurrence of any event specified in Section
9.1(g) or (h) (in the case of clause (i) of Section 9.1(h) upon the expiration
of the 60-day period mentioned therein), the obligation of each Lender to make
Loans shall automatically terminate and the unpaid principal amount of all
outstanding Loans and all interest and other amounts as aforesaid shall
automatically become due and payable without further act of the Administrative
Agent, or any Lender and without presentment, demand, protest, notice of
intention to accelerate, notice of acceleration or any other notice of any kind,
all of which are hereby expressly waived by the Company and each Guarantor.
 
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9.3 Rights Not Exclusive. The rights provided for in this Agreement and the
other Loan Documents are cumulative and are not exclusive of any other rights,
powers, privileges or remedies provided by law or in equity, or under any other
instrument, document or agreement now existing or hereafter arising.
 
ARTICLE X

 
THE ADMINISTRATIVE AGENT
 
10.1 Appointment and Authorization; Limitation of Agency. Each Lender hereby
irrevocably (subject to Section 10.9) appoints, designates and authorizes the
Administrative Agent to take such action on its behalf under the provisions of
this Agreement and each other Loan Document and to exercise such powers and
perform such duties as are expressly delegated to it by the terms of this
Agreement or any other Loan Document, together with such powers as are
reasonably incidental thereto. The duties of the Administrative Agent shall be
administrative and mechanical in nature; notwithstanding any provision to the
contrary contained elsewhere in this Agreement or in any other Loan Document,
the Administrative Agent shall not have any duty or responsibility, except those
expressly set forth herein, nor shall the Administrative Agent, under any
circumstances, have or be deemed to have any fiduciary relationship with any
Person, and no implied covenants, functions, responsibilities, duties,
obligations or liabilities shall be read into this Agreement or any other Loan
Document or otherwise exist against the Administrative Agent.
 
10.2 Delegation of Duties. The Administrative Agent may execute any of its
duties under this Agreement or any other Loan Document by or through agents,
employees or attorneys in fact and shall be entitled to advice of counsel
concerning all matters pertaining to such duties. The Administrative Agent shall
not be responsible for the negligence or misconduct of any agent or attorney in
fact that it selects with reasonable care.
 
10.3 Liability of Administrative Agent. None of the Administrative Agent-Related
Persons shall (i) be liable for any action taken or omitted to be taken by any
of them under or in connection with this Agreement or any other Loan Document or
the transactions contemplated hereby (except for its own gross negligence or
willful misconduct), or (ii) be responsible in any manner to any of the Lenders
for any recital, statement, representation or warranty made by the Company, any
Guarantor or any Subsidiary or Affiliate of the Company, or any officer thereof,
contained in this Agreement or in any other Loan Document, or in any
certificate, report, statement or other document referred to or provided for in,
or received by the Administrative Agent under or in connection with, this
Agreement or any other Loan Document, or the validity, effectiveness (other than
such Administrative Agent-Related Person’s own due execution and delivery),
genuineness, enforceability or sufficiency of this Agreement or any other Loan
Document, or for any failure of the Company, any Guarantor or any other party to
any Loan Document to perform its obligations hereunder or thereunder. No
Administrative Agent-Related Person shall be under any obligation to any Lender
to ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the Property, books or records of the Company, any
Guarantor or any of the Company’s other Subsidiaries or Affiliates.
 
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10.4 Reliance by Administrative Agent.
 
(a) The Administrative Agent shall be entitled to rely, and shall be fully
protected in relying, upon any writing, resolution, notice, consent,
certificate, affidavit, letter, telegram, facsimile, telex, telephonic or
electronic message, statement or other document or conversation believed by it
to be genuine and correct and to have been signed, sent or made by the proper
Person or Persons, and upon advice and statements of legal counsel, independent
accountants and other experts selected by the Administrative Agent. The
Administrative Agent shall be fully justified in failing or refusing to take any
action under this Agreement or any other Loan Document unless it shall first
receive such advice or concurrence of the Lenders as it deems appropriate and,
if it so requests, it shall first be indemnified to its satisfaction by the
Lenders against any and all liability and expense which may be incurred by it by
reason of taking or continuing to take any such action. The Administrative Agent
shall in all cases be fully protected in acting, or in refraining from acting,
under this Agreement or any other Loan Document in accordance with a request or
consent of the Lenders and such request and any action taken or failure to act
pursuant thereto shall be binding upon all of the Lenders.
 
(b) For purposes of determining compliance with the conditions specified in
Section Article V, each Lender that has made available to the Administrative
Agent its Pro Rata Share of the initial Credit Extension or subsequent Credit
Extension, as the case may be, shall be deemed to have consented to, approved or
accepted or to be satisfied with, each document or other matter either sent by
the Administrative Agent to such Lender for consent, approval, acceptance or
satisfaction, or required thereunder to be consented to or approved by or
acceptable or satisfactory to the Lender as a condition precedent to such
initial Credit Extension or subsequent Credit Extension, as applicable.
 
10.5 Notice of Default. The Administrative Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Event of Default, except
with respect to Defaults in the payment of principal, interest and fees required
to be paid to the Administrative Agent for the account of the Lenders, unless
the Administrative Agent shall have received written notice from a Lender or the
Company referring to this Agreement, describing such Default or Event of Default
and stating that such notice is a “notice of default”. The Administrative Agent
will notify the Lenders of its receipt of any such notice. Subject to Section
10.4(a), the Administrative Agent shall take such action with respect to such
Default or Event of Default as may be requested by the Required Lenders in
accordance with Article IX; provided, however, that unless and until the
Administrative Agent has received any such request, the Administrative Agent may
(but shall not be obligated to) take such action, or refrain from taking such
action, with respect to such Default or Event of Default as it shall deem
advisable or in the best interest of the Lenders.
 
10.6 Credit Decision. Each Lender acknowledges that no Administrative
Agent-Related Person has made any representation or warranty to it, and that no
act by any Administrative Agent-Related Person hereafter taken, including any
review of the affairs of the Company, any Guarantor or their respective
Subsidiaries, shall be deemed to constitute any representation or warranty by
any Administrative Agent-Related Person to any Lender. Each Lender represents to
the Administrative Agent that it has, independently and without reliance upon
any Administrative Agent-Related Person and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, prospects, operations, Property, financial and
other condition and creditworthiness of the Company, and all applicable bank
regulatory laws relating to the transactions contemplated hereby, and made its
own decision to enter into this Agreement and to extend credit to the Company
hereunder. Each Lender also represents that it will, independently and without
reliance upon any Administrative Agent-Related Person and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit analysis, appraisals and decisions in taking or not taking
action under this Agreement and the other Loan Documents, and to make such
investigations as it deems necessary to inform itself as to the business,
prospects, operations, Property, financial and other condition and
creditworthiness of the Company. Except for notices, reports and other documents
expressly herein required to be furnished to the Lenders by the Administrative
Agent, the Administrative Agent shall not have any duty or responsibility to
provide any Lender with any credit or other information concerning the business,
prospects, operations, Property, financial and other condition or
creditworthiness of the Company which may come into the possession of any of the
Administrative Agent-Related Persons.
 
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10.7 Indemnification. Whether or not the transactions contemplated hereby are
consummated, the Lenders shall indemnify upon demand the Administrative
Agent-Related Persons (to the extent not reimbursed by or on behalf of the
Company and without limiting the obligation of the Company to do so), pro rata
according to each respective Lender’s Pro Rata Share, each Administrative
Agent-Related Person from and against any and all Indemnified Liabilities
INCLUDING SUCH INDEMNIFIED LIABILITIES AS MAY ARISE OR BE CAUSED BY THE
NEGLIGENCE, SOLE, JOINT, CONCURRENT, COMPARATIVE OR OTHERWISE OF SUCH
ADMINISTRATIVE AGENT-RELATED PERSONS; provided, however, that no Lender shall be
liable for the payment to any Administrative Agent-Related Persons of any
portion of such Indemnified Liabilities to the extent the same arise from (i)
the gross negligence or willful misconduct of any Administrative Agent-Related
Person or (ii) a claim or action asserted by one or more other Administrative
Agent-Related Persons. Without limitation of the foregoing, each Lender shall
reimburse the Administrative Agent upon demand for its ratable share of any
costs or out of pocket expenses (including Attorney Costs) incurred by the
Administrative Agent in connection with the preparation, execution, delivery,
administration, modification, amendment or enforcement (whether through
negotiations, legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement, any other Transaction Document
or any document contemplated by or referred to herein, to the extent that the
Administrative Agent is not reimbursed for such expenses by or on behalf of the
Company. The undertaking in this Section 10.7 shall survive the payment of all
Obligations hereunder and the resignation or replacement of the Administrative
Agent.
 
10.8 Administrative Agent in Individual Capacity. Bank of Montreal and its
Affiliates may make loans to, accept deposits from, acquire or underwrite equity
or debt securities of and generally engage in any kind of banking, investment
banking, trust, financial advisory, underwriting or other business with the
Company and its Affiliates as though Bank of Montreal were not the
Administrative Agent hereunder and without notice to or consent of the Lenders.
The Lenders acknowledge that, pursuant to such activities, Bank of Montreal or
its Affiliates may receive information regarding the Company or its Affiliates
(including information that may be subject to confidentiality obligations in
favor of the Company or such Affiliate) and acknowledge that the Administrative
Agent-Related Persons shall be under no obligation to provide such information
to them. With respect to Obligations held by it, Bank of Montreal shall have the
same rights and powers under this Agreement as any other Lender and may exercise
the same as though it were not the Administrative Agent.
 
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10.9 Successor Administrative Agent. The Administrative Agent may resign as
Administrative Agent upon 30 days’ notice to the Lenders. If the Administrative
Agent resigns under this Agreement, the Lenders shall appoint from among the
Lenders a successor administrative agent for the Lenders, which successor agent
shall be consented to by the Company (which consent shall not be unreasonably
withheld or delayed). If no successor administrative agent is appointed prior to
the effective date of the resignation of the Administrative Agent, the
Administrative Agent may appoint, after consulting with the Lenders and the
Company, a successor administrative agent from among the Lenders. Upon the
acceptance of its appointment as successor administrative agent hereunder, such
successor administrative agent shall succeed to all the rights, powers and
duties of the retiring Administrative Agent and the term “Administrative Agent”
shall mean such successor administrative agent and the retiring Administrative
Agent’s appointment, powers and duties as Administrative Agent shall be
terminated. After any retiring Administrative Agent’s resignation hereunder as
Administrative Agent, the provisions of this Article X and Sections 11.4 and
11.5 shall inure to its benefit as to any actions taken or omitted to be taken
by it while it was Administrative Agent under this Agreement. If no successor
agent has accepted appointment as Administrative Agent by the date which is 30
days following a retiring Administrative Agent’s notice of resignation, the
retiring Administrative Agent’s resignation shall nevertheless thereupon become
effective and the Lenders shall perform all of the duties of the Administrative
Agent hereunder until such time, if any, as the Lenders appoint a successor
administrative agent as provided for above.
 
10.10 Withholding Tax.
 
(a) Any Foreign Lender that is entitled to an exemption from or reduction of
withholding tax under the laws of the United States, or under any treaty to
which the United States is a party, with respect to payments under this
Agreement shall deliver to the Company (with a copy to the Administrative
Agent), at the time or times prescribed by applicable law, such properly
completed and executed documentation prescribed by applicable law or reasonably
requested by the Company or the Administrative Agent as will permit such
payments to be made without withholding or at a reduced rate of withholding. In
addition, any Lender, if requested by the Company or the Administrative Agent,
shall deliver such properly completed and executed documentation prescribed by
applicable law or reasonably requested by the Company or the Administrative
Agent as will enable the Company or the Administrative Agent to determine
whether or not such Lender is subject to backup withholding or information
reporting requirements. Each Lender shall promptly (i) notify the Company and
the Administrative Agent of any change in circumstances which would modify or
render invalid any such claimed exemption or reduction and (ii) take such steps
as may be required pursuant to Section 3.1(e).
 
(b) Without limiting the generality of the foregoing provisions of Section
10.10(a), each Foreign Lender shall deliver to the Company and the
Administrative Agent (in such number of copies as shall be requested by the
recipient) on or prior to the date on which such Foreign Lender becomes a Lender
under this Agreement (and from time to time thereafter upon the request of the
Company or the Administrative Agent, but only if such Foreign Lender is legally
entitled to do so), whichever of the following is applicable:
 
(i) duly completed copies of IRS Form W-8BEN claiming eligibility for benefits
of an income tax treaty to which the United States is a party,
 
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(ii) duly completed copies of IRS Form W-8ECI,
 
(iii) in the case of a Foreign Lender claiming the benefits of the exemption for
portfolio interest under Section 881(c) of the Code, (x) a certificate to the
effect that such Foreign Lender is not (A) a "bank" within the meaning of
Section 881(c)(3)(A) of the Code, (B) a "10 percent shareholder" of the Company
within the meaning of Section 881(c)(3)(B) of the Code, or (C) a "controlled
foreign corporation" described in Section 881(c)(3)(C) of the Code and (y) duly
completed copies of IRS Form W-8BEN, or
 
(iv) any other form prescribed by applicable law as a basis for claiming
exemption from or a reduction in United States Federal withholding tax duly
completed together with such supplementary documentation as may be prescribed by
applicable law to permit the Company or the Administrative Agent to determine
the withholding or deduction required to be made.
 
 
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(c) If any Lender delivers to the Company and the Administrative Agent completed
and executed documentation described in Section 10.10(a) and (b) claiming a
reduction in withholding tax, the Company and the Administrative Agent may
withhold from any amount payable to such Lender hereunder an amount equivalent
to the applicable withholding tax after taking into account such reduction. If
the forms or other documentation required by Section 10.10(a) and (b) are not
delivered by a Lender to the Company and the Administrative Agent, then the
Company and the Administrative Agent may withhold from any amount payable to
such Lender not providing such forms or other documentation an amount equivalent
to the applicable withholding tax.
 
(d) If the IRS or any other Governmental Authority of the United States or other
jurisdiction asserts a claim that the Company or the Administrative Agent did
not properly withhold tax from amounts paid to or for the account of any Lender
(because the appropriate form was not delivered, was not properly completed or
executed, or because such Lender failed to notify the Company and the
Administrative Agent of a change in circumstances which rendered the exemption
from, or reduction of, withholding tax ineffective or modified, or for any other
reason) such Lender shall indemnify the Company and the Administrative Agent
fully for all amounts paid, directly or indirectly, by the Company or the
Administrative Agent (as the case may be) as tax or otherwise, including
penalties, additions to tax and interest, and including any taxes imposed by any
jurisdiction on the amounts payable to the Company or the Administrative Agent
under this Section 10.10(d), together with all costs and expenses (including
Attorney Costs). The obligation of the Lenders under this Section 10.10(d) shall
survive the payment of all Obligations and the resignation or the replacement of
the Administrative Agent.
 
10.11 Arranger; Syndication Agent. Each of the Arranger and the Syndication
Agent, in their respective capacities as such, shall have no duties or
responsibilities, and shall incur no liability, under this Agreement or the
other Loan Documents.
 
10.12 Release of Collateral. The Administrative Agent is hereby irrevocably
authorized by each of the Lenders to effect any release of Liens or Guaranty
Obligations contemplated by Section 11.26.
 
ARTICLE XI

 
MISCELLANEOUS
 
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11.1 Amendments and Waivers. No amendment, modification, termination or waiver
of any provision of this Agreement or any other Loan Document, and no consent
with respect to any departure by the Company or any Guarantor therefrom, shall
be effective unless the same shall be in writing and signed by the Required
Lenders (or by the Administrative Agent at the written request of the Required
Lenders) and the Company or the applicable Guarantor, and then any such waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which it is given; provided, however, that no such waiver,
amendment, modification, termination or consent shall, unless in writing and
signed by all the Lenders directly affected thereby (or in the case of clauses
(e) and (f), all of the Lenders), the Company or the applicable Guarantor do any
of the following:
 
(a) increase or extend the Commitment of any Lender (it being understood that
the waiver of an Event of Default shall not constitute an extension or increase
of any Commitment of any Lender);
 
(b) postpone the final maturity date of any Loan, or postpone or delay any date
fixed by this Agreement or any other Loan Document for any payment of principal,
interest, fees or other amounts due to the Lenders (or any of them) hereunder
(it being understood that the waiver of an obligation to pay interest at the
Default Rate or Event of Default shall not constitute a postponement of any date
fixed for the payment of principal, interest or fees)or under any other Loan
Document; 
 
(c) reduce the principal of, or the rate of interest specified herein on any
Loan, or (subject to clause (ii) below) any fees or other amounts payable
hereunder (it being understood that a change to the definition of “Default Rate”
or the waiver of an Event of Default shall not constitute a reduction of the
principal of or rate of interest specified) or under any other Loan Document;
 
(d) change the pro rata application of payments, prepayments, reductions of the
Commitments or change in any manner the definition of “Required Lenders”; 
 
(e) amend this Section 11.1, or any provision of this Agreement which, by its
terms, expressly requires the approval or concurrence of all Lenders; or
 
(f) release all or substantially all of the Collateral (except for releases in
connection with Dispositions which are permitted hereunder or under any Loan
Document), or release any material Guarantor from any Guaranty;
 
provided further, however, that no amendment, waiver or consent shall, unless in
writing and signed by the Administrative Agent in addition to the Required
Lenders or all the Lenders, as the case may be, affect the rights or duties of
the Administrative Agent under this Agreement or any other Loan Document.
 
11.2 Notices.
 
(a) All notices, requests and other communications shall be in writing and
mailed, faxed or delivered, to the address or facsimile number specified for
notices on the signature pages hereof or, as directed to the Company or the
Administrative Agent, to such other address as shall be designated by such party
in a written notice to the other parties, and as directed to any other party, at
such other address as shall be designated by such party in a written notice to
the Company and the Administrative Agent.
 
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(b) All such notices, requests and communications shall, when transmitted by
overnight delivery, or faxed, be effective when delivered for overnight
(next-day) delivery, or transmitted in legible form by facsimile machine,
respectively, or if mailed, upon the third Business Day after the date deposited
into the U.S. mail, or if delivered, upon delivery; except that notices pursuant
to Article II or IX shall not be effective until actually received by the
Administrative Agent. 
 
(c) Any agreement of the Administrative Agent and the Lenders herein to receive
certain notices by telephone or facsimile is solely for the convenience and at
the request of the Company. The Administrative Agent and the Lenders shall be
entitled to rely on the authority of any Person purporting to be a Person
authorized by the Company to give such notice and the Administrative Agent and
the Lenders shall not have any liability to the Company or any other Person on
account of any action taken or not taken by the Administrative Agent or the
Lenders in reliance upon such telephonic or facsimile notice. The obligation of
the Company to repay the Loans shall not be affected in any way or to any extent
by any failure by the Administrative Agent and the Lenders to receive written
confirmation of any telephonic or facsimile notice or the receipt by the
Administrative Agent and the Lenders of a confirmation which is at variance with
the terms understood by the Administrative Agent and the Lenders to be contained
in the telephonic or facsimile notice.
 
11.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in
exercising, on the part of the Administrative Agent or any Lender, any right,
remedy, power or privilege hereunder, shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, remedy, power or privilege
hereunder preclude any other or further exercise thereof or the exercise of any
other right, remedy, power or privilege.
 
11.4 Costs and Expenses. The Company shall:
 
(a) whether or not the transactions contemplated hereby are consummated, pay or
reimburse the Administrative Agent and the Arranger within five Business Days
after demand (subject to Section 5.1(e)) for all reasonable and documented
out-of-pocket costs and expenses incurred by the Administrative Agent, the
Arranger or any of their Affiliates in connection with the syndications of the
Credit Extensions hereunder (other than fees payable to syndicate members) and
the development, preparation, delivery, administration and execution of, and any
amendment, supplement, waiver or modification to (in each case, whether or not
consummated), this Agreement, any Loan Document and any other documents prepared
in connection herewith or therewith, the consummation of the transactions
contemplated hereby and thereby, and the syndication of the credit facilities
provided herein, including Attorney Costs incurred by such Person with respect
thereto except such costs and expenses as may be incurred by the assignor
Lenders or Assignee under Section 11.8(a); and
 
(b) pay or reimburse the Administrative Agent, any other Agent and each Lender
within five Business Days after demand (subject to Section 5.1(e)) for all
documented out-of-pocket costs and expenses (including Attorney Costs) incurred
by each of them in connection with the enforcement, attempted enforcement, or
preservation of any rights or remedies under this Agreement or any other Loan
Document during the existence of a Default or after acceleration of the Loans
(including in connection with any “workout” or restructuring regarding the
Loans, and including in any Insolvency Proceeding or appellate proceeding).
 
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11.5 Indemnity. Whether or not the transactions contemplated hereby are
consummated, the Company shall indemnify and hold each Agent-Related Person and
each Lender and each of their respective Affiliates, successors and permitted
assigns and its and their respective officers, directors, employees, counsel,
agents, advisors, controlling Persons, members and attorneys in fact (each, an
“Indemnified Person”) harmless from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
charges, expenses and disbursements (including Attorney Costs) of any kind or
nature whatsoever which may at any time (including at any time following
repayment of the Loans, and the termination, resignation or replacement of the
Administrative Agent or replacement of any Lender) be imposed on, incurred by or
asserted against any such Person in any way relating to or arising out of this
Agreement or any document contemplated by or referred to herein, including any
of the Transaction Documents, or the transactions contemplated hereby, including
the Output Acquisition, or any action taken or omitted by any such Person under
or in connection with any of the foregoing, including with respect to any
investigation, litigation or proceeding (including any Insolvency Proceeding or
appellate proceeding) related to or arising out of this Agreement, any
Transaction Document, the Loans or the use of the proceeds thereof, whether or
not any Indemnified Person is a party thereto (all the foregoing, collectively,
the “Indemnified Liabilities”), WHETHER OR NOT SUCH INDEMNIFIED LIABILITIES
ARISE OUT OF OR AS A RESULT OF ANY INDEMNIFIED PARTY’S NEGLIGENCE IN WHOLE OR IN
PART, INCLUDING, WITHOUT LIMITATION, THOSE CLAIMS WHICH RESULT FROM THE SOLE,
JOINT, CONCURRENT OR COMPARATIVE NEGLIGENCE OF THE INDEMNIFIED PARTY, OR ANY ONE
OR MORE OF THEM; provided, however, that the Company shall have no obligation
hereunder to any Indemnified Person with respect to Indemnified Liabilities to
the extent same arise (i) from the gross negligence or willful misconduct of, or
breach of the Loan Documents by, such Indemnified Person or (ii) in the case of
any Lender or Affiliate thereof, from the gross negligence or willful misconduct
of such Indemnified Person’s Affiliates, or any of its or their respective
officers, directors, employees, counsel, agents, advisors, controlling Persons,
members or attorneys in fact. No Indemnified Person shall be liable for any
damages arising from the use by unauthorized Persons of information or other
materials sent through electronic, telecommunications or other information
transmission systems that are intercepted by such Persons or for any special,
indirect, consequential or punitive damages in connection with this Agreement.
All amounts due under this Section 11.5 shall be payable not later than 30 days
after written demand therefor. The agreements in Section 11.4 and this Section
11.5 shall survive payment of all other Obligations.
 
11.6 Payments Set Aside. To the extent that the Company makes a payment to the
Administrative Agent or the Lenders, or the Administrative Agent or the Lenders
exercise their right of set-off, and such payment or the proceeds of such
set-off or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside or required (including pursuant to any
settlement entered into by the Administrative Agent or such Lender in its
discretion) to be repaid to a trustee, debtor-in-possession, receiver or any
other Person, in connection with any Insolvency Proceeding or otherwise, then
(a) to the extent of such recovery the obligation or part thereof originally
intended to be satisfied shall be revived and continued in full force and effect
as if such payment had not been made or such set-off had not occurred, and (b)
each Lender severally agrees to pay to the Administrative Agent or such Lender
upon demand its Pro Rata Share of any amount so recovered from or repaid by the
Administrative Agent or such Lender.
 
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11.7 Successors and Assigns. This Agreement shall become effective at the
Effective Time after it shall have been executed by the Company, each Original
Guarantor and the Administrative Agent and after the Administrative Agent shall
have been notified by each Lender that such Lender has executed it and
thereafter this Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, except
that the Company may not assign or transfer any of its rights or obligations
under this Agreement without the prior written consent of the Administrative
Agent and each Lender.
 
11.8 Assignments, Participations, etc.
 
(a) Each Lender may assign to one or more assignees (each, an “Assignee”) all or
a portion of its interests, rights and obligations under this Agreement
(including all or a portion of its Commitment and the Loans at the time owing to
it) with the prior written consent of the Administrative Agent (not to be
unreasonably withheld or delayed) and prior written notice to (but not consent
of) the Company; provided, however, that (i) the amount of the Commitment or
Loans of the assigning Lender subject to each such assignment (determined as of
the date the Assignment and Acceptance in the form of Exhibit “E” (the
“Assignment and Acceptance”) with respect to such assignment is delivered to the
Administrative Agent and determined on an aggregate basis in the event of
concurrent assignments to Related Funds (as defined below)) shall not, unless
consented to by the Administrative Agent, be less than $1,000,000 (or, if less,
the entire remaining amount of such Lender’s Commitment or Loans), (ii) the
parties to each such assignment shall execute and deliver to the Administrative
Agent an Assignment and Acceptance via an electronic settlement system
acceptable to the Administrative Agent (or, if previously agreed with the
Administrative Agent, manually) and shall pay to the Administrative Agent a
processing and recordation fee in the amount of $3,500.00 (which fee may be
waived or reduced in the sole discretion of the Administrative Agent), provided
further, however, that only one such fee shall be payable in the case of
concurrent assignments to Persons that, after giving effect to such assignments,
will be Related Funds and (iii) the Assignee, if it shall not be a Lender, shall
deliver to the Administrative Agent an administrative questionnaire in such form
as supplied from time to time by the Administrative Agent (an “Administrative
Questionnaire”) and all applicable tax forms. Upon acceptance and recording
pursuant to Section 11.8(c), from and after the effective date specified in each
Assignment and Acceptance, (A) the assignee thereunder shall be a party hereto
and, to the extent of the interest assigned by such Assignment and Acceptance,
have the rights and obligations of a Lender under this Agreement and (B) the
assigning Lender thereunder shall, to the extent of the interest assigned by
such Assignment and Acceptance, be released from its obligations under this
Agreement (and, in the case of an Assignment and Acceptance covering all or the
remaining portion of an assigning Lender’s rights and obligations under this
Agreement, such Lender shall cease to be a party hereto but shall continue to be
entitled to the benefits of Article III and Section 11.5, as well as to any fees
accrued for its account prior to the effective date specified in such Assignment
and Acceptance and not yet paid). The term “Related Funds” shall mean with
respect to any Lender that is a fund or combined investment vehicle that invests
in bank loans, any other fund that invests in bank loans and is managed or
advised by the same investment advisor as such Lender or by an Affiliate of such
investment advisor.
 
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(b) By executing and delivering an Assignment and Acceptance, the assigning
Lender thereunder and the Assignee thereunder shall be deemed to confirm to and
agree with each other and the other parties hereto as follows: (i) such
assigning Lender warrants that it is the legal and beneficial owner of the
interest being assigned thereby free and clear of any adverse claim and that its
Commitment, and the outstanding balances of its Loans, in each case without
giving effect to assignments thereof which have not become effective, are as set
forth in such Assignment and Acceptance, (ii) except as set forth in (i) above,
such assigning Lender makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with this Agreement, or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement,
any other Loan Document or any other instrument or document furnished pursuant
hereto, or the financial condition of the Company or any Subsidiary or the
performance or observance by the Company or any Subsidiary of any of its
obligations under this Agreement, any other Loan Document or any other
instrument or document furnished pursuant hereto; (iii) such Assignee represents
and warrants that it is legally authorized to enter into such Assignment and
Acceptance; (iv) such Assignee confirms that it has received a copy of this
Agreement, together with copies of the most recent financial statements referred
to in Section 5.1 or delivered pursuant to Section 7.1, the Intercreditor
Agreement and such other documents and information as it has deemed appropriate
to make its own credit analysis and decision to enter into such Assignment and
Acceptance; (v) such Assignee will independently and without reliance upon the
Administrative Agent, such assigning Lender or any other Lender and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
this Agreement; (vi) such Assignee appoints and authorizes the Administrative
Agent to take such action as agent on its behalf and to exercise such powers
under this Agreement, as are delegated to the Administrative Agent, by the terms
hereof and thereof, together with such powers as are reasonably incidental
thereto; and (vii) such Assignee agrees that it will perform in accordance with
their terms all the obligations which by the terms of this Agreement are
required to be performed by it as a Lender and will be bound by and will take no
actions contrary to the provisions of the Intercreditor Agreement. The
Administrative Agent shall be entitled to rely, without any independent
investigation, on the representations and warranties and other statements deemed
to be made by the assigning Lender and the Assignee pursuant to this Section
11.8(c) and shall not incur any liability for relying thereon.
 
(c) The Administrative Agent, acting for this purpose as an agent of the
Company, shall maintain at one of its offices in Chicago, Illinois a copy of
each Assignment and Acceptance delivered to it. Upon its receipt of, and consent
to, a duly completed Assignment and Acceptance executed by an assigning Lender
and an Assignee, an Administrative Questionnaire completed in respect of the
Assignee (unless the Assignee shall already be a Lender hereunder), the
processing and recordation fee referred to in Section 11.8(b) above, if
applicable, and the written consent of the Administrative Agent to such
assignment and any applicable tax forms, the Administrative Agent shall (i)
accept such Assignment and Acceptance and (ii) record the information contained
therein in the Register. No assignment shall be effective unless it has been
recorded in the Register as provided in this Section 11.8(c). The Register shall
be available for inspection by the Company or any Lender (with respect to any
entry relating to such Lender’s Loans) at any reasonable time and from time to
time upon reasonable prior notice.
 
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(d) Notwithstanding anything to the contrary contained herein, any Lender (a
“Granting Lender”) may grant to a special purpose funding vehicle (an “SPC”),
identified as such in writing from time to time by the Granting Lender to the
Administrative Agent and the Company, the option to provide to the Company all
or any part of any Loan that such Granting Lender would otherwise be obligated
to make to the Company on the Effective Date pursuant to this Agreement;
provided, however, that (i) nothing herein shall constitute a commitment by any
SPC to make any Loan and (ii) if an SPC elects not to exercise such option or
otherwise fails to provide all or any part of such Loan, the Granting Lender
shall be obligated to make such Loan pursuant to the terms hereof. The making of
a Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender
to the same extent, and as if, such Loan were made by such Granting Lender. Each
party hereto hereby agrees that no SPC shall be liable for any indemnity or
similar payment obligation under this Agreement (all liability for which shall
remain with the Granting Lender). In furtherance of the foregoing, each party
hereto hereby agrees (which agreement shall survive the termination of this
Agreement) that, prior to the date that is one year and one day after the
payment in full of all outstanding commercial paper or other senior Indebtedness
of any SPC, it will not institute against, or join any other person in
instituting against, such SPC any bankruptcy, reorganization, arrangement,
insolvency or liquidation proceedings under the laws of the United States or any
State thereof. In addition, notwithstanding anything to the contrary contained
in this Section 11.8, any SPC may (i) with notice to, but without the prior
written consent of, the Company and the Administrative Agent and without paying
any processing fee therefor, assign all or a portion of its interests in any
Loans to the Granting Lender or to any financial institutions (consented to by
the Administrative Agent) providing liquidity and/or credit support to or for
the account of such SPC to support the funding or maintenance of Loans and (ii)
disclose on a confidential basis any non−public information relating to its
Loans to any rating agency, commercial paper dealer or provider of any surety,
guarantee or credit or liquidity enhancement to such SPC.
 
(e) Within five Business Days after its receipt of notice by the Administrative
Agent that it has received an executed Assignment and Acceptance and payment of
the processing fee, if a Note was issued in respect of the assigned interests,
upon the request of the Administrative Agent by the Assignee, the Company shall
execute and deliver to the Administrative Agent a new Note evidencing such
Assignee’s assigned Loans and, if the assignor Lender has retained a portion of
its Loans and its Commitment, a replacement Note, upon the request of the
Administrative Agent by the assignor Lender, in the principal amount equal to
the Loans and Commitments, if any, retained by the assignor Lender (such Note to
be in exchange for, but not in payment of, the Note held by such Lender).
 
(f) Any Lender may at any time sell to one or more commercial banks or other
Persons not Affiliates of the Company (a “Participant”) participating interests
in any Loans, the Commitment of that Lender, if any, and the other interests of
that Lender (the “Originating Lender”) hereunder and under the other Loan
Documents; provided, however, that (i) the Originating Lender’s obligations
under this Agreement shall remain unchanged, the Originating Lender shall remain
a Lender for all purposes hereof and the other Loan Documents to which such
Originating Lender is a party, and the Participant may not become a Lender for
purposes hereof or for any other of the Loan Documents, (ii) the Originating
Lender shall remain solely responsible for the performance of such obligations,
(iii) the Company and the Administrative Agent shall continue to deal solely and
directly with the Originating Lender in connection with the Originating Lender’s
rights and obligations under this Agreement and the other Loan Documents, and
(iv) no Lender shall transfer or grant any participating interest under which
the Participant has rights to approve any amendment to, or any consent or waiver
with respect to, this Agreement or any other Loan Document, except to the extent
such amendment, consent or waiver would require unanimous consent of the
Lenders. In the case of any such participation, the Participant shall not have
any rights under this Agreement, or any of the other Loan Documents (the
Participant’s rights against the Originating Lender in respect of such
participation being those set forth in the agreement creating or evidencing such
participation with such Lender), and all amounts payable by the Company
hereunder shall be determined as if such Lender had not sold such participation;
except that, if amounts outstanding under this Agreement are due and unpaid, or
shall have been declared or shall have become due and payable upon the
occurrence and continuance of an Event of Default, each Participant shall be
deemed to have the right of set off in respect of its participating interest in
amounts owing under this Agreement to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under this
Agreement.
 
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(g) Each Lender agrees to take normal and reasonable precautions and exercise
due care to maintain the confidentiality of all information provided to it by
the Company, or by the Administrative Agent on the Company’s behalf, under or in
connection with this Agreement or any other Loan Document, and neither it nor
any of its Affiliates shall use any such information other than in connection
with or in enforcement of this Agreement and the other Loan Documents, except to
the extent such information (i) was or becomes generally available to the public
other than as a result of disclosure by such Lender, or (ii) was or becomes
available on a non-confidential basis from a source other than the Company,
provided, however, that such source is not bound by a confidentiality agreement
with the Company known to the Lender; provided further, however, that any Lender
may disclose such information (and, in the case of the following subclauses (A)
through (D), shall provide promptly written notice of such disclosure to the
Company) (A) at the request or pursuant to any requirement of any Governmental
Authority to which such Lender is subject or in connection with an examination
of such Lender by any such authority; (B) pursuant to subpoena or other court
process; (C) when required to do so in accordance with the provisions of any
applicable Requirement of Law; (D) to the extent reasonably required in
connection with any litigation or proceeding to which the Administrative Agent,
any Lender or their respective Affiliates may be party; (E) to the extent
reasonably required in connection with the exercise of any remedy hereunder or
under any other Loan Document; (F) to such Lender’s independent auditors and
other professional advisors; (G) to any Affiliate of such Lender, or to any
Participant or Assignee, actual or potential, provided that such Affiliate,
Participant or Assignee agrees to keep such information confidential to the same
extent required of the Lenders hereunder; and (H) as to any Lender, as expressly
permitted under the terms of any other document or agreement regarding
confidentiality to which the Company is party or is deemed to be party with such
Lender.
 
(h) Notwithstanding any other provision in this Agreement, any Lender may at any
time create a security interest in, or pledge, all or any portion of its rights
under and interest in this Agreement and the Note held by it in favor of any
Federal Reserve Lender in accordance with Regulation A of the FRB or U.S.
Treasury Regulation 31 CFR §203.14, and such Federal Reserve Lender may enforce
such pledge or security interest in any manner permitted under applicable law.
Any Lender may at any time assign all or any portion of its rights under this
Agreement to secure extensions of credit to such Lender or in support of
obligations owed by such Lender; provided, however, that no such assignment
shall release a Lender from any of its obligations hereunder or substitute any
such assignee for such Lender as a party hereto.
 
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11.9 Interest. It is the intention of the parties hereto to comply with
applicable usury laws, if any; accordingly, notwithstanding any provision to the
contrary in this Agreement, the Notes or in any of the other Loan Documents
securing the payment hereof or otherwise relating hereto, in no event shall this
Agreement, the Notes or such other Loan Documents require or permit the payment,
taking, reserving, receiving, collection, or charging of any sums constituting
interest under applicable laws which exceed the Highest Lawful Rate. If any such
excess interest is called for, contracted for, charged, taken, reserved, or
received in connection with the Loans evidenced by the Notes or in any of the
Loan Documents securing the payment thereof or otherwise relating thereto, or in
any communication by the Administrative Agent or the Lenders or any other Person
to the Company or any other Person, or in the event all or part of the principal
or interest thereof shall be prepaid or accelerated, so that under any of such
circumstances or under any other circumstance whatsoever the amount of interest
contracted for, charged, taken, reserved, or received on the amount of principal
actually outstanding from time to time under the Notes or any other Loan
Document shall exceed the Highest Lawful Rate, then in any such event it is
agreed as follows: (i) the provisions of this Section 11.9 shall govern and
control, (ii) neither any Company nor any other Person now or hereafter liable
for the payment of the Notes shall be obligated to pay the amount of such
interest to the extent such interest is in excess of the Highest Lawful Rate,
(iii) any such excess which is or has been received notwithstanding this Section
11.9 shall be credited against the then unpaid principal balance of the Notes
or, if the Notes have been or would be paid in full, refunded to the Company,
and (iv) the provisions of this Agreement, the Notes and the other Loan
Documents securing the payment thereof and otherwise relating thereto, and any
communication to the Company, shall immediately be deemed reformed and such
excess interest reduced, without the necessity of executing any other document,
to the Highest Lawful Rate as now or hereafter construed by courts having
jurisdiction hereof or thereof. Without limiting the foregoing, all calculations
of the rate of the interest contracted for, charged, collected, taken, reserved,
or received in connection with the Notes, this Agreement or any other Loan
Document which are made for the purpose of determining whether such rate exceeds
the Highest Lawful Rate shall be made to the extent permitted by applicable laws
by amortizing, prorating, allocating and spreading during the period of the full
term of the Loans, including all prior and subsequent renewals and extensions,
all interest at any time contracted for, charged, taken, collected, reserved, or
received. The terms of this Section 11.9 shall be deemed to be incorporated in
every document and communication relating to the Notes, the Loans or any other
Loan Document.
 
11.10 Indemnity and Subrogation. In addition to all such rights of indemnity and
subrogation as any Guarantor may have under applicable law, the Company agrees
that in the event a payment shall be made by a Guarantor under a Guaranty in
respect of a Credit Extension to the Company, the Company shall indemnify such
Guarantor for the full amount of such payment and such Guarantor shall be
subrogated to the rights of the Person to whom such payment shall have been made
to the extent of such payment subject to the provisions of the Guaranty executed
by such Guarantor. Notwithstanding any provision of this Agreement to the
contrary, all rights of the Guarantors under this Section 11.10 and all other
rights of indemnity, contribution or subrogation under applicable law or
otherwise shall be fully subordinated to the indefeasible payment in full of the
Obligations, and no payments may be made in respect of such rights of indemnity,
contribution or subrogation until all the Obligations have been paid in full and
the Commitments shall have expired. No failure on the part of the Company to
make the payments required by this Section 11.10 (or any other payments required
under applicable law or otherwise) shall in any respect limit the obligations
and liabilities of the Guarantors with respect to any Guaranty, and each
Guarantor shall remain liable for the full amount of the obligation of the
Guarantors under each such Guaranty in accordance therewith.
 
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11.11 Automatic Debits of Fees. With respect to any fee, or any other cost or
expense (including Attorney Costs) due and payable to the Administrative Agent
under the Loan Documents, the Company hereby irrevocably authorizes the
Administrative Agent, after giving reasonable prior notice to the Company, to
debit any deposit account of the Company with the Administrative Agent in an
amount such that the aggregate amount debited from all such deposit accounts
does not exceed such fee or other cost or expense. If there are insufficient
funds in such deposit accounts to cover the amount of the fee or other cost or
expense then due, such debits will be reversed (in whole or in part, in the
Administrative Agent’s sole discretion) and such amount not debited shall be
deemed to be unpaid. No such debit under this Section 11.11 shall be deemed a
set-off.
 
11.12 Notification of Addresses, Lending Offices, Etc. Each Lender shall notify
the Administrative Agent in writing of any changes in the address to which
notices to the Lender should be directed, of addresses of any Lending Office, of
payment instructions in respect of all payments to be made to it hereunder and
of such other administrative information as the Administrative Agent shall
reasonably request.
 
11.13 Counterparts. This Agreement may be executed in any number of separate
counterparts, no one of which need be signed by all parties; each of which, when
so executed, shall be deemed an original, and all of such counterparts taken
together shall be deemed to constitute but one and the same instrument. A fully
executed counterpart of this Agreement by facsimile signatures shall be binding
upon the parties hereto.
 
11.14 Severability. The illegality or unenforceability of any provision of this
Agreement or any instrument or agreement required hereunder shall not in any way
affect or impair the legality or enforceability of the remaining provisions of
this Agreement or any instrument or agreement required hereunder.
 
11.15 No Third Parties Benefited. This Agreement is made and entered into for
the sole protection and legal benefit of the Company, the Guarantors, the
Lenders, the Administrative Agent, the Administrative Agent-Related Persons and
the Indemnified Persons, and their permitted successors and assigns, and no
other Person shall be a direct or indirect legal beneficiary of, or have any
direct or indirect cause of action or claim in connection with, this Agreement
or any of the other Loan Documents.
 
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11.16 Governing Law, Jurisdiction. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
 
11.17 Submission To Jurisdiction; Waivers. Each of the parties hereto hereby
irrevocably and unconditionally:
 
(a) submits, for itself and its Property, to the nonexclusive jurisdiction of
the Supreme Court of the State of New York sitting in New York County and of the
United States District Court of the Southern District of New York, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement, or for recognition or enforcement of any judgment,
and each of the parties hereto hereby irrevocably and unconditionally agrees
that all claims in respect of any such action or proceeding may be heard and
determined in such New York State or, to the extent permitted by law, in such
Federal court. Each of the parties hereto agrees that a final judgment in any
such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in this Agreement shall affect any right that the Administrative Agent
may otherwise have to bring any action or proceeding relating to this Agreement
against the Company or any Guarantor or its respective Property in the courts of
any jurisdiction;
 
(b) waives, to the fullest extent it may legally and effectively do so, any
objection which it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement in any court
referred to in Section 11.17(a), and each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court; and
 
(c) consents to service of process in the manner provided for notices herein;
provided, however, nothing in this Agreement will affect the right of any party
to this Agreement to serve process in any other manner permitted by law.
 
11.18 Entire Agreement. This Agreement, together with the other Loan Documents,
embodies the entire agreement and understanding among the Company, the
Guarantors, the Lenders and the Administrative Agent, and supersedes all prior
or contemporaneous agreements and understandings of such Persons, oral or
written, relating to the subject matter hereof and thereof.
 
11.19 NO ORAL AGREEMENTS. THIS WRITTEN TERM LOAN AGREEMENT, TOGETHER WITH THE
OTHER WRITTEN LOAN DOCUMENTS EXECUTED IN CONNECTION HEREWITH, REPRESENTS THE
FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
 
11.20 Accounting Changes. If at any time any Accounting Change (as defined
below) would affect the computation of any financial ratio or requirement set
forth in any Loan Document, and either the Company or the Required Lenders shall
so request, the Administrative Agent and the Company shall negotiate to amend
such ratio or requirement to preserve the original intent thereof in light of
such Accounting Change (subject to the approval of the Required Lenders);
provided, however, that until so amended such ratio or requirement shall
continue to be computed in accordance with GAAP prior to such change therein.
“Accounting Change” refers to any change in accounting principles required by
the promulgation of any rule, regulation, pronouncement or opinion by the
Financial Accounting Standards Board of the American Institute of Certified
Public Accountants or, if applicable, the SEC.
 
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11.21 WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC. THE COMPANY, THE GUARANTORS,
THE LENDERS AND THE ADMINISTRATIVE AGENT EACH HEREBY KNOWINGLY, VOLUNTARILY,
INTENTIONALLY, AND IRREVOCABLY (A) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED
BY LAW, ANY RIGHT IT 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) WAIVES, TO THE MAXIMUM
EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY
SUCH LITIGATION ANY “SPECIAL DAMAGES”, AS DEFINED BELOW, (C) CERTIFIES 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
11.21. AS USED IN THIS SECTION, “SPECIAL DAMAGES” INCLUDES ALL SPECIAL,
CONSEQUENTIAL, EXEMPLARY, OR PUNITIVE DAMAGES (REGARDLESS OF HOW NAMED), BUT
DOES NOT INCLUDE ANY PAYMENTS OR FUNDS WHICH ANY PARTY HERETO HAS EXPRESSLY
PROMISED TO PAY OR DELIVER TO ANY OTHER PARTY HERETO.
 
11.22 Intercreditor Agreement. Each Lender (a) hereby agrees that it will be
bound by and take no actions contrary to the Intercreditor Agreement and (b)
hereby irrevocably authorizes and instructs the Administrative Agent to enter
into the Intercreditor Agreement on its behalf.
 
11.23 USA PATRIOT Act. Each Lender hereby notifies each Loan Party that pursuant
to the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed
into law October 26, 2001)), it is required to obtain, verify and record
information that identifies each Loan Party, which information includes the name
and address of such Loan Party and other information that will allow such Lender
to identify such Loan Party in accordance with that Requirement of Law.
 
11.24 Acknowledgments. Each of the Company and each Guarantor hereby
acknowledges that:
 
(a) it has been advised by counsel in the negotiation, execution and delivery of
this Agreement and the other Loan Documents;
 
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(b) neither the Administrative Agent, any other Agent nor any Lender has any
fiduciary relationship with or duty to the Company or any Guarantor arising out
of or in connection with this Agreement or any of the other Loan Documents, and
the relationship between the Administrative Agent, any other Agent and the
Lenders, on one hand, and the Company and the Guarantors, on the other hand, in
connection herewith or therewith is solely that of creditor and debtor; and
 
(c) no joint venture is created hereby or by the other Loan Documents or
otherwise exists by virtue of the transactions contemplated hereby among the
Administrative Agent, any other Agent and the Lenders or among the Company and
the Guarantors and the Lenders.
 
11.25 Survival of Representations and Warranties. All representations and
warranties made herein, in the other Loan Documents and in any document,
certificate or statement delivered pursuant hereto or in connection herewith
shall survive the execution and delivery of this Agreement and the making of the
Loans and other extensions of credit hereunder.
 
11.26 Release of Collateral and Guarantee Obligations.
 
(a) Notwithstanding anything to the contrary contained herein or in any other
Loan Document, but subject to Sections 5.1(e) and 5.4 (e) of the Intercreditor
Agreement, upon request of the Company in connection with any Disposition of
Property (including any Disposition of a Guarantor) permitted by the Loan
Documents, the Administrative Agent shall (without notice to, or vote or consent
of, any Lender or any Qualified Derivative Contract Counterparty) take such
actions as shall be required to release its security interest in any Collateral
being Disposed of in such Disposition, and to release any Guaranty Obligations
under any Loan Document of any Person being Disposed of in such Disposition, to
the extent necessary to permit consummation of such Disposition in accordance
with the Loan Documents; provided, however, that the Company shall have
delivered to the Administrative Agent, at least ten Business Days prior to the
date of the proposed release (or such shorter period agreed to by the
Administrative Agent), a written request for release identifying the relevant
Collateral being Disposed of in such Disposition and, in the case of a
Disposition under Section 8.2(f) or any other Disposition of Collateral
comprising (i) Hydrocarbon Interests or (ii) other Property with a book value in
excess of $2,000,000, and the terms of such Disposition in reasonable detail,
including the date thereof, the price thereof and any expenses in connection
therewith, together with a certification by the Company stating that such
transaction is in compliance with this Agreement and the other Loan Documents
and that the proceeds of such Disposition will be applied in accordance with
this Agreement and the other Loan Documents.
 
(b) Notwithstanding anything to the contrary contained herein or any other Loan
Document, when all Obligations (other than obligations in respect of any
Qualified Derivative Contract) have been paid or otherwise satisfied in full and
all Commitments have terminated or expired, but subject to Sections 5.1(e) and
5.4(e) of the Intercreditor Agreement, upon request of the Company, the
Administrative Agent shall (without notice to, or vote or consent of, any
Lender, or any Qualified Derivative Contract Counterparty) take such actions as
shall be required to release its security interest in all Collateral, and to
release all Guaranty Obligations provided for in any Loan Document, whether or
not on the date of such release there may be outstanding Obligations in respect
of the Qualified Derivative Contracts. Any such release of Guaranty Obligations
shall be deemed subject to the provision that such Guaranty Obligations shall be
reinstated if after such release any portion of any payment in respect of the
Obligations guaranteed thereby shall be rescinded or must otherwise be restored
or returned upon the insolvency, bankruptcy, dissolution, liquidation or
reorganization of the Company or any Guarantor, or upon or as a result of the
appointment of a receiver, intervenor or conservator of, or trustee or similar
officer for, the Company or any Guarantor or any substantial part of its
Property, or otherwise, all as though such payment had not been made.
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.

       
COMPANY:
 
THE EXPLORATION COMPANY OF DELAWARE, INC.
 
   
   
  By:   /s/ James E. Sigmon  

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James E. Sigmon
 
President and Chief Executive Officer

 

     
ORIGINAL GUARANTORS:
 
TXCO ENERGY CORP.
 
   
   
  By:   /s/ P. Mark Stark  

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P. Mark Stark
 
Vice President, Treasurer and
Chief Financial Officer

 

     
TEXAS TAR SANDS INC.
 
   
   
  By:   /s/ M. Frank Russell  

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M. Frank Russell
 
Vice President and General Counsel

 

     
OUTPUT ACQUISITION CORP.
 
   
   
  By:   /s/ Roberto R. Thomae  

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Roberto R. Thomae
 
Vice President and Secretary

        
   
Address for Notice:
Principal Place of Business
and Chief Executive Office:
 
     
   
777 E. Sonterra Blvd., Suite 350
San Antonio, Texas 78258
Attention: Chief Financial Officer
Facsimile No.: (210) 496-3232

 
Term Loan Agreement Signature Page
 

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ADMINISTRATIVE AGENT AND A LENDER:
 
BANK OF MONTREAL, acting through its U.S. branches and agencies, including its
Chicago, Illinois branch, as Administrative Agent and as a Lender
 
   
   
  By:   /s/ Joseph A. Bliss   

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Joseph A. Bliss
 
Managing Director

        
   
Address:    115 South LaSalle Street
11th Floor West
Chicago, Illinois 60603
 
Facsimile No.: (312) 765-8078

Attention:     Terri Perez-Ford, Specialist

with copy to:

Address:        Bank of Montreal
Houston Agency
700 Louisiana Street
4400 Bank of America Center
Houston, Texas 77002

Facsimile No.: (713) 223-4007

Attention:      Joseph A. Bliss

Applicable Lending Office
for Base Rate Loans and
LIBO Rate Loans:

Address:        115 South LaSalle Street,
11th Floor West
Chicago, Illinois 60603

Facsimile No.:  (312) 765-8078

Attention:      Terri Perez-Ford, Specialist
 

 
Term Loan Agreement Signature Page
 

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