EX-10.1



 






Exhibit 10.1




ADVANCING TERM CREDIT AGREEMENT




BETWEEN




BPI ENERGY, INC.,

a Nevada corporation,

as Borrower




AND




GASROCK CAPITAL LLC,

a Delaware limited liability company,

as Lender




Dated as of July 27, 2007




 





ADVANCING TERM LOAN OF UP TO $75,000,000



 





 









 








TABLE OF CONTENTS




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






i









 







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






ii









 






EXHIBITS




	 	 	 
	Exhibit A

	 	Property Descriptions
	Exhibit B

	 	Form of Note
	Exhibit C

	 	Form of Property Operating Statement
	Exhibit D

	 	Form of Request for Commitment
	Exhibit E

	 	Form of Cost Certificate
	Exhibit F

	 	Form of Intercreditor Agreement
	Exhibit G

	 	Form of Compliance Certificate






SCHEDULES




	 	 	 
	Schedule 2.1

	 	Wire Transfer Instructions
	Schedule 2.1 (a)

	 	Committed Initial D&A Operations
	Schedule 4.1 (c)(i)

	 	Shareholders of Borrower
	Schedule 4.1 (c)(ii)

	 	Equity Interest Obligations
	Schedule 4.1 (e)

	 	No Conflicts or Consents
	Schedule 4.1 (g)

	 	Borrower’s Pro Forma Financial Statements
	Schedule 4.1 (h)

	 	Other Obligations and Restrictions
	Schedule 4.1 (j)

	 	Litigation
	Schedule 4.1 (k)

	 	ERISA Plans
	Schedule 4.1 (l)

	 	Names and Places of Business
	Schedule 4.1 (m)

	 	Unpaid Bills
	Schedule 4.1 (o)

	 	Affiliates
	Schedule 4.1 (q)

	 	Compliance with Environmental and Other Laws
	Schedule 4.1 (r)

	 	Equipment Description
	Schedule 4.1 (s)

	 	Purchasers of Hydrocarbons
	Schedule 4.1 (t)

	 	Existing Hydrocarbon Sales Agreements
	Schedule 4.1 (u)

	 	Existing Swap Agreements; Material Contracts
	Schedule 4.1 (v)

	 	Employment Related Agreements
	Schedule 7.1 (e)

	 	Additional Reserve Report Parameters and Guidelines








iii









 









ADVANCING TERM CREDIT AGREEMENT




     THIS ADVANCING TERM CREDIT AGREEMENT (“Agreement”) is made and entered into effective
as of July 27, 2007 by and between BPI ENERGY, INC., a Nevada corporation (“Borrower”), and
GASROCK CAPITAL LLC, a Delaware limited liability company (“Lender”).



     WHEREAS, Borrower has requested that Lender make available, and Lender is willing to make
available to Borrower on the terms and conditions hereinafter set forth, loans for the payment for
the development and, where specifically noted, the acquisition of certain oil and gas properties
and for pipeline construction projects.



     NOW, THEREFORE, in consideration of the foregoing and the terms, covenants, provisions and
conditions hereinafter set forth in this Agreement, the parties to this Agreement agree as follows:



ARTICLE I



DEFINITIONS AND REFERENCES




Section 1.1 Defined Terms
.. As used in this Agreement, each of the following terms has the meaning given it in this Section
1.1 or in the sections and subsections referred to below:




     “AAA” is defined in Section 12.1(a).



     “Account Debtor” is defined in Section 6.4.



     “Accounting Procedure” means the accounting procedure attached to and incorporated in
any Operating Agreement.



     “Administration Fee” is defined in Section 7.1(ff).



     “AFE” means Authorization for Expenditures.



     “Affiliate” means, with respect to a specified Person, another Person that directly,
or indirectly through one or more intermediaries, Controls or is Controlled by or is under common
Control with the Person specified.



     “Agreement” means this Advancing Term Credit Agreement, as the same may be amended,
restated, extended or otherwise modified from time to time.



     “Approved Counterparty” means a counterparty to a Permitted Swap Agreement that is
approved by Lender in writing.



     “Arbitration Notice” is defined in Section 12.1(c).



     “Benefit Plans” is defined in Section 4.1(k).



     “Borrower” has the meaning assigned to that term in the preamble of this Agreement.



 









 







     “Borrower Operating Account” means that certain bank account maintained by Borrower
with KeyBank National Association, ABA #041001039, Account #359681162939.



     “Borrower Sub-Account” is defined in Section 2.7(a).



     “Business Day” means for all purposes, a day other than a Saturday, Sunday or legal
holiday for commercial banks under the laws of the State of Texas or the laws of the United States
of America and, if such day relates to the determination of the LIBOR Rate, means any such day on
which dealings in U.S. dollar deposits are conducted by and between banks in the London interbank
Eurodollar market.



     “Business Entity” means a company, corporation, limited liability company, limited
partnership, partnership, joint venture, joint stock company, firm, trust (or trustee thereof),
business association, unincorporated organization, bank or other entity other than a natural
person, that has been formed and exists to conduct any line of business.



     “Change of Control” means, with respect to any Person, an event or series of events by
which the holders of the capital ownership of such Person as of the date hereof cease to own and
control, directly or indirectly, at least fifty-one percent (51%) of such Person’s capital
ownership.



     “Closing” is defined in Section 9.1.



     “Closing Costs” is defined in Section 2.1(a).



     “Closing Date” is defined in Section 9.1.



     “Code” is defined in Section 3.1.



     “Collateral” means all property of any kind which, pursuant to any Loan Document, is
subject to a Lien in favor of Lender or is purported or intended to be subject to such a Lien,
including without limitation, (a) the Properties, (b) Borrower’s interest in the Hydrocarbons
produced therefrom or attributable thereto, (c) the Equipment (including fixtures) and gathering
systems, (d) Borrower’s interests in the seismic, geological and geophysical data relating thereto,
(e) Borrower’s books and records relating thereto and all products and proceeds of any of the
foregoing, and (f) all of the capital stock issued by Borrower.



     “Compliance Certificate” means a certificate substantially in the form of Exhibit G.



     “Control” means the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of a Person, whether through the ability to
exercise voting power, by contract or otherwise. For the purposes of this definition, and without
limiting the generality of the foregoing, any Person that owns directly or indirectly 10% or more
of the Equity Interests having ordinary voting power for the election of the directors or other
governing body of a Person will be deemed to “control” such other Person. “Controlling”
and “Controlled” have meanings correlative thereto.



     “Cost Certificate” is defined in Section 2.1(d)(iii).



2









 








     “D&A Loan” means, prior to the Drawdown Termination Date, the loan or loans made or to
be made from Lender to Borrower, as evidenced by the Note, to fund Borrower’s share of the costs
and expenses of D&A Operations, including the Discretionary D&A Loans.



     “D&A Operations” means, prior to the Drawdown Termination Date, the development and
acquisition activities proposed to be undertaken by Borrower or, in the case of Non-Operated
Properties, participated in by Borrower from time to time, including (a) drilling, sidetracking,
deepening, fracturing, refracturing, completing, recompleting or reworking activities or similar
activities to be conducted on the Properties, (b) maintenance and reclamation of wells and other
fixtures and equipment that are part of the Properties, (c) acquisition and installation of
gathering and compression assets, (d) installation and construction of pipeline assets, (e)
acquisition of any one or more additional Oil and Gas properties, including undeveloped lease
acquisitions, and (f) geological and geophysical examinations, aerial mapping, test well drilling
and other operations in order to explore an area and evaluate the existing structural or
stratigraphic traps and includes bulldozing, road building, surveying and all work necessarily
connected therewith.



     “Debt Service” means the principal and interest due pursuant to the Note for any
Interest Period.



     “Default” means any event or condition which would, with the giving of any requisite
notices and/or the passage of any requisite periods of time, constitutes an Event of Default.



     “Default Rate” means the lesser of (a) the Interest Rate, plus four percent (4%) per
annum and (b) the Maximum Rate.



     “Defensible Title” means with respect to the Properties, such title that: (a) with
regard to Leasehold Interests (i) with respect to each well or Unit located on or pooled with the
Leases entitles Borrower to receive, free and clear of all royalties, overriding royalties and net
profits interests (except the Royalty Interests), or other burdens on or measured by production of
Hydrocarbons, not less than the Net Revenue Interests of Borrower reflected on Exhibit A for such
wells or Units for the productive life of such well or Unit (subject only to the Permitted
Encumbrances); and (ii) with respect to each well or Unit located on or pooled with the Leases
obligates Borrower to bear costs and expenses relating to the maintenance, development and
operation of such well or Unit in an amount not greater than the Working Interests reflected on
Exhibit A for the productive life of such well or Unit; free and clear of any Lien (subject only to
Permitted Encumbrances) and (b) with regard to Fee Interests, entitles Borrower to receive
production of Hydrocarbons equal to the undivided fee interest owned by Borrower as reflected on
Exhibit A.



     “Delta Properties” means the Properties located in Saline County, Illinois.



     “Deposit Account Control Agreement” means that certain agreement dated of even date
herewith among Borrower, Lender and KeyBank National Association covering the Borrower Operating
Account.



     “Development Operations” means those activities described in parts (a) and (b) of the
definition of D&A Operations.



3









 





     “Direct Taxes” means, without duplication (a) Property Taxes, (b) Severance Taxes, (c)
ad valorem taxes, (d) conservation taxes, and (e) any other taxes of any kind, excluding only
income taxes, margin taxes, gross income taxes, backup withholding taxes and franchise taxes,
imposed on Borrower or any producer in connection with or as a result of its ownership of interests
in the Properties.



     “Discretionary D&A Loans” is defined in Section 2.1(c).



     “Drawdown Termination Date” means the earlier of (a) July 27, 2010, and (b) the Loan
Termination Date then in effect.



     “Engineers” means, unless specifically provided otherwise, an independent petroleum
engineering firm to be mutually acceptable to Borrower and Lender; provided that any prior
acceptance by a party of any independent petroleum engineering firm does not necessarily denote
acceptance by such party of such firm at any future time or date.



     “Environmental Laws” means any and all Governmental Requirements pertaining in any way
to health, safety the environment or the preservation or reclamation of natural resources, in
effect in any and all jurisdictions in which the Borrower is conducting or at any time has
conducted business, or where any Property of the Borrower is located, including without limitation,
the Oil Pollution Act of 1990 (“OPA”), as amended, the Clean Air Act, as amended, the
Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 (“CERCLA”),
as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health
Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 (“RCRA”), as
amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the
Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials
Transportation Act, as amended, and other environmental conservation or protection Governmental
Requirements. The term “oil” shall have the meaning specified in OPA, the terms “Hazardous
Substance” and “release” (or “threatened release”) have the meanings specified
in CERCLA, the terms “solid waste” and “disposal” (or “disposed”) have the
meanings specified in RCRA and the term “oil and gas waste” shall have the meaning specified in
Section 91.1011 of the Texas Natural Resources Code (“Section 91.1011”); provided, however,
that (a) in the event either OPA, CERCLA, RCRA or Section 91.1011 is amended so as to broaden the
meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective
date of such amendment and (b) to the extent the laws of the state or other jurisdiction in which
any Property of the Borrower is located establish a meaning for “oil,” “Hazardous
Substance,” “release,” “solid waste,” “disposal” or “oil and gas
waste” which is broader than that specified in either OPA, CERCLA, RCRA or Section 91.1011,
such broader meaning shall apply.



     “Environmental Report” means any Phase I Environmental Site Assessment or similar or
related report and related to the Properties, including any such report prepared by a qualified
“environmental professional,” as such term is defined by the Environmental Protection Agency.



     “Equipment” means all equipment of Borrower more particularly described in Schedule
4.1(r), and all other equipment of Borrower, used for or in the operation of the Properties which
may not be described in Schedule 4.1(r), of every kind and nature whether



4









 







located on the Properties
or located elsewhere, including but not limited to all pipelines, well and lease equipment and
surface equipment, casing, tubing, connections, rods, pipe, machines, other compressors, gathering
systems, meters, motors, pumps, tankage, fixtures, storage and handling equipment and all other
equipment or movable property of any kind and nature and wherever situated now or hereafter owned
by Borrower or in which Borrower may now or hereafter have any interest (to the extent of such
interest), together with all additions and accessions thereto, all replacements and all accessories
and parts therefor, all logs and records in connection therewith, all rights against suppliers,
warrantors, manufacturers, sellers or others in connection therewith, and together with all
substitutes and replacements for any of the foregoing.



     “Equity Interests” means shares of capital stock, partnership interests, membership
interests in a limited liability company, beneficial interests in a trust or other equity ownership
interests in a Person, and any warrants, options or other rights entitling the holder thereof to
purchase or acquire any such Equity Interest.



     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from
time to time, together with all rules and regulations promulgated with respect thereto.



     “ERISA Affiliate” means each trade or business (whether or not incorporated) which
together with the Borrower would be deemed to be a “single employer” within the meaning of section
4001(b)(1) of ERISA or subsections (b), (c), (m) or (o) of section 414 of the Code.



     “ERISA Plan” means any pension benefit plan or multiemployer plan which is maintained
by any Person and which is subject to Title IV of ERISA or ERISA Section 302 or Code Section 412.



     “ERISA Event” means (a) a “Reportable Event” described in section 4043 of ERISA and
the regulations issued thereunder, (b) the withdrawal of the Borrower or any ERISA Affiliate from a
Plan during a plan year in which it was a “substantial employer” as defined in section 4001(a)(2)
of ERISA, (c) the filing of a notice of intent to terminate a Plan or the treatment of a Plan
amendment as a termination under section 4041 of ERISA, (d) the institution of proceedings to
terminate a Plan by the PBGC, (e) receipt of a notice of withdrawal liability pursuant to Section
4202 of ERISA or (f) any other event or condition which might constitute grounds under section 4042
of ERISA for the termination of, or the appointment of a trustee to administer, any Plan.



     “Event of Default” is defined in Section 10.1.



     “Existing Swap Agreements” means the Swap Agreements listed on Schedule 4.1(u).



     “Expenses” means, in connection with the Properties, Borrower’s share of costs and
expenses relating to, without duplication, Operating Expenses, Direct Taxes (other than Property
Taxes), royalties and overriding royalty interests (in existence as of the date hereof),
one-twelfth (1/12th) of the estimated annual Property Taxes, and associated Swap
Settlement Payables.



     “Extended Termination Date” is defined in Section 2.9.



5









 





     “Facility Fees” means the fees owed by Borrower to Lender as consideration, in part,
for Lender’s assistance to Borrower in structuring the transactions contemplated under this
Agreement and the other Loan Documents in an amount equal to two percent (2.0%) of any Loan each
time a Loan is funded.



     “Fee Interest” means a Hydrocarbon Interest arising from ownership relating to a
mineral fee interest.



     “Financial Statements” means the financial statements of Borrower required to be
delivered pursuant to Section 7.1(c) hereof.



     “Fiscal Quarter” means a three-month period ending on April 30, July 31, October 31 or
January 31 of any year.



     “Fiscal Year” means a twelve-month period ending on July 31 of any year.



     “Forward NYMEX Market Prices” means no less than 85% of the then-current NYMEX futures
prices for natural gas or crude oil, as the case may be, for the applicable month of future
production. Lender shall determine such percentage at or above 85% in its sole reasonable
discretion.



     “GAAP” means those generally accepted accounting principles and practices which are
recognized as such by the Financial Accounting Standards Board (or any generally recognized
successor).



     “gas” means and includes, in each case, natural gas, casinghead gas, coal bed methane
gas, coal mine methane gas and all methane gas found in the coal seams or other strata in
communication with the coal.



     “Governing Body” means, in the case of a corporation, its board of directors, in the
case of a limited liability company, its members or its managers, depending on how the management
of such Business Entity is allocated in its Governing Documentation, in the case of a general
partnership or joint venture, the partners or the joint venturers thereof, respectively, in the
case of a limited partnership, the applicable Governing Body of the general partner thereof, if
such general partner is a Business Entity, and in the case of any other Business Entity not
specified herein, the designees thereof that, pursuant to the Governing Documentation of such
Business Entity, fulfill the responsibilities typically discharged by a board of directors of a
corporation.



     “Governing Documentation” means, in the case of a corporation, its certificate of
incorporation or formation, articles of incorporation and bylaws, as amended, in the case of a
limited liability company, its certificate of formation, its limited liability company agreement,
and its operating agreement or regulations (or similar documentation as denominated under the laws
of the jurisdiction in which it is formed), in the case of a partnership, joint venture or a
limited partnership, its certificate of formation, and the applicable partnership agreement or
joint venture agreement, and in the case of any other Business Entity not specifically enumerated
herein, the applicable documentation typically utilized in the jurisdiction where such Business
Entity has been formed for purposes of initially forming such Business Entity according to the
laws of such jurisdiction and thereafter operating and managing such Business Entity.



6









 





     “Governmental Authority” means the government of the United States of America, any
other nation or any political subdivision thereof, whether state or local, and any agency,
authority, instrumentality, regulatory body, court, central bank or other entity exercising
executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or
pertaining to government over the Borrower, any of its Properties or the Lender.



     “Governmental Requirement” means any law, statute, code, ordinance, order,
determination, rule, regulation, judgment, decree, injunction, franchise, permit, certificate,
license, authorization or other directive or requirement, whether now or hereinafter in effect,
including, without limitation, Environmental Laws, energy regulations and occupational, safety and
health standards or controls, of any Governmental Authority.



     “Gross Receipts” means, in relation to and arising from the Properties and Permitted
Swap Agreements, all sums received therefrom by Borrower, including, but not limited to Swap
Settlement Proceeds and proceeds under gas sales agreements, oil sales agreements, natural gas
liquids sales agreements, gas processing agreements, gas gathering agreements, Operating
Agreements, saltwater disposal agreements, and service agreements, including, but not limited to
receipts pursuant to Accounting Procedures, and any other receipts relating to or arising from the
Properties, other than the proceeds of Collateral governed separately by Section 2.4(b).



     “Guarantee” shall include any agreement, whether such agreement is on a contingency
basis or otherwise, to purchase, repurchase or otherwise acquire any Indebtedness or liability of
any other Person, or to purchase, sell or lease, as lessee or lessor, property or services in any
such case primarily for the purpose of enabling another Person to make payment of any such
Indebtedness or liability, or to make any payment (whether as a capital contribution, purchase of
any equity interest or otherwise) to assure a minimum equity, asset base, working capital or other
balance sheet or financial condition, in connection with Indebtedness or liability of another
Person, or to supply funds to or in any manner invest in another Person in connection with such
Person’s Indebtedness or liability.



     “Guarantor” means BPI Energy Holdings, Inc., a corporation formed under the laws of
the Province of British Columbia, Canada.



     “Guaranty” means a Guaranty of Borrower’s Obligations, executed by Guarantor, in form
and content satisfactory to Lender, as the same may be modified, amended or supplemented from time
to time.



     “Hydrocarbons” means oil, gas, drip gasoline, natural gasoline, condensate,
distillate, liquid hydrocarbons, gaseous hydrocarbons, coal bed methane gas from coal seams and
coal mine methane gas from mine voids, and all products refined or separated therefrom.



     “Hydrocarbon Interests” means Leasehold Interests, Fee Interests and other interests
in or under oil, gas and other liquid or gaseous hydrocarbon deeds, leases or farmout agreements
(including the Leases) with respect to Hydrocarbons wherever located, mineral fee interests,
overriding royalty and royalty interests, net profit interests, production payment interests
relating to Hydrocarbons wherever located, including any beneficial, reserved or residual interest of
whatever nature.



7









 





     “Indebtedness” means, as to any Person, without duplication, (a) obligations of such
Person for borrowed money, (b) obligations of such Person evidenced by bonds, debentures, notes or
other similar instruments, (c) obligations of such Person in respect of the deferred purchase price
of property or services (other than trade payables incurred in the ordinary course of business on
terms customary in the trade), (d) obligations of such Person under any conditional sale or other
title retention agreement(s) relating to property acquired by such Person, (e) capitalized lease
obligations of such Person, (f) obligations, contingent or otherwise, of such Person in respect of
letters of credit, acceptances or similar extensions of credit, (g) guaranties by such Person of
the type of indebtedness described in clauses (a) through (f) above, (h) all indebtedness of a
third party secured by any Lien on property owned by such Person, whether or not such indebtedness
has been assumed by such Person, (i) all obligations of such Person, contingent or otherwise, to
purchase, redeem, retire or otherwise acquire for value any Equity Interest of such Person, (j)
off-balance sheet liability retained in connection with asset securitization programs, synthetic
leases, sale and leaseback transactions or other similar obligations arising with respect to any
other transaction which is the functional equivalent of or takes the place of borrowing but which
does not constitute a liability on the consolidated balance sheet of such Person and its
subsidiaries and (k) net obligations under any derivative contract including any Swap Agreement,
commodity agreement, interest rate agreement or foreign exchange agreement, excluding any non-cash
mark-to-market adjustments.



     “Initial Committed D&A Operations” is defined in Section 2.1(a).



     “Initial Loans” is defined in Section 2.1(a).



     “Initial Termination Date” means July 25, 2008.



     “Intercreditor Agreement” means that certain Intercreditor Agreement among Borrower,
Lender and the Approved Counterparty under the initial Permitted Swap Agreement and executed and
delivered pursuant to Section 6.1 in form attached hereto as Exhibit F.



     “Interest Period” means each monthly period beginning on (and including) the Repayment
Date in one calendar month and ending on (but not including) the Repayment Date in the next
following calendar month, provided that the first Interest Period for the Note and Loans shall
begin on the date a Loan is first funded hereunder and ending on the second following Repayment
Date.



     “Interest Rate” means the lesser of (a) the Maximum Rate and (b) the greater of (i)
the LIBOR Rate plus the LIBOR Margin, and (ii) from the Closing Date through the Initial
Termination Date, a fixed annual rate of 15%, and thereafter, a fixed annual rate of 12%.



     “Investment” means, for any Person: (a) the acquisition (whether for cash, Property,
services or securities or otherwise) of Equity Interests of any other Person or any agreement to
make any such acquisition (including, without limitation, any “short sale” or any sale of any
securities at a time when such securities are not owned by the Person entering into such short
sale); (b) the making of any deposit with, or advance, loan or capital contribution to, assumption
of Indebtedness of, purchase or other acquisition of any other Indebtedness or equity
participation or interest in, or other extension of credit to, any other Person (including the



8









 







purchase of Property from another Person subject to an understanding or agreement, contingent or
otherwise, to resell such Property to such Person, but excluding any such advance, loan or
extension of credit having a term not exceeding ninety (90) days representing the purchase price of
inventory or supplies sold by such Person in the ordinary course of business); (c) the purchase or
acquisition (in one or a series of transactions) of Property of another Person that constitutes a
business unit or (d) the entering into of any guarantee of, or other contingent obligation
(including the deposit of any Equity Interests to be sold) with respect to, Indebtedness or other
liability of any other Person and (without duplication) any amount committed to be advanced, lent
or extended to such Person.



     “JIBs” is defined in Section 7.1(c)(iii).



     “Lease” or “Leases” means, whether one or more, (a) those certain oil, gas,
coal bed methane and/or mineral deeds or leases or farmout agreements set forth in the description
of the Property on Exhibit A and any other interests in such deeds, leases or farmout agreements,
whether now owned or hereafter acquired by Borrower, and any extension, renewals, corrections,
modifications, elections or amendments of any such deeds or leases or farmout agreements, or (b)
other oil, gas and/or mineral deeds or leases or farmout agreements or other interests pertaining
to the Properties which may now and hereafter be made (or intended or purported to be made) subject
to the lien of any of the Security Documents and any extension, renewals, corrections,
modifications, elections or amendments of any such deeds or leases or farmout agreements.



     “Leasehold Interest” means a Hydrocarbon Interest arising from ownership relating to
an oil, gas and/or mineral lease.



     “Lender” shall have the meaning assigned to such term in the preamble of this
Agreement, and its successors and assigns.



     “Lender Account” is defined in Section 2.7(a).



     “Letters in Lieu” means those certain letters in lieu of transfer orders, duly
executed by Borrower, in the form reasonably satisfactory to Lender.



     “LIBOR Margin” means (a) from the Closing Date through the Initial Termination Date,
9% per annum, and (b) thereafter, 6% per annum.



     “LIBOR Rate” means for any day the fluctuating rate of interest equal to the one-month
London interbank offered rate as published in the “Money Rates” section of The Wall Street Journal
as stated on the first Business Day of the calendar month in which such day lies, provided that in
any event, LIBOR Rate for any non-Business Day will be the LIBOR Rate in effect on the immediately
preceding Business Day, even if such Business Day is in the previous calendar month. In the event
The Wall Street Journal is no longer published or no longer publishes the LIBOR Rate in its “Money
Rates” table, Lender shall choose a substitute LIBOR Rate that is based upon comparable information
subject, however, to Section 3.2 hereof.



     “Lien” means, with respect to any property or assets, any right or interest therein of
a creditor to secure Indebtedness owed to it or any other arrangement with such creditor which



9









 







provides for the payment of such Indebtedness out of such property or assets or which allows it to
have such Indebtedness satisfied out of such property or assets prior to the satisfaction of
general creditors of the owner of such property or assets, including, without limitation, any lien,
mortgage, security interest, pledge, deposit, production payment, rights of a vendor under any
title retention or conditional sale agreement or lease substantially equivalent thereto, tax lien,
mechanic’s or materialman’s lien, or any other charge or encumbrance for security purposes, whether
arising by law or agreement or otherwise, but excluding any right of offset which arises without
agreement in the ordinary course of business. “Lien” also means any filed financing statement, any
registration of a pledge (such as with an issuer of unregistered securities), or any other
arrangement or action which would serve to perfect a Lien described in the preceding sentence,
regardless of whether such financing statement is filed, such registration is made, or such
arrangement or action is undertaken before or after such Lien exists.



     “Loan Documents” means this Agreement, the Note, each Royalty Interest Conveyance,
Letters in Lieu, each Mortgage, the Security Agreement, the Guaranty, the Letters in Lieu, the
Notices of Assignment of Proceeds, the Deposit Account Control Agreement, Permitted Swap
Agreements, the Intercreditor Agreement, each Subordination Agreement and all other security
agreements, deeds of trust, mortgages, chattel mortgages, pledges, guaranties, financing
statements, continuation statements, extension agreements and other agreements or instruments, in
as many counterparts as Lender may require, now, heretofore or hereafter delivered by Borrower to
Lender in connection with this Agreement or any transaction contemplated hereby to secure or
guarantee the payment of any part of the Obligations.



     “Loan Termination Date” means the earliest of: (a) the later of (i) the Initial
Termination Date, and (ii) if the Loan Termination Date then in effect is extended pursuant to
Section 2.9, the Extended Termination Date, (b) the date on which all Obligations of
Borrower under the Loan Documents (other than the Royalty Interest Conveyances) have been paid and
performed in full and Lender’s obligation (if any) to advance any Loans has terminated, and (c) the
date on which Lender notifies Borrower of the acceleration of payment of any portion or all of the
Obligations because of the occurrence of an Event of Default.



     “Loan to Value Ratio” means, when determined, the ratio derived by dividing (a) the
aggregate principal amount of the Loans outstanding at that time, by (b) the PW10 of Borrower’s
Proved Developed Producing Reserves in the Properties, net to Borrower’s interest, and calculated
by Lender in connection with the most recent Reserve Report delivered hereunder (after being
adjusted from time to time to incorporate Lender’s then-current assumptions with respect to
pricing, Expenses and hedges under Permitted Swap Agreements). Lender’s then-current assumptions
will include forward price assumptions consisting of the Forward NYMEX Market Prices.



     “Loans” means, collectively, the Initial Loans, the Discretionary D&A Loans,
Administrative Fees and the Facility Fees advanced hereunder, and “Loan” means,
individually, any Initial Loan or any D&A Loan as described in Section 2.1, any Administrative Fee
and any Facility Fee advanced hereunder.



10









 





     “Lockbox” means Lender’s lockbox established with the lending institution where the
Lender Account is maintained to which Gross Receipts of Borrower that are not wire-transferred into
the Lender Account will be directed for subsequent transfer into the Lender Account.



     “Material Adverse Effect” means a material adverse change in, or material adverse
effect on (a) the business, operations, assets, liabilities (actual or contingent) or condition
(financial or otherwise) of the Borrower, (b) the ability of the Borrower to perform any of its
obligations under any Loan Document to which it is a party, (c) the validity or enforceability of
any Loan Document, or (d) the rights and remedies of or benefits available to Lender under any Loan
Document.



     “Material Contracts” means any agreement or arrangement to which Borrower is a party
or to under which Borrower is bound (other than the Loan Documents) for which Borrower’s breach or
non-performance could be reasonably expected to have a Material Adverse Effect on the business,
operations, properties, assets, condition (financial or otherwise) of Borrower or the ability of
Borrower to fully and timely perform its Obligations or adversely affect the legality, validity,
binding effect or enforceability of any Loan Document, the contracts listed on Schedules 4.1(t) and
(u) and the Operating Agreements.



     “Maximum Rate” means the maximum non-usurious rate of interest that Lender is
permitted under applicable law to contract for, take, charge, or receive from Borrower.



     “Mortgage” is defined in Section 6.1.



     “Net Revenue” means, unless specified otherwise, the aggregate amount calculated as
Gross Receipts minus the aggregate amount calculated as Expenses, for any specified period.



     “Net Revenue Interest” and “NRI” means in relation to Leasehold Interests (a)
with respect to a Unit for which a net revenue interest is stated, that interest in the applicable
Hydrocarbons produced, saved and sold from such unitized area which is afforded to Borrower by
virtue of its ownership of the Hydrocarbon Interests included in whole or in part in such area
after deducting all burdens against the production therefrom, and (b) with respect to a Well for
which a net revenue interest is stated, that interest in the applicable Hydrocarbons produced,
saved and sold from the Well which is afforded to Borrower by virtue of its ownership of the
Hydrocarbon Interests after deducting all burdens against the production therefrom.



     “Net Revenue Reimbursement Amount” is defined in Section 2.7(b).



     “Non-Operated Properties” means the Properties (as herein defined) but as to which
Borrower does not serve as Operator.



     “Note” is defined in Section 2.1(d).



     “Notice of Assignment of Proceeds” is defined in Section 6.4.



     “Obligations” means all Indebtedness and all obligations from time to time owing from
Borrower to Lender or any of Lender’s Affiliates under or pursuant to any of the Loan



11









 







Documents in connection with this Agreement or any transaction contemplated hereby, including
without limitation, all principal, interest, fees, expenses, costs and indemnities.



     “Oil and Gas Properties” means (a) Hydrocarbon Interests; (b) the Properties now or
hereafter pooled or unitized with Hydrocarbon Interests; (c) all presently existing or future
unitization, pooling agreements and declarations of pooled units and the units created thereby
(including without limitation all units created under orders, regulations and rules of any
Governmental Authority) which may affect all or any portion of the Hydrocarbon Interests; (d) all
operating agreements, contracts and other agreements, including production sharing contracts and
agreements, which relate to any of the Hydrocarbon Interests or the production, sale, purchase,
exchange or processing of Hydrocarbons from or attributable to such Hydrocarbon Interests; (e) all
Hydrocarbons in and under and which may be produced and saved or attributable to the Hydrocarbon
Interests, including all oil in tanks, and all rents, issues, profits, proceeds, products, revenues
and other incomes from or attributable to the Hydrocarbon Interests; (f) all tenements,
hereditaments, appurtenances and Properties in any manner appertaining, belonging, affixed or
incidental to the Hydrocarbon Interests and (g) all Properties, rights, titles, interests and
estates described or referred to above, including any and all Property, real or personal, now owned
or hereinafter acquired and situated upon, used, held for use or useful in connection with the
operating, working or development of any of such Hydrocarbon Interests or Property (excluding
drilling rigs, automotive equipment, rental equipment or other personal Property which may be on
such premises for the purpose of drilling a well or for other similar temporary uses) and including
any and all oil wells, gas wells, injection wells or other wells, buildings, structures, fuel
separators, liquid extraction plants, nitrogen removal units, plant compressors, pumps, pumping
units, field gathering systems, tanks and tank batteries, fixtures, valves, fittings, machinery and
parts, engines, boilers, meters, apparatus, equipment, appliances, tools, implements, cables,
wires, towers, casing, tubing and rods, surface leases, rights-of-way, easements and servitudes
together with all additions, substitutions, replacements, accessions and attachments to any and all
of the foregoing.



     “Operating Agreements” means, whether one or more, operating agreements relating to
the Properties to which Borrower is currently a party or by which Borrower is currently bound, and
operating agreements related to the Properties to which Borrower hereafter becomes a party or by
which Borrower hereafter becomes bound, which later operating agreements shall be reasonably
satisfactory in form and substance to Lender.



     “Operating Expenses” means (a) in relation to Leasehold Interests, Borrower’s
proportionate share of (i) direct lease operating expenses and well maintenance expenses (such well
maintenance expenses shall be limited to $25,000.00 per event, net to Borrower’s interest, without
Lender’s prior consent), which arise from Borrower’s Working Interests in the wells that are
subject to the Mortgage, that are billed to Borrower by the Operator or incurred by Borrower, as
Operator, of the Properties and (ii) Borrower’s Working Interest share of expenses incurred in the
repair, maintenance and replacement of damaged or obsolete Equipment (such equipment repair,
maintenance and replacement expenses shall be limited to $25,000.00 per event, net to Borrower’s
interest, without Lender’s prior consent) and (b) in relation to Fee Interests, Borrower’s direct
operating expenses and well maintenance expenses (such well maintenance expenses shall be limited
to $25,000 per event, without Lender’s prior consent), which arise from Borrower’s fee interests in
the Wells that are subject to the Mortgage, that are billed to Borrower



12









 







by the Operator or incurred by Borrower, as Operator, of the Properties and (ii) Borrower’s
expenses incurred in the repair, maintenance and replacement of damaged or obsolete Equipment (such
equipment repair, maintenance and replacement expenses shall be limited to $25,000.00 per event,
without Lender’s prior consent)



     “Operating Report” is defined in Section 7.1(u).



     “Operator” means, with regard to the Properties, Borrower, and any other operator,
including contract operator, as such terms are generally understood in the oil and gas industry.



     “Pay Rate” means an annual fixed rate equal to 12%.



     “Permitted Encumbrances” means:




     (a) Liens pursuant to any Loan Document;




     (b) Liens for taxes, assessments, or other governmental charges or levies not yet
delinquent or which are being contested in good faith and by appropriate proceedings
diligently conducted, if adequate reserves with respect thereto are maintained on the books
of the applicable Person in accordance with GAAP;




     (c) operators’, non-operators’, vendors’, carriers’, warehousemen’s, mechanics’,
materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business or
which are incident to the exploration, development, operation, and maintenance of the
Properties, not overdue for a period of more than sixty (60) days or which are disputed in
good faith and by appropriate proceedings diligently conducted, if adequate reserves with
respect thereto are maintained on the books of the applicable Person in accordance with
GAAP;




     (d) Liens in connection with workers’ compensation, unemployment insurance and other
social security legislation as provided by any Governmental Requirement, other than any Lien
imposed by ERISA;




     (e) deposits to secure the performance of trade contracts, statutory obligations,
surety bonds (other than bonds related to judgments or litigation), performance bonds and
other obligations of a like nature incurred in the ordinary course of business;




     (f) easements, rights-of-way, restrictions, servitudes, permits, conditions, covenants,
exceptions, or reservations and other similar encumbrances, defects, irregularities, minor
imperfections and deficiencies in title affecting real property which, in the aggregate, are
not substantial in amount, and which do not in any case materially detract from the value of
the property subject thereto or materially interfere with the ordinary conduct of the
business of the applicable Person;




     (g) Liens arising in connection with capital leases or purchase money obligations
approved by Lender; and



13









 






     (h) Liens permitted under Section 6.1 that are granted by Borrower to counterparties
under Permitted Swap Agreements.




     (i) the Leases; and




     (j) Liens on equipment arising under equipment leases or securing acquisition financing
of such equipment.



     “Permitted Swap Agreement” means a Swap Agreement with an Approved Counterparty on
terms and conditions, and in a form reasonably acceptable to Lender, including a master swap
agreement on International Swap Dealers Association forms and the schedules thereto and any
confirmations thereunder which Borrower enters into with an Approved Counterparty on terms
reasonably acceptable to Lender.



     “Person” means an individual, any Business Entity, estate or executor thereof, court
or governmental unit or any agency or subdivision thereof, or any other legally recognizable
entity.



     “Pledge Agreement” means a pledge agreement (covering, without limitation, all of the
capital stock of Borrower) executed by Guarantor as debtor in favor of Lender as secured party
dated as of the date hereof, in form and content satisfactory to Lender, as the same may be
modified, amended or supplemented pursuant to the terms of this Agreement.



     “Pro Forma Financial Statements” is defined in Section 4.1(g).



     “Properties” means all Oil and Gas Properties and the other oil and gas assets of
Borrower described in Exhibit A, as Exhibit A may be modified, amended or supplemented from time to
time, including at such times as Lender advances Discretionary D&A Loans for purposes of acquiring
additional Oil and Gas Properties.



     “Property Operating Statement” means the monthly statement, in the form of Exhibit C,
or another form mutually acceptable to Borrower and Lender (but containing at a minimum the same
requested information) to be prepared and delivered by Borrower to Lender pursuant to Section 2.6.



     “Property Taxes” means taxes imposed periodically on Borrower by the applicable
Governmental Authority which are based on or measured by the estimated value (at the time such
taxes are assessed) of any Hydrocarbons or other assets situated within the Properties.



     “Proved Developed Non-Producing Reserves” means Proved Reserves that are estimated to
be recoverable by existing wells that are not yet capable of producing such reserves without
completions or recompletions being conducted within the existing wellbores thereof.



     “Proved Developed Producing Reserves” means Proved Reserves that are estimated to be
recoverable by existing wells that are then capable of producing such reserves.



     “Proved Reserves” means the current estimated quantity of Hydrocarbons which analysis
of geologic and engineering data demonstrate with reasonable certainty to be recoverable in the



14









 







future from known oil and gas reservoirs under existing economic and operating conditions
based on either actual production or conclusive formation tests.



     “Proved Undeveloped Reserves” means Proved Reserves that are estimated to be
recoverable from wells to be drilled in the future.



     “Purchasers of Hydrocarbons” means the Persons listed on Schedule 4.1(s) and all other
Persons who, now or may in the future, purchase Hydrocarbons attributable or allocable to
Borrower’s Hydrocarbon Interests in the Properties.



     “PW10” means the present worth of future net cash flow, discounted to present value at
the simple interest rate of ten percent (10%) per year.



     “Repayment Date” means, prior to the satisfaction of all Obligations, the last
Business Day of each month, commencing with the month of August 2007 and ending on the Loan
Termination Date.



     “Request for Commitment” means a written request, in the form of Exhibit D, to Lender
from Borrower, signed by an authorized representative of Borrower as specified in the resolutions
and incumbency certificate to be delivered pursuant to Section 9.2(c) hereof, for an advance of
funds under a Discretionary D&A Loan.



     “Reserve Report” is defined in Section 7.1(e).



     “Royalty Interest” means, with respect to each of the Properties, (a) in relation to
Leasehold Interests, a cost-free overriding royalty interest from Borrower’s Hydrocarbons produced,
saved and sold, proportionately reduced to Borrower’s Working Interest and other Hydrocarbon
Interests in Hydrocarbons in, under and to be produced from or attributable to the Properties and
(b) in relation to Fee Interests, a cost-free royalty interest from Borrower’s Hydrocarbons
produced, saved and sold, from the fee interest in, under and to be produced from or attributable
to the Properties; in each case, conveyed to Lender pursuant to any Royalty Interest Conveyance,
including, but not limited to, any Royalty Interest to be conveyed pursuant to Section 8.4.



     “Royalty Interest Conveyance” means the Overriding Royalty Interest and Royalty
Interest Conveyance pursuant to which Borrower conveys to Lender the Royalty Interest from time to
time according to the requirements of Section 8.4 below.



     “Royalty Interest Letters in Lieu” means those certain letters in lieu of transfer
orders in relation to any Royalty Interest, duly executed by Borrower, in the form satisfactory to
Lender.



     “Security Agreement” means a security agreement (covering, without limitation
Accounts, Equipment, General Intangibles and Inventory of Borrower as those terms are defined in
the Uniform Commercial Code adopted by the State of Formation of Borrower) executed by Borrower as
debtor in favor of Lender as secured party dated as of the date hereof, in form and content
satisfactory to Lender, as the same may be modified, amended or supplemented pursuant to the terms
of this Agreement.



15









 





     “Security Documents” means each Mortgage, the Security Agreement, the Deposit Account
Control Agreement, the Pledge Agreement, and all other security agreements, deeds of trust,
mortgages, chattel mortgages, pledges, guaranties, financing statements, continuation statements,
extension agreements and other agreements or instruments now, heretofore, or hereafter delivered to
Lender in connection with this Agreement or any transaction contemplated hereby to secure or
guarantee the payment of any part of the Obligations, as the same may be modified, amended or
supplemented from time to time pursuant to this Agreement.



     “Severance Taxes” means state taxes imposed by the applicable Governmental Authority
at the time oil or gas is produced from a well which are based on or measured by the amount or
value of such production.



     “State of Formation” means the state in which Borrower is formed as a Business Entity
under the applicable statutes of such state.



     “Subordination Agreement” means an agreement, in form and substance satisfactory to
Lender, executed by the Partners (or Affiliates thereof) of Borrower subordinating any amounts owed
or that may become owing to any of them by Borrower, to the rights of and obligations owed to
Lender under this Agreement and the other Loan Documents.



     “Subsidiary” means: (a) any Person of which at least a majority of the outstanding
Equity Interests having by the terms thereof ordinary voting power to elect a majority of the board
of directors, manager or other governing body of such Person (irrespective of whether or not at the
time Equity Interests of any other class or classes of such Person shall have or might have voting
power by reason of the happening of any contingency) is at the time directly or indirectly owned or
controlled by the Borrower or one or more of its Subsidiaries or by the Borrower and one or more of
its Subsidiaries and (b) any partnership of which the Borrower or any of its Subsidiaries is a
general partner. Unless otherwise indicated herein, each reference to the term
“Subsidiary” shall mean a Subsidiary of the Borrower.



     “Swap Agreement” means (a) any interest rate or currency swap, rate cap, rate collar,
forward agreement and other exchange or rate protection agreements or any option with respect to
any such transaction and (b) any swap agreement, cap, collar, floor, exchange transaction, forward
agreement or exchange or protection agreement related to Hydrocarbons or any option with respect to
such transaction.



     “Swap Settlement Payables” means any settlement amounts payable by Borrower under the
terms of any executed Permitted Swap Agreement, after giving effect to any netting provisions of
such agreement.



     “Swap Settlement Proceeds” means any settlement amounts paid to Borrower under the
terms of any executed Permitted Swap Agreement, after giving effect to any netting provisions of
such agreement.



     “Tax Claim” means any claim by a taxing authority that Borrower owes or that
Borrower’s interest in any of the Properties is subject to a Lien securing any amount of taxes of
any kind.



16









 





     “Taxes” is defined in Section 3.1(a).



     “Title Documents” means copies of documents and instruments supporting Borrower’s
title in and to some or all of the Properties and any related reports, abstracts and analyses to be
delivered by Borrower to Lender from time to time.



     “Title Opinions” means those certain title opinions to be delivered by Borrower to
Lender from time to time.



     “Unit” means, in respect of each Well or group of related Wells, Borrower’s interest
in Oil and Gas Properties covering the lands attributed to each such respective Well or group of
related Wells for pooling, unitization and/or proration purposes, from time to time, whether so
attributed to such Well or group of related Wells in order to comply with the terms of the
applicable deed, oil and gas leases, farmout agreements, coal bed methane leases, pooling or
unitization agreements, unit operating agreements or the like or in order to comply with the
applicable rules and regulations of applicable governmental authorities related to pooling,
unitization, well spacing or the like and, including without limitation any pooled (compulsory or
voluntary) unit, proration unit, production unit, regulatory unit, field-wide unit, or other
similar designation or allocation of lands to such Well or group of related Wells; provided,
however, that, to the extent lands have not been attributed to any such Well or group of related
Wells either by any such deed or contractual or regulatory authority, then the applicable Unit will
consist of all of Borrower’s interest in Oil and Gas Properties supporting Borrower’s right to
receive production or proceeds of production from such Well or Wells without geographic
limitations.



     “Well” means a well producing or capable of producing Hydrocarbons, including those
described or referred to in Exhibit A or on any exhibit to any Security Documents, as such Exhibit
A or other exhibit may be modified, amended or supplemented from time to time.



     “Wire Transfer Instructions” means the instructions described on Schedule 2.1 relating
to the disbursements by Lender of the amounts constituting the Initial Loans (other than the
Facility Fee and the initial Administration Fee).



     “Working Interest” and “WI” means in relation to Leasehold Interests (a) with
respect to a Unit for which a working interest is stated, Borrower’s share of the costs of
operations conducted thereon, and (b) with respect to a Well for which a working interest is
stated, Borrower’s share of costs of the operation thereof.



     Section 1.2 Exhibits and Schedules. All exhibits and schedules attached to this Agreement are incorporated herein by reference
and made a part hereof for all purposes.



     Section 1.3 Amendment of Defined Instruments. Unless the context otherwise requires or unless otherwise provided herein, the terms
defined in this Agreement which refer to a particular agreement, instrument or document also refer
to and include all renewals, extensions, modifications, amendments and restatements of
such agreement, instrument or document; provided that nothing contained in this Section shall
be construed to authorize any such renewal, extension, modification, amendment or restatement.



17









 





     Section 1.4
References and Titles. All references in this Agreement to exhibits, schedules, articles, sections, subsections
and other subdivisions refer to the exhibits, schedules, articles, sections, subsections and other
subdivisions of this Agreement unless otherwise expressly provided. Section and subdivision
headings are for convenience only, do not constitute any part of such sections or subdivisions and
shall be disregarded in construing the language contained in such sections or subdivisions. The
words “this Agreement,” “this instrument,” “herein,” “hereof,” “hereby,” “hereunder” and words of
similar import refer to this Agreement as a whole and not to any particular sections or
subdivisions unless expressly so limited. The phrases “this section” and “this subsection” and
similar phrases refer only to the sections or subsections hereof in which such phrases occur. The
word “or” is not exclusive, and the word “including” (in its various forms) means “including
without limitation.” Pronouns in masculine, feminine and neuter genders shall be construed to
include any other gender, and words in the singular form shall be construed to include the plural
and vice versa, unless the context otherwise requires.



     Section 1.5
Calculations and Determinations. All calculations pursuant to the Loan Documents of fees and of interest shall be made on
the basis of actual days elapsed (including the first day but excluding the last) and a year of 360
days. Unless otherwise expressly provided herein or Lender otherwise consents in writing, all
Financial Statements and reports to be furnished to Lender under the Loan Documents shall be
prepared and all financial computations and determinations made pursuant to the Loan Documents, and
with respect to the Financial Statements, shall be made in accordance with GAAP.




ARTICLE II



THE LOANS




     Section 2.1 The Loans
.. Subject to the terms and conditions under this Agreement (including the right of Lender to
terminate any of its obligations hereunder upon the occurrence of an Event of Default or a
Default), Lender agrees to make the following Loans to Borrower.





     (a) The Initial Loans. On or after the Closing Date and on or before the
Drawdown Termination Date, Lender agrees to advance to Borrower up to $10,200,000
(collectively, the “Initial Loans”) to be applied as follows:




     (i) $9,059,566.40 used for D&A Operations described on Schedule 2.1(a) attached
hereto, including reimbursement to Borrower for expenses incurred by Borrower prior
to the disbursement of the Initial Loans in connection with such D&A Operations (the
“Initial Committed D&A Operations”); provided that such Schedule 2.1(a) may
be amended, restated, or supplemented by mutual agreement of Borrower and Lender;




     (ii) To reimburse Borrower and Lender for, or advance to Borrower or Lender
amounts to pay, certain expenses (including accounting, legal and other similar
fees) actually incurred by Borrower or Lender under Section 7.1(y) in an amount of
up to $516,457.84 (the “Closing Costs”);



18









 






     (iii) To pay a Facility Fee of $177,638.56 in respect of its funding the
Initial Loans; and




     (iv) To pay the initial Administration Fee in the amount of $5,000.




     Upon the funding of the Initial Loans, Lender will concurrently refund to Borrower the
$50,000 expense advance delivered to Lender by Borrower between May 21, 2007 and the Closing
Date.




     (b) Discretionary D&A Loans.




     (i) Prior to the Drawdown Termination Date and subject to the terms of Section
2.1(c), Lender may, but shall not be obligated to, make additional advances to
Borrower of D&A Loan(s) up to an aggregate of $64,800,000 (less the aggregate amount
of all Facility Fees and Administration Fees) to be used exclusively for certain D&A
Operations proposed by Borrower following Closing, including reimbursement to
Borrower for expenses incurred by Borrower prior to the disbursement of any such
advances in connection with such D&A Operations (the “Discretionary D&A
Loans”).




     (ii) Pursuant to a Request for Commitment, Lender may make, subject to its sole
discretion, advances for Discretionary D&A Loans in an amount determined by Lender
in its sole discretion. Within fifteen (15) days after Lender’s receipt of a
Request for Commitment for a Discretionary D&A Loan listing all applicable
expenditures and all the technical information that Lender may reasonably require to
evaluate the expenditures (including but not limited to a project overview, a
proposed work plan and, at Lender’s request, a third-party engineering evaluation
where applicable) that Borrower desires to make in order to conduct a D&A Operation,
Lender shall notify Borrower in writing whether in its sole and absolute discretion
Lender will make an advance equal to the total estimated expenditures shown on such
Request for Commitment.




     (iii) At the end of each Fiscal Quarter, at Borrower’s written request, Lender
will review the progress of Borrower’s D&A Operations and determine, in its sole
discretion, whether to increase the aggregate amount of Discretionary D&A Loans.




     (c) All D&A Loans.




     (i) Any Request for Commitment for a Discretionary D&A Loan in relation to one
or more D&A Operations shall be for a minimum of $1,000,000. Each Request for
Commitment shall include (A) the applicable request for an advance of the additional
Facility Fee payable pursuant to Section 7.1(aa), (B) a
variance allowance not to exceed ten percent (10%) of the estimated expenses
set forth in the Request for Commitment (such allowance will be available only to
the extent the actual costs of any D&A Operation exceeds 100% of the estimated
costs), and (C) the AFE(s) applicable to such D&A Operation(s) and such other



19









 







supporting materials sufficient for Lender to assess whether it will grant approval
thereof.




     (ii) If approved, Lender will advance that portion of the Discretionary D&A
Loan necessary to pay Borrower’s share of costs and expenses attributable to such
operations, including reimbursement to Borrower for expenses incurred by Borrower
prior to such disbursement in connection with such operations (not to exceed the
amount requested in the Request for Commitment); provided that Borrower has provided
all information requested by Lender.




     (iii) Any advances to be made by Lender under this Section 2.1(c), if at all,
shall be made on the date specified on the applicable Request for Commitment or
acquisition. Within the earlier of thirty (30) days after completion of any funded
D&A Operation(s), or within ten (10) Business Days after receipt of sufficient
information thereon from the Operator or seller, as applicable, Borrower shall
provide Lender a preliminary cost certificate in the form attached hereto as Exhibit
E (the “Cost Certificate”), duly executed by an authorized officer of
Borrower, setting forth the amount of costs and expenses that were incurred by
Borrower and that have either been paid by Borrower or are to be paid from the
proceeds of advances. Borrower shall not later than 180 days following the
completion of any D&A Operation provide Lender a completed Cost Certificate, duly
executed by an authorized officer of Borrower certifying the costs and expenses that
were incurred by Borrower and paid by Borrower. To the extent any D&A Loan proceeds
remain unused by Borrower subsequent to the completed D&A Operations for which they
were advanced, Borrower may use such unused funds only for other D&A Operations
approved by Lender or to repay any Obligations in accordance with the terms of this
Agreement.




     (iv) Any Request for Commitment shall be made by Borrower for business
opportunities, projects, and/or uses that are described as D&A Operations subject,
without limitation, to the following:




     (A) All statements of costs and estimates provided to Lender shall be
rendered in sufficient detail to give Lender complete and accurate
information as to the purpose for and amount of all items included therein,
and Lender shall be entitled to such additional information regarding such
expenditures as Lender may reasonably request. All such data shall be
subject to audit by Lender’s representatives at any time mutually agreeable
to the parties.




     (B) Borrower agrees that, subject to any other conditions expressly set
forth in this Agreement, with respect to any Development Operation
consisting of a new-well drill or any other operation requiring
Borrower to expend more than $25,000, Lender’s funding of such
operation is further subject to the requirement that prior to or
contemporaneously with the submission of a Request for Commitment covering
each such operation Borrower shall submit to Lender all title



20









 







information in
its possession or available to it from third parties, with such information
being satisfactory to Lender in its reasonable discretion, relating to the
Hydrocarbon Interests relating to such operations, unless current Title
Documents covering such lands have already been provided under this
Agreement, in either event which confirm that Borrower owns Defensible Title
thereto subject only to a first priority lien under the Mortgage in favor of
Lender and Permitted Encumbrances. If such activity is a D&A Operation that
relates to the acquisition of one or more undeveloped Hydrocarbon Interests,
however, Borrower shall only be required to deliver title materials
satisfactory to Lender covering the lands covered by such Hydrocarbon
Interests. If title materials and data available to Borrower are
unsatisfactory to Lender, Lender may, but shall not be obligated to, advance
D&A Loans, provided that, Borrower provides supplemental title materials
within sixty (60) days following the funding of any D&A Loan that are
satisfactory to Lender. Nothing in this Section 2.1(c)(iv)(B) shall affect
Borrower’s obligation to deliver the Title Opinions as set forth in Section
7.1(x).




     (C) Notwithstanding the foregoing or anything herein to the contrary,
in no event shall Lender be obligated to make the Initial Loans pursuant to
Section 2.1(a) in excess of an aggregate amount of $10,200,000; and in no
event shall Lender be obligated to make any Discretionary D&A Loans approved
by Lender pursuant to Section 2.1(c) in excess of an aggregate amount of
$64,800,000 including the aggregate amount of Facility Fees related thereto
and Administration Fees.




     (D) No Default or Event of Default shall have occurred and be
continuing, and no Loan shall be advanced following the Drawdown Termination
Date.




     (d) Promissory Note. The Loans described in Section 2.1 and all other amounts
due under this Agreement shall be evidenced by a promissory note in the face amount of
$75,000,000 (the “Note”), in the form of Exhibit B as appropriately completed. The
final maturity date of such Note shall be the Loan Termination Date and all amounts
evidenced by the Note shall be secured by the Security Documents.



     Section 2.2 Interest.




     (a) Subject to the provisions of subsection (b) below, each Loan shall accrue interest
on the outstanding principal amount thereof at a rate per annum equal to the Interest Rate
and shall be payable as set forth in Section 2.6 hereof.




     (b) If any amount payable by Borrower under any Loan Document is not paid when due,
whether at stated maturity or by acceleration or otherwise, such amount shall thereafter
accrue interest, after as well as before judgment, at the Default Rate to the fullest extent
permitted by applicable laws. Furthermore, while any Event of Default exists (either before
or after acceleration), Borrower shall pay interest on the principal



21









 







amount of all
outstanding Obligations, after as well as before judgment, at the Default Rate to the
fullest extent permitted by applicable laws.




     (c) Interest on each Loan shall be due and payable in arrears on each Repayment Date
applicable thereto and at such other times as may be specified herein. Interest hereunder
shall be due and payable in accordance with the terms hereof before and after judgment, and
before and after the commencement of any proceeding under any applicable bankruptcy,
insolvency or other similar law of any jurisdiction now or hereafter in effect, including
the federal Bankruptcy Code, as amended from time to time. At Borrower’s request and at
Lender’s consent, granted in its sole discretion, interest which has accrued and is not paid
when due shall be added to and become part of the principal under the Note; provided,
however, the capitalization of such accrued and unpaid interest pursuant to this sentence
will not preclude Lender from declaring or maintaining an Event of Default or charging
interest, after as well as before judgment, at the Default Rate based on Borrower’s failure
to pay such amount to the extent Lender has such right under any other provision of this
Agreement or under any of the other Loan Documents.




     (d) All computations of interest and all fees for a given period shall be made by
multiplying the applicable annual rate times a fraction the numerator of which shall be the
actual number of days elapsed during such period and the denominator of which shall be 360.
Interest shall accrue on the day on which the Loan is made, but shall not accrue on the day
on which the Loan or such portion thereof is paid, provided that any Loan that is repaid on
the same day on which it is made shall accrue interest for one day.




     (e) To the extent Debt Service and other Obligations for a particular Interest Period
exceed the amount of Net Revenue swept and applied by Lender pursuant to Section 2.6, then
the percent of Net Revenue swept and applied by Lender shall at Lender’s option be increased
to a percentage (up to 100%) necessary to sweep a sufficient portion of the Net Revenue to
pay (i) all Debt Service and other Obligations due for that Interest Period plus (ii) all
Debt Service and other Obligations remaining unpaid from any prior Interest Period. To the
extent all payments for such previously unpaid Debt Service and other Obligations are
satisfied, the percent of Net Revenue swept shall be reduced to the extent provided in
Section 2.6. To the extent that the application provisions under this Section 2.2(e)
conflict with those under Section 2.6(b), Section 2.6(b) controls.



     Section 2.3
Repayment of the Loans. 
Borrower shall repay the outstanding principal amount of the Loans evidenced by the Note
plus all accrued and unpaid interest thereon by the Loan Termination Date. Loans advanced pursuant
to this Agreement and repaid by Borrower, may not be reborrowed.



     Section 2.4 Prepayment of the Loans.




     (a) Voluntary Prepayments. Borrower may prepay the Note, in whole or in part,
any time after the Closing Date; provided that Borrower shall provide Lender at least three
(3) Business Days’ prior written notice of such prepayment, except in



22









 







connection with
Section 2.4(b). If the outstanding principal amount of the Note is prepaid in full, all
fees paid hereunder that may otherwise constitute interest under applicable law, including
the Facility Fees, shall constitute prepayment penalties.




     (b) Mandatory Prepayment. Except as expressly provided otherwise in Sections
2.6, 6.5 and 6.7, Borrower shall deliver to Lender one hundred percent (100%) of the net
proceeds of any disposition of Collateral or any issuance of Subordinated Debt one Business
Day after Borrower’s receipt of such net proceeds and such amounts shall be applied to
reduce the outstanding principal amount of the Note. Borrower shall use 100% of all
insurance proceeds to promptly acquire new or replacement assets which are contemporaneously
subjected to a first priority Lien in favor of Lender on terms satisfactory to Lender and
its counsel, provided, that, if (i) an Event of Default exists when Borrower receives such
proceeds, or (ii) Borrower has not acquired such assets within ninety (90) days after its
receipt of such proceeds, then, in each case, Borrower shall deliver such proceeds to Lender
and such amount shall be applied to reduce the outstanding principal amount of the Note. In
furtherance thereof, Borrower agrees to promptly execute and deliver to Lender a Mortgage
and any other Security Documents described in Section 6.1 to grant Lender a first priority
lien, subject only to the Permitted Encumbrances, in any such replacement property, and
further agrees that if such property is a replacement Oil and Gas Property previously
subject to a Royalty Interest, to promptly execute and deliver a Royalty Interest Conveyance
to Lender on the Business Day following Borrower’s acquisition of such property.




     (c) Prepayments Generally. Any principal prepaid pursuant to this Section 2.4
shall be in addition to, and not in lieu of, all payments otherwise required to be paid
under the Loan Documents at the time of such prepayment.



     Section 2.5
Commencement of Royalty Interest. The Royalty Interest will be applicable with respect to all Hydrocarbons produced from or
attributable to the Properties from and after the first day of the month of the Closing Date, as
more particularly described in the Royalty Interest Conveyance.



     Section 2.6 Application of Receipts.




     (a) Net Revenue shall be calculated by Lender based on the Property Operating
Statement. Borrower shall prepare and deliver the Property Operating Statement to Lender
once per month, as soon as practical and in any event no later than the last Business Day of
each month. Such Property Operating Statement shall detail Borrower’s Gross Receipts and
Expenses with respect to such month and for any other such amounts relating to any preceding
months that were not previously accounted for in a Property Operating Statement and shall
also detail the production of Hydrocarbons from the properties as described therein.
Borrower shall deliver the first Property Operating Statement to Lender no later than the
last Business Day of August 2007; provided, however, that this first Property Operating
Statement shall cover the period from Closing Date through and including the last Business
Day of August 2007, and shall reflect Gross Receipts received and Expenses paid for such
period which are related to



23









 







production for all periods prior to and including the last day
of July 2007, to the extent available to Borrower.




     (b) From the Closing Date through the Initial Termination Date,




     (i) accrued and unpaid interest shall be due and payable on each Repayment
Date; provided that (A) the amount of interest that would accrue at a rate equal to
the Pay Rate shall be paid in immediately available funds and all Net Revenue shall
be applied first to pay Expenses and then to pay such interest, and (B) all
additional accrued and unpaid interest shall be capitalized so that it is added to
and becomes part of the principal under the Note, and




     (ii) if the amount of Net Revenue for any month is not sufficient to pay that
portion of the accrued and unpaid interest payable in immediately available funds,
the amount of such excess accrued and unpaid interest shall be capitalized so that
it is added to and becomes part of the principal under the Note.




     (c) After the Initial Termination Date, effective as of each Repayment Date and at the
end of each Interest Period, Gross Receipts for such Interest Period shall be applied as
follows:




     (i) First, to the amount necessary to pay the Expenses.




     (ii) Second, (A) for the 12 months immediately following the Initial
Termination Date, sixty-five percent (65.0%) of the Net Revenue to Lender for
payment of amounts which are included within Debt Service and other Obligations to
Lender for such Interest Period; and (B) for each calendar month thereafter,
eighty-five percent (85.0%) of the Net Revenue to Lender for payment of amounts
which are included within Debt Service and other Obligations to Lender for such
Interest Period; provided that, upon the occurrence and continuation of an Event of
Default, the percentage of the Net Revenue to be applied for Debt Service and other
Obligations to Lender may be increased to one hundred percent (100%) or such other
amount specified in Section 2.2(e) above for so long as an Event of Default is
continuing. The amount paid to Lender pursuant to this Section 2.6(c)(ii) shall be
applied first to any interest due on the
Note, until all accrued interest is paid in full, and any remaining amounts
paid pursuant to this Section 2.6(c)(ii) shall be applied to remaining outstanding
principal under the Note. If the Property Operating Statement is not received by the
Lender on or before the last Business Day of the month, Borrower irrevocably
authorizes the Lender to apply any necessary portion of Gross Receipts received by
the Lender toward any interest due on the Note, until all accrued interest is paid
in full, superceding the payment priority of Expenses set forth in Section 2.6(c)(i)
above.




     (iii) Third, $5,000 to Lender as the Administration Fee (other than the initial
Administration Fee) to the extent such fee accrues in the current month the Property
Operating Statement is due.



24









 






     (iv) Fourth, so long as no Event of Default shall have occurred and be
continuing, any remaining amounts shall be paid to Borrower by remitting such sums
to the Borrower Operating Account in accordance with Section 2.7(b).



     Section 2.7 Borrower Sub-Account.




     (a) Until all of Borrower’s Obligations have been fully satisfied, Borrower shall
direct and cause all Purchasers of Hydrocarbons, the Operators, all counterparties under
Swap Agreements, all account debtors of Borrower (including under pipeline transportation
contracts), and any other customers of Borrower to deposit all payments of any nature
whatsoever due and owing by such Persons to Borrower directly into an account maintained by
Lender (the “Lender Account”); provided, however, that Purchasers of Hydrocarbons,
with prior notice to Lender, may make distributions to third-party royalty interest owners
and working interest owners and may withhold Severance Taxes. Lender shall establish a
sub-account (the “Borrower Sub-Account”) on its internal books and records and shall
credit to such Borrower Sub-Account all collected funds which constitute such payments.
After payment of the amounts described in this Section 2.7 and subject to Section 2.6,
Borrower authorizes Lender to debit the Borrower Sub-Account for the payment of all
Obligations hereunder when due and payable.




     (b) As soon as practical after the Borrower delivers to the Lender its monthly Property
Operating Statement, provided that no Event of Default has occurred and is continuing, and
after withholding all distributions that Lender is entitled to pursuant to Section
2.6(c)(ii) and (iii), Lender will release to Borrower the funds credited to the Borrower
Sub-Account, by remitting to the Borrower Operating Account the amount payable to Borrower
pursuant to Section 2.6(c)(i) for the payment of Expenses and pursuant to Section
2.6(c)(iv) (the “Net Revenue Reimbursement Amount”). Borrower shall have the right
to use funds paid over to the Borrower Operating Account as the Net Revenue Reimbursement
Amount for any corporate or business purposes of Borrower. Borrower will have sixty (60)
days after the receipt of such funds to contest the amounts of funds released, after which
time the amounts released will be deemed conclusively correct absent manifest error,
provided Borrower may not contest any such amounts
released for any reason after the Loan Termination Date. If Borrower desires to
contest any such amount it shall do so by providing Lender written notice with a report
analyzing its basis regarding any error. Lender shall thereafter notify Borrower, within
thirty (30) days of receipt of Borrower’s analysis, if it agrees with or disputes Borrower’s
analysis. If Lender disputes Borrower’s analysis, Lender’s notice shall detail the specific
basis of the dispute and the amount of the dispute. If Lender agrees with Borrower’s
analysis, Lender will disburse any such amounts to Borrower within fifteen (15) days of the
date of Lender’s notice.



     Any amounts deposited into the Lender Account owing to third-party working interest,
overriding royalty interest and royalty interest owners whose interests in the Properties were
created prior to the time such Properties became subject to any of the Security Documents or to
taxing authorities for production taxes shall be released by Lender to Borrower within three (3)
Business Days after receipt of a certificate from Borrower detailing such amounts and the party to
be paid so that Borrower may return such amounts to such third-party working interest,



25









 







overriding
royalty interest and royalty interest owners and taxing authorities. Lender shall have the right
to undertake audit procedures during normal business hours and upon reasonable prior notice to
periodically confirm that such payments and all Expenses have been made by Borrower. Lender shall
have the right at its option, but not the obligation, to make payments directly for Expenses and
such other payments directly to the third-party working interest, overriding royalty interest and
royalty interest holders and taxing authorities upon the occurrence of and during the continuance
of an Event of Default hereunder. Except as provided in this Section 2.7, upon the occurrence of
and during the continuance of an Event of Default, any funds in the Borrower Sub-Account may be
applied, at Lender’s option, against unpaid Obligations, and the Swap Settlement Payables on a pro
rata basis, such Obligations and Swap Settlement Payables being, in such event, pari passu.



     Section 2.8 Use of Proceeds
.. Initial Loan proceeds may be used by Borrower for the purposes described in Section 2.1(a).
Discretionary D&A Loan proceeds may be used by Borrower for the purposes of funding Borrower’s
share of costs and expenses relating to the conduct of the Discretionary D&A Operations pursuant to
Section 2.1(b) and Section 2.1(c), including reimbursement of expenses previously paid by Borrower
for any corporate or business purpose of Borrower, all as approved by Lender in writing. In no
event shall funds from the Loans be used by Borrower, directly or indirectly, for personal, family,
household or agricultural purposes, or any other purpose not specifically described in this Section
2.8 or in Section 2.1.




     Section 2.9 Optional Extension of Loan Termination Date



     Lender may in its sole discretion, by notice to Borrower, not later than 90 days prior to the
Initial Termination Date, notify Borrower that Lender is electing to extend the Loan Termination
Date then in effect until July 29, 2011 (the “Extended Termination Date”). Notwithstanding
the foregoing, the extension of the Loan Termination Date pursuant to this Section shall not be
effective unless:




     (i) no Default or Event of Default shall have occurred and be continuing on the date of
such extension and after giving effect thereto; and




     (ii) the representations and warranties of Borrower contained in this Agreement are
true and correct in all material respects on and as of the date of such extension and after
giving effect thereto, as though made on and as of such date (except to the extent that (A)
the facts upon which such representation are based have been changed by the extension of
credit hereunder or by subsequent events and circumstances not constituting violations of
the other provisions of this Agreement, or (B) if any such representation or warranty is
expressly stated to have been made as of a specific date, as of such specific date).



     Section 2.10
Other Operations. Until all Obligations (other than the obligations under any Royalty Interest Conveyance) have
been paid in full and this Agreement has been terminated, other than the Initial Committed D&A
Operations and the prudent maintenance of existing wells included in the Collateral, Borrower may
not conduct or invest in any development activities, including, without limitation, drilling,
sidetracking, deepening,



26









 







completing, recompleting or reworking operations, without first submitting
to Lender a Request for Commitment to fund such activities.



ARTICLE III



TAXES AND YIELD PROTECTION




     Section 3.1 Taxes.




     (a) Any and all payments by Borrower to or for the account of Lender under any Loan
Document other than the Royalty Interest Conveyance shall be made free and clear of and
without deduction by Borrower for any and all taxes, duties, levies, imposts, deductions,
assessments, fees, withholdings or similar charges, and all liabilities with respect
thereto, other than Direct Taxes, but excluding, in the case of Lender, taxes imposed on or
measured by its income (except as required by applicable law), and franchise taxes imposed
on it (in lieu of income taxes), by the jurisdiction (or any political subdivision thereof)
under the applicable laws of which Lender is organized or maintains a lending office (all
such non-excluded taxes, duties, levies, imposts, deductions, assessments, fees,
withholdings or similar charges, and liabilities being hereinafter referred to as “Other
Taxes”). To confirm Borrower’s ability to comply with the foregoing, Lender represents
and warrants to Borrower that Lender is (i) not subject to backup withholding and is
otherwise current on its obligations under the Internal Revenue Code of 1986 (as amended and
any successor statute, the “Code”), and (ii) not a foreign person within the meaning
of the Code or under any laws of any jurisdiction of which Lender is subject, the effect of
which laws would be to require Borrower to withhold taxes from payments made to or for the
account of Lender. If Borrower shall be required by any applicable laws to deduct any Other
Taxes from or in respect of any sum
payable under any Loan Document to Lender, (i) the sum payable shall be increased as
necessary so that, after making all required deductions (including deductions applicable to
additional sums payable under this Section), Lender receives an amount of principal and
interest it would have received had no such deductions been made, (ii) Borrower shall make
such deductions, (iii) Borrower shall pay the full amount deducted to the relevant taxation
authority or other authority in accordance with applicable laws, and (iv) within thirty days
after the date of such payment, Borrower shall furnish to Lender the original or a certified
copy of a receipt evidencing payment thereof.




     (b) To the extent not duly paid by Borrower, Borrower shall indemnify Lender within ten
(10) days after written demand therefor, for the full amount of any Other Taxes paid by
Lender on or with respect to any payment by or on account of any obligation of the Borrower
hereunder (including Other Taxes imposed or asserted on or attributable to amounts payable
under this Section 3.1) (“Indemnified Taxes”) and any penalties, interest and
reasonable expenses arising therefrom or with respect thereto, whether or not such
Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental
Authority. A certificate of Lender as to the basis of such Other Taxes and the amount of
such payment or liability under this Section 3.1 shall be delivered to the Borrower and
shall be conclusive absent manifest error.



27









 






     (c) In addition, Borrower agrees to pay any and all present or future stamp, court or
documentary taxes and any other excise or property taxes or charges or similar levies which
arise from any payment made under any Loan Document or from the execution, delivery,
performance, enforcement or registration of, or otherwise with respect to, any Loan
Document.



     Section 3.2
Inability to Determine LIBOR Rate. If Lender determines in connection with any request for a Loan or continuation thereof for
any reason that adequate and reasonable means do not exist for determining the LIBOR Rate, Lender
will promptly so notify Borrower if Lender reasonably determines that such event or events have any
impact on the application of the Interest Rate. In such event, Lender shall use, as the LIBOR
Rate, the average LIBOR Rate for the two immediately preceding months (for one-month terms) until
Lender notifies Borrower that the circumstances giving rise to such determination no longer exist.



ARTICLE IV



REPRESENTATIONS AND WARRANTIES




     Section 4.1
Representations and Warranties of Borrower. To confirm Lender’s understanding concerning Borrower and Borrower’s businesses, properties
and obligations, and to induce Lender to enter into this Agreement and to make the Loans, Borrower
represents and warrants to Lender that:




     (a) No Default. No Event of Default or Default has occurred and is continuing.




     (b) Organization and Good Standing. Borrower is a Business Entity as set forth
in the preamble hereof duly organized and validly existing under the laws of State of
Formation, having all requisite corporate powers necessary to carry on its businesses and to
enter into and consummate the transactions contemplated by the Loan Documents. Borrower is
authorized to do business in all other jurisdictions wherein the character of the properties
owned or held by it or the nature of the business transacted by it makes such qualification
necessary, except where the failure to so qualify cannot reasonably be expected to have a
Material Adverse Effect. All the information set forth in the Guaranty regarding Guarantor
is true and correct.




     (c) Capitalization: Compliance with Security Laws.




     (i) As of the date hereof, the record holders of the Equity Interests of
Borrower consist exclusively of those Persons listed on Schedule 4.1(c)(i) and such
schedule accurately lists the percentage ownership of each such record holder in
Borrower and all other names which such record holders conduct business.




     (ii) Except as disclosed on Schedule 4.1(c)(ii), Borrower is not (A) subject to
any agreement under which there may become outstanding, nor are there currently
outstanding, any rights to purchase, or securities convertible into or exchangeable
for, any Equity Interests of Borrower including, but not limited



28









 







to, options,
warrants or rights or (B) under any obligation (contingent or otherwise) to purchase
or otherwise acquire or retire any of its Equity Interests.




     (iii) Except as contemplated by this Agreement or as disclosed on Schedule
4.1(c)(ii), there are no agreements, understandings, plans or arrangements in
existence which pertain to the distribution rights, voting, sale or transfer of any
Equity Interests of Borrower. Borrower has complied in all material respects with
all applicable federal and state corporate laws. There is no pending or, to the
knowledge of Borrower, threatened litigation against Borrower involving any federal
or state securities law claims against Borrower.




     (d) Authorization. Borrower has taken all actions necessary to authorize the
execution and delivery of the Loan Documents and to authorize the consummation of the
transactions contemplated thereby and the performance of its obligations thereunder.
Borrower is duly authorized to borrow funds hereunder and generally to conduct all D&A
Operations.




     (e) No Conflicts or Consents. Except with regard to Borrower’s obligations
that will be satisfied prior to or contemporaneously with Closing and except as set forth on
Schedule 4.1(e), the execution and delivery by Borrower of the Loan Documents, the
performance of its obligations under the Loan Documents, and the consummation of the
transactions contemplated by the various Loan Documents does not and will not (i) conflict
with any provision of (A) any applicable domestic or any foreign law, statute, rule or
regulation, the violation of which could reasonably be expected to have a Material Adverse
Effect, (B) the Governing Documents of Borrower, or (C) any agreement,
judgment, license, order or permit applicable to or binding upon Borrower, the
violation of which could reasonably be expected to have a Material Adverse Effect (ii)
result in the acceleration of any Indebtedness owed by Borrower, or (iii) result in or
require the creation of any Lien upon any assets or properties of Borrower, except as
expressly contemplated in the Loan Documents. Except as expressly contemplated in the Loan
Documents and except as has been obtained, no consent, approval, authorization or order of,
and no notice to or filing with, any court or Governmental Authority or third party is
required in connection with the execution, delivery or performance by Borrower of any Loan
Document or to consummate any transactions contemplated by the Loan Documents. No consents,
options, rights of first refusal or similar rights are outstanding in favor of any Person
regarding the consummation of the transactions contemplated under the various Loan
Documents, or, except for consents, permits and authorizations required to be obtained or
renewed from time to time from Governmental Authorities, conducting the D&A Operations.




     (f) Enforceable Obligations. This Agreement is, and the other Loan Documents
when executed and delivered by Borrower will be, legal, valid and binding obligations of
Borrower enforceable in accordance with their terms except as such enforcement may be
limited by bankruptcy, insolvency or similar laws of general application relating to the
enforcement of creditors’ rights or by principles of equity applicable to the enforcement of
creditors’ rights generally. The Mortgage, the UCC-1 Financing Statements relating to the
Security Documents and the Royalty Interest



29









 







Conveyance to be filed or recorded in the
various jurisdictions are in proper form for filing or recordation under the laws of such
jurisdictions.




     (g) Pro Forma Financial Statements. Attached as Schedule 4.1(g) are unaudited,
management-prepared pro forma balance sheets of the Guarantor and the Borrower, in each
case, as of the Closing Date (the “Pro Forma Financial Statements”). The Pro Forma
Financial Statements present fairly the pro forma financial condition of the Guarantor and
of the Borrower as of the date thereof and are in accordance with the projected or actual
(as the case may be) performance and books and records of Guarantor and Borrower.




     (h) Other Obligations and Restrictions. Except as disclosed on Schedule
4.1(h), the Indebtedness under the Loan Documents, and except for Indebtedness permitted
under Section 7.2(f), Borrower does not have any outstanding Indebtedness. No Tax Claim or
other claim for delinquent Property Taxes or Severance Taxes exists. Borrower is not
subject to or restricted by any franchise, contract, deed, charter restriction or other
instrument or restriction which could reasonably be expected to have a Material Adverse
Effect on Borrower’s financial condition, or Borrower’s ability to timely pay the Note and
the other Obligations and to perform its obligations under the Loan Documents or conduct the
D&A Operations.




     (i) Full Disclosure. The written information delivered by Borrower, or on
behalf of Borrower or any Affiliate of Borrower, to Lender in connection with the
negotiation of this Agreement or in connection with any transaction contemplated hereby is
true and correct in all material respects and does not contain any untrue statement of a
material fact or omit to state any material fact known to Borrower which is necessary
to make the statements contained herein or therein not misleading as of the date made or
deemed made. No facts are known to Borrower that have not been disclosed to Lender in
writing which could reasonably be expected to have a Material Adverse Effect on Borrower’s
financial condition, or Borrower’s ability to timely pay or perform its obligations.




     (j) Litigation. Except as disclosed on Schedule 4.1(j), there are no actions,
suits or legal, equitable, arbitrative or administrative proceedings pending, or to the
knowledge of Borrower threatened, against Borrower or affecting any of the Properties before
any federal, state, municipal or other court, department, commission, body, board, bureau,
agency or instrumentality, domestic or foreign, and there are no outstanding judgments,
injunctions, writs, rulings or orders by any such governmental entity against Borrower or
any of the Properties.




     (k) ERISA Liabilities.




     (i) Schedule 4.1(k) sets out a list of all employee benefit plans and programs
of the Borrower and its ERISA Affiliates which benefit the employees of the Borrower
or its ERISA Affiliates, including but not limited to, plans and programs providing
for pension, retirement, profit-sharing, savings, bonus, 401(k), deferred or
incentive compensation, hospitalization, medical, dental,



30









 







vision, pharmaceutical,
life or disability insurance, vacation and paid holiday, termination or severance
pay, deferred compensation, restricted stock, stock option or stock appreciation
rights benefit plans (the “Benefit Plans”). Neither Borrower nor any ERISA
Affiliate maintains, has ever maintained or has, or ever has had or could have any
liability with respect to employee benefit plan that is subject to Title IV of
ERISA, a “multiemployer plan” within the meaning of Section 3(37) of ERISA or any
plan subject to Section 302 of ERISA or Section 412 of the Code. Borrower and its
ERISA Affiliates, if any, are in compliance in all material respects with ERISA and
all applicable laws, including but not limited to the Consolidated Omnibus Budge
Reconciliation Act of 1985, as amended, applicable to any employee benefit plan or
program which is maintained or contributed to by Borrower or its ERISA Affiliate, or
to which Borrower or its ERISA Affiliate has any responsibility or fixed or
contingent liability.




     (ii) Neither Borrower nor any ERISA Affiliate maintains, has ever maintained
(or has ever had any liability with respect to) any plan subject to Section 302 of
ERISA or Section 412 of the Code. Borrower and its ERISA Affiliates are in
compliance in all material respects with ERISA, the Code, and all applicable laws,
including but not limited to the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended, applicable to any Benefit Plan or any employee benefit plan or
program which is maintained or contributed to by Borrower or its ERISA Affiliate, or
to which Borrower or its ERISA Affiliate has any responsibility or fixed or
contingent liability. Each Benefit Plan that is intended to be tax qualified under
Code Section 501 or Code Section 401 has received a favorable determination letter
as to its tax qualified status for all
amendments for which such letter may be received from the Internal Revenue
Service, and no event has occurred that would negatively affect the qualified status
of such plan. There is no prohibited transaction under ERISA or Code Section 4975
which are not otherwise exempt under ERISA or the Code with respect to any Benefit
Plan.




     (l) Names and Places of Business. Except as set forth on Schedule 4.1(l),
Borrower has not during the preceding three (3) years, been known by or used any other name.
The principal office and principal places of business of Borrower are set forth on Schedule
4.1(l). Borrower does not now have any other office or place of business. Except as set
forth on Schedule 4.1(l), Borrower is not engaged in any business or activity other than the
acquisition, ownership, operation and development of properties potentially productive of
oil and/or gas and related activities.




     (m) Unpaid Bills. Except as disclosed on Schedule 4.1(m) and except as
incurred in the ordinary course of business and which are not yet delinquent, Borrower has
no unpaid bills with respect to improvements to any of the Collateral which may give rise to
mechanic’s, materialman’s or other similar liens arising by operation of applicable law
should such bills remain unpaid.




     (n) Title. Subject to Permitted Encumbrances, (i) Borrower will have all legal
and beneficial rights, title and interest in and to all production from or allocable to its
Net



31









 







Revenue Interest and other Hydrocarbon Interests in the Properties and have the
exclusive right to sell the same subject to the Royalty Interest, and (ii) Borrower will
have good and Defensible Title to the Properties, the Equipment and to its other properties
and assets. The Collateral will be owned by Borrower free and clear of any Lien (other than
Permitted Encumbrances). Borrower’s Working Interests are not greater than, and Borrower’s
Net Revenue Interests are not less than, those stated on Exhibit A attached hereto.
Guarantor is duly authorized to execute and deliver the Guaranty to Lender.




     (o) No Affiliates or Other Owners. Except as disclosed on Schedule 4.1(o), (i)
Borrower does not have any Affiliate or own any Equity Interest in any other Person, (ii)
Borrower is not a member of any joint venture or association of any type whatsoever and
(iii) Borrower is not party to any contract or agreement with any of its Affiliates.
Borrower is not party to any transaction of any kind with any Affiliate of Borrower other
than on fair and reasonable terms substantially as favorable to Borrower as would be
obtainable by Borrower at the time in a comparable arm’s length transaction with a Person
other than an Affiliate.




     (p) Investment Company. Borrower is not an “investment company” within the
meaning of the Investment Company Act of 1940, as amended.




     (q) Environmental and Other Laws. Except as disclosed on Schedule 4.1(q), (i)
Borrower is conducting its business in material compliance with all applicable federal,
state or local laws, including Environmental Laws, and has been and is in material
compliance with any licenses and permits required under any such laws which affect or
relate to the Collateral; (ii) none of the operations or properties of Borrower is the
subject of federal, state or local investigation evaluating whether any material remedial
action is needed to respond to a release of any Hazardous Materials into the environment or
to the improper storage or disposal (including storage or disposal at offsite locations) of
any Hazardous Materials; (iii) Borrower has not filed or received any notice under any
federal, state or local law indicating that it is or may be responsible for the improper
release into the environment, or the improper storage or disposal, of any Hazardous
Materials or that any Hazardous Materials have been improperly released, or are improperly
stored or disposed of, upon the Properties; and (iv) Borrower is not aware of contingent
liability under any Environmental Laws or in connection with the release into the
environment, or the storage or disposal, of any Hazardous Materials, upon the Properties.




     (r) Equipment. Schedule 4.1(r) sets forth all material Equipment owned by
Borrower as of the Closing Date, except for office equipment and fixtures and other
Equipment with market value of less than $10,000, individually.




     (s) Purchasers of Hydrocarbons. All of the Purchasers of Hydrocarbons produced
from or allocated to the Properties, and the most recent address of each such Persons as
shown in Borrower’s records and the contact information for each such Purchaser of
Production, are set forth on Schedule 4.1(s), as supplemented pursuant to Section 7.1(c)(v).



32









 






     (t) Hydrocarbon Sales and Related Agreements. All existing agreements that are
binding on Borrower or the Properties and that are not terminable upon thirty (30) days or
less notice for the sale, purchase, (including, but not limited to, calls on production and
preferential rights to purchase production) gathering, transportation, handling, processing,
treating and/or storage of Hydrocarbons are described on Schedule 4.1(t).




     (u) Swap Agreements; Material Contracts. All Existing Swap Agreements or other
hedge agreements to which Borrower is a party or by which Borrower is bound are described on
Schedule 4.1(u). All the volumes, notional or physical, of the Hydrocarbons hedged under
the Existing Swap Agreements and the terms and the fixed, floating and collar prices and any
other applicable prices are set forth on Schedule 4.1(u). All Material Contracts of
Borrower are listed on Schedule 4.1(u). There have been no amendments to or modifications
of the Material Contracts, except as set forth on Schedule 4.1(u).




     (v) Employees. Except as set forth on Schedule 4.1(v), neither Borrower nor any
ERISA Affiliate is a party to any existing employment agreements, deferred compensation,
stock option, bonus, consulting or retirement agreements or plans, or other employee benefit
plans of any kind, including without limitation any pension or welfare benefit plans with
any employee which are not terminable at-will. No employees of Borrower are represented by
any labor union or collective bargaining agreement, nor is any union organization effort
pending or threatened against Borrower.




     (w) Operations. Borrower is the operator of record of all the Properties.




     (x) Ownership In Properties. Except through their respective ownership
interests in Borrower, no shareholders or any Affiliates of Borrower own any interests in
the Properties.




     (y) Insolvency. After giving effect to the execution and delivery of the Loan
Documents and the making of the Loans under this Agreement, Borrower will not be
“insolvent,” within the meaning of such term as defined in § 101 of Title 11 of the United
States Code, as amended from time to time, or be unable to pay its debts generally as such
debts become due, or have an unreasonably small capital to engage in any business or
transaction, whether current or contemplated.




     (z) OFAC. Borrower is not (i) a person whose property or interest in property
is blocked or subject to blocking pursuant to Section 1 of Executive Order 13224 of
September 23, 2001 Blocking Property and Prohibiting Transactions With Persons Who Commit,
Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)), (ii) engaged in any
dealings or transactions prohibited by Section 2 of such executive order, or otherwise
associated with any such person in any manner violative of Section 2, or (iii) a Person on
the list of Specially Designated Nationals and Blocked Persons or subject to the limitations
or prohibitions under any other U.S. Department of Treasury’s Office of Foreign Assets
Control regulation or executive order.



33









 






     (aa) Patriot Act. Borrower is in compliance, in all material respects, with
(i) the Trading with the Enemy Act, as amended, and each of the foreign assets control
regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as
amended) and any other enabling legislation or executive order relating thereto, and (ii)
the Uniting And Strengthening America By Providing Appropriate Tools Required To Intercept
And Obstruct Terrorism (USA Patriot Act of 2001). No part of the proceeds of the Loans will
be used, directly or indirectly, for any payments to any governmental official or employee,
political party, official of a political party, candidate for political office, or anyone
else acting in an official capacity, in order to obtain, retain or direct business or obtain
any improper advantage, in violation of the United States Foreign Corrupt Practices Act of
1977, as amended.



ARTICLE V



NOTICE OF CERTAIN EVENTS




     So long as any Obligations are owing to Lender under this Agreement or any other Loan
Documents, Borrower shall deliver to Lender or notify Lender of, as the case may be, the following
items:



     Section 5.1 Notice of Default, Event of Default and Other Matters
.. Borrower shall notify Lender within three (3) Business Days after becoming aware of the
existence of any of the following:





     (a) any Default or Event of Default;




     (b) any developments or other information which could reasonably be expected to have a
Material Adverse Effect on the properties, business, prospects, profits or condition
(financial or otherwise) of Borrower or its ability to perform its Obligations;




     (c) any material dispute (including tax liability disputes) that may arise between
Borrower and any Governmental Authority;




     (d) the commencement of any material litigation or proceeding affecting Borrower or the
Properties (whether by the filing of a complaint, service of process or by attachment or
arrest of any asset);




     (e) any labor dispute or controversy resulting in or likely to result in a strike or
work stoppage against Borrower;




     (f) any proposal by any public authority to acquire any assets or business of Borrower;




     (g) the location of any Collateral other than at the places indicated in or as
permitted under the Loan Documents;




     (h) any proposed or actual change of the name, identity or structure of Borrower;



34









 






     (i) any material loss or damage to any of Borrower’s property, business or operations;




     (j) any potentially material environmental situation, circumstance or condition that
causes or may cause Section 4.l(q) to be false;




     (k) any other matter which has resulted or may reasonably be expected to result in a
material adverse change in the financial condition, operations or assets of Borrower; or




     (l) Borrower or any ERISA Affiliate having any obligation or liability with respect to
an ERISA Plan or any prohibited transaction as defined in ERISA or Code Section 4975 with
respect to any Benefit Plan or the occurrence of an ERISA Event that, in any such case,
could reasonably be expected to have a Material Adverse Effect.



     Section 5.2
Other Information. Borrower shall provide such other information regarding the financial condition of Borrower
or any property of Borrower as Lender reasonably may request from time to time.



ARTICLE VI



SECURITY; ETC.




     Section 6.1
Security; Guaranty. The Obligations will be secured by first priority (subject only to the Permitted
Encumbrances) Liens on the Collateral as set forth in the various Security Documents concurrently
or hereafter delivered, including, without limitation, each Mortgage, Security Agreement, Financing
Statement and Assignment of Production to be executed by Borrower covering the Properties (whether
one or more, the “Mortgage”), and the Security Agreement, Pledge Agreement, and the Deposit
Account Control Agreement, each in form and substance reasonably satisfactory to Lender. Lender
will permit the counterparty under a Permitted Swap Agreement to obtain Liens from Borrower
covering, all or a portion of, the Properties that are pari passu with Lender’s first priority
liens; provided, however, Borrower, Lender and such counterparty shall enter into an Intercreditor
Agreement, reasonably satisfactory to Lender. Any time Borrower obtains any new Property following
Closing using any Loan proceeds hereunder, Borrower agrees to promptly execute and deliver to
Lender a Mortgage and any other Security Documents described in this Section 6.1 to grant Lender a
first priority (subject only to the Permitted Encumbrances) lien in such Property, and further
agrees to promptly execute and deliver an Royalty Interest Conveyance as required under Sections
8.4. The Obligations will also be secured by the Guaranty.



     Section 6.2
Perfection and Protection of Security Interests and Liens. Borrower will from time to time deliver to Lender any security agreements, financing
statements, continuation statements, extension agreements, amendments, confirmations and other
documents, properly completed and executed (and acknowledged when required) in form and substance
reasonably satisfactory to Lender, which Lender reasonably requests for the purpose of perfecting,
confirming, protecting or establishing the priority of any Liens or other rights in the Collateral
securing any Obligations.



35









 





     Section 6.3
Release of Collateral. Upon the payment and performance in full by Borrower of all Obligations (other than those
arising under the Royalty Interest Conveyance and indemnity obligations and similar obligations
that survive the termination of the Loan Documents), Lender shall deliver or cause to be delivered
to Borrower, at Borrower’s expense, releases and satisfactions, or transfers without warranty, of
all Collateral, including releases of Deeds of Trust, financing statements, and other registrations
of security with respect to the Collateral and a release of the Deposit Account Control Agreement,
and Borrower shall deliver to Lender a general release of all of Lender’s liabilities and
obligations including under the Loan Documents (other than those arising under the Royalty Interest
Conveyance, and indemnity obligations and similar obligations that survive the termination of the
Loan Documents) and an acknowledgment that the same have been terminated.



     Section 6.4
Account Debtors. All account debtors (including any Operator, Purchasers of Hydrocarbons and counterparties
under Permitted Swap Agreements) relating to the Working Interests, Net Revenue Interests and other
Hydrocarbon Interests in the Properties, under pipeline transportation agreements and relating to
Permitted Swap Agreements (collectively, “Account Debtors”) will receive notification from
Lender (as assignee) and Borrower (as assignor) (the
“Notice of Assignment of Proceeds”) to make payment of all amounts owed from time to
time by the Account Debtor to the Borrower for sales of all production from or allocable to
Borrower’s interest in the Properties and all other Gross Receipts into the Lockbox or directly
into the Lender Account. Borrower shall use commercially reasonable efforts to obtain and deliver,
within thirty (30) days after the closing, from all Account Debtors, an executed Notice of
Assignment of Proceeds which will instruct the Account Debtors to remit all proceeds from sales of
all production from or allocable to the Net Revenue Interest in the Properties and all other Gross
Receipts into the Lockbox or directly into the Lender Account. Lender may prohibit Borrower from
selling any Hydrocarbon production to a purchaser that refuses to execute and deliver to Lender a
Notice of Assignment of Proceeds. If Borrower receives any Gross Receipts, Borrower shall promptly
notify Lender and follow Lender’s instructions regarding submitting such proceeds to the Lockbox or
the Lender Account, and, until received by Lender, Borrower shall hold such proceeds in trust for
Lender.



     Section 6.5 Location; Records.




     (a) As long as no Default or Event of Default exists, Borrower may dispose of Equipment
in accordance with the terms of the applicable Operating Agreements and may dispose of
obsolete, broken or worn Equipment, in either case without Lender’s consent, but upon prior
written notice to Lender; provided that the proceeds of any such disposition shall (i) be
used to purchase substantially similar replacement Equipment or (ii) be delivered to Lender
to be applied pursuant to Section 2.6(c)(ii).




     (b) Except to the extent it is being used or transported in the ordinary course of
business, all Equipment owned by or on behalf of Borrower will be kept at its current
location. Borrower shall be permitted to change the location of any Equipment if Borrower
has given prior written notice of the new location to Lender and Borrower has taken all
actions necessary to maintain the perfection and priority of any Liens in favor of Lender
against such Equipment. Borrower will at all times hereafter keep correct and accurate
records itemizing and describing the location, kind, and type of all Equipment



36









 







currently
owned or hereafter acquired by Borrower, Borrower’s cost therefor, all of which records
shall be available during Borrower’s usual business hours upon demand of any officer,
employee, agent or representative of Lender.



     Section 6.6
Maintenance. Borrower will (a) keep all of its Equipment in good condition, repair, and working order
(ordinary wear and tear excepted), substantially in accordance with any manufacturer’s manual, if
applicable; (b) not misuse, abuse, waste, destroy or endanger the Equipment; (c) promptly, or in
the case of any loss or damage to the Equipment, make or cause to be made all repairs, replacements
or other improvements to the Equipment that are sufficient to continue the operation of Borrower’s
business; and (d) will not use any Equipment in violation of any law, statute, ordinance, or
legislation or allow it to be so used.



     Section 6.7
Dispositions. Where Borrower is permitted to dispose of any Equipment under this Agreement or by consent
thereto hereafter given by Lender, Borrower shall do so in an arm’s length transaction, in good
faith and by obtaining a commercially reasonable price therefor and without impairing the operating
integrity of its remaining Equipment.



ARTICLE VII



COVENANTS OF BORROWER





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






     (a) Payment and Performance. Subject to Section 2.6, Borrower will pay all
amounts due to Lender under the Loan Documents in accordance with the terms hereof and
thereof and will observe, perform and comply with every covenant, term and condition in the
Loan Documents and will use its commercially reasonable efforts to cause each Affiliate to
observe, perform and comply with every covenant, term and condition in the Loan Documents to
which it is a party.




     (b) Compliance with Tax Laws. Borrower shall comply with all federal, state or
local laws and regulations regarding the collection, payment and deposit of employee income,
employment, and social security and sales and use taxes and royalty payments.




     (c) Books, Financial Statements and Reports. Borrower will at all times
maintain full and accurate books of account and records and a standard system of accounting
and will furnish the following statements and reports to Lender at Borrower’s expense:




     (i) As soon as available, and in any event within ninety (90) days after the
end of each Fiscal Year, complete consolidated audited financial statements of
Guarantor, prepared in reasonable detail in accordance with GAAP by a mutually
agreeable independent accounting firm (Meaden & Moore, Ltd.). These financial



37









 







statements shall contain a balance sheet as of the end of such Fiscal Year and
statements of operations, and cash flows, and changes in shareholders’ capital
accounts for such Fiscal Year, subject to changes resulting from normal year-end
adjustments, each setting forth in comparative form the corresponding figures for
the preceding Fiscal Year.




     (ii) As soon as available, and in any event within sixty (60) days after the
end of each Fiscal Quarter, Guarantor’s consolidated balance sheet as of the end of
such Fiscal Quarter and consolidated statements of Guarantor’s earnings and cash
flows for the period from the beginning of the then current Fiscal Year
to the end of such Fiscal Quarter, all in reasonable detail and including
consolidating statements on the Borrower.




     (iii) Within ninety (90) days after the end of each Fiscal Year, a comfort
letter prepared by a mutually agreeable independent accounting firm (Meaden & Moore,
Ltd.) confirming that such firm has, on behalf of Borrower, reviewed the joint
interests billings (“JIBs”), if any, charged to Borrower by the Operator or
by Borrower as the Operator during the prior Fiscal Year and confirmed that the JIBs
presented to Borrower by Operator or by Borrower as the accurately account for the
amounts owed by and to Borrower under the applicable Operating Agreements during
that period.




     (iv) Within three (3) Business Days after receipt by Borrower, copies of all
reports and other information provided by any other Person to Borrower in connection
with the Loan Documents. Borrower may arrange for such reports and information to
be provided directly to Lender by the Person providing the same to Borrower.




     (v) Within three (3) Business Days after the end of each Fiscal Quarter, a
report setting forth any change in the list of Purchasers of Hydrocarbons listed on
Schedule 4.1(s).




     (vi) Contemporaneously with the financial statements delivered pursuant to
subparts (i) and (ii) above, Borrower shall deliver a Compliance Certificate. Upon
Lender’s written request, Borrower shall deliver the same financial statements for
Borrower which are required under subparts (i) and (ii) for the Guarantor (in
addition to those delivered for the Guarantor).




     (d) Other Information and Inspections.




     (i) Borrower will furnish to Lender any information which Lender may from time
to time reasonably request concerning any covenant, provision or condition of the
Loan Documents or any matter in connection with Borrower’s assets, business and/or
operations. Borrower will permit representatives appointed by Lender (including
independent accountants, agents, attorneys, appraisers and any other Persons) to
visit and inspect, during reasonable business hours and upon two (2) Business Days
written notice, any of Borrower’s property,



38









 







including its books of account, other
books and records, and any facilities or other business assets, and to make extra
copies therefrom and photocopies and photographs thereof, and to write down and
record any information such representatives obtain, and Borrower shall permit Lender
or its representatives to investigate and verify the accuracy of the information
furnished to Lender in connection with the Loan Documents and to discuss all such
matters with its officers, employees and representatives.




     (ii) Lender agrees to maintain the confidentiality of the information received
from Borrower relating to Borrower and its business which is clearly
identified at the time of delivery as confidential (“Confidential
Information”). Information is not confidential if it is available to Lender on
a non-confidential basis prior to disclosure by Borrower.




     (iii) Confidential Information may be disclosed by Lender (or by Lender’s
representatives, including independent accountants, agents, attorneys, appraisers
and any other Persons) to its (A) Affiliates and its Affiliates’ respective
partners, directors, officers, employees, agents, advisors and representatives, (B)
to the extent required by applicable laws or regulations or by any subpoena or
similar legal process, and (C) in connection with the exercise of any remedies
hereunder or under any other Loan Document or any action or proceeding relating to
this Agreement or any other Loan Document or the enforcement of rights hereunder or
thereunder.




     (iv) For purposes of this Section, any Person required to maintain the
confidentiality of the Confidential Information as provided in this Section shall be
considered to have complied with its obligation to do so if such Person has
exercised the same degree of care to maintain the confidentiality of such
Information as such Person would accord to its own confidential information.




     (e) Reserve Reports. On or before March 31 of each year (but effective as of
the preceding December 31) and on or before September 30, of each year (but effective as of
the preceding July 31), commencing on March 31, 2008 Borrower, at its own expense, shall
cause the preparation and delivery to Lender of petroleum engineering reports in a form
reasonably satisfactory to Lender (collectively, the “Reserve Report”). Lender may
in its sole discretion also request at least one additional Reserve Report during the course
of each calendar year, which shall update the last Reserve Report previously delivered by
Borrower with an effective date of no earlier than 90 days prior to the date of delivery of
such additional Reserve Report. Each Reserve Report to be delivered by Borrower hereunder
shall be prepared by an Engineer; provided that, with regard to the effective March 31, 2008
Reserve Report and thereafter, Lender approves Schlumberger as the Engineer unless for
periods following March, 2008, Lender provides Borrower 60-day prior written notice that
Lender does not consider Schlumberger as a satisfactory Engineer. All Reserve Reports
required by this paragraph shall be prepared at Borrower’s sole expense. Each Reserve
Report provided by Borrower shall set forth updated estimates of Proved Reserves which are
further categorized as Proved Developed Producing Reserves, Proved Developed Non-Producing
Reserves, Proved Undeveloped



39









 







Reserves, and shall also set forth projected production
profiles and overall economics of the Properties. Furthermore, the additional parameters
and guidelines set forth on Schedule 7.1(e) shall also be applied in the preparation of each
Reserve Report provided by Borrower. Each Reserve Report provided by Borrower will be based
on the following assumptions:




     (i) Oil and gas pricing used will be determined by Lender in its sole
discretion, based in part on Forward NYMEX Market Prices reduced by (A) the
historical average basis differential between the pricing employed by independent
third-party over-the-counter counterparties compared to the prevailing wellhead
prices at the production location and (B) any other adjustments as may be
necessary including but not limited to gathering, transportation, and processing
fees.




     (ii) Average lease or other applicable operating expenses and production taxes
will be derived by the Engineer(s) who prepare such report from the Operator’s best
estimate and historical operating expenses, subject to Lender’s approval.




     (f) Notice of Investigations or Proceedings. Borrower shall give Lender
immediate written notice of any proceeding at law or in equity against Borrower or any of
its Affiliates or affecting any of the Collateral, or any investigation or proceeding before
or by any administrative or governmental agency.




     (g) Notice of Damage to Collateral. Borrower shall give Lender prompt written
notice of any destruction or substantial damage to any of the Collateral and of the
occurrence of any condition or event which has caused, or may cause, material loss or
depreciation in the value of any Collateral.




     (h) Maintenance of Licenses. Borrower shall maintain all material licenses,
permits, charters and registrations which are required for the conduct of their businesses.




     (i) Maintenance of Rights. Borrower will maintain, preserve, protect and keep
all of its material contractual and property rights, other than in connection with the Loan
Documents and will not waive, amend or release any such rights without the prior written
consent of Lender, which consent will not be unreasonably withheld.




     (j) Maintenance of Existence and Qualifications. Borrower will maintain and
preserve its Business Entity existence and its material rights and franchises in full force
and effect and will qualify and/or remain qualified to do business as a foreign Business
Entity in all states or jurisdictions where the failure to do so could reasonably be
expected to have a Material Adverse Effect.




     (k) Payment of Trade Debt. Borrower will (i) timely pay all taxes, assessments
and other governmental charges or levies imposed upon it or upon its income, profits or
property, except those being contested in good faith and by appropriate proceedings
diligently conducted, if adequate reserves with respect thereto are maintained on the books
of Borrower in accordance with GAAP; (ii) within 60 days after



40









 







the same becomes due pay all
Indebtedness (other than the Obligations) owed by it; and (iii) maintain appropriate
accruals and reserves for all of the foregoing Indebtedness in accordance with GAAP.




    (l) Creditors. Promptly upon Lender’s request, Borrower shall provide Lender
with a statement showing the identity of Borrower’s creditors, the amount due to each and
the date each payment is due thereunder. Borrower shall notify Lender immediately if
Borrower fails to timely make any payment to lessors, suppliers, vendors, owners of royalty
interest, tax authorities or other Persons, where such nonpayment could
result in any Lien against any item of Collateral or otherwise interfere with or
jeopardize performance by Borrower of its obligations under the Loan Documents.




    (m) Interest. Borrower hereby promises to pay interest to Lender on all
Obligations (including Obligations to pay fees or to reimburse or indemnify Lender) at the
Interest Rate with respect to the principal amount of the Loans as set forth in Section 2.2
and otherwise as stated in Section 7.1(ee) after such Obligations become due.




    (n) Compliance with Regulations, Orders and Law. Borrower will conduct its
business and affairs in compliance with all material laws, regulations and orders applicable
thereto, including without limitation, Environmental Laws, ERISA and the regulations of any
state or federal agency which has jurisdiction over the exploration and production
activities to be conducted on any Property.




    (o) Insurance. Borrower shall keep or cause to be kept all of the Collateral
that are fixtures or personal property insured for their current value (or such coverage as
is commercially reasonable and customary within the oil and gas industry) by insurance
companies licensed to do business in the states in which the Properties are located against
loss or damage by fire or other risk usually insured against by owners or users of similar
properties in similar businesses under extended coverage endorsement and against theft,
burglary and pilferage, together with other insurance covering such other hazards as Lender
may from time to time request, in amounts in accordance with industry standards and from
companies satisfactory to Lender. Borrower shall deliver the policy or policies of such
insurance or certificates of insurance to Lender and such policies and all proceeds thereof
shall be security for all Obligations. All such insurance shall contain endorsements in
form satisfactory to Lender showing Lender as a loss payee or additional party insured as
its interest may appear; provided that Lender shall not be named as an additional insured or
loss payee on the policies described in this Section 7.1(o) to the extent such policies
apply to vehicles or worker’s compensation. The following types of insurance covering the
Collateral and the interest and liabilities incident to the ownership, possession and
operation thereof shall be secured by Borrower or as applicable, by the Operator of the
Properties, on Borrower’s behalf:




     (i) To the extent Borrower has employees, worker’s compensation insurance and
employer’s liability insurance covering the employees of Borrower engaged in
operations contemplated hereunder in compliance with all applicable state and
federal law and endorsed to provide all states coverage and occupational disease
coverage;



41









 






       (ii) Comprehensive general liability insurance with combined single limit of
not less than $1,000,000 per occurrence, and $2,000,000
in the aggregate and
endorsed to provide coverage for explosion, collapse and underground damage hazards
to property of others, contractual liability, products and completed operations, and
for damage to underground resources, and accidental pollution, bodily injury and
property damage coverage in sufficient amounts to meet umbrella underlying
requirements;




       (iii) Comprehensive automobile liability insurance covering all owned, hired or
non-owned vehicles with a combined single limit of not less than $500,000 per
occurrence;




       (iv) Excess umbrella liability insurance with a combined single limit of not
less than $10,000,000 per occurrence and policy aggregate;




       (v) Worker’s compensation insurance covering all persons employed by Borrower,
the Operator or their respective agents or subcontractors of any tier in connection
with any construction affecting the Collateral, including, without limitation, all
agents and employees of Borrower, the Operator and their respective subcontractors
with respect to whom death or bodily injury claims could be asserted against
Borrower;




       (vi) Pollution control insurance not less than $1,000,000 per occurrence and
$2,000,000 in the aggregate; and




      (vii) If requested by Lender, well control insurance (including coverage for
costs of redrilling) in an amount per occurrence satisfactory to Lender, and
builder’s risk insurance.




     (p) Policy Counterparts or Certificates of Insurance. Borrower shall deliver
to Lender valid counterparts of all insurance policies and all endorsements thereto (or, at
its option, valid certificates of such insurance) which are required hereunder to be
obtained and maintained by Borrower or the Operator.




     (q) Prudent Operations. Borrower shall prudently develop, or use its
commercially reasonable efforts to cause the Properties to be continuously operated and
maintained to produce the output from or allocable to such Property over the productive life
thereof in a good and workmanlike manner consistent with prudent operator practices.




     (r) Maintenance of Leases. As to Borrower-operated Properties, Borrower shall
use commercially reasonable efforts as a prudent operator (or use its commercially
reasonable efforts as to Non-Operated Properties) to keep and perform all of the terms,
conditions and covenants of the Leases constituting Properties which are to be kept and
performed by the lessee for the benefit of the Lender and the holder of the Royalty
Interests.



42









 






     (s) Weekly Field Activity and Production Reports. Borrower shall provide
Lender, to the extent possible, by telecopy or e-mail, a weekly report on Tuesday of each
week detailing all drilling, completions and workovers in relation to capital expenditures
for the preceding week with respect to the Properties and all costs and expenses associated
with such activities and (ii) quantities and types of Hydrocarbons produced from or
allocable to each of the Properties; all of the foregoing to be in form and substance
satisfactory to Lender.




     (t) Monthly Review Conference. At Lender’s request, within fourteen (14) days
after Borrower has submitted to Lender each monthly Property Operating Statement pursuant to
Section 2.6, representatives of Lender and Borrower shall hold a teleconference at a
mutually acceptable time to conduct a monthly review conference that will focus on, among
other things, the data contained in the most recently submitted Property Operating Statement
and such other operational and financial data and information as Lender may reasonably
request.




     (u) Operating Reports. Concurrently with the delivery of the financial
statements delivered in accordance with Section 7.1(c)(i), Borrower shall provide Lender
with a rolling revenue, lease and other operating expense and capital expenditure forecast
by month covering Borrower’s interest in the Properties for the succeeding 12-month period
(“Operating Report”). Such Operating Reports shall include a brief discussion by
Borrower of operating and financial variances from the prior Operating Report delivered to
Lender.




     (v) AFEs. Borrower shall provide Lender with all AFEs, each setting forth an
estimate of work to be done, each of which shall be supported by appropriate invoices, bids,
estimates, contracts or other support, prior to commencing the activity contemplated by such
AFE.




     (w) Hydrocarbon Production Swap Agreements. Borrower will from time to time,
upon three (3) Business Days’ notice by Lender, enter into one or more Hydrocarbon price
swaps pursuant to a Permitted Swap Agreement in form and substance reasonably satisfactory
to Lender (or additional confirmations under Existing Permitted Swap Agreements), such that
volumes equal approximately seventy five percent (75%) of Borrower’s interest share of the
Proved Developed Producing Reserves scheduled to be produced during the term of this
Agreement (based upon the most recent Reserve Report), but not necessarily beyond the Loan
Termination Date are dedicated to the Permitted Swap Agreements or such other price risk
management program as approved by Lender; provided that, if projected Net Revenue plus any
other applicable revenue applied to Debt Service, is insufficient to fully amortize the
Loans by their stated maturity, Lender may require that Borrower enter into one or more such
swaps for a term or terms that extend beyond the Loan Termination Date. Borrower and Lender
shall make commercially reasonable efforts to agree upon a swap strategy that will most
accurately reflect the make-up and pricing of the Hydrocarbons produced and sold by
Borrower, but if the parties are unable to agree on the swap strategy, Borrower shall not be
released from its obligation to implement the Permitted Swap Agreement(s) required by this
Section 7.1(w).



43









 






     (x) Post-Closing Title Opinions. Borrower will deliver to Lender, within sixty
(60) days following Closing, Title Opinions that are satisfactory to Lender covering
Hydrocarbon Interests comprising 50% of the PW10 of Borrower’s Proved Developed Producing
Reserves in the Properties and 50% of the PW10 of Borrower’s other Proved Reserves in the
Properties and, within thirty (30) days following such 60-day period, Title Opinions that
are satisfied to Lender covering Hydrocarbon Interests comprising an additional 30% of the
PW10 of Borrower’s Proved Developed Producing Reserves in the
Properties and an additional 30% of the PW10 of Borrower’s other Proved Reserves in the
Properties (for a combined total of 80% in each case), at each such time showing Defensible
Title to the Properties in Borrower subject only to: (i) a first priority lien created by
the Mortgage in favor of Lender, (ii) the Royalty Interests and (iii) the Permitted
Encumbrances, and otherwise satisfactory in form and substance to Lender.




     (y) Fees and Expenses Borrower will pay, on or before the Closing Date, all
reasonable third-party and out-of-pocket costs, fees and expenses incurred by Lender in
connection with this Agreement, including, without limitation, all title, due diligence,
environmental, engineering, technical, travel, legal and related expenses incurred by Lender
in connection with this Agreement and the Loan Documents and the transactions contemplated
thereunder (to be financed by Lender as a portion of the Initial Loan). After the Closing
Date, Borrower will, from time to time, pay or reimburse Lender for all expenses incurred in
connection with the administration, amendment or enforcement of this Agreement, including,
without limitation, any subsequent amendment, mortgage, extension, release or renewal of any
Loan Document or the legal expenses attributable to the enforcement of the same, all
continuing or additional title, due diligence, environmental, engineering, and technical
expenses, all expenses incurred in connection with division orders, any travel expenses, and
all legal and related expenses incurred by Lender in connection therewith.




     (z) Environmental Compliance. Within sixty (60) days of Closing, Borrower
shall remedy or cause to be remedied all matters set forth in any Environmental Report and
any environmental compliance issues listed on Schedule 4.1(q) (including the implementation
of a spill prevention control and countermeasure plan at the Delta compression facility) so
as to be in compliance with all applicable Environmental Laws.




     (aa) Facility Fee. Borrower agrees to pay to Lender a Facility Fee in
consideration of Lender’s commitment to make the Loans. Each time Lender advances a Loan, a
Loan in the amount of an additional Facility Fee will be earned and Borrower shall be deemed
to have requested that Lender advance to Borrower such additional Facility Fee on such date,
with such additional Facility Fee having been contemporaneously paid by Borrower to Lender.
Any portion of the Facility Fee that is determined to be interest in excess of the maximum
non-usurious interest that Lender is permitted under applicable law to contract for, take,
charge, or receive from Borrower shall be automatically credited to principal amount owing
under the Note, effective as of the date such portion is received by Lender.




     (bb) D&A Operations. Borrower shall submit a Request for Commitment with the
applicable AFE(s) and other supporting materials to Lender for the proposed D&A



44









 







Operation(s)
for which it seeks funding hereunder. With respect to all D&A Operations that are approved
by Lender as set forth in Section 2.1, Borrower shall conduct all such D&A Operations
substantially in accordance with and within the cost and time parameters specified in the
Request for Commitment specific to those D&A Operations; provided that, Lender is not
obligated to commit funds for D&A Operations except as specifically described in Section 2.1
for any specific D&A Operations, including any associated cost overruns; and provided
further that if Borrower is unable to conduct all
such D&A Operations within the amounts funded as the D&A Loans plus the variance
allowance, both as described in the specified Request for Commitment, Borrower shall use its
own capital (or any unused surplus of any prior D&A Loan to the extent permitted hereunder)
to conduct and complete all such D&A Operations. Borrower’s intent, willingness and ability
to conduct each of the D&A Operations and the actual implementation of such D&A Operations
is a material inducement to Lender’s entry into this Agreement, in the absence of which
Lender would not have done so. Time is of the essence in the proposal and conduct by
Borrower of each of the D&A Operations approved by Lender.




     (cc) Protection Against Drainage. Until the Obligations have been fully and
finally paid and performed, (i) to the extent that Properties are operated by Borrower,
Borrower shall act as a prudent operator in an effort to identify and prevent the occurrence
of any drainage of Hydrocarbons from the Properties and (ii) to the extent that Properties
are not operated by Borrower, Borrower shall, or use commercially reasonable efforts to
cause the Operator to, utilize its property and contractual rights as a prudent owner in an
effort to identify and prevent the occurrence of any drainage of Hydrocarbons from the
Properties, other than in the ordinary course of operations in accordance with industry
practice and procedure.




     (dd) Expenditures Related to Initial Loans. On or before ten (10) days
following Lender’s issuance of advances under the Initial Loans, Borrower will deliver to
Lender a report which provides an itemized and detailed description of the expenditures paid
to be paid and/or for which Borrower was reimbursed with the Initial Loan proceeds, together
with all relevant documentation evidencing such expenditures.




     (ee) Interest on Lender’s Third Party Costs, Expenses and Fees. All
third-party costs, fees and expenses incurred by Lender for which Borrower is obligated to
pay or reimburse Lender pursuant to the provisions of this Agreement which are not paid on
or before the Closing Date in accordance with Section 7.1(y) shall be payable within fifteen
(15) days after Borrower’s receipt of an invoice therefor from either Lender or its
third-party consultants or vendors, and if not paid within fifteen (15) days after
Borrower’s receipt of such invoice, Borrower shall pay interest, after as well as before
judgment, at the Default Rate from the date payable until paid on all such amounts.




     (ff) Administration Fee. At Closing, and on the first day of each Fiscal
Quarter, Borrower shall pay to Lender an administration fee in the amount of $5,000
(“Administration Fee”). The initial Administration Fee shall be deemed advanced by
Lender to Borrower on the Closing Date as part of the Initial Loan and paid by Borrower to
Lender contemporaneously therewith, and each subsequent Administration Fee shall



45









 







be paid by
Borrower to Lender pursuant to Section 2.6. Each Administrative Fee shall be used by Lender
for incidental administrative matters on behalf of Borrower and any such fees shall not be
reimbursable to Borrower. If such fees exceed $5,000 during any Fiscal Quarter, such
expenses shall be payable by Borrower to Lender pursuant to Section 7.1(y).




     (gg) Further Assurances. Borrower agrees, upon request of Lender and at
Borrower’s expense, to furnish to Lender such information, to execute and deliver to Lender
such documents, and to do such other acts and things, all as Lender may reasonably request.



     Section 7.2
Negative Covenants. Borrower warrants, covenants and agrees that until the full and final repayment and
performance of the Obligations (other than Obligations under the Royalty Interest Conveyance, and
indemnity obligations and similar obligations that survive the termination of the Loan Documents)
and the termination of each of the Loan Documents (other than the Royalty Interest Conveyance):




     (a) Limitation on Sales of Collateral. Borrower will not sell, transfer,
lease, exchange, alienate or otherwise dispose of any Collateral or any interest therein
except for: (i) sales of Hydrocarbon production in the ordinary course of business, (ii)
dispositions expressly permitted by other provisions of this Agreement, including under
Section 6.5, and (iii) dispositions to which Lender has granted its express written consent.




     (b) Limitation on Distributions. Borrower shall not, either directly or
indirectly, make any distribution, pay any compensation, or make any advances to any of its
shareholders; provided that nothing in this subpart (b) shall prevent or prohibit Borrower
from making payments (i) permitted by Section 7.2(e) to officers, directors and employees
who are also shareholders of Borrower, or (ii) professional fees to Borrower’s legal
counsel.




     (c) Limitation on Credit Extensions. Borrower will not extend credit, make
advances or make loans to any Person other than in the ordinary course of business, unless
approved by Lender in writing.




     (d) Certain Contracts; Amendments; ERISA Plans. Without Lender’s prior written
approval, Borrower will not amend or permit any amendment to any contract or lease which
releases, qualifies, limits, makes contingent or otherwise detrimentally affects the rights
and benefits of Lender under or acquired pursuant to any Loan Documents. Borrower will not,
and will not permit any ERISA Affiliate to, incur any fixed or contingent obligation to
contribute to any ERISA Plan. Without Lender’s approval, no material modification of any
Benefit Plan will be made and no new Benefit Plan will be established, except in the
ordinary course of business. Without Lender’s prior written approval, Borrower will not (i)
amend or modify any term of, or cancel or terminate, any Material Contract in any manner
that would have a material adverse effect on Lender or (ii) enter into any Swap Agreement,
except for Permitted Swap Agreements.



46









 






     (e) Compensation. Borrower shall not, directly or indirectly, enter into any
employment agreement or other arrangement with or for the benefit of an officer, director
or employee of Borrower other than reasonable compensation for services as an officer,
director, employee or third-party provider of services.




     (f) Debt. Except for Indebtedness arising in connection with Permitted
Encumbrances or as otherwise expressly provided in Schedule 4.1(h) or this Section 7.2(f)
(and subject to any Subordination Agreement), Borrower shall not (i) create, incur, assume
or suffer to exist any Indebtedness, except (A) Obligations to Lender hereunder, (B)
Indebtedness incurred under any Permitted Swap Agreement, and (C) trade payables incurred in
the ordinary course of Borrower’s business, or (ii) sell, discount or factor its accounts,
instruments, intangibles, leases or chattel paper; provided, however, Borrower may incur
Indebtedness not to exceed $25,000 per transaction and an aggregate amount not to exceed
$75,000 at any time outstanding with regard to direct costs and expenses incurred in the
operation of the Properties.




     (g) Guarantees. Except as expressly provided herein, Borrower shall not
assume, guaranty, or endorse or otherwise become directly or contingently liable in
connection with any other liability of any other Person except for the indemnification
contained herein and customary indemnification to directors, managers, officers and
employees and normal and customary provisions in contracts entered into in the ordinary
course of business in connection with operating the Oil and Gas Properties.




     (h) Mergers and Acquisitions. Borrower shall not (i) merge into or consolidate
with another Person or sell, lease or otherwise dispose of all or substantially all of its
assets, or (ii) acquire or commit or agree to acquire any of the stock, securities or
material assets of any other Person other than (A) as disclosed in writing to, and approved
by, Lender, not unreasonably withheld, in connection with Borrower’s acquisition of any of
the Properties, (B) any assets directly for use on the Properties in the ordinary course of
business, or (C) those acquisitions permitted as D&A Operations.




     (i) Cancellation of Claims. Borrower shall not cancel any claim or
Indebtedness owed to Borrower in excess of $15,000 in the aggregate during any Fiscal Year
during the term of this Agreement, except for reasonable consideration and in the ordinary
course of its business.




     (j) Defaults. Borrower shall not default under any material lease, mortgage,
deed of trust or lien on real estate owned or leased by Borrower including any default that
would result in a Default or an Event of Default.




     (k) Security Interests and Liens. Borrower shall not permit any Lien to exist
or consent to the filing of any instrument creating any Lien on any of the Collateral other
than the Liens created by the Loan Documents granted herein and Permitted Encumbrances.




     (l) Creation of Subsidiary. Borrower shall not (i) create any direct or
indirect subsidiary or divest itself of any material assets by transferring them to any
future



47









 







subsidiary or by entering into a partnership, joint venture or similar arrangement,
(ii) make any material change in its capital structures, or (iii) enter into any management
contract permitting a third party any management rights with respect to Borrower’s
business.




     (m) Certain Changes. Unless Borrower gives Lender ten (10) Business Days prior
written notice, Borrower shall not transfer its principal office or its registered offices
from its current location or change its name.




     (n) Loan Documents. Borrower shall not alter, amend or cause the alteration or
amendment of any of the Loan Documents without the prior written consent of Lender.




     (o) Amendments to Formation Documents and Material Contracts. Borrower shall
not adopt any amendment, modification or waiver of any provision of its (i) Governing
Documents or (ii) Material Contracts that could reasonably be expected to have a material
adverse effect on Lender or on Borrower’s ability to perform its obligations hereunder.




     (p) Investments. Without Lender’s prior written consent, Borrower will not
make, or suffer to exist, any Investment except (i) Investments in overnight funds,
certificates of deposit and/or other obligations of (A) national banks, (B) any trust
company having capital, surplus and undivided profits of at least $100,000,000, (C) issuers
of commercial paper rated not less than A-1 by Standard & Poors or P-1 by Moody’s Investors
Service at the time of purchase by Borrower and/or (D) obligations of the United States
government or any agency thereof, and (ii) the current, but not additional, Investments in
Subsidiaries in existence as of the date hereof.




     (q) Change of Operator. Borrower shall not resign as Operator of the
Properties and shall not take any action to appoint, replace or remove any Operator of any
of the Non-Operated Properties without Lender’s prior written consent or instructions.




     (r) Affiliate Transactions. Borrower shall not enter into any transactions
with any Affiliate of Borrower, except with Lender’s prior written approval and then only to
the extent the terms of any such transaction are fair and reasonable (at least as favorable
as would be obtainable by Borrower at the time in a comparable arm’s length transaction with
a Person other than an Affiliate).




     (s) Ratios. Borrower shall not permit at any time (i) its current liabilities
(excluding from the calculation of current liabilities the Loans and any required
mark-to-market of unliquidated commodity-hedge contracts required under FASB 133) to exceed
its current assets (excluding from the calculation of current assets any required
mark-to-market of unliquidated commodity-hedge contracts required under FASB 133),
calculated in accordance with GAAP, and (ii) its Loan to Value Ratio to be greater than (A)
1.0 to 1.0 for the period commencing on September 30, 2008 (based on the Reserve Report
dated effective July 31, 2008) through and including, March 31, 2010 (based on the Reserve
Report dated effective December 31, 2009), or (B) 0.7 to 1.0 at any time thereafter.



48









 






     (t) Swap Agreements. Borrower shall not enter into any Swap Agreement other
than (i) with an Approved Counterparty, and (ii) with the consent of Lender.



ARTICLE VIII



FURTHER RIGHTS OF LENDER




     Section 8.1
Maintenance of Security Interests. Borrower authorizes Lender to execute alone any financing statement or other documents or
instruments that Lender may reasonably require under Section 6.2 to perfect, protect or establish
any Lien hereunder or under any Security Documents and further authorizes Lender to sign Borrower’s
name on the same. Borrower hereby authorizes Lender, during the continuance of any Event of
Default, to appoint such Person or Persons as Lender may designate as its agent and
attorney-in-fact to endorse the name of Borrower on any checks, notes, drafts or other forms of
payment or security that may come into the possession of either Lender or any Affiliate of Lender,
to sign Borrower’s name on invoices or bills of lading, drafts against customers, notices of
assignment, letters in lieu, verifications and schedules and, generally, to do all things necessary
to carry out this Agreement and the Security Documents. The powers granted herein, being coupled
with an interest, are irrevocable during the term hereof or so long as any obligations are due and
owing to Lender. Neither Lender nor the agent and attorney-in-fact shall be liable for any act or
omission, error in judgment or mistake of law so long as the same is not malicious or grossly
negligent. Upon payment and performance of all Obligations of Borrower to Lender (other than
Obligations under the Royalty Interest Conveyance and indemnity obligations and similar obligations
that survive the termination of the Loan Documents), such power of attorney shall terminate without
any required action by Lender or Borrower.



     Section 8.2
Performance of Obligations. In the event that Borrower fails to purchase or maintain insurance in accordance with the
requirements of this Agreement, or to pay any tax, assessment, government charge or levy, except as
the same may be otherwise permitted hereunder, or in the event that any Lien prohibited hereby
shall not be paid in full or discharged, or in the event that Borrower shall fail to perform or
comply with any other covenant, promise or Obligation to Lender hereunder or under any Loan
Document, Lender may, but shall not be required to, perform, pay, satisfy, discharge or bond the
same for the account of Borrower, and all funds so paid by Lender, including, without limitation,
reasonable attorneys’ fees and disbursements, shall be treated as an additional Obligation of
Borrower to Lender hereunder and under the Loan Documents.



     Section 8.3
Access to Collateral. In addition to Lender’s rights under Section 7.1(d), upon the occurrence and during the
continuance of an Event of Default, Lender may (a) enter Borrower’s premises during normal standard
business hours; and (b) until it completes the enforcement of its rights in the Equipment or other
Collateral subject to its Lien and the sale or other disposition of any property subject thereto,
take possession of such premises without charge, rent or payment therefor, or place custodians in
control thereof, remain on such premises and use the same and any of Borrower’s Equipment and other
Collateral for the purpose of completing any work in process, preparing any Collateral for
disposing of or collecting any Collateral.






     Section 8.4 Royalty Interests.



49









 






     (a) At Closing, Borrower shall execute and deliver to Lender a Royalty Interest
Conveyance granting to Lender:




     (i) an overriding royalty interest in and to the Leasehold Interests described
on Exhibit A equal to one percent (1.0%) of 8/8ths, proportionately reduced to
Borrower’s Working Interest;




     (ii) a royalty interest in and to the Fee Interests more particularly described
on Exhibit A equal to one percent (1.0%) of 8/8ths of such interests; and




     (iii) a royalty interest or overriding royalty interest, as applicable, in the
Wells described on Exhibit A (and related Units) equal to an additional four percent
(4.0%) of 8/8ths of such interests (for Leasehold Interests, proportionately reduced
to Borrower’s Working Interest).




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




     (c) After the Initial Termination Date and thereafter so long as the Obligations remain
outstanding (other than the obligations under any Royalty Interest Conveyance), Borrower
shall grant to Lender a royalty interest in and to Fee Interests and an overriding royalty
interest in and to Leasehold Interests covering such interests, in each case, acquired after
the Closing Date equal to one percent (1.0%) of 8/8ths (for Leasehold Interests,
proportionately reduced to Borrower’s Working Interest).




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




50









 






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





ARTICLE IX



CLOSING; CONDITIONS TO CLOSING




     Section 9.1
Closing. Subject to the conditions set forth in this Agreement, the closing shall occur at a
mutually agreeable time on or before July 27, 2007 (the “Closing”). The date the Closing
actually occurs is hereby called the “Closing Date.” The Closing shall be held at the
offices of Lender’s counsel in Houston, Texas, or at such other place as Borrower and Lender may
agree in writing.



     Section 9.2
Conditions to Closing. As conditions precedent to the making of the Initial Loan hereunder and to the making of
any other Loans, Lender shall have obtained approval of its management and its lenders, and
Borrower shall deliver to Lender the following items duly executed (where required) and in form and
substance satisfactory to Lender and its counsel:




     (a) the Note and multiple counterparts of this Agreement;




     (b) the Royalty Interest Conveyance(s), Mortgage, Security Agreement, Guaranty, Letters
in Lieu, Royalty Interest Letters in Lieu and the other Loan Documents and in as many
counterparts as Lender may require;




     (c) a certificate of the secretary or assistant secretary of Borrower dated the Closing
Date, certifying (i) the incumbency of its officers executing this Agreement, the Loan
Documents and any other documents required hereby, (ii) resolutions adopted by the Governing
Body of Borrower authorizing Borrower’s execution and delivery of this Agreement, the Note,
the Security Documents, the other Loan Documents and all other documents and instruments
contemplated by this Agreement to which they are parties;




     (d) a certificate of an officer of Borrower dated the Closing Date, certifying the
truth and accuracy of the representations and warranties of Borrower set forth in this
Agreement and the other Loan Documents and Borrower’s performance and compliance with all
agreements and covenants required by this Agreement to be performed or complied with prior
to the making of the Loans;




     (e) a certificate of an officer of Borrower dated the Closing Date, certifying the
truth and accuracy of the following lists to be provided by Borrower: (i) a list of all
mechanics’ and materialmen’s liens (and other similar liens), and liens under operating and
similar agreements, to the extent the same relate to expenses incurred in the ordinary



51









 







course of business; (ii) a list of statutory liens for taxes which are not yet delinquent;
and (iii) a list of all outstanding Indebtedness of Borrower and other outstanding
Indebtedness of Borrower individually in excess of $10,000;




     (f) the Governing Documents of Borrower, all certified by an officer of Borrower;




     (g) certificates, as of the most recent dates practicable, of the Secretary of State of
Formation attesting to Borrower’s existence, and of each state in which Borrower is
qualified to do business as a Business Entity specified in the preamble hereof, attesting to
such qualification;




     (h) certificates, as of the most recent dates practicable, of the Governing Authority
in the State of Formation attesting to Borrower’s good standing;




     (i) the written opinions of Borrower’s counsel and special local counsel, dated the
Closing Date and addressed to Lender;




     (j) evidence that Borrower has obtained or caused to be obtained insurance in
accordance with Sections 7.1(o) and (p);




     (k) title materials satisfactory to Lender establishing that Borrower owns or has
acquired Defensible Title to the Properties, subject only to Permitted Encumbrances and that
neither the Properties nor Borrower is subject to ongoing or threatened litigation;




     (l) the Pro Forma Financial Statements of Borrower as of the Closing Date;




     (m) the results of a Uniform Commercial Code search showing all financing statements
and other documents or instruments on file against Borrower from the Secretary of State of
Formation;




     (n) with regard to any D&A Loans, evidence satisfactory to Lender that all conditions
and requirements set forth in Section 2.1 have been satisfied;




     (o) a Permitted Swap Agreement under which volumes equal approximately seventy five
percent (75%) of Borrower’s interest share of the Proved Developed Producing Reserves
scheduled to be produced during the term of the Permitted Swap
Agreement (based upon the most recent Reserve Report),with a tenor of at least 2 years,
and a price not less than $7.00 per mmbtu; and




     (p) such other documents and instruments as Lender may reasonably request.



     Section 9.3
Conditions Precedent to Agreement. Lender shall not make any Loans available unless the following conditions precedent have
been satisfied.




     (a) There is no continuing Event of Default, Default or Tax Claim;



52









 






     (b) Borrower’s representations and warranties made in any Loan Document shall be true
and correct as if made on the date of such Loan (except to the extent that (i) the facts
upon which such representation are based have been changed by the extension of credit
hereunder or by subsequent events and circumstances not constituting violations of the other
provisions of this Agreement, or (ii) if any such representation or warranty is expressly
stated to have been made as of a specific date, as of such specific date);




     (c) Borrower shall not be in default under the terms of the Loan Documents which are
required to be performed or complied with by it on or prior to the date of such Loans;




     (d) With respect to all Loans, no law, regulation, order, judgment or decree of any
governmental authority is in effect or pending which shall enjoin, prohibit or restrain such
Loan or impose, or result in the imposition of, any adverse condition upon Lender;




     (e) With respect to all Loans, Lender shall have received all documents and instruments
which Lender has then reasonably requested as to, (i) the accuracy and validity of or
compliance with all representations, warranties and covenants made by any Person in any Loan
Document, (ii) the satisfaction of all conditions contained herein or therein, and (iii) all
other matters pertaining hereto and thereto. All such additional documents and instruments
shall be satisfactory to Lender in form, substance, and date;




     (f) Lender shall have received satisfactory due diligence analysis including, but not
limited to, financial and operational data, title and environmental review, data regarding
litigation matters, all such data to be provided by Borrower;




     (g) Lender shall have received satisfactory information regarding existing operating
agreements and all existing gas sales and oil sales agreements which will include, for gas
sales on a well-by-well basis, where applicable, transportation costs, gathering costs,
processing costs, gas stream heating content, then-current market prices for gas of similar
quality and copies of existing sales agreements and for oil sales, individual well specific
gravity of produced oil, transportation costs, sulfur content, purchase bonuses,
then-current market prices for oil of similar quality, and copies of existing sales
agreements;




     (h) Lender shall have received a fully executed and notarized Royalty Interest
Conveyance for each Royalty Interest Lender is entitled to receive and Borrower is obligated
to grant, under Section 8.4; and




     (i) No event, which has had (or could reasonably be expected to have) a Material
Adverse Effect, shall have occurred.



53









 





ARTICLE X



EVENTS OF DEFAULT AND REMEDIES




     Section 10.1
Events of Default. Each of the following events constitutes an Event of Default under this Agreement:




     (a) Borrower fails to pay any Obligation for principal or interest owing under the Note
when the same is due and payable, whether at a date for the payment of an installment or at
a date fixed for prepayment thereof;




     (b) After the Initial Termination Date, Projected Net Revenue attributable to Proved
Reserves based on any of the Reserve Reports to be delivered to Lender after the Closing
Date (after being adjusted to incorporate Lender’s then-current assumptions with respect to
pricing (including forward price assumptions of Forward NYMEX Market Prices), Expenses,
discount rates and hedges under Permitted Swap Agreements) is insufficient to fully amortize
the Loans by the last day of the 48 month period after the effective date of any such
Reserve Report and Borrowers are unable to demonstrate to Lender’s reasonable satisfaction
that Borrowers are able to fully satisfy the Obligations through a sale of the Borrowers’
assets or all of the Equity Interest in the Borrowers;




     (c) Any Loan Document at any time ceases to be valid, binding and enforceable against
Borrower for any reason other than its release or subordination made with the consent of
Lender; the Guaranty at any time ceases to be valid, binding and enforceable against
Guarantor for any reason or Guarantor defaults under the Guaranty; or Borrower, Guarantor or
any other obligor asserts that any Loan Document to which it is a party is not valid,
binding and enforceable against any such party;




     (d) Borrower fails to (i) duly observe, perform or comply with any covenant set forth
in Section 7.2 or (ii) enter into the Permitted Swap Agreement as set forth in Section 2.7
and said failure to enter into the Permitted Swap Agreement continues for a period of three
(3) Business Days after receipt of notice thereof by Borrower;




     (e) Any “Event of Default” (as defined in any Security Document) (other than an event
which is referred to in subsections (a) through (c) above) occurs under the Security
Document, and the same is not remedied within the applicable period of grace (if any)
provided in such Security Document;




     (f) Borrower fails (other than as referred to in subsections (a) through (d) above) to
duly observe, perform or comply with any covenant, agreement, condition or
provision of any Loan Document, and such failure is not remedied within thirty (30)
days of the time at which Borrower receives notice from Lender;




     (g) Any representation or warranty previously, presently or hereafter made in writing
by or on behalf of Borrower or Guarantor in connection with any Loan Document shall prove to
have been false or incorrect in any material respect on any date on or as of which made;



54









 






     (h) Other than with respect to a Permitted Encumbrance, any Lien for $100,000 or more,
other than the Liens held by Lender against the Property or any portion thereof, or any Lien
resulting from a Tax Claim or otherwise, for $100,000 or more is asserted against Borrower
and such assertion is not withdrawn, formally disputed in good faith, or otherwise disposed
of within thirty days (30) thereafter;




     (i) Subject to Permitted Encumbrances, Lender shall at any time not have a perfected
first priority Lien on all or any part of the Collateral;




     (j) The Working Interest and/or Net Revenue Interest on the Properties is decreased
from those set forth in Exhibit A without the prior written consent of Lender;




     (k) Borrower:




     (i) has entered against it a judgment, decree or order for relief by a court of
competent jurisdiction in an involuntary proceeding commenced under any applicable
bankruptcy, insolvency or other similar law of any jurisdiction now or hereafter in
effect, including the federal Bankruptcy Code, as from time to time amended, or has
any such proceeding commenced against it and any such judgment, decree, order or
proceeding shall not have been dismissed within sixty (60) days; or




     (ii) commences a voluntary case under any applicable bankruptcy, insolvency or
similar law now or hereafter in effect, including the federal Bankruptcy Code, as
from time to time amended; or applies for or consents to the entry of an order for
relief in an involuntary case under any such law; or makes a general assignment for
the benefit of creditors; or fails generally to pay (or admits in writing its
inability to pay) Indebtedness as such Indebtedness becomes due; or takes action to
authorize any of the foregoing; or




     (iii) suffers the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of all or
a substantial part of its assets or of any part of the Collateral in a proceeding
brought against or initiated by it, or such appointment or taking possession is at
any time consented to, requested by or acquiesced to by it and any such appointment
shall not have been dismissed within sixty (60) days; or




     (iv) suffers the entry against it of a final judgment for the payment of money
in excess of $100,000, unless the same is discharged within sixty (60) days after
the date of entry thereof or an appeal or appropriate proceeding for review
thereof is taken within such period and a stay of execution pending such appeal
is obtained; or




     (v) suffers a writ or warrant of attachment or any similar process to be issued
by any court against all or any substantial part of its assets or any part of the
Collateral, and such writ or warrant of attachment or any similar process is not
stayed or released within sixty (60) days after the entry or levy thereof or after
any stay is vacated or set aside; or



55









 






     (vi) fails to pay any Indebtedness in excess of $100,000 (other than the
Obligations) or any interest or premium thereon, when due (whether at scheduled
maturity or by acceleration, demand or otherwise) and such failure shall continue
after the applicable grace period, if any, specified in the agreement or instrument
relating to any such Indebtedness or any other event shall occur and shall continue
after the applicable grace period, if any, specified in such agreement or
instrument, if the effect of such default or event is to accelerate or to permit the
acceleration of, the maturity of such Indebtedness (in excess of $100,000), or if,
as the result of such a default, any such Indebtedness (in excess of $100,000) shall
be declared to be due and payable, or is required to be prepaid, prior to the stated
maturity thereof; or




     (vii) fails to perform its obligations under the Royalty Interest Conveyance,
or any Permitted Swap Agreement and such failure continues beyond any applicable
grace period set forth therein; or




     (l) a Change of Control occurs with regard to Borrower; or James G. Azlein or James E.
Craddock ceases to be materially involved in the management of Borrower and another Person
acceptable to Lender does not replace such Person within ninety (90) days.



     Section 10.2 Acceleration.




     (a) Automatic Acceleration. Upon the occurrence of an Event of Default
described in Section 10.1(k)(i), (k)(ii) or (k)(iii), all of the Obligations shall thereupon
be immediately due and payable, without demand, presentment, notice of demand or of dishonor
and nonpayment, protest, notice of protest, notice of intention to accelerate, declaration
or notice of acceleration, or any other notice or declaration of any kind, all of which are
hereby expressly waived by Borrower and each obligor, if any, that at any time ratifies or
approves this Agreement, as a guarantor or otherwise. After any acceleration under this
subsection, any obligation of Lender to make any further Loans or advances of any kind under
any Loan Document shall be permanently terminated.




     (b) Other Acceleration. Upon the occurrence and during the continuance of any
Event of Default not described in the preceding Section 10.2(a), Lender may at any time and
from time to time and without notice to Borrower, declare any or all of the Obligations
immediately due and payable, and all such Obligations shall thereupon be
immediately due and payable, without demand, presentment, notice of demand or of
dishonor and nonpayment, protest, notice of protest, notice of intention to accelerate,
declaration or notice of acceleration, or any other notice or declaration of any kind, all
of which are hereby expressly waived by Borrower.



     Section 10.3
Remedies. If any Event of Default shall occur and be continuing, Lender’s obligation to make any
Loan(s) shall be suspended, and Lender may protect and enforce its rights under the Loan Documents
by any appropriate proceedings, including proceedings for specific performance of any covenant or
agreement contained in any Loan Document, and Lender may enforce the payment of any Obligations due
or enforce any other



56









 







legal or equitable right. All rights, remedies and powers conferred upon
Lender under the Loan Documents shall be deemed cumulative and not exclusive of any other rights,
remedies or powers available under the Loan Documents or at law or in equity. If any Default shall
occur and be continuing, Lender’s obligation to make any Loans shall be suspended, so long as any
such Default or resulting Event of Default is continuing.



     Section 10.4
Indemnity. BORROWER AGREES TO INDEMNIFY LENDER, UPON DEMAND, FROM AND AGAINST ANY AND ALL LIABILITIES,
OBLIGATIONS, CLAIMS, LOSSES, DAMAGES, PENALTIES, FINES, ACTIONS, JUDGMENTS, SUITS, SETTLEMENTS,
COSTS, EXPENSES OR DISBURSEMENTS (INCLUDING REASONABLE FEES OF ATTORNEYS, EXPERTS AND ADVISORS) OF
ANY KIND OR NATURE WHATSOEVER (IN THIS SECTION 10.4 COLLECTIVELY CALLED “LIABILITIES AND COSTS”)
WHICH TO ANY EXTENT (IN WHOLE OR IN PART) MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST LENDER
GROWING OUT OF, RESULTING FROM OR IN ANY OTHER WAY ASSOCIATED WITH ANY OF THE COLLATERAL, THE LOAN
DOCUMENTS OR THE TRANSACTIONS AND EVENTS INCLUDING, WITHOUT LIMITATION, THE ENFORCEMENT OR DEFENSE
THEREOF AT ANY TIME ASSOCIATED THEREWITH OR CONTEMPLATED THEREIN (INCLUDING ANY VIOLATION OR
NONCOMPLIANCE WITH ANY ENVIRONMENTAL LAWS BY ANY PERSON OR ANY LIABILITIES OR DUTIES OF ANY PERSON
WITH RESPECT TO HAZARDOUS MATERIALS FOUND IN OR RELEASED INTO THE ENVIRONMENT). THE FOREGOING
INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND COSTS ARE IN ANY WAY OR TO ANY
EXTENT CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY KIND BY LENDER PROVIDED
ONLY THAT NO PERSON SHALL BE ENTITLED UNDER THIS SECTION 10.4 TO RECEIVE INDEMNIFICATION FOR THAT
PORTION, IF ANY, OF ANY LIABILITIES AND COSTS WHICH IS CAUSED BY LENDER’S GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT. AS USED IN THIS SECTION 10.4, THE TERM “LENDER” SHALL REFER NOT ONLY TO THE
PERSON DESIGNATED AS SUCH IN SECTION 1.1, BUT ALSO TO ITS LENDERS AND MEMBERS AND, WITH RESPECT TO
EACH OF THE FOREGOING, EACH DIRECTOR, OFFICER, AGENT, ATTORNEY, EMPLOYEE, REPRESENTATIVE AND
AFFILIATE OF SUCH PERSON.



ARTICLE XI



MISCELLANEOUS




     Section 11.1 Waivers and Amendments; Acknowledgments and Admissions.




     (a) Waivers and Amendments. No failure or delay (whether by course of conduct
or otherwise) by Lender in exercising any right, power or remedy which Lender may have under
any of the Loan Documents shall operate as a waiver thereof or of any other right, power or
remedy, nor shall any single or partial exercise by Lender of any such right, power or
remedy preclude any other or further exercise thereof or of any other right, power or
remedy. No waiver of any provision of any Loan Document and no consent to any departure
therefrom shall ever be effective unless it is in writing and signed by Lender, and then
such waiver or consent shall be effective only in the specific instances and for the
purposes for which given and to the extent specified in such writing.



57









 







No notice to or
demand on Borrower shall in any case of itself entitle Borrower to any other or further
notice or demand in similar or other circumstances. No modification or amendment of or
supplement to this Agreement or the other Loan Documents shall be valid or effective unless
the same is in writing and signed by the party against whom it is sought to be enforced.




     (b) Acknowledgments and Admissions. Borrower hereby represents, warrants and
acknowledges that (i) it has been advised by counsel in the negotiation, execution and
delivery of the Loan Documents to which it is a party, (ii) it has made independent
decisions to enter into this Agreement and the other Loan Documents to which it is a party,
without reliance on any representation, warranty, covenant or undertaking by Lender, whether
written, oral or implicit, other than as expressly set out in this Agreement or in another
Loan Document delivered on or after the date hereof, (iii) there are no representations,
warranties, covenants, undertakings or agreements by Lender to Borrower as to the Loan
Documents except as expressly set out in this Agreement or in another Loan Document
delivered on or after the date hereof, (iv) Lender owes no fiduciary duty to Borrower with
respect to any Loan Document or the transactions contemplated thereby, (v) the relationship
pursuant to the Loan Documents between Borrower, on one hand, and Lender, on the other hand,
is and shall be solely that of debtor and creditor, respectively, (vi) no partnership or
joint venture exists with respect to the Loan Documents between Borrower and Lender, (vii)
should an Event of Default or Default occur or exist Lender will, subject to the terms
hereof, determine in its sole discretion and for its own reasons what remedies and actions
it will or will not exercise or take at that time, (viii) without limiting any of the
foregoing, Borrower is not relying upon any representation or covenant by Lender, or any
representative thereof, and no such representation or covenant has been made, that Lender
will, at the time of an Event of Default or Default, or at any other time, waive, negotiate,
discuss or take or refrain from taking any action permitted under the Loan Documents with
respect to any such Event of Default or Default or any other provision of the Loan
Documents, and (ix) Lender has relied upon the truthfulness of the acknowledgments in this
Section 11.1(b) in deciding to execute and deliver this Agreement and to make the Loans.



     Section 11.2
Assignments; Survival of Agreements; Cumulative
Nature. Lender may assign and/or transfer a portion or all of its rights and privileges under the
Loan Documents at any time and from time to time, including, but not limited to, any collateral
assignment to secure any indebtedness of Lender to any other Person. In connection with any
assignment or transfer by Lender, Lender is hereby authorized to provide any information provided
to Lender by Borrower or provided by any other Person at Borrower’s request or authorization. Any
assignee of any of Lender’s rights under any of the Loan Documents shall be subrogated to any
related rights and remedies that Lender may exercise against Borrower. All of the various
representations, warranties, covenants and agreements of Borrower in the Loan Documents shall
survive the execution and delivery of this Agreement and the other Loan Documents and the
performance hereof and thereof, including the making or granting of the Loans and the delivery of
the Note and the other Loan Documents, and shall further survive until all of the Obligations
(other than Obligations under the Royalty Interest Conveyance, and indemnity obligations and
similar obligations that survive the termination of the Loan Documents) are paid in full to Lender
and all of Lender’s obligations to Borrower are terminated. The representations, warranties and



58









 







covenants made by Borrower in the Loan Documents, and the rights, powers and privileges granted to
Lender in the Loan Documents, are cumulative, and, except for expressly specified waivers and
consents, no Loan Document shall be construed in the context of another to diminish, nullify or
otherwise reduce the benefit to Lender of any such representation, warranty, covenant, right, power
or privilege. In particular and without limitation, no exception set out in this Agreement to any
representation, warranty or covenant herein contained shall apply to any similar representation,
warranty or covenant contained in any other Loan Document, and each such similar representation,
warranty or covenant shall be subject only to those exceptions which are expressly made applicable
to it by the terms of the various Loan Documents.



     Section 11.3
Notices. All notices, requests, consents, demands and other communications required or permitted
under any Loan Document shall be in writing, unless otherwise specifically provided in such Loan
Document, and shall be deemed sufficiently given or furnished to a Person if delivered by personal
delivery, by telecopy, by delivery service with proof of delivery or by registered or certified
United States mail, postage prepaid, to the address or telecopy number for such Person set forth
below (unless changed by similar notice in writing given by the particular Person whose address is
to be changed). Any such notice or communication shall be deemed to have been given (a) in the
case of personal delivery or delivery service, as of the date of delivery at the address and in the
manner provided herein, (b) in the case of telecopy, upon receipt, or (c) in the case of registered
or certified United States mail three (3) Business Days after deposit in the mail.



     For delivery to Borrower:


BPI Energy, Inc.

Attn: James G. Azlein, President

30775 Bainbridge Road, Suite 280

Solon, Ohio 44139

Telephone: (440) 248-4200

Telecopy: (440) 248-4240




     with a copy to:


Thompson Hine LLP

Attn: David J. Naftzinger

3900 Key Center, 127 Public Square

Cleveland, Ohio 44114-1291

Telephone: (216) 566-5625

Telecopy: (216) 566-5800




     For delivery to Lender:


GasRock Capital LLC

Attn: Marshall Lynn Bass

1301 McKinney St., Suite 2800

Houston, Texas 77010

Telephone: (713) 300-1400

Telecopy: (713) 300-1401




59









 








     with a copy to:


Porter & Hedges, L.L.P.

Attn: Ephraim del Pozo

1000 Main Street, 36th Floor

Houston, Texas 77002

Telephone: (713) 226-6660

Telecopy: (713) 226-6260




     Section 11.4
Parties in Interest; Transfers. All grants, covenants and agreements contained in the Loan Documents shall bind and inure
to the benefit of the parties thereto and their respective successors and permitted assigns;
provided, however, that Borrower shall not assign or transfer any of its rights or delegate any of
its duties or obligations under any Loan Document without the prior written consent of Lender.
Nothing expressed or referred to in this Agreement shall be construed to give any Person other than
the parties to this Agreement any legal or equitable right, remedy, or claim under or with respect
to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and
conditions are for the sole and exclusive benefit of the parties to this Agreement and their
successors and permitted assigns.



     Section 11.5
Governing Law; Submission to Process. Except to the extent that the law of another jurisdiction is expressly elected in a Loan
Document or mandatorily applies, the Loan Documents shall be deemed contracts and instruments made
under the laws of the State of Texas and shall be construed and enforced in
accordance with and governed by the laws of the State of Texas, without regard to principles
of conflicts of law. This Agreement has been entered into in Houston, Texas and shall be
performable for all purposes in Harris County, Texas. Subject to the provisions of Article XII,
courts within the State of Texas shall have jurisdiction over any and all disputes between Borrower
and Lender, whether in law or equity, including, but not limited to, any and all disputes arising
out of or relating to this Agreement or any other Loan Document; and venue in any such dispute
whether in federal or state court shall be laid in Harris County, Texas.



     Section 11.6
Limitation on Interest. Lender, Borrower and any other parties to any Loan Documents intend to contract in strict
compliance with applicable usury law from time to time in effect. In furtherance thereof, the
parties stipulate and agree that none of the terms and provisions contained in the Loan Documents
shall ever be construed to create a contract to pay, for the use, forbearance or detention of
money, interest in excess of the maximum amount of interest permitted to be charged by applicable
law from time to time in effect. Borrower nor any present or future guarantors, endorsers or other
Persons hereafter becoming liable for payment of any Obligation shall ever be liable for unearned
interest thereon or shall ever be required to pay interest thereon in excess of the maximum amount
that may be lawfully charged under applicable law from time to time in effect, and the provisions
of this Section 11.6 shall control over all other provisions of the Loan Documents which may be in
conflict or apparent conflict herewith. Lender expressly disavows any intention to charge or
collect excessive unearned interest or finance charges in the event the maturity of any Obligation
is accelerated. If (a) the maturity of



60









 







any Obligation is accelerated for any reason, (b) any
Obligation is prepaid and as a result any amounts held to constitute interest are determined to be
in excess of the legal maximum, or (c) Lender or any other holder of any or all of the Obligations
shall otherwise collect fees or other moneys which are determined to constitute interest (including
any payment of the Facility Fee) which would otherwise increase the interest on any or all of the
Obligations to an amount in excess of that permitted to be charged by applicable law then in
effect, then all such sums determined to constitute interest in excess of such legal limit shall,
without penalty, be promptly applied to reduce the then outstanding principal of the related
Obligations or, at Lender’s or such holder’s option, promptly returned to Borrower or the other
payor thereof upon such determination. In determining whether or not the interest paid or payable
under any specific circumstance exceeds the maximum amount permitted under applicable law, Lender
and Borrower (and any other payors thereof) shall to the greatest extent permitted under applicable
law, (w) characterization of any Facility Fee as a commitment fee due and payable prior to the date
of this Agreement as consideration for its commitment to make a Loan, (x) characterize any
non-principal payment as an expense, fee or premium rather than as interest, (y) exclude voluntary
prepayments and the effects thereof, and (z) amortize, prorate, allocate and spread the total
amount of interest throughout the entire contemplated term of the instruments evidencing the
Obligations in accordance with the amounts outstanding from time to time thereunder and the maximum
legal rate of interest from time to time in effect under applicable law in order to lawfully charge
the maximum amount of interest permitted under applicable law.



     Section 11.7
Termination; Limited Survival. In their sole and absolute discretion, Borrower and Lender may each, at any time that no
Obligations are owing, elect in a notice delivered to the other to terminate this Agreement. Upon
receipt of such a notice, if no Obligations are then owing (other than Obligations under the
Royalty Interest Conveyance and indemnity obligations and similar obligations that survive the
termination of the Loan Documents), this Agreement and all other Loan Documents shall thereupon be
terminated and the parties thereto released from any prospective obligations thereunder.
Notwithstanding the foregoing or anything herein to the contrary, any waivers or admissions made by
Borrower or Lender in any Loan Documents, and any obligations which any Person may have to
indemnify or compensate Lender shall survive any termination of this Agreement or any other Loan
Document. At the request and expense of Borrower, Lender shall prepare and execute all necessary
instruments to reflect and effect such termination of the Loan Documents; provided, however, that
nothing in this Section 11.7 shall affect any and all continuing rights, validity and
enforceability of the Royalty Interests.



     Section 11.8 Severability. If any term or provision of any Loan Document shall be determined to be illegal or
unenforceable, all other terms and provisions of the Loan Documents shall nevertheless remain
effective and shall be enforced to the fullest extent permitted by applicable law.



     Section 11.9
Counterparts. This Agreement may be separately executed in any number of counterparts and by different
parties hereto in separate counterparts, each of which when so executed shall be deemed to
constitute one and the same Agreement.



     Section 11.10
Further Assurances. The parties agree (a) to furnish upon request to each other such information, (b) to
execute and deliver to each other such documents, and (c) to



61









 







do such other acts and things, all as
the other party may reasonably request for the purpose of carrying out the intent of this Agreement
and the Loan Documents.



     Section 11.11 Waiver of Jury Trial, Punitive Damages, Etc.
BORROWER AND LENDER HEREBY (a) KNOWINGLY, VOLUNTARILY, INTENTIONALLY AND IRREVOCABLY WAIVE, TO
THE MAXIMUM EXTENT PERMITTED BY LAW, ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION BASED HEREON, OR DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN
CONNECTION WITH THE LOAN DOCUMENTS OR ANY TRANSACTION CONTEMPLATED THEREBY OR ASSOCIATED THEREWITH,
BEFORE OR AFTER MATURITY; (b) IRREVOCABLY WAIVE, TO THE MAXIMUM EXTENT PERMITTED BY LAW ANY RIGHT
THEY MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (c) CERTIFY THAT NO
PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED,
EXPRESSLY OR OTHERWISE OR IMPLIED THAT SUCH PARTY
WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (d)
ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND
THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS CONTAINED IN THIS SECTION 11.11.



     Section 11.12
Controlling Provision Upon Conflict. Except as may be expressly provided otherwise herein, in the event of a conflict between the
provisions of this Agreement and those of any other Loan Document or any other instrument referred
to herein or executed in connection with this Agreement, the provisions of this Agreement shall
control.



     Section 11.13
Patriot Act. The Lender hereby notifies the Borrower that if Lender is subject to the USA Patriot Act of
2001 (31 U.S.C. 5318 et seq.), pursuant to Section 326 thereof, it is required to obtain, verify
and record information that identifies the Borrower, including the name and address of Borrower and
other information allowing such Lender to identify the Borrower in accordance with such act.



ARTICLE XII



ARBITRATION




     Section 12.1 Arbitration.




     (a) Borrower and Lender and any other obligor party (the “parties”) will
attempt in good faith to resolve any controversy, claim or dispute arising out of or
relating to this Agreement, including contract and tort disputes, the Loan Documents or
Collateral promptly by negotiations between themselves. The negotiation process may be
started by the giving of written notice by any party to the other parties in accordance with
the terms of Section 11.3, and the parties agree to negotiate in good faith, and select an
independent mediator to facilitate the negotiations and conduct up to eight consecutive
hours of mediated negotiations in Houston, Texas within 30 days after the notice is first



62









 







sent. If, within 10 days after the initial notice, the parties are not able to agree upon a
mediator, the party originally giving the notice shall promptly notify American Arbitration
Association (“AAA”), 1331 Lamar, Suite 1180, Houston, Texas 77010, (713) 739-1302.
AAA will promptly designate a mediator who is independent and impartial, and AAA’s decision
about the identity of the mediator will be final and binding.




     (b) No arbitration may be commenced by any party unless and until a negotiation
complying with the foregoing paragraph has been completed, and no litigation or other
proceeding may ever be instituted at any time in any court for the purpose of adjudicating,
interpreting or, except as may be set forth in Section 12.1(h), enforcing any rights or
obligations of the parties hereto or any rights or obligations
relating to the subject matter hereof, whether or not covered by the express terms of
this Agreement, or for the purpose of adjudicating a breach or determination of the validity
of this Agreement, or for the purpose of appealing any decision of an arbitrator.




     (c) If a controversy, claim or dispute is not resolved after completion of the
negotiation process described above, then, upon notice by any party to the other parties (an
“Arbitration Notice”) and to AAA, the controversy, claim or dispute shall be
submitted to an arbitration panel for binding arbitration in Houston, Texas, in accordance
with AAA’s Commercial Arbitration Rules (the “Rules”). The parties agree that they
will faithfully observe this Agreement and the Rules and that they will abide by and perform
any award rendered by the arbitration panel. The arbitration shall be governed by the
Federal Arbitration Act, 9 U.S.C. Section 1-16 (or by the same principles enunciated by such
Act in the event it may not be technically applicable). The statutes of limitations,
estoppel, waiver, laches and similar doctrines which would otherwise be applicable in an
action brought by a party shall be applicable in any arbitration proceeding and the
commencement of an arbitration proceeding shall be deemed the commencement of an action for
these purposes. The award or judgment of the arbitration panel shall be final and binding
on all parties and judgment upon the award or judgment of the arbitration panel may be
entered and enforced by any court having jurisdiction. The parties agree to execute a
stipulated judgment in accordance with the award of the arbitration panel to be filed in any
court having jurisdiction. If any party becomes the subject of a bankruptcy, receivership
or other similar proceeding under the laws of the United States of America, any state or
commonwealth or any other nation or political subdivision thereof, then, to the extent
permitted or not prohibited by applicable law, any factual or substantive legal issues
arising in or during the pendency of any such proceeding shall be subject to all of the
foregoing mandatory mediation and arbitration provisions and shall be resolved in accordance
therewith. The agreements contained herein have been given for valuable consideration, are
coupled with an interest and are not intended to be executory contracts. The fees and
expenses of the arbitration panel will be shared by all parties engaged in the claim,
dispute or controversy on a basis determined to be fair and equitable by the arbitrator,
taking into account the relative fault of each party, the relative credibility and merit of
all claims and defenses made by each party and the cooperation, speed and efficiency of each
party in conducting the arbitration proceedings and complying with the Rules and with orders
and requests of the arbitrator.



63









 






     (d) Promptly after the Arbitration Notice is given, each party will select an
independent and impartial arbitrator who will in turn select an independent and impartial
third arbitrator (each such arbitrator must be experienced in or have extensive familiarity
with the oil and gas industry). If the arbitrators selected by the parties are unable to
agree on a third arbitrator, then one of the parties shall notify AAA and AAA shall select
the third arbitrator with oil and gas industry experience or familiarity. The decision of
AAA with respect to the selection of the arbitrator will be final and binding in such case.
Such three arbitrators will constitute the arbitration panel.




     (e) Within 10 days after the selection of the arbitration panel, the parties and their
counsel will appear before the arbitration panel at a place and time in Houston, Texas, as
may be designated by the arbitration panel for the purpose of each party making
a one hour or less presentation and summary of the case. Thereafter, the arbitration
panel will set dates and times for additional hearings until the proceeding is concluded.
Additionally, the arbitration panel shall establish a schedule for and limits on the amount
of discovery to be requested and performed by the parties during the arbitration
proceedings. The parties shall strictly comply with the schedule and limits set by the
arbitrators, and any request for variance therefrom must be approved by the arbitrators.
The desire and goal of the parties is, and the arbitration panel will be advised that its
goal should be, to conduct and conclude the arbitration proceeding as expeditiously as
possible. If any party or his counsel fails to appear at any scheduled hearing, the
arbitration panel shall be entitled to reach a decision based on the evidence which has been
presented to it by the parties who did appear. Any arbitral award may be confirmed by a
Texas state court.




     (f) Any arbitral award may be enforced in the courts of the state of Texas or of the
United States of America for the Southern District of Texas, and, by execution and delivery
of this Agreement, the parties hereby accept for themselves and in respect of their
property, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid
courts for said purpose and the parties hereby irrevocably waive to the fullest extent
permitted by law any objection, including without limitation, any objection to the laying of
venue or based on the grounds of forum non conveniens, which they may now or hereafter have
to the bringing of any such action or proceeding in such respective jurisdictions.




     (g) The arbitration panel will have no authority to award punitive or other damages not
measured by the prevailing party’s actual damages and may not, in any event, make any
ruling, finding, or award that does not conform to the terms and conditions of this
Agreement.




     (h) For the avoidance of doubt, and notwithstanding anything to the contrary in Section
12.1, the provisions of this Section 12.1 relating to arbitration or mediation of disputes
shall not apply to (i) litigation that is instituted for the sole purpose of either: (A)
compelling a party to submit to arbitration in accordance with the provisions of this
Section 12.1, or (B) obtaining enforcement of any award or judgment of the arbitrator(s)
issued pursuant to this Section 12.1, (ii) Lender’s enforcement of any nonjudicial rights or
remedies under this Agreement or any of the Security Documents arising out of an



64









 







Event of
Default, including but not limited to, taking or disposing of Collateral without judicial
process pursuant to Article 9 of the Uniform Commercial Code as adopted in the state whose
laws govern lender’s security interest in the Collateral or pursuant to the real property
code or applicable statutes of the state or states where the Properties are located, (iii)
obtaining injunctive relief or a temporary restraining order, including a power of sale, or
(iv) obtaining a writ of attachment; provided that no such act shall constitute a waiver of
this arbitration provision or be prohibited by this arbitration provision.



ARTICLE XIII



NOTICE TO BORROWER



THIS WRITTEN CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS BETWEEN THE PARTIES REPRESENT THE FINAL
EXPRESSION OF THE AGREEMENTS BETWEEN THE PARTIES. THIS WRITTEN CREDIT AGREEMENT AND THE OTHER
LOAN DOCUMENTS BETWEEN THE PARTIES MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES.



THERE ARE NO UNWRITTEN, ORAL AGREEMENTS BETWEEN THE PARTIES.



THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS SUPERCEDE THAT CERTAIN TERM SHEET DATED ON OR
ABOUT MAY 21, 2007, EXECUTED BY BORROWER AND LENDER.




(Signatures on the following page)





65









 








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



	 	 	 	 	 	 	 
	 	 	BORROWER:	 	 
	 
	 	 	 	 	 	 
	 	 	BPI ENERGY, INC.,

a Nevada corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ James G. Azlein	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	James G. Azlein

President	 	 
	 
	 	 	 	 	 	 
	 	 	LENDER:	 	 
	 
	 	 	 	 	 	 
	 	 	GASROCK CAPITAL LLC,

a Delaware limited liability company	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Marshall Lynn Bass	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Marshall Lynn Bass

Principal	 	 






Signature Page to Advancing Term Credit Agreement