**Ex. 4(b)(3)**

 

 

**CREDIT AGREEMENT**

** **

**BETWEEN**

** **

** **

**GATEWAY PIPELINE COMPANY AND**

**GATEWAY PROCESSING COMPANY,**

**as Borrowers,**

** **

** **

**GATEWAY ENERGY CORPORATION,**

**as Guarantor,**

** **

** **

** **

** **

**and**

** **

** **

**SOUTHWEST BANK OF TEXAS, N.A.,**

**as Lender**

** **

** **

** **

** **

**March 31, 2003**

 

 

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**TABLE OFCONTENTS**

 
|                                            |                                          |   |
|-------------------------------------------------|-----------------------------------------------|--------|
| SECTION 1   DEFINITIONS                    |                                          |
|                                            | 1.1 Definitions                               |   |
|                                            | 1.2 Other Definitional  Provisions            |   |
|                                            | 1.3 Accounting Terms and  Determinations      |   |
|                                            |                                          |   |
| SECTION  2  THE TERM                       |                                          |
|                                            | 2.1 Advances                                  |   |
|                                            | 2.2 Payments                                  |   |
|                                            | 2.3  Interest Rate and Payments               |   |
|                                            | 2.4 Default Rate                              |   |
|                                            | 2.5 Interest  Calculations                    |   |
|                                            | 2.6 Voluntary Prepayments                     |   |
|                                            | 2.7 Order of  Application                     |   |
|                                            |                                          |   |
| SECTION  3  SECURITY                       |                                          |
|                                            | 3.1 Security                                  |   |
|                                            | 3.2 Additional Security and  Guaranties       |   |
|                                            | 3.3 Security  Documents                       |   |
|                                            | 3.4 Setoff                                    |   |
|                                            |                                          |   |
| SECTION  4  CONDITIONS PRECEDENT           |                                          |
|                                            | 4.1 Initial  Advance                          |   |
|                                            | 4.2 The Loan  Advances                        |   |
|                                            | 4.3  Materiality of Conditions                |   |
|                                            | 4.4 Waiver of  Conditions                     |   |
|                                            |                                          |   |
| SECTION  5  WARRANTIES AND REPRESENTATIONS |                                          |
|                                            | 5.1 Existence and  Authority                  |   |
|                                            | 5.2 Binding  Obligations                      |   |
|                                            | 5.3  Compliance with Laws and Documents       |   |
|                                            | 5.4 Litigation                                |   |
|                                            | 5.5 No Consents                               |   |
|                                            | 5.6 Location                                  |   |
|                                            | 5.7 Solvency                                  |   |
|                                            | 5.8 Debt                                      |   |
|                                            | 5.9 Fiscal Year                               |   |
|                                            | 5.10  Relationship with Lender                |   |
|                                            | 5.11  Financial Statements                    |   |
|                                            | 5.12 Taxes                                    |   |
|                                            | 5.13  Government Regulation                   |   |
|                                            | 5.14  Employee Benefit Plans                  |   |
|                                            | 5.15 Purpose of the  Revolving LoanAdvances   |   |
|                                            | 5.16 Properties; Liens                        |   |
|                                            | 5.17  Environmental Laws: Hazardous Materials |   |
|                                            | 5.18 Insurance                                |   |
|                                            | 5.19 Operation of  Business                   |   |
|                                            | 5.20 Margin  Securities                       |   |
|                                            | 5.21 Disclosure                               |   |
|                                            | 5.22 Agreements                               |   |
|                                            |                                          |   |
| SECTION  6  COVENANTS                      |                                          |
|                                            | 6.1 Use of Proceeds                           |   |
|                                            | 6.2 Books and  Records                        |   |
|                                            | 6.3 Items to  be Furnished                    |   |
|                                            | 6.4 Inspection                                |   |
|                                            | 6.5 Taxes                                     |   |
|                                            | 6.6 Expenses                                  |   |
|                                                 |                                               |        |  |

 

i

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|                                 | 6.7  Maintenance of Existence, Assets and Business  |   |
|--------------------------------------|-----------------------------------------------------|--------|
|                                 | 6.8  Maintenance of Priority of Lender Liens        |   |
|                                 | 6.9  Dispositions of Properties                     |   |
|                                 | 6.10 Sales                                          |   |
|                                 | 6.11  Compliance with Laws and Documents            |   |
|                                 | 6.12  Fiscal Year and Accounting Methods            |   |
|                                 | 6.13 Insurance; Payment of  Premiums                |   |
|                                 | 6.14 Environmental  Laws                            |   |
|                                 | 6.15  GENERAL INDEMNIFICATION                       |   |
|                                 | 8.16  ENVIRONMENTAL INDEMNIFICATION                 |   |
|                                 | 6.17  Employee Benefit Plans                        |   |
|                                 | 6.18 Notice of  Litigation                          |   |
|                                 | 6.19 Loans,  Advances and Investments               |   |
|                                 | 6.20 Transactions with Affiliates                   |   |
|                                 | 6.21 Material  Contracts                            |   |
|                                 | 6.22 New Business                                   |   |
|                                 | 6.23 Addresses                                      |   |
|                                 | 6.24  Restrictions on Debt                          |   |
|                                 | 6.25  Issuance of Capital Stock                     |   |
|                                 | 6.26  Mergers and Dissolutions                      |   |
|                                 | 6.27 Default on  Debt                               |   |
|                                 | 6.28 Distributions                                  |   |
|                                 | 6.29 Current Ratio                                  |   |
|                                 | 6.30 Net Worth                                      |   |
|                                 | 6.31 Interest  Coverage Ratio                       |   |
|                                 | 6.32 Limitation on  Liens                           |   |
|                                 |                                                |   |
| SECTION  7  DEFAULT             |                                                |
|                                 | 7.1  Payment of Obligations                         |   |
|                                 | 7.2 Certain  Covenants                              |   |
|                                 | 7.3 Other Covenants                                 |   |
|                                 | 7.4  Voluntary Debtor Relief                        |   |
|                                 | 7.5  Involuntary Proceedings                        |   |
|                                 | 7.6 Attachment                                      |   |
|                                 | 7.7 Payment  of Judgments                           |   |
|                                 | 7.8 Default  Under Other Debt                       |   |
|                                 | 7.9  Divestment Proceedings                         |   |
|                                 | 7.10 Concealment or Removal  of Collateral          |   |
|                                 | 7.11  Misrepresentation                             |   |
|                                 | 7.12 Validity and  Enforceability of Loan Documents |   |
|                                 | 7.13 ERISA                                          |   |
|                                 | 7.14 Change of  Control                             |   |
|                                 | 7.15  Material Adverse Change                       |   |
|                                 |                                                |   |
| SECTION  8  RIGHTS AND REMEDIES |                                                |
|                                 | 8.1 Remedies Upon  Default                          |   |
|                                 | 8.2 Waivers                                         |   |
|                                 | 8.3  Performance by Lender                          |   |
|                                 | 8.4 Delegation of Duties  and Rights                |   |
|                                 | 8.5 Lender Not  in Control                          |   |
|                                 | 8.6 Waivers by Lender                               |   |
|                                 | 8.7 Cumulative  Rights                              |   |
|                                 | 8.8  Application of Proceeds                        |   |
|                                 | 8.9  Diminution in Value of Collateral              |   |
|                                 | 8.10 Certain  Proceedings                           |   |
|                                 |                                                |   |
| SECTION  9  MISCELLANEOUS       |                                                |
|                                 | 9.1 Changes in GAAP                                 |   |
|                                 | 9.2 Exhibits                                        |   |
|                                 | 9.3 Communications                                  |   |
|                                 | 9.4  Form and Number of Documents                   |   |

 

ii

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|   | 9.5  Exceptions to Covenants                                                      |   |
|--------|-----------------------------------------------------------------------------------|--------|
|   | 9.6 Survival                                                                      |   |
|   | 9.7 GOVERNING LAW                                                                 |   |
|   | 9.8 Maximum  Interest Rate                                                        |   |
|   | 9.9 Invalid  Provisions                                                           |   |
|   | 9.10 Entirety                                                                     |   |
|   | 9.11 Amendments, Etc                                                              |   |
|   | 9.12 Waivers                                                                      |   |
|   | 9.13  Governmental Regulation                                                     |   |
|   | 9.14  Multiple Counterparts                                                       |   |
|   | 9.15  Discharge Only Upon Payment In Full; Reinstatement In Certain Circumstances |   |
|   | 9.16 Waiver by  Borrower                                                          |   |
|   | 9.17 Successors  and Assigns; Participations; Novation                            |   |
|   | 9.18 ARBITRATION                                                                  |   |
|   | 9.19 Jurisdiction and Venue                                                       |   |

 

 

 

SCHEDULES AND EXHIBITS

 
| Schedules      |                          |
|----------------|-------------------------------|
|           |                          |
| Schedule  3.1  | Waxahachie  Contracts and     |
|           | Madisonville  Contracts       |
| Schedule  4.1  | Letter  of Credit Form        |
| Schedule  6.24 | Existing  Debt                |
|           |                          |
| Exhibits       |                          |
|           |                          |
| Exhibit  A     | Term  Note                    |
| Exhibit  B     | Advance  Request Notice       |
| Exhibit  C     | Compliance  Certificate       |
| Exhibit  D     | Financial  Report Certificate |

 

 

iii

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### **CREDITAGREEMENT**

 

 

THIS CREDIT AGREEMENT is entered into as of March 31, 2003, betweenGateway Pipeline Company, a Texas corporation (“Pipeline”) and GatewayProcessing Company, a Texas corporation (“Processing”, Pipeline and Processingcollectively “Borrowers”), Gateway Energy Corporation, a Delawarecorporation (“Guarantor”), and Southwest Bank of Texas, N.A., a nationalbanking association (“Lender”).

 

WITNESSETH:

 

1.             Contemporaneously herewith,Borrowers and Lender entered into First Amended and Restated Credit Agreement,and the certificates and documents executed pursuant thereto or in connectiontherewith, to (a) partially amend, extend and restate (but  not discharge, novate or release) the  Credit Agreement (“2002 Credit Agreement”)dated as of February 21, 2002 establishing a One Million Five Hundred ThousandDollars ($1,500,000.00) term credit facility, which was previously amended by(i) Loan ModificationAgreement dated as of August 31, 2002 and recorded in Volume 1883, page 1812 ofthe Official Public Records of Ellis County, Texas, and in Volume 632, page 173of the Official Public Records of Madison County, Texas, to modify the MaturityDate, Payment Date and other terms of the 2002 Credit Agreement, (ii) letteragreement dated December 12, 2002 to amplify the procedures for administeringdraw requests pursuant to the 2002 Credit Agreement, (iii) Second LoanModification Agreement dated as of February 20, 2003, from Borrowers to A.Stephen Kennedy, as Trustee, and the Lender to further modify the Payment Dateand other terms of the 2002 Credit Agreement and (iv) Third Loan Modification Agreement dated as of March 31, 2003,recording deferred, from Mortgagor to A. Stephen Kennedy, as Trustee, and theBank ( collectively, the “Existing CreditAgreement”) and (b) finance the construction and mobilization of the  Madisonville Gathering System (defined belowand in the Existing Credit Agreement) by Borrowers; and

 

2.             Borrowers have requested thatLender establish a new credit facility to provide supplemental financing forthe completion and mobilization of the Madisonville Gathering System, andLender has agreed to do so, upon and subject to the conditions and covenantsstated herein.

 

Fora sufficient consideration including, without limitation, the mutual covenantscontained herein, Borrowers and Lender agree as follows:

 

SECTION 1.  DEFINITIONS.

 

1.1           Definitions.  As used in this Agreement, the following terms have the followingmeanings:

 

ADAC means AllenDrilling Acquisition Company, a Nebraska corporation duly qualified to conductbusiness and in good standing in the State of Texas.

 

ADACAgreement means the Agreement dated March 6, 2003, and anyamendment, extension, modification, renewal or supplement thereto, delivered byBorrowers, Guarantor and ADAC with respect to the Madisonville GatheringSystem.

 

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Affiliate of any Personmeans any other Person who directly or indirectly controls, or is controlledby, or is under common control with, such Person.  For purposes of this definition only, “control,” “controlled by,”and “under common control with” mean possession, directly or indirectly, ofpower to direct or cause the direction of management or policies (whetherthrough ownership of voting securities, by contract, or otherwise).  Any Person who beneficially owns, directlyor indirectly, 10% or more (in number of votes) of the securities havingordinary voting power for the election of directors (or individuals performingsimilar functions of a Person) and any Person who is an officer or director ofa Person shall be conclusively deemed to control such Person.

 

Agreement means this CreditAgreement, including the Schedules and Exhibits hereto, as the same may beamended, restated or supplemented from time to time.

 

Borrowers mean Pipeline,Processing and their permitted successors and assigns, respectively.

 

BusinessDay means any day (other than Saturdays and Sundays) on which commercialbanks are not authorized or required to close in Houston, Texas.

 

CapitalLease Obligations means, as to any Person, the obligations of suchPerson to pay rent or other amounts under a lease of (or other agreementconveying the right to use) real and/or personal Property, which obligationsare required to be classified and accounted for as a capital lease on a balancesheet of such Person under GAAP.  Forpurposes of this Agreement, the amount of Capital Lease Obligations shall bethe capitalized amount thereof, determined in accordance with GAAP.

 

CapitalStock means any and all shares, interests, participations, rights or otherequivalents (however designated) of corporate stock.

 

Changeof Control means any of the following events:  (a) any “person” or “group” of persons whoare not currently stockholders or beneficial holders shall have acquired“beneficial ownership” of more than 25% of the outstanding common stock of theBorrowers  (within the meaning ofSection 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, andthe applicable rules and regulations thereunder), or (b) during any period of12 consecutive months, commencing before or after the date of this Agreement,Guarantor shall cease for any reason to own one hundred per cent (100%) of theCapital Stock of each of Pipeline and Processing, subject to the SecurityDocuments delivered to the Lender contemporaneously herewith.

 

ClosingDate means the date on which all of the conditions precedent in Section 4have been satisfied.

 

Code means theInternal Revenue Code of 1986, as amended, and all regulations promulgated andrulings issued thereunder.

 

Collateral is defined in Section3.1.

 

CurrentAssets means, at any particular time, all amounts which, in conformity withGAAP, would be included as current assets on a consolidated balance sheet ofBorrowers and Guarantor.

 

2

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CurrentLiabilities means, at any particular time, all amounts which, inconformity with GAAP, would be included as current liabilities on aconsolidated balance sheet of Borrowers and Guarantor.

 

CurrentFinancials means (a) the audited Financial Statements showing theconsolidated financial condition and results of operations of Borrowers andGuarantors on a consolidating accounting basis for the year ended onDecember 31, 2001, and (b) the unaudited interim Financial Statementsof Borrowers and Guarantor on a consolidating accounting basis dated as ofSeptember 30, 2002.

 

Debt means as to anyPerson at any time (without duplication): (a) all obligations of that Personfor borrowed money, (b) all obligations of that Person evidenced by bonds,notes, debentures, or other similar instruments, (c) all obligations of thatPerson to pay the deferred purchase price of Property or services, except tradeaccounts payable of that Person arising in the ordinary course of business thatare not past due by more than ninety (90) days, (d) all Capital LeaseObligations of that Person, (e) all Debt or other obligations of othersGuaranteed by that Person, (f) all obligations secured by a Lien existing onProperty owned by that Person, whether or not the obligations secured therebyhave been assumed by that Person or are non-recourse to the credit of thatPerson, (g) all reimbursement obligations of that Person (whether contingent orotherwise) in respect of letters of credit, bankers’ acceptances, surety orother bonds and similar instruments, (h) all obligations of that Person toredeem or retire shares of Capital Stock of that Person, (i) all obligationsand liabilities of that Person in connection with Financial Hedges andHydrocarbon Hedges, and (j) all liabilities of that Person in respect ofunfunded vested benefits under any Plan; provided, however, thatthe Debt of any Person shall not include any liability that (i) was incurred bythat Person on ordinary (or better than ordinary) trade terms to vendors,suppliers, or other Persons providing goods and services for use by that Personin the ordinary course of its business or (ii) may be beyond the stated term ifthat Person disputes the liability in good faith and maintains adequatereserves therefor in accordance with GAAP.

 

DebtorRelief Laws means the Bankruptcy Code of the United States ofAmerica and all other applicable liquidation, conservatorship, bankruptcy,moratorium, rearrangement, receivership, insolvency, reorganization, fraudulenttransfer or conveyance, suspension of payments or similar Laws from time totime in effect affecting the Rights of creditors generally.

 

Deedof Trust means each of the First Amended and Restated Deeds OfTrust, Mortgages, Assignments, Security Agreements And Financing Statements inform and substance acceptable to the Lender, and any amendment, extension,modification, renewal or supplement thereof, delivered or to be deliveredpursuant to the Existing Agreement by (a) Pipeline covering the WaxahachieContracts and the Waxahachie Distribution System, and amending and restating(but not novating) the Waxahachie Mortgage and (b) Pipeline and Processingcovering the Madisonville Contracts and the Madisonville Gathering System, andamending and restating (but not novating) the Madisonville Mortgage.

 

Default is defined in Section 7.

 

DefaultRate means a per annum rate of interest equal from day to day to the lesserof (a) ten and one — quarter per cent (10.25%) or (b) the Highest Lawful Rate.

 

3

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EnvironmentalLaws means any and all federal, state, and local laws, regulations, andrequirements regulating, pertaining to, or imposing liability or standards ofconduct concerning any Hazardous Substance or environmental protection,including, without limitation, the Comprehensive Environmental Response,Compensation and Liability Act of 1980, 42 U.S.C. § 9601 et seq., theResource Conservation and Recovery Act of 1976, 42 U.S.C. § 6901 et seq.,the Superfund Amendment and Reauthorization Act of 1986, 42 U.S.C. §11001-11050, the Clean Air Act, 42 U.S.C. 7401 et seq., the Clean WaterAct, 33 U.S.C. § 1251 et seq., and the Toxic Substances Control Act, 15U.S.C. § 2601 et seq., as such laws, regulations, and requirements maybe amended or supplemented from time to time.

 

EnvironmentalLiabilities means, as to any Person, all liabilities, obligations,responsibilities, Remedial Actions, losses, damages, punitive damages,consequential damages, treble damages, costs, and expenses, (including, withoutlimitation, all reasonable fees, disbursements and expenses of counsel, expertand consulting fees and costs of investigation and feasibility studies), fines,penalties, sanctions, and interest incurred as a result of any claim or demand,by any Person, whether based in contract, tort, express or implied warranty,strict liability, criminal or civil statute, including any Environmental Law,permit, order or agreement with any Governmental Authority or other Person,arising from environmental, health or safety conditions or the Release orthreatened Release of a Hazardous Substance into the environment.

 

ERISA means theEmployee Retirement Income Security Act of 1974, as amended, and theregulations promulgated and rulings issued thereunder.

 

ERISAAffiliate means any company or trade or business (whether or notincorporated) which is a member of a group of which the Borrowers and Guarantorare a member and which is under common control with the Borrowers and Guarantorwithin the meaning of Section 414(b) or (c) of the Code.

 

Exhibit means an exhibitattached hereto unless otherwise specified.

 

ExistingCredit Agreement means the documents described in Recital 1.

 

ExistingLoan means the loans made by Lender to Borrower pursuant to the ExistingLoan Documents.

 

ExistingLoan Documents means the documents now or hereafter executed inconnection with the Existing Loan including, without limitation (a) promissorynote of even date herewith made by Borrowers and payable to the order of Lenderin the original principal amount of One Million Five Hundred Thousand andNO/100ths Dollars ($1,500,000.00), (b) the First Amended and Restated CreditAgreement of even date herewith, together with the security documents and otherloan documents described therein or delivered pursuant thereto, by or on behalfof Borrowers or Guarantor to or for the benefit of Lender in connection thepromissory note for the Existing Loan, and (c) any amendment, extension,modification, renewal or supplement thereof.

 

FinancialReport Certificate means a certificate substantially in the form of ExhibitD and containing such other certifications and information as Lender mayreasonably request concerning compliance with the Loan Documents.

 

4

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FinancialStatements means balance sheets, profit and loss statements,statement of retained earnings and statements of cash flow prepared incomparative form to the corresponding period of the preceding reporting period.

 

GAAP means generallyaccepted accounting principles of the Securities and Exchange Commission, andto the extent not inconsistent therewith the Accounting Principles Board of theAmerican Institute of Certified Public Accountants and the Financial AccountingStandards Board, which are applicable as of the date of the Current Financials.

 

GovernmentalAuthority means any nation or government, any state or politicalsubdivision thereof and any entity exercising executive, legislative, judicial,regulatory, or administrative functions of or pertaining to government.

 

Guarantee by any Personmeans any obligation, contingent or otherwise, of such Person directly orindirectly guaranteeing any Debt or other obligation of any other Person and,without limiting the generality of the foregoing, any obligation, direct orindirect, contingent or otherwise, of such Person (a) to purchase or pay (oradvance or supply funds for the purchase or payment of) such Debt or otherobligation (whether arising by virtue of partnership arrangements, by agreementto keep-well, to purchase assets, goods, securities or services, totake-or-pay, or to maintain financial statement conditions or otherwise) or (b)entered into for the purpose of assuring in any other manner the obligee ofsuch Debt or other obligation of the payment thereof or to protect the obligeeagainst loss in respect thereof (in whole or in part), provided that theterm Guarantee shall not include obligations under endorsements for collectionor deposit in the ordinary course of business. The term “Guarantee” used as a verb has a corresponding meaning.

 

                Guarantor means GatewayEnergy Corporation, and its permitted successors and assigns.

 

                Guaranty means thecontinuing guaranty agreement in favor of the Lender in form and substanceacceptable to the Lender, and any amendment, extension, modification, renewalor supplement thereof, delivered or to be delivered by the Guarantor hereunder.

 

HazardousSubstance means any hazardous or toxic waste (or any substancewhich is listed as such under any Environmental Law).

 

HighestLawful Rate means the maximum rate or amount of interest whichLender is allowed by Law to contract for, charge, take, reserve or receive.

 

IndemnifiedLiabilities is defined in Section 6.15.

 

IndemnifiedParties is defined in Section 6.15.

 

Laws mean allapplicable statutes, laws, ordinances, rules, regulations, orders, writs,injunctions, or decrees of any Tribunal, and any judicial interpretationthereof.

 

LenderLiens means Liens in favor of Lender securing all or any of the Obligations,including but not limited to Rights in any Collateral created in favor ofLender.

 

Lender means SouthwestBank of Texas, N.A. and its successors and assigns.

 

5

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Letters of Credit means, collectively, one or moreirrevocable standby letters of credit in favor of Lender, issued by one or morebanks approved by Lender in its sole and absolute discretion, pursuant to whichLender shall be unconditionally authorized to draw an aggregate amount of up toNine Hundred Thousand and no/100ths Dollars ($900,000) on or before May 30,2006 after the occurrence of a Default, together with any renewal orreplacement of any thereof including, without limitation, letters of creditdelivered by ADAC on behalf of the Borrowers to Lender pursuant to Section4.1 by (i) Gold Bank of Leawood, Kansas, pursuant to which Lender shall beunconditionally authorized to draw Five Hundred Thousand and no/100ths Dollars($500,000.00) and (ii) Bank Julius Baer & Co. Ltd., New York Branch,pursuant to which Lender shall be unconditionally authorized to draw FourHundred Thousand and no/100ths Dollars ($400,000.00).

 

Lien means any lien,mortgage, security interest, pledge, charge, title retention agreement orencumbrance of any kind, and any other Right of or arrangement with anycreditor to have his claim satisfied out of any property or assets, or theproceeds therefrom, prior to the general creditors of the owner thereof.

 

Litigation means any claim,demand or action conducted or expressly threatened in writing by or before anyTribunal including, but not limited to, claims or demands by any Person foractual or claimed breaches of any express or implied conditions or covenantscontained or referred to in any agreement, contract or lease included in the Collateral.

 

Loan means the amountloaned by Lender to Borrowers under the Loan Documents.

 

LoanDocuments means (a) this Agreement and any certificatesdelivered pursuant to this Agreement, (b) any and all notes (including, withoutlimitation, the Note), the Security Documents and other agreements in favor ofLender that have been, are now being or hereafter are delivered pursuant tothis Agreement, and (c) all future renewals, extensions or restatements of, oramendments or supplements to, any of the foregoing.

 

MadisonvilleContracts means the gas purchase, treatment and transportationcontracts related to the Madisonville gathering system more particularlydescribed on Schedule 3.1, for (i) Processing to purchase sour gas atthe wellhead from Redwood Energy Production L.P.’s Ruby Magness Well No. 1 inthe Madisonville Rodessa Field, (ii) Processing to deliver that gas to theseparator installed by Hanover Compression Limited Partnership (“Hanover”) forthe Ruby Magness Well No. 1 for removal of CO2 and H2S at a treatment plant tobe fabricated, installed, operated and owned at a location in the MadisonvilleRodessa field by Hanover, (iii) Pipeline to accept the processed gas at thetailgate of Hanover’s treatment plant and (iv) Pipeline to transport the processedgas approximately seven miles on a pipeline to be constructed by Pipeline forProcessing’s account to a delivery point on TXU Lone Star’s transmission linefor marketing.

 

MadisonvilleMortgage means the Deed of Trust, Mortgage, Assignment of Production,Security Agreement and Financing Statement dated as of August 31, 2002, and recorded in Volume 632, page 186 of theOfficial Public Records of Madison County, Texas, from Gateway Pipeline Company, as mortgagor and debtor, to A. StephenKennedy, as Trustee for the benefit of Southwest Bank of Texas, N.A., asholder and secured party, covering the Madisonville Gathering System.

 

MadisonvilleGathering System means the contracts, easements, equipment, facilities,fixtures, real property and any and all other Property of any nature whatsoever

 

6

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moreparticularly described in the Madisonville Mortgage, as amended and restatedfrom time to time in connection with this Agreement, whether (i) now owned orhereafter acquired by Pipeline or Processing, (ii) real, personal or mixed or(iii) situated on the easements or real property described in applicable theDeeds of Trust, or used by Pipeline or Processing in connection with theMadisonville Contracts.

 

MaterialAdverse Effect means any set of circumstances or events which wouldreasonably be expected to (a) have any adverse effect upon the validity orenforceability of any Loan Document, (b) be material and adverse to theCollateral as a whole, or the financial condition of Borrowers or Guarantor asrepresented in the Current Financials, or (c) cause a Default.

 

                Maturity Date is April30, 2006.

 

                Minimum Net Operating Marginmeans the remainder of (a) the gross proceeds received by each Borrower from(i) the distribution, gathering, marketing, processing, sale or transportationof petroleum, natural gas and all other hydrocarbons produced therefrom or inassociation therewith (including, without limitation, all commodities,products, by-products and residual products of commercial value derived,manufactured or produced from the foregoing) pursuant to the WaxahachieContracts and the Madisonville Contracts and (ii) the operation and ownershipof the Pipeline Systems, minus (b) the sum of (i) the purchase price paid byeach Borrower for the petroleum and natural gas sold pursuant to the WaxahachieContracts and the Madisonville Contracts and (ii) the reasonable and necessaryexpenses incurred in maintaining and operating (aa) the Waxahachie DistributionSystem by Pipeline in connection with sale of petroleum and natural gaspursuant to the Waxahachie Contracts and (bb) the Madisonville Gathering Systemin connection with the processing and sale of petroleum and natural gaspursuant to the Madisonville Contracts. Each Borrower shall exclude general andadministrative expenses from the calculation of Minimum Net Operating Margin.

 

MultiemployerPlan means a multiemployer plan as defined in Sections 3(37) or 4001(a)(3)of ERISA or Section 414(f) of the Code to which the Borrowers, Guarantoror any ERISA Affiliate is making, or has made, or is accruing, or has accrued,an obligation to make contributions within the past three (3) calendar years.

 

MultipleEmployer Plan means any employee benefit plan within the meaning of Section 3(3)of ERISA, other than a Multiemployer Plan, which is subject to Title IV ofERISA and to which the Borrowers, Guarantor or any ERISA Affiliate and anemployer other than an the Borrower, Guarantor or any ERISA Affiliatecontribute or have an obligation to contribute.

 

Note means thePromissory note executed and delivered by Borrowers pursuant to Section 2.1, and any amendment, rearrangement,restatement, renewal and extension of the Note.

 

Obligations means all presentand future obligations, indebtedness, and liabilities of Borrowers andGuarantor to Lender arising pursuant to any of (a) the Loan Documents, whetherdirect, indirect, related, unrelated, fixed, contingent, liquidated, orunliquidated, including, without limitation, the obligation of Borrowers andthe Guarantor to repay the Loan, interest on the Loan, and all fees,indemnities, costs, and expenses (including attorneys’ fees) provided for inthe Loan Documents which are attributable to the Loan and (b) the loandocuments now or hereafter executed and delivered by Borrowers and 

 

7

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Guarantorin connection with the Existing Loan, whether direct, indirect, related,unrelated, fixed, contingent, liquidated, or unliquidated, including, withoutlimitation, the obligation of Borrowers and the Guarantor to repay the ExistingLoan, interest on the Existing Loan, and all fees, indemnities, costs, andexpenses (including attorneys’ fees) provided for in the Existing LoanDocuments.

 

PaymentDate means the last day of each calendar month during the term of thisAgreement, beginning April 30, 2003 and continuing on the last day of eachconsecutive calendar month thereafter until the Maturity Date.

 

PBGC means the PensionBenefit Guaranty Corporation or any successor thereof, established pursuant toERISA.

 

PBGCPlan means any Pension Plan subject to Title IV of ERISA.

 

PensionPlan means an employee pension benefit plan as defined in Section 3(2)of ERISA which Borrowers, Guarantor or any ERISA Affiliate sponsors ormaintains, or to which s, Guarantors or any ERISA Affiliate makes, is making oris obligated to make contributions, excluding any Multiemployer Plan.

 

PermittedLiens means (a) the Lender Liens, (b)****Liens listed on Schedule 6.24 hereto,which Borrowers have disclosed to Lender, (c) Liens for Taxes, Liens ofmechanics and materialmen, and other liens incurred in the ordinary course ofbusiness of the Pipeline Systems that do not exceed ** **$100,000.00in the aggregate, (d) Liens securing the payment and performance of leases forequipment used by Borrowers in the ordinary course of business of the PipelineSystems that do not cover or encumber any of Borrowers’ respective Propertyexcept the equipment leased thereunder, (e) pledges or deposits made to secure payment of worker’s compensation, orto participate in any fund in connection with worker’s compensation,unemployment insurance, pensions or other social security programs, (f)good-faith pledges or deposits made by (i) Processing to secure performance ofbids or contracts, not in excess of 10% of the aggregate amount due thereunder,to construct the Madisonville Gathering System in connection with theMadisonville Contracts, or (ii) the Borrowers to obtain certificates ofresponsibility or statutory bonds, in the ordinary course of business of thePipeline Systems, (g) encumbrances consisting of zoning restrictions, easementsor other restrictions on the use of Property, none of which materially impairthe use of such Property by Borrowers, in the operation of their respectivebusinesses, and none of which is violated by existing or proposed structures orland use, and (h) claims and Liens for Taxes due and payable, claims and Liensupon, and defects of title to, real or personal property, including anyattachment of personal or real property or other legal process prior toadjudication of a dispute on the merits, claims and Liens of carriers,landlords, mechanics, materialmen, warehousemen or other like Liens, andadverse judgments on appeal, so long as the validity or amount thereof is beingcontested in good faith and by appropriate and lawful proceedings diligentlyconducted, reserves or other appropriate provision (if any) required by GAAPhave been made, levy and execution thereon have been (and continue to be)stayed (provided that any of the foregoing which burden any Collateral must besubordinate to all Lender Liens), and they do not materially detract from thevalue of the Property of the Person in question, or materially impair the usethereof in the operation of its business, individually or in the aggregate.

 

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Person means anyindividual, sole proprietorship, unincorporated organization, corporation,association, partnership, joint venture, trust, institution, Tribunal or otherentity.

 

PipelineSystems mean (i) the Madisonville Gathering System and (ii) the WaxahachieDistribution System.

 

Plan means anyemployee benefit plan as defined in Section 3(3) of ERISA established ormaintained by the Borrowers, Guarantor or any ERISA Affiliate and which iscovered by Title IV of ERISA.

 

PotentialDefault means the occurrence of any event which, with notice or lapse of timeor both, would become a Default.

 

ProhibitedTransaction is as defined in Section 406 of ERISA or Section 4975of the Code.

 

Property means property ofall kinds, real, personal or mixed, tangible or intangible (including, withoutlimitation, all rights relating thereto), whether owned or acquired on or afterthe date of this Agreement.

 

Regulation D meansRegulation D of the Board of Governors of the Federal Reserve System asthe same may be amended or supplemented from time to time.

 

RegulatoryChange means, with respect to Lender, any change after the date of thisAgreement in United States federal, state, or foreign laws or regulations(including Regulation D) or the adoption or making after such date of anyinterpretations, directives, or requests applying to a class of banks includingLender of or under any United States federal or state, or any foreign, laws orregulations (whether or not having the force of law) by any court orgovernmental or monetary authority charged with the interpretation oradministration thereof.

 

Release is as defined in42 U.S.C. § 9601(22).

 

RemedialAction means all actions required to (a) cleanup, remove, treat, or otherwiseaddress Hazardous Substances in the environment, (b) prevent the Release orthreat of Release or minimize the further Release of Hazardous Substances sothat they do not migrate or endanger or threaten to endanger public health orwelfare or the environment, or (c) perform pre-remedial studies andinvestigations and post-remedial monitoring and care for incidents involvingactual or threatened Releases of Hazardous Substances or actual or potentialviolations of Environmental Laws.

 

ReportableEvent is as defined in Section 4043 of ERISA.

 

Rights means rights,remedies, powers, privileges and benefits.

 

Schedule means a scheduleattached hereto unless specified otherwise.

 

Section means a sectionor subsection of this Agreement unless specified otherwise.

 

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SecurityAgreements means (i) the security agreement in form and substanceacceptable to the Lender, and any amendment, extension, modification, renewalor supplement thereof, delivered or to be delivered by ADAC hereunder coveringall of the Letters of Credit now or hereafter delivered by ADAC on behalf ofBorrowers pursuant to the ADAC Agreement to Lender, (ii) the First Amended andRestated Security Agreement delivered contemporaneously herewith by Guarantor,as Debtor, to the Lender, as secured party, and any amendment, extension,modification, renewal or supplement thereof, which covers all of the fully paidand non-assessable Capital Stock of each of the Borrowers that has been issuedand is outstanding and (iii) First Amended and Restated Security Agreementdelivered contemporaneously herewith by the Borrowers, as Debtors, to theLender, as secured party, and any amendment, extension, modification, renewalor supplement thereof, which covers all of the Madisonville Contracts and theother collateral described therein.

 

SecurityDocuments means, collectively, the Deeds of Trust, theGuaranties, each of the Security Agreements, and all related financingstatements and any other agreement, in form and substance satisfactory toLender, executed and delivered by any Person in connection with or pursuant tothis Agreement for the purpose of creating a first priority Lien on any of itsProperty.

 

SubordinationAgreement means an agreement in form and substance acceptable toLender, and any amendment, extension, modification, renewal or supplementthereof, delivered or to be delivered by ADAC expressly subordinating all Liensand Rights that the Borrowers or Guarantor may now or hereafter grant ADAC inthe Pipeline Systems, Madisonville Contracts, Waxahachie Contracts or otherProperty pursuant to the ADAC Agreement.

 

Subsidiary with respect toany Person means (a) a corporation a majority of whose voting stock is at anytime, directly or indirectly, owned by that Person, by one or more Subsidiariesof that Person, or by that Person and one or more Subsidiaries of that Person,or (b) any other Person (other than a corporation) in which that Person, aSubsidiary of that Person, or that Person and one or more Subsidiaries of thatPerson, directly or indirectly, at the date of determination thereof, has (i)at least a majority ownership interest or (ii) the power to elect or direct theelection of the majority of the directors or other governing body of thatPerson.

 

TangibleNet Worth means, at any particular time, all amounts which, inconformity with GAAP, would be included as stockholders’ equity on a balancesheet of Borrowers or Guarantor, provided, however, there shallbe (i) added thereto the Debt of that Person, calculated in accordance withGAAP consistently applied, heretofore (or hereafter) incurred, that by theexpress terms of the instrument creating or evidencing that Debt (or asubordination agreement in form and substance acceptable to the Lender) isvalidly and effectively made subordinate and subject in the right of paymentand performance to the prior payment of the Obligations to the Lender and (ii)excluded therefrom (a) any amount at which shares of Capital Stock of eitherBorrower appears as an asset on Borrowers’ or Guarantor’s balance sheet, (b)goodwill, including any amounts, however designated, that represent the excessof the purchase price paid for assets or stock over the value assigned thereto,(c) patents, trademarks, trade names, and copyrights, and (d) all other assetswhich are properly classified as intangible assets under GAAP.

 

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Taxes means all taxes,assessments, fees, levies, imposts, duties, deductions, withholdings or othercharges of any nature whatsoever from time to time or at any time imposed byany Law or Tribunal.

 

Tribunal means any (a)local, state or federal judicial, executive or legislative instrumentality, and(b) private arbitration board or panel.

 

UCC means the UniformCommercial Code as in effect in the applicable jurisdiction.

 

WaxahachieContracts means the gas purchase, sale, transportation and othercontracts more particularly described on Schedule 3.1, and any and alladditions, amendments, extension, modification, renewal or supplement thereof,pursuant to which Pipeline buys, sells and transports natural gas with respectto the Waxahachie Distribution System on the terms and conditions specified ineach contract.

 

WaxahachieDistribution System means the contracts, easements, equipment, facilities,fixtures, real property and any and all other Property of any nature whatsoevermore particularly described in the Waxahachie Mortgage, as amended and restatedfrom time to time in connection with this Agreement, whether (i) now owned orhereafter acquired by Pipeline, (ii) real, personal or mixed or (iii) situatedon the easements or real property described in the Deed of Trust, or used byPipeline in connection with the Waxahachie Contracts.

 

WaxahachieMortgage means the First Amended and Restated Deed of Trust, Mortgage, Assignment ofProduction, Security Agreement and Financing Statement executedcontemporaneously herewith by Pipeline, as Mortgagor and Debtor, and deliveredto A. Stephen Kennedy, as Trustee, and the Lender, as Beneficiary, Mortgageeand Secured Party, and any amendment,extension, modification, renewal or supplement thereof, which covers theWaxahachie Distribution System.

 

WelfarePlan means an employee welfare benefit plan as defined in Section 3(l) ofERISA which Borrowers, Guarantor or any ERISA Affiliate sponsors or maintains,excluding any Multiemployer Plan.

 

1.2           Other Definitional Provisions.  All definitions contained in this Agreementare equally applicable to the singular and plural forms of the terms defined.Each gender shall be deemed to include the other genders, and the singularshall be deemed to include the plural (and vice versa), as the contextrequires. Each representation, warranty and covenant herein shall haveindependent significance; and if two representations, warranties or covenantsin the Loan Documents relate to the same subject matter (regardless of therelative levels of specificity), the maintenance of one representation,warranty or covenant shall not cure, diminish or mitigate the breach of anotherrepresentation, warranty or covenant. The words “hereof,” “herein,” and“hereunder” and words of similar import referring to this Agreement refer tothis Agreement as a whole and not to any particular provision of thisAgreement. The word “include” and its variants mean “include, but not limitedto” and illustrative examples shall not be construed to limit (expressly or byimplication) the matters they illustrate. The captions of articles, sectionsand clauses are provided for convenience only, and not as an aid to theconstruction of any of the Loan Documents. Unless otherwise specified, all Article and Section references pertainto this Agreement.  Terms used hereinthat are defined in the UCC, unless 

 

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otherwisedefined herein, shall have the meanings specified in the UCC. The Borrowers,Guarantor and the Bank have participated jointly in the drafting of the LoanDocuments. If an ambiguity, question of intent or question of interpretationarises, the Loan Documents shall be construed as if drafted jointly by theparties, and no presumption or burden of proof shall arise favoring ordisfavoring any Party by virtue of the authorship of all or any part of theLoan Documents.

 

1.3           Accounting Terms and Determinations.  Except as otherwise expressly provided herein, all accountingterms used herein shall be interpreted, and all financial statements andcertificates and reports as to financial matters required to be delivered toLender hereunder after the Closing Date shall be prepared, in accordance withGAAP, on a basis consistent with those used in the preparation of the financialstatements referred to in Section 5.11 hereof.  All calculations made for the purposes ofdetermining compliance with the provisions of this Agreement shall be made byapplication of GAAP, on a basis consistent with those used in the preparationof the financial statements referred to in Section 5.11 hereof.

 

SECTION 2.  THE REVOLVING LOAN.

 

2.1           Advances.  Subject to and in reliance upon the terms, conditions,representations and warranties in the Loan Documents, Lender hereby agrees tomake to Borrowers, prior to the Maturity Date, in one or more advances, a Loanup to the aggregate principal amount of Nine Hundred Thousand Dollars($900,000.00).  The Loan shall beevidenced by a promissory note executed by the Borrowers and payable to theorder of Lender substantially in the form of Exhibit A, dated as ofMarch 31, 2003 and maturing on the Maturity Date (the “Note”).

 

(a) Borrowers may borrow,pay, prepay in whole or in part and reborrow hereunder until Maturity Date,  so long as not more than an amount of principal equal to NineHundred Thousand Dollars ($900,000.00), in the aggregate, is outstandingat any one time. The Borrowers and Lender acknowledge that (i) this is arevolving credit loan, (ii) the Lender may limit or reduce the amount of anyadvance requested by the Borrowers under the Note or this Agreement, from timeto time, so that the maximum amount of principal outstanding under the Note orany of the other Loan Documents does not exceed the face amount of the Note,(iii) the Borrowers shall prepay the amount of principal outstanding under theNote or any of the other Loan Documents, from time to time, that may exceed theface amount of the Note within five (5) days of receipt of written notice fromLender or as otherwise provided in Section 2.6 (b), and (iv) there maybe times when no indebtedness is owing under the Note or the other LoanDocuments due to prepay­ments made by the Borrowers thereon, but the Note andthe other Loan Documents shall remain valid and shall be in full force andeffect (notwithstanding such occurrences), as to any and all subsequent loansor advances.

 

(b)Each advance shall be made in accordance with Subparagraphs (c) and (d) belowfollowing Lender’s receipt of Borrowers’ advance request notice, and allmaterials specified therein, which shall (i) be irrevocable and binding onBorrowers, (ii) designate whether the Borrowers will use the advance to pay(aa) current construction and mobilization costs attributable to the completionof the Madisonville Gathering System represented by invoices attached to thenotice of advance or (bb) in whole or in part, a subordinated debt principaland interest payment of approximately Two Hundred Fifty Thousand and No/100thsDollars ($250,000.00), and (iii) state the amount of each requested advance,and the date the Lender is requested to make each advance.

 

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(c) For each advancerequest, the Borrowers will: (1) deliver, or cause all vendors that provide orsupply labor, materials or services to or for the account of the Borrowers inconnection with the construction and mobilization of the Madisonville GatheringSystem to deliver, copies of all bills, invoices and statements to Borrowersand Lender that will be paid from the applicable advance; (2) promptly revieweach bill, invoice and statement upon receipt to confirm that (a) the vendoractually provided or supplied the labor, materials and services describedtherein, (b) the labor, materials and services conform, in all respects, to theapplicable plans, specifications and requirements for the MadisonvilleGathering System, and (c) the vendor is owed the full amount set forth in theapplicable bill, invoice and statement; and (3) deliver an advance requestnotice, substantially in the form attached as Exhibit B hereto, to theLender requesting the Lender to (a) make an advance pursuant to Section 2.1of this Agreement and (b) pay directly to the applicable vendor all (or aspecific part) of the applicable invoice on or before the applicable due date

 

(d)The Lender must receive Borrowers’ notices of advance no later than 2:00 p.m.(Houston, Texas time) one (1) Business Day preceding the Business Day theBorrowers wish to receive an advance for Madisonville Gathering System forcompletion and mobilization costs Each advance shall be subject to thesatisfaction of the applicable conditions precedent in Section 4.

 

 Lender shall (unless to its actual knowledgeany of the conditions precedent therefor have not been satisfied by Borrowersor waived by Lender) make each requested advance, as applicable, available toBorrowers by wire transfer or deposit as directed by Borrowers in the notice ofadvance. Each advance shall be reflected by a notation made by Lender in itsbusiness records. The aggregate amount of the advances reflected by thenotations made in Lender’s business records shall be, in the absence of manifesterror,  conclusive evidence of theprincipal amount owed by Borrowers under the Note, which the Borrowers shallrepay pursuant to Section 2.2.

 

2.2           Payments.  The Borrowers shall repay the principal amount then outstanding,and all accrued but unpaid interest, on the Loans advanced under this Agreementin full on the Maturity Date; provided that, the Borrower (a) shall makemandatory prepayments of principal as provided in Section 2.1 (a) and(b) may make voluntary prepayments of principal from time to time as providedin Section 2.6. Each payment on the Obligations must be paid at Lender’soffice, 5 Post Oak Park Place Office Building, 4400 Post Oak Parkway, Houston,Texas 77027, in funds which are or will be available for immediate use byLender by 2:00 p.m. (Houston time) on the day due.  If any action is required or any payment is to be made on a daywhich is not a Business Day, then that action or payment may be delayed untilthe next succeeding Business Day.  Anyextension of time shall be included in the computation of payments of interestand fees.  All payments by the Borrowersof principal of and interest on the Loan, and of all fees and other amountspayable under any Loan Document, shall be payable without deduction for or onaccount of any present or future Taxes or other charges (excluding anyfranchise taxes or income taxes imposed on or measured by the overall netincome, assets, net worth or shareholders’ capital of Lender) levied or imposedby the United States of America (or by any political subdivision or taxingauthority thereof or therein) through withholding or deduction with respect toany such payments.  If any Taxes orother charges are so levied or imposed, the Borrowers will make additionalpayments in such amounts so that every net payment of principal of and intereston the Obligations, and of all other amounts payable by it under any LoanDocument, after withholding or deduction for or on account 

 

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ofany such present or future Taxes or other charges, will not be less than theamount provided for herein or therein.

 

2.3           Interest Rate and Payments.  The principal of the Loan advanced underthis Agreement shall bear interest prior to the earlier of the Maturity Date,or Default, at a fixed rate of **s**even and one-quarter per cent (7.25%) perannum. The Borrowers shall pay accrued but unpaid interest on the principaladvanced hereunder beginning on April 30, 2003 and continuing on each PaymentDate thereafter until the Maturity Date.

 

2.4           Default Rate.  At the option of Lender and to the extent permitted by Law, allpast-due (a) principal of the Loan and accrued interest thereon and(b) any other amount payable by Borrowers under any of the Loan Documentsshall bear interest from the date due (stated or by acceleration) at theDefault Rate until paid, regardless of whether such payment is made before orafter entry of a judgment.

 

2.5           Interest Calculations.  All payments of interest shall be calculated on the basis ofactual number of days (including the first day but excluding the last day)elapsed but computed as if each calendar year consisted of 365 or 366 days, asthe case may be.

 

2.6           VoluntaryPrepayments.  Borrowersmay, upon one Business Day’s notice, prepay all or any part of the outstandingprincipal of the Loan from time to time prior to the Maturity Date, in whole orin part. A notice of prepayment shall constitute a binding obligation ofBorrowers to make a prepayment on the date stated therein.  Prepayments of principal of the Loan shallbe applied to principal installments in inverse order of maturity, and may bere-borrowed as provided in this Agreement.

 

                                2.7           Order ofApplication.

 

                                (a)           So long as no Default has occurredand is continuing, payments of the Obligations shall be applied in full untilexhausted first to accrued interest, and second to principal ofthe Obligations as directed by Borrowers.

 

                                (b)           At any time during which a Defaulthas occurred and is continuing, any payment or prepayment (including proceedsfrom the exercise of any Rights under the Loan Documents) shall be applied inthe following order: (i) to expenses for which Lender is entitled toreimbursement in accordance with Section 6.6 but for which Lender hasnot then been reimbursed, (ii) to accrued interest on the Obligations, (iii) tothe principal of the Loan, or (iv) any combination of the foregoing in eachcase in the manner Lender deems appropriate.

 

SECTION 3.  SECURITY.

 

3.1           Security.  The full and complete payment andperformance of the Obligations shall be secured by (a) the Letters of Credit,(b) the Guaranty, and (c) first priority, perfected Lender Liens in, andassignment of, all of the issued and outstanding Capital Stock of each of theBorrowers, the Waxahachie Contracts, the Madisonville Contracts, the PipelineSystems and all Property appurtenant thereto as described in the SecurityDocuments (collectively, and together with proceeds and products thereof, the “Collateral”),each such Lender Lien and assignment to be evidenced by a Security Document.

 

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3.2           Additional Security and Guaranties.  Lender may, without notice or demand and without affectingBorrowers’ obligations under the Loan Documents, from time to time (a) takefrom any Person and hold collateral (other than the Collateral) for the paymentand performance of all or any part of the Obligations and exchange, enforce orrelease such collateral or any part thereof, (b) accept and hold any endorsementor guaranty of payment of all or any part of the Obligations and release anyendorser or guarantor, or any Person who has given any other security for thepayment of all or any part of the Obligations, or any other Person in any wayobligated to pay all or any part of the Obligations, and (c) accept and holdany extension, renewal or replacement of the Letters of Credit as may benecessary to maintain a Letter of Credit as part of the Collateral as providedherein.

 

3.3           Security Documents.  Borrowers and Guarantor shall promptlyexecute and cause to be executed such further documents, schedules andinstruments, including without limitation, security agreements, UCC financingstatements, as Lender, in its sole discretion, reasonably deems necessary orproper to create, evidence, maintain, continue and perfect its Liens on theCollateral.

 

3.4           Setoff.  If a Default shall have occurred and becontinuing, Lender is hereby authorized at any time and from time to time,without notice to Borrowers or Guarantor (any such notice being herebyexpressly waived by Borrowers and Guarantor), to set off and apply any and alldeposits (general or special, time or demand, provisional or final) at any timeheld and other indebtedness at any time owing by Lender to or for the credit orthe account of Borrowers or Guarantor against any and all of the obligations ofBorrowers or Guarantor now or hereafter existing under this Agreement or anyother Loan Document, irrespective of whether or not Lender shall have made anydemand under this Agreement or such other Loan Document and although suchobligations may be unmatured.  Lenderagrees promptly to notify Borrowers and Guarantor after any such setoff andapplication, provided that the failure to give such notice shall not affect thevalidity of such setoff and application. The Rights of Lender hereunder are in addition to other Rights(including, without limitation, other rights of setoff) which Lender may have.

 

3.5           Proceeds. Notwithstanding that, by the terms ofthe various Security Documents, Borrowers are and will be assigning to Lenderall of the “Proceeds” (as defined therein) accruing to the Collateral coveredthereby, so long as no Default has occurred, Borrowers may continue to receiveall of the Proceeds, subject, however, to the Liens created under the SecurityDocuments, which Liens are hereby affirmed and ratified.  Upon the occurrence of a Default, Lender mayexercise all rights and remedies granted under the Security Documents,including the right to obtain possession of all of the Proceeds then held byBorrowers or to receive all other Proceeds directly from the Persons makingpayment thereof.  In no case shallLender’s failure to collect any of the Proceeds constitute an estoppel, waiver,remission or release of any of its Rights under the Security Documents, norshall any release of any Proceeds by Lender to Borrowers constitute anestoppel, waiver, remission, or release of any other Proceeds or of any Rightsof Lender to collect other Proceeds thereafter.

 

SECTION 4.  CONDITIONS PRECEDENT.

 

4.1           Initial Advance.  The obligation of Lender to make the initial advance under thisAgreement is subject to the condition precedent that Lender shall have receivedand 

 

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approvedon or before the date of the Advance all of the following, each dated (unlessotherwise indicated) the date hereof, in form and substance satisfactory toLender:

 

(a)           Resolutions.  Resolutions of the Board of Directors ofeach of the Borrowers and the Guarantor (certified by their respectiveSecretary or Assistant Secretary) which respectively authorize the execution,delivery and performance by the Borrowers and the Guarantor of the LoanDocuments to which each is a party;

 

(b)           Incumbency Certificates.  Certificates of incumbency of each of theBorrowers and the Guarantor (certified by their respective Secretary orAssistant Secretary) certifying (i) the name of each officer of the Borrowersor the Guarantor that is authorized to sign this Agreement and each of theother Loan Documents to which each is a party (including the certificatescontemplated herein) together with specimen signatures of each such officer and(ii) who will, until replaced by other officers duly authorized for thatpurpose, act as the representative of the Borrowers or the Guarantor for thepurposes of signing documents and giving notices and other communications inconnection with the Loan Documents and the transactions contemplated thereby;

 

(c)           Articles of Incorporation.  True and complete copies of the articles ofincorporation of each of the Borrowers filed with the Secretary of State ofTexas, and certificates of incorporation filed with the Secretary of State ofDelaware and qualification to conduct business filed with the Secretary ofState of Texas of the Guarantor, each certified by the Secretary of the applicable Person as of the ClosingDate or by an authorized public officer within thirty (30) days of the Closingdate;

 

(d)           Bylaws.  The bylaws of each of the Borrowers and theGuarantor certified by their respective Secretary or Assistant Secretary to becomplete and in effect on the Closing Date;

 

(e)           Governmental Certificates.  Certificates of the appropriate governmentofficials of the States of Delaware and Texas, as applicable to theirrespective incorporation and qualification to conduct business of Borrowers andGuarantor, as to the existence and good standing of each dated within thirty(30) days prior to the Closing Date;

 

(f)            Note.  The Note executed by Borrowers;

 

(g)           Security Documents. TheSecurity Documents executed by Borrowers and the Guarantor, as applicable, andfiled of record in the appropriate public records as may be required to perfecta first priority Lien in the Collateral in Lender;

 

(h)           Guaranty. The Guarantyexecuted by the Guarantor;

 

(i)            Letters of Credit. TheLetters of Credit each in the form attached as Schedule 4.1.

 

(j)            Subordination Agreement. TheSubordination Agreement executed by ADAC;

 

(k)           Facility Fee. Lender shallhave received a non-refundable fee of Ten Thousand and no/100ths Dollars($10,000.00) for services rendered, 

 

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andto be rendered, by Lender separate and apart from the lending of money or theprovision of credit pursuant to the Loan Documents;

 

(l)            Fees and Expenses.  Lender shall have received all fees andexpenses (including, without limitation, reasonable fees and expenses ofcounsel for Lender) payable by the Borrowers on the Closing Date pursuant tothis Agreement;

 

(m)          Compliance Certificate.  A “Compliance Certificate” of the  president, secretary or chief financialofficer of each of the Borrowers and the Guarantor in substantially the formset out in Exhibit C  hereto inwhich such officer certifies to the satisfaction of the conditions set out insubsections (a), (b) and (c) of Section 4.2 hereof;

 

(n)           Gas Contracts.  A true and correctcopy of each of and the Waxahachie Contracts and the Madisonville Contracts;

 

(o)           Insurance. True and correctcopies of certificates or binders of insurance, noting the Lender as loss payeeor additional insured, evidencing Borrower’s compliance with Section 6.13of this Agreement;

 

(p)           Material Contracts.  A true and correct copy of every contractpertaining to the Collateral which either (i) affects the marketability, use orvalue, of the Collateral in any material respect or (ii) creates or evidences amaterial obligation or material liability on the part of Borrowers which hasnot been taken into account in the most recent Financial Statements provided toLender (collectively, “Material Contracts”);

 

(q)           Lien Searches.  The results of Uniform Commercial Code andother Lien searches showing all financing statements and other Lien instrumentsfiled against the Borrowers or the Guarantor or any of the Financial Statementsin such public offices as may be identified by Lender, such searches to be asof a date no more than thirty (30) days prior to the Closing Date; and

 

(r)            Title Information.  Copies of all title opinions, policies,reports or other information in the possession or under the control of Pipelinewith respect to the status of title to the Pipeline Systems that are requestedby Lender.

 

4.2           The Loan Advances.  The obligation of Lender to make Loan advances (including theinitial advance) is subject to the following additional conditions precedent:

 

(a)           No Default.  No Default shall have occurred and becontinuing, or would result from the advance;

 

(b)           Representations and Warranties.  All of the representations and warranties ofthe Borrowers and Guarantor contained in Section 5 hereof and inthe other Loan Documents shall be true and correct in all material respects onand as of the date of the advance with the same force and effect as if suchrepresentations and warranties had been made on and as of such date;

 

(c)           No Legal Violation.  The making of the advance will not violateany law, rule or regulation or any order of any Governmental Authorityapplicable to Borrowers or Guarantor;

 

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(d)           AFEs and invoices. The Lendershall have received a true and correct copy of all authorities for expenditure,business plans or other material that relate to working capital expenditures,and invoices directly or indirectly related to the construction andmobilization of the Madisonville Gathering System, which will be paid by Borrowersfrom proceeds of any advance;

** **

**(e)           Auditsand inspections. Without limiting the generality of the other rights setforth herein, the Lender (at its sole election) shall be entitled to (1) auditthe bills, invoices and statements, and obtain copies of any applicablecontracts, delivery tickets, work orders and other materials that may not havepreviously been delivered to it pursuant to Section 2.1 or this Section,related to the construction of the Madisonville Gathering System as Lender mayreasonably request, (2) enter the easements, facilities and other Propertyincorporated in, or used in connection with, the Madisonville Gathering System,(3) inspect the labor, materials and services described in any bill, invoice orstatement, and labor, materials and services incorporated in the MadisonvilleGathering System, prior to making any advance, (4) receive copies of completioncertificates, as-built drawings, plans and specifications and other materialsgenerated or received by the Borrowers with respect to the construction andmobilization of the Madisonville Gathering System, and (5) require any and allvendors to deliver documents reasonably satisfactory to the Lenderacknowledging receipt of payment and releasing and waiving any and all liensand other rights with respect to the labor, materials and services that arecovered by the payment.**

 

(e)           Additional Documentation. TheBorrower shall furnish copies of such additional  acceptance certificates, approvals, inspection reports,  lien waivers, opinions, or other documentsas Lender or its legal counsel, may reasonably request.

 

Eachnotice of advance by the Borrowers hereunder shall constitute a representationand warranty by the Borrowers and Guarantors that (i) the conditions precedentset forth in Sections 4.2(a), (b) and (c) have beensatisfied (both as of the date of such notice and as of the date of suchborrowing, unless the Borrowers or Guarantor otherwise notify Lender prior tothe date of such borrowing) and (ii) the proceeds of the advance shall only beused for the purposes stated in the notice of advance and, if applicable,approved by Lender.

 

4.3           Materiality of Conditions.  Each condition precedent herein is materialto the transactions contemplated herein, and time is of the essence in respectof each thereof.

 

4.4           Waiver of Conditions.  Lender may, at its election, make any advance without allconditions being satisfied, but this shall not be deemed to be an estoppel,waiver, remission or release of the requirement that any conditions precedentbe satisfied as a prerequisite for any subsequent advance, unless Lenderspecifically waives each such item in writing.

 

SECTION 5.  WARRANTIES AND REPRESENTATIONS.

 

Borrowers and Guarantor represent and warrant to Lender as follows:

 

5.1           Existence and Authority.  Borrowers are corporations duly organizedand validly existing under the Laws of the State of Texas. Guarantor is acorporation duly organized and validly existing under the Laws of the State ofDelaware, and qualified to conduct business in the State of Texas. Eachpossesses all requisite authority, power, licenses, permits and franchises toconduct its business as presently conducted, to own its 

 

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Propertiesand assets, and to execute, deliver and comply with the terms of each LoanDocument to which it is a party, except where the failure to so possess couldnot, individually or collectively, have a Material Adverse Effect.

 

5.2           Binding Obligations.  The negotiation, preparation, execution and delivery of thisAgreement and the other Loan Documents have been duly authorized and approvedby all necessary corporate action and constitute the legal, valid and bindingobligations of the Borrowers and the Guarantor, enforceable against Borrowersand the Guarantor in accordance with their respective terms, except as theenforceability thereof may be limited by applicable Debtor Relief Laws, whichmay delay the enforcement of certain remedies, or by general principles ofequity (regardless whether considered in a proceeding in equity or at Law).

 

5.3           Compliance with Laws and Documents.  Borrowers and Guarantor are not, nor willthe execution, delivery and the performance of and compliance with the terms ofthis Agreement and the other Loan Documents by the Borrowers or Guarantor causeany of them to be, in violation of (i) any Laws, other than such violationswhich could not, individually or collectively, cause a Material Adverse Effect,or (ii) their organizational documents. The execution, delivery, and the performance of and compliance with theterms of this Agreement and the other Loan Documents by Borrowers and Guarantorare consistent with, and will not conflict with, result in any breach of,constitute a default  under, or resultin the creation or imposition of (or the obligation to create or impose) anyLien (except pursuant hereto) upon any of the property, assets or revenues ofBorrowers or Guarantor pursuant to the terms of any agreement, contract, deedof trust, indebtedness, instrument, mortgage, or Law to which Borrowers orGuarantor are a party or by which Borrowers or Guarantor, or any of theirproperty, assets or revenue are bound or to which they are subject, excludingany conflicts, breaches or defaults which individually or collectively could nothave a Material Adverse Effect.

 

5.4           Litigation.  Borrowers and Guarantor are not involved in, nor aware of thethreat of, any Litigation which could reasonably be expected to have a MaterialAdverse Effect, nor are there any outstanding or unpaid judgments againstBorrowers or  Guarantor which could havea Material Adverse Effect.

 

5.5           No Consents.  Except as may be contemplated by the Loan Documents, no order,consent, approval, license, permit, waiver, exemption, authorization of orvalidation of, or filing, recording or registration with (except as heretoforehave been obtained or made), or exemption by, any Person or Tribunal isrequired to authorize, or is required in connection with, the execution, delivery,performance, legality, validity, binding effect or enforceability of thisAgreement or any other Loan Document.

 

5.6           Location.  The chief executive offices of each of the Borrowers andGuarantor are located at the addresses shown on the signature page(s)hereto.  Each of the Borrowers andGuarantor is entitled to receive notices hereunder at its chief executiveoffice, notwithstanding that it may maintain other places of business.

 

5.7           Solvency. Each of Borrowers andGuarantor have sufficient capital to carry on all business and transactions inwhich they are now respectively engaged or are about to engage, are now solventand will continue to be solvent after the execution of this Agreement and eachother Loan Document and will be able to pay their respective Debts as theymature.  The capital of each of theBorrowers and the Guarantor is not 

 

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unreasonablysmall to carry out their respective businesses as now conducted and as proposedto be conducted, considering their respective capital needs, projected capitalrequirements and capital availability thereof. Borrowers and Guarantor do not intend to incur Debts beyond theirrespective ability to pay such Debts as they mature (taking into account thetiming and amounts of cash to be received by it and the amounts to be payableon or in respect of its Debts).

 

5.8           Debt.  Borrowers and Guarantor are not directly or indirectly obligated(including, without limitation, as a guarantor) on any borrowed money otherthan Debt permitted under Section 6.24 hereof.

 

5.9           Fiscal Year.  Each of the Borrowers’ and Guarantor’s fiscal years ends onDecember 31.

 

5.10         Relationship with Lender.  No Person who may be deemed to have“control” of the Borrowers or the Guarantor is an “executive officer,”“director,” or “principal shareholder” of Lender or any correspondent ofLender, as such quoted terms are defined in section 215.2 ofRegulation 0 of the Board of Governors of the Federal Reserve System, asamended.

 

5.11         Financial Statements.  Each of Borrowers’ and Guarantor’s Current Financials wereprepared on an accrual accounting basis and present fairly Borrowers’ and  Guarantor’s consolidated financialcondition, and the results of their respective operations, as of (and for theportions of the fiscal year ending on) the dates thereof.  All material liabilities (direct orindirect, fixed or contingent) of Borrowers and Guarantor as of the dates ofthe Current Financials are reflected therein or in the notes thereto.

 

5.12         Taxes.  All Tax returns and reports of the Borrowers and Guarantor requiredto be filed have been filed (or extensions granted), and all Taxes imposed uponBorrowers or Guarantor which are due and payable have been paid, other thanTaxes being contested in good faith for which the criteria for Permitted Lienshave been satisfied.

 

5.13         Government Regulation.  Borrowers and Guarantor are not (nor is any transactioncontemplated hereunder) subject to regulation under the Public Utility HoldingCompany Act of 1935, the Federal Power Act, the Investment Company Act of 1940,the Interstate Commerce Act (as any of the preceding acts have been amended),any regulations promulgated by the Office of Foreign Assets Control as codifiedin Chapter V of 31 C.F.R. Pipeline is a “utility” as defined in Chapter 35 ofthe Texas Business and Commerce Code, as amended; however Processing andGuarantor  are not “utilities”.

 

5.14         Employee Benefit Plans. (a) No PensionPlan of Borrowers or Guarantor has incurred an accumulated funding deficiencyin an amount sufficient to be reasonably likely to have a Material AdverseEffect, (b) Borrowers and Guarantor have not incurred any liability to the PBGCin connection with any such Pension Plan which would reasonably be expected tohave a Material Adverse Effect, (c) Borrowers and Guarantor have not withdrawnin whole or in part from participation in a Multiemployer Plan, and (d) noProhibited Transaction or Reportable Event has occurred with respect to aPension Plan which would be reasonably likely to have a Material AdverseEffect.

 

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5.15         Purpose of the Revolving Loan Advances.

 

(a)           The proceeds of the Loan will only beused by Borrowers: (a)  to construct andmobilize the Madisonville Gathering System; or (b) for working capital purposesapproved by Lender pursuant to Section 2.1.

 

(b)           Advances may not be used directly orindirectly for the payment of dividends on Borrower’s Capital Stock.

 

(c)           Advances may not and will not be useddirectly or indirectly for the purpose of purchasing or carrying, or for thepurpose of extending credit to others for the purpose of purchasing orcarrying, any “margin stock” as that term is defined in Regulations T, U and Xof the Board of Governors of the Federal Reserve System, as amended, or torepay any indebtedness which was created for the purpose of purchasing orcarrying margin stock.

 

5.16         Properties;Liens.

 

(a)           Borrowers have good and marketabletitle to all of their respective Properties including, without limitation, thePipeline Systems/the Collateral (except for Properties that have been disposedof in the ordinary course of business, or as permitted under this Agreement,without having a Material Adverse Effect on either Borrowers’ Tangible NetWorth, or ability to repay the Obligations as provided herein, respectively).

 

(b)           Other than Permitted Liens, no liensencumber (i) Borrowers’ Property including, without limitation, the PipelineSystems/the Collateral or (ii) the Capital Stock of each Borrower that has beenissued to the Guarantor and is outstanding.

 

5.17         Environmental Laws: Hazardous Materials.

 

(a)           Ownership of Borrowers’ Property doesnot violate any applicable Law of any Governmental Authority or Tribunal or anyrestrictive covenant (recorded or otherwise), including without limitation allapplicable flood disaster laws, water disposal permits, and Environmental Lawswhere such violation would have a Material Adverse Effect.

 

(b)           No notice, notification, demand,citation, summons or order has been issued to Borrowers, no complaint has beenfiled and served on Borrowers,  nopenalty has been assessed against Borrowers and, to the knowledge of Borrowers,no investigation or review is pending or threatened by any Tribunal or otherPerson with respect to (i) any alleged violation of any Environmental Law inconnection with the Borrowers’ Property, or (ii) any alleged failure to haveany permit, certificate, license, approval, registration or authorizationrequired in connection with the Borrowers’ Property, or (iii) any generation,treatment, storage, recycling, transportation or disposal or Release (otherthan in compliance with Environmental Laws or permits issued thereunder) of anyHazardous Substance in connection with the Borrowers’ Property where, in eachcase, any such event has a Material Adverse Effect.

 

(c)           Except in compliance with EnvironmentalLaws and permits issued thereunder, or where it could not have a MaterialAdverse Effect, (i) Borrowers, and to their knowledge other Persons, have notReleased any Hazardous Substance on, under or 

 

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inconnection with the Borrowers’ Property and none of their  Property have been used (whether byBorrowers or any other Person) as a dump site for any Hazardous Substance; (ii)no polychlorinated biphenyls, urea or formaldehyde is present in connectionwith the Borrowers’ Property; (iii) no asbestos is present in connection withthe Borrowers’  Property; (iv) there areno underground storage tanks, active or abandoned, which have been used tostore or have contained any Hazardous Substance in connection with theBorrowers’ Property; and (v) no Hazardous Substance has been reported aspresent in connection with the Borrower’s Property in a threshold planningquantity, where such a quantity has been established by Law.

 

(d)           Borrowers have not transported orarranged for the transportation (directly or indirectly) of any HazardousSubstance to any location which is listed or proposed for listing under anyEnvironmental Law as a Hazardous Substance site which may lead to claimsagainst Borrowers for clean-up costs, remedial work, damages to naturalresources or personal injury, in each case having a Material Adverse Effect.

 

(e)           No oral or written notification of aRelease of a Hazardous Substance has been filed by or on behalf of Borrowersand none of the Borrowers’ Property is listed or proposed for listing on anynational priority list promulgated pursuant to any Environmental Law.

 

(f)            There are no Liens on any of theBorrowers’ Property arising under any Environmental Laws and, to theirknowledge, no actions by any Tribunal have been taken or are in process whichcould subject any of the Borrowers’ Property to such Liens, or which wouldrequire any of them to place any notice or restriction relating to the presenceof any Hazardous Substance in any deed to any of the Borrowers’ Property wheresuch Liens, notices or restrictions have a Material Adverse Effect.

 

(g)           Borrowers and Guarantor has madeavailable to Lender all material reports of environmental investigations,studies, audits, tests, reviews or other analyses conducted by or which are intheir possession relating to the Borrowers’ Property.

 

(h)           Except as previously disclosed toLender in writing, there have been no agreements (or communications related toagreements) with any Tribunal or any private entity, including, but not limitedto, any prior owners of the Borrowers’ Property relating to liability arisingfrom, or the violation of, any Environmental Law relating to their Property orthe transportation of any Hazardous Substance to or from their Property, exceptfor agreements and communications made in the ordinary course of business inconnection with permits, required reports, requirements of any EnvironmentalLaw or inspections of Tribunals having jurisdiction over the Borrowers’ Property.

 

5.18         Insurance.  Borrowers and Guarantor maintain insurance which complies with Section 6.13.

 

5.19         Operation of Business.  Borrowers and Guarantor possess alllicenses, permits, franchises, patents, copyrights, trademarks, and tradenames, or Rights thereto, reasonably necessary to conduct their businessessubstantially as now conducted and as presently proposed to be conducted exceptwhere the failure to so possess would not individually or in the aggregate,result in a Material Adverse Effect, and the Borrowers and Guarantor are not inviolation of any valid Rights of others which violation may cause a MaterialAdverse Effect with respect to any of the foregoing.

 

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5.20         Margin Securities.  The Borrowers and Guarantor are not engagedprincipally, or as one of their important activities, in the business ofextending credit for the purpose of purchasing or carrying margin stock (withinthe meaning of Regulations  T, U, or Xof the Board of Governors of the Federal Reserve System).

 

5.21         Disclosure.  No statement, information, report,representation, or warranty made by the Borrowers or Guarantor in thisAgreement or in any other Loan Document or furnished to Lender in connectionwith this Agreement or any transaction contemplated hereby contains any untruestatement of a material fact or omits to state any material fact necessary tomake the statements herein or therein not misleading.  There is no fact, event, or condition known to the Borrowers orGuarantor which has had a Material Adverse Effect, or which could reasonably beexpected to have a Material Adverse Effect, that has not been disclosed inwriting to Lender.

 

5.22         Agreements.  The Borrowers and Guarantor are not a partyto any indenture, loan, or credit agreement, or to any lease or other agreementor instrument, or subject to any charter or corporate restriction that couldreasonably be expected to have a Material Adverse Effect.  The Borrowers and Guarantor are not indefault in any material respect in the performance, observance, or fulfillmentof any of the obligations, covenants, or conditions contained in any agreementor instrument material to its business to which they are a party.

 

SECTION 6.  COVENANTS.

 

Solong as (i) Lender is committed to make advances under this Agreement and (ii)any portion of the Obligations are outstanding, unless Borrowers receive aprior written notice from Lender that it does not object to a deviation,Borrowers and Guarantor covenant and agree as follows:

 

6.1           Use of Proceeds.  Borrowers shall use the proceeds of the Loan only as representedherein.

 

6.2           Books and Records.  Borrowers and Guarantor shall keep, in accordance with GAAP,proper and complete accounting books, records and accounts, and in respect ofthe Borrowers’ Property, Borrowers shall maintain proper and complete contract,division order, land, title and such other books, files and records as areusually and customarily maintained by a reasonable and prudent operator of oiland gas pipelines and, in each instance, will permit Lender to inspect the sameand make and take away copies thereof at reasonable times during normalbusiness hours.

 

6.3           Items to be Furnished.  Borrowers and Guarantor shall cause the following to be furnishedto Lender:

 

(a)           As soon as available, but no laterthan 150 days after the last day of each fiscal year of Guarantor, FinancialStatements showing the consolidated financial condition and results ofoperations of Guarantor and its Subsidiaries as of, and for the year ended on,such last day, accompanied by (i) the opinion, without material qualification,by a firm of independent certified public accountants acceptable to Lender,based on an audit using generally accepted auditing standards, that such FinancialStatements were prepared in accordance with GAAP and present fairly thefinancial condition and results of 

 

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operationsof Guarantor and its Subsidiaries, and (ii) a Financial Report Certificate withrespect to such Financial Statements.

 

(b)           As soon as available, but no laterthan 75 days after the last day of each fiscal quarter of Borrowers andGuarantor (i) Financial Statements showing the financial condition and resultsof operations of Borrowers and Guarantor as of, and for the period from thebeginning of the current fiscal year to, such last day, and a Financial ReportCertificate with respect to such Financial Statements, and (ii) a report fromeach of the Borrowers summarizing the results of their respective PipelineSystems, in form and substance acceptable to the Lender.

 

(c)           Concurrently with the delivery ofeach of the Financial Statements referred to in subparagraphs (a) and (b) ofthis Section 6.3, a certificate of the chief financial officer ofBorrowers and Guarantor (i) stating that to the best of such officer’sknowledge, no Default has occurred and is continuing, or if a Default hasoccurred and is continuing, a statement as to the nature thereof and the actionthat is proposed to be taken with respect thereto and (ii) showing inreasonable detail the calculations demonstrating compliance with Sections 6.29,6.30 and 6.31.

 

(d)           Promptly after the issuance thereof,true copies of any order issued by any Tribunal in any Litigation to whichBorrowers or Guarantor are a party, and any press release or other statement made available generally by or onbehalf of Borrowers or Guarantor to the public, which relate to any facts orcircumstances that individually or in the aggregate may have a Material AdverseEffect on any of the Borrowers or Guarantor.

 

(e)           Notice promptly after Borrowers orGuarantor know or should know of any change in any fact or circumstancerepresented or warranted in any Loan Document which individually or in theaggregate may have a Material Adverse Effect on any of the Borrowers orGuarantor, or a Default or Potential Default, written notice of the nature thereof and the action Borrowers orGuarantor has taken, is taking, or proposes to take with respect thereto.

 

(f)            A summary, or when requested byLender, copies, of all material proceedings, hearings or other actionsconducted before any Tribunal in respect of the Collateral and the operationsof Borrowers or Guarantor in respect thereto which relate to any facts or circumstancesthat individually or in the aggregate may have a Material Adverse Effect on anyof the Borrowers or Guarantor.

 

(g)           As soon as possible and in any eventwithin five (5) Business Days after Borrowers or Guarantor know or should knowthat any Reportable Event or Prohibited Transaction has occurred with respectto any Plan or that the PBGC, Borrowers or Guarantor have instituted or willinstitute proceedings under Title IV of ERISA to terminate any Plan, ineach case, which would reasonably be expected to have a Material AdverseEffect, a certificate of the chief financial officer of Borrowers or Guarantorsetting forth the details as to such Reportable Event or Prohibited Transactionor Plan termination and the action that Borrowers or Guarantor propose to takewith respect thereto.

 

(h)           As soon as possible and in any eventwithin five (5) days after the occurrence thereof, written notice of any matterthat could reasonably be expected to have a Material Adverse Effect.

 

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(i)            Promptly upon request therefor byLender, such information (not otherwise required to be furnished under the LoanDocuments) respecting the business affairs, assets, and liabilities ofBorrowers or Guarantor and such opinions, certifications, and documents, inaddition to those mentioned herein, as Lender may reasonably request.

 

6.4           Inspection.  Borrowers and Guarantor shall allow Lender to inspect any oftheir respective assets and to discuss any of their affairs, conditions andfinances with their directors, officers or employees (including Persons workingfor or on behalf of either of the Borrowers or Guarantor on a contract basis)from time to time during reasonable business hours, and Borrowers and Guarantorshall permit Lender and its authorized agents, if any, access for the purposesof inspecting the same. Borrowersand Guarantor hereby authorize (a) all duly constituted federal, state andmunicipal authorities to furnish to Lender copies of any reports of examinationof Borrowers and Guarantor which have been made by such authorities; and (b)Lender, following a Default or Potential Default, to contact and discuss any ofthe Borrowers’ or Guarantor’s affairs, conditions or finances. The rights grantedto Lender in this Section are in addition to, and not in limitation of, thosegranted in Section 2.1.

 

6.5           Taxes.  Borrowers and Guarantor shall promptly pay when due any and allTaxes applicable to each of them or their Property, except Taxes for which thecriteria for Permitted Liens have been satisfied, and Borrowers and Guarantorwill not, directly or indirectly, use any portion of the Loan proceeds of anyadvance to pay the wages of employees unless a timely payment to or deposit withthe United States of America of all amounts of Tax required to be deducted andwithheld with respect to such wages is also made.

 

6.6           Expenses.  Borrowers and Guarantor shall pay within 10 days after request(a) all reasonable costs, fees and expenses paid or incurred by Lender(including, but not limited to, any additional filing or recording fees and thereasonable fees and expenses of counsel to Lender) in connection with thenegotiation, preparation and execution of the Loan Documents relating toBorrowers or Guarantor, and in connection with any amendment, waiver or consentrequested by Borrowers or Guarantor with respect thereto, and (b) allreasonable costs, fees and expenses paid or incurred by Lender after theoccurrence of any Default in connection with the enforcement of theObligations, as the case may be, or the exercise of any Rights (including, butnot limited to, reasonable attorneys’ fees and court costs) against it, all ofwhich shall be a part of the Obligations, as the case may be.

 

6.7           Maintenance of Existence, Assets andBusiness.  Borrowers and Guarantor shall at all times: (a) maintain theirexistence and authority to transact business and good standing in alljurisdictions where the failure to so maintain might have a Material AdverseEffect; (b) maintain all licenses, permits and franchises necessary for theirbusiness where the failure to so maintain might have a Material Adverse Effect;(c) keep all of their assets which are useful in and necessary to its businessin good working order and condition and make all necessary repairs thereto andreplacements thereof so that the value and operating efficiency thereof shallat all times be maintained and preserved; and (d) operate their Property in aprudent manner consistent with normal industry practices.

 

6.8           Maintenance of Priority of Lender Liens.  Borrowers and Guarantor shall perform such acts and dulyauthorize, execute, acknowledge, deliver, file and record such additionalassignments, security agreements, deeds of trust, mortgages, financing 

 

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statementsand other agreements, documents, instruments and certificates as Lender mayreasonably deem necessary or appropriate in order to perfect and maintain theLiens under the Security Documents in favor of Lender and preserve and protectthe Rights of Lender under the Loan Documents. Borrowers shall not, directly or indirectly, create, incur, or suffer orpermit to be created or incurred or to exist any Lien upon any of theirpresently unencumbered assets or properties, other than Permitted Liens.

 

6.9           Dispositions of Properties.

 

(a)           Without the consent of Lender,Borrowers will not sell, lease, assign, transfer, or otherwise dispose of(collectively, a “Disposition”) any of the Borrowers’   Property except:

 

(i)            Dispositions ofinventory (including oil and gas processed, sold and transported in connectionwith their Pipeline Systems) in the ordinary course of business; or

 

(ii)           Dispositions ofProperty no longer used or useful in the conduct of its business.

 

(b)           Except as permitted by Section 6.10,Borrowers will not enter into any contract or agreement affecting Borrowers’title to or operation of the Borrowers’ Property or the processing, sale ortransportation of oil and gas therefrom, other than:

 

(i)            division orders andtransfer orders or other agreements entered into in the ordinary course ofbusiness which are cancelable upon 30 days notice without penalty or liability,

 

(ii)           gas processing,purchase, sales or transportation contracts with a term less than six (6)months entered into in the ordinary course of business, and

 

(iii)          agreements orcontracts entered into in the ordinary course of business which do not,individually or in the aggregate, materially affect their Pipeline Systems.

 

TheBorrowers may retain the proceeds from any Disposition so long as Borrowers orGuarantor are not (or immediately after the Disposition will not be) in Defaulthereunder.

 

6.10         Sales.  Borrowers will only sell oil and gasprocessed, purchased, sold and transported through Borrowers’ Pipeline Systemsfor a commercially reasonable price.

 

6.11         Compliance with Laws and Documents.  Borrowers and Guarantor will not, directlyor indirectly, violate the provisions of any Laws or their organizationaldocuments and will not amend, modify or terminate any of their organizationaldocuments where such violation, amendment, modification or termination,individually or in the aggregate, could cause a Material Adverse Effect.  Borrowers and Guarantor will comply in allmaterial respects with all material agreements, contracts and instrumentsbinding upon them or affecting their business, or their Property.

 

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6.12         Fiscal Year and Accounting Methods.  After the Closing Date, Borrowers  and Guarantor will not change their fiscal years or methods ofaccounting (other than immaterial changes in methods).

 

6.13         Insurance; Payment of Premiums.

 

(a)           Borrowers shall, at their sole costand expense, keep and maintain in respect of the Borrowers’ Property suchinsurance as is generally kept and maintained by reasonable and prudentoperators of oil and gas pipelines, including, but not limited to, worker’scompensation insurance, property insurance and general liability insurance.

 

(b)           All such policies of insurance shallbe in a form, with such deductibles, and with insurers recognized asfinancially sound and reputable by prudent business Persons in the samebusinesses as Borrowers and acceptable to Lender.  Upon request of Lender, prior to the initial Loan advance,Borrowers shall deliver to Lender a certificate of insurance for each policy ofinsurance required by this Section 6.13 and evidence of payment of allpremiums therefor.  Such policies ofinsurance and the certificates evidencing the same shall contain anendorsement, in form and substance acceptable to Lender, showing Lender as an additionalloss payee.  Such endorsement or anindependent instrument furnished to Lender shall provide that the insurancecompanies will give Lender at least 30 days prior written notice before anysuch insurance shall be altered or canceled and that no act or default ofBorrowers or any other Person shall affect the Rights of Lender to recoverunder such insurance in case of loss or damage.  If no Default has occurred and is continuing, Borrowers may usethe insurance proceeds to repair or replace damaged or destroyed Propertycovered by the applicable insurance policy.

 

**(c) The Borrowers shall: (1) obtain certificates ofinsurance confirming that each vendor has worker’s compensation, generalliability and other insurance coverage as may be reasonable or necessary inconnection with the labor, materials and services to be provided or supplied tothe Madisonville Gathering System; (2) periodically provide Lender currentlists of all vendors, their respective wire transfer instructions and othermaterials as the Lender may reasonably request; and (3) protect theMadisonville Gathering System from any and all claims, demands, causes ofaction and Liens that may accrue to, or be asserted by, any of the vendors (orany of the vendors’ agents, employees or independent contractors).**

 

6.14         Environmental Laws.  Borrowers shall conduct their business so as to comply with allapplicable Environmental Laws and shall promptly take corrective action toremedy any non-compliance with any Environmental Law, except where failure toso comply or take such action could not reasonably be expected to cause aMaterial Adverse Effect.  Borrowersshall establish and maintain at their expense a system which, in theirreasonable business judgment, will assure its continued compliance withEnvironmental Laws, which system shall include annual reviews of suchcompliance by employees or agents who are familiar with the requirements of theEnvironmental Laws.

 

6.15         GENERAL INDEMNIFICATION.  BORROWERS SHALL INDEMNIFY, PROTECT AND HOLD LENDER AND ITSPARENTS, SUBSIDIARIES, DIRECTORS, OFFICERS, EMPLOYEES, REPRESENTATIVES, AGENTS,SUCCESSORS, ASSIGNS AND ATTORNEYS (COLLECTIVELY, THE “INDEMNIFIED PARTIES”)HARMLESS FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES,DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, CLAIMS, PROCEEDINGS, 

 

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COSTS,EXPENSES (INCLUDING, WITHOUT LIMITATION, ALL REASONABLE ATTORNEYS’ FEES ANDLEGAL EXPENSES WHETHER OR NOT SUIT IS BROUGHT) AND DISBURSEMENTS OF ANY KIND ORNATURE WHATSOEVER WHICH MAY AT ANY TIME BE IMPOSED ON, INCURRED BY, OR ASSERTEDAGAINST THE INDEMNIFIED PARTIES, IN ANY WAY RELATING TO OR ARISING OUT OF THELOAN DOCUMENTS THAT RELATE TO BORROWERS OR GUARANTOR OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN THAT RELATETO BORROWERS OR GUARANTOR (COLLECTIVELY, THE “INDEMNIFIED LIABILITIES”);PROVIDED, HOWEVER, THAT ALTHOUGH EACH INDEMNIFIED PARTYSHALL HAVE THE RIGHT TO BE INDEMNIFIED FOR ITS OWN ORDINARY NEGLIGENCE, NOINDEMNIFIED PARTY SHALL HAVE THE RIGHT TO BE INDEMNIFIED HEREUNDER FOR ITS OWNFRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. THE PROVISIONS OF AND UNDERTAKINGS AND INDEMNIFICATION SET FORTH IN THISSECTION 6.15 SHALL SURVIVE (A) THE SATISFACTION AND PAYMENT OF THEOBLIGATION AND TERMINATION OF THIS AGREEMENT, AND (B) THE RELEASE OF ANY LENDERLIENS OR THE EXTINGUISHMENT OF SUCH LIENS BY FORECLOSURE OR ACTION IN LIEUTHEREOF.

 

6.16         ENVIRONMENTAL INDEMNIFICATION.  BORROWERS SHALL INDEMNIFY, PROTECT AND HOLD EACH INDEMNIFIEDPARTY HARMLESS FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES,DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, CLAIMS, PROCEEDINGS, COSTS,EXPENSES (INCLUDING, WITHOUT LIMITATION, ALL REASONABLE ATTORNEYS’ FEES ANDLEGAL EXPENSES WHETHER OR NOT SUIT IS BROUGHT) AND DISBURSEMENTS OF ANY KIND ORNATURE WHATSOEVER WHICH MAY AT ANY TIME BE IMPOSED ON, INCURRED BY, OR ASSERTEDAGAINST SUCH INDEMNIFIED PARTIES, WITH RESPECT TO OR AS A DIRECT OR INDIRECTRESULT OF THE VIOLATION BY BORROWERS OR GUARANTOR OF ANY ENVIRONMENTAL LAW; ORWITH RESPECT TO OR AS A DIRECT OR INDIRECT RESULT OF BORROWERS OR GUARANTORS’USE, GENERATION, MANUFACTURE, PRODUCTION, STORAGE, RELEASE, THREATENED RELEASE,DISCHARGE, DISPOSAL OR PRESENCE IN CONNECTION WITH THE PROPERTIES OF AHAZARDOUS SUBSTANCE INCLUDING, WITHOUT LIMITATION, (A) ALL DAMAGES OF ANY SUCHUSE, GENERATION, MANUFACTURE, PRODUCTION, STORAGE, RELEASE, THREATENED RELEASE,DISCHARGE, DISPOSAL OR PRESENCE, OR (B) THE COSTS OF ANY REASONABLY REQUIRED ORNECESSARY ENVIRONMENTAL INVESTIGATION, MONITORING, REPAIR, CLEANUP ORDETOXIFICATION AND THE PREPARATION AND IMPLEMENTATION OF ANY CLOSURE, REMEDIALOR OTHER PLANS.  THE PROVISIONS OF ANDUNDERTAKINGS AND INDEMNIFICATION SET FORTH IN THIS SECTION 6.16SHALL SURVIVE (X) THE SATISFACTION AND PAYMENT OF THE OBLIGATIONS ANDTERMINATION OF THIS AGREEMENT, AND (Y) THE RELEASE OF ANY LENDER LIENS OR THEEXTINGUISHMENT OF SUCH LIENS BY FORECLOSURE OR ACTION IN LIEU THEREOF.

 

6.17         Employee Benefit Plans.  Borrowers and Guarantor will not, directlyor indirectly, (a) engage in any Prohibited Transaction which would reasonablybe expected to have a Material Adverse Effect, (b) permit any Pension Planestablished or maintained by Borrowers or Guarantor to ever be subject toinvoluntary termination proceedings, or (c) fully or partially withdraw fromany Multiemployer Plan, if such withdrawal would 

 

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reasonablybe expected to have a Material Adverse Effect. Borrowers and Guarantor shall make all required contributions to anyPlan subject to Section 412 of the Code, if failure to do so would reasonablybe expected to have a Material Adverse Effect.

 

6.18         Notice of Litigation.  Promptly after the commencement thereof,Borrowers  and Guarantor shall providenotice to Lender of all actions, suits, and proceedings before any GovernmentalAuthority or Tribunal affecting Borrowers or Guarantor which, if determinedadversely to any of Borrowers or Guarantor, could have a Material AdverseEffect.

 

6.19         Loans,Advances and Investments.  Borrowers and Guarantor will not, directlyor indirectly, loan, advance or otherwise extend credit to, or contributecapital to, invest in or purchase or commit to purchase any Capital Stock orother securities or evidences of indebtedness of, or interests in, any other Person,otherthan (a) investments in obligations of the United States ofAmerica and agencies thereof and obligations guaranteed by the United States ofAmerica maturing within one year from the date of acquisition, (b) certificatesof deposit issued by Lender or a commercial institution organized under theLaws of the United States of America or any state thereof and having a combinedcapital, surplus, and undivided profits of not less than $100,000,000 (as shownin its most recently published statement of condition), (c) current trade andcustomer accounts receivable which are for goods furnished or services renderedin the ordinary course of business, and are payable in accordance withcustomary trade terms, (d) stock, obligations, or securities received in thesettlement of debts (created in the ordinary course of business and incompliance with this Agreement) owing to Borrowers or Guarantor, and (e)contracts to purchase and sell oil and gas in connection with the PipelineSystems, pipeline interconnect and operating agreements,  processing agreements, service contracts,transportation agreements or other similar or customary arrangements, in eachcase made or entered into with any other Person in the ordinary course of theiroil and gas pipeline business as a means of gathering, marketing, processing ortransporting oil and gas, providedthat none of the foregoingshall impair, reduce, dilute, or adversely affect any of the Borrowers’Property.

 

6.20         Transactions with Affiliates.  Borrowers will not, directly or indirectly,enter into any transaction (including, but not limited to, the sale or exchangeof property or the rendering of service) with any of their Affiliates, otherthan transactions in the ordinary course of Borrowers’ business and uponfair and reasonable terms no less favorable than Borrowers could obtain orcould become entitled to in an arm’s-length transaction with a Person which wasnot an Affiliate.

 

6.21         Material Contracts.  Borrowers will not enter into or be a party to any agreement forthe purchase of materials, supplies, or other tangible personal property ifsuch agreement requires Borrowers to pay for such items regardless of theiractual or tendered delivery.  Borrowerswill not materially amend, alter the terms and conditions of or cancel any oftheir Material Contracts, except for amendments and alterations which (a) aremade by a Borrower on an arms-length basis in the ordinary course of theBorrowers’ respective businesses, (b) for a price and terms that are no lessfavorable to the Borrower than the price and terms incorporated into theMaterial Contract as presently existing and (c) individually or in the aggregate do not have a Material AdverseEffect on any of the Borrowers or Guarantor.

 

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6.22         New Business.  Borrowers will not, directly or indirectly, engage in anybusiness other than the business in which they are presently engaged.

 

6.23         Addresses.  Borrowers and Guarantor will not change their names or relocatetheir chief executive offices or places where their books and records relatedto their assets are kept to a county, parish or state other than as indicatedon the signature page(s) hereto, unless Lender is provided 30 days priorwritten notice of such proposed change in name or location (such notice ofchange in location to include, without limitation, the name of the county orparish and state of such location).

 

6.24         Restrictions on Debt.  Borrowers and Guarantor will not incur, create, assume, or permitto exist any Debt, except:

 
|                                                                                                                                                                                                                                                     | (a)    | the  Obligations;                                                                    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                     |   |                                                                                 |
|                                                                                                                                                                                                                                                     | (b)    | existing  Debt described on Schedule 6.24 hereto;                               |
|                                                                                                                                                                                                                                                     |   |                                                                                 |
|                                                                                                                                                                                                                                                     | (c)    | Debt  secured by Permitted Liens; and                                                |
|                                                                                                                                                                                                                                                     |   |                                                                                 |
|                                                                                                                                                                                                                                                     | (d)    | Extensions,  renewals and refinancings of Debt described in clauses (b) and (c) |
| above,  without any increase in the outstanding principal amount thereof, provided  that the other terms and conditions of such extension, renewal or refinancing  are not materially more onerous than the existing terms and conditions of  such Debt. |

 

6.25         Issuance of Capital Stock. Issuance ofCapital Stock. Borrowers and Guarantor willnot, directly or indirectly, issue, sell, assign or otherwise dispose of(i) any shares of any class of their Capital Stock, (ii) anysecurities exchangeable for or convertible into or carrying any rights to acquireany shares of any class of their Capital Stock, (iii) any options,warrants or any other rights to acquire any shares of any class of theirCapital Stock, except for Guarantor’s currently existing stock basedcompensation plans, being (a) the 1998 Stock Option Plan dated May 28, 1998,authorizing Guarantor to issue options to purchase up to 600,000 shares ofGuarantor’s common stock to Guarantor’s directors, officers, employees andcertain other third parties and (b) the 1998 Outside Directors Stock OptionPlan dated May 28, 1998, authorizing Guarantor to issue options to purchase upto 100,000 shares of Guarantor’s common stock to Guarantor’s outside directors,in an aggregate amount that does not exceed two (2%) of Guarantor’s stockcurrently outstanding as of the date of this agreement in any calendar year,(iv) any subordinated debt, or (v) any senior unsecured debt.

 

6.26         Mergers and Dissolutions.  Borrowers and Guarantor will not, directlyor indirectly, merge or consolidate with any other Person (unless Borrowers orGuarantor are the surviving corporation) or liquidate, wind up, or dissolve (orsuffer any liquidation or dissolution).

 

6.27         Default on Debt.  Borrowers and Guarantor will not (a) default in the due andpunctual payment of the principal of or the interest on any Debt individuallyor in the aggregate exceeding $100,000.00 or (b) become directly or indirectlyobligated (including, without limitation, as a guarantor) on any borrowed moneyother than Debt permitted under Section 6.24 hereof. Notwithstanding theforegoing, Borrowers and Guarantor may dispute, in good faith, their respectiveobligations to pay or perform any Debt due (or 

 

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claimedto be due) by Borrowers or Guarantor to any Third Person if the Borrowers orGuarantor, as applicable (a) establish and maintain adequate reserves inaccordance with GAAP with respect thereto if it should be determined that the Borrowers or Guarantor are obligated topay or perform  all or any part of theDebt in dispute, and (b) implement and diligently prosecute procedures andproceedings as required under the relevant documents (or in the absence ofrequired dispute resolution procedures, as may be commercially reasonable) forthe orderly resolution of the dispute.

 

6.28         Distributions. Borrowers shall not, directlyor indirectly, declare, make or pay any dividend or distribution with respectto, or retire, redeem, purchase, or otherwise acquire for value, any equitysecurities or other forms of ownership interests issued by Borrowers.

 

6.29         Current Ratio  Borrowers will at all times maintain a positive ratio of CurrentAssets to Current Liabilities of not less than 1.0 to 1.0; provided thatinstallments of principal and interest on the Loan shall be excluded fromCurrent Liabilities as they mature.

 

6.30         Tangible Net Worth.  Borrowers will at all times maintain positive Tangible Net Worthof not less than eighty per cent (80%) of their respective Tangible Net Worthon the Closing Date calculated at the end of each of Borrowers’ fiscal quartersthereafter.

 

6.31         Minimum Net Operating Margin. The Borrowers shall maintaina combined Minimum Net Operating Margin (trailing two consecutive calendarquarters) of not less than Four Hundred Thousand Dollars ($400,000.00).

 

6.32         Limitation on Liens. Borrowers will not incur,create, assume, or permit to exist any Lien upon any of their Property orrevenues, whether now owned or hereafter acquired, except Permitted Liens.

6.33         Lettersof Credit.The final maturity of each Letter of Credit shall fall on the thirtieth(30) day following the Maturity Date. The Borrowers shall cause the Letters ofCredit to remain in full force and effect, without interruption, from theClosing Date to a date that is not less than thirty (30) days after the MaturityDate. If, for any reason, any Letter of Credit has a shorter expiry date, theBorrowers shall cause that Letter of Credit to be reissued, renewed or extendedfor subsequent periods of at least a one-year duration by the issuing bank oranother bank approved by Lender in its sole and absolute discretion. If theBorrowers request the Lender to extend the Maturity Date hereunder (or extendthe maturity date of the Existing Loan, as specified in the Existing LoanDocuments ), and the Lender agrees to do so in its sole discretion, theBorrowers shall similarly cause the Letters of Credit to be reissued, renewedor extended for subsequent periods, by the issuing bank or another bank, all asmay be approved by Lender in its sole and absolute discretion. Borrowers’failure to obtain the reissuance, renewal or extension of any Letter of Creditas provided above at least sixty (60) days prior to the maturity date of theapplicable Letter of Credit shall entitle the Lender to fully draw the entireface amount of that Letter of Credit. The Lender shall also be entitled to draw upon each  Letter of Credit at any time (a) the Lenderdecides the funds are needed by Borrowers to pay any amounts due hereunder,under any other Loan Document or any Existing Loan Document or (b) an Event ofDefault has occurred**.**If ADAC ceases to be the sole accountparty with respect to any Letter of Credit then (1) Borrowers shall give noticethereof to Lender within ten (10) Business Days after the date any other partybecomes an account party with respect to that Letter of Credit and (2) no laterthan 

 

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thirty (30) daysthereafter, Borrowers shall cause any other account party with respect to aLetter of Credit to execute and deliver a Security Agreement and SubordinationAgreement in substance equivalent to the Security Agreement and SubordinationAgreement executed and delivered by ADAC.

 

 

SECTION 7.  DEFAULT.

 

Theterm “Default” means the occurrence of any one or more of the followingevents (including the passage of time, if any, specified therefor) (providedthat if any such event occurs and Lender subsequently agrees in writingthat it will not exercise any Rights hereunder as a result thereof, theoccurrence of such event shall no longer be deemed a “Default” hereunderinsofar as the state of facts giving rise to such event is concerned, but thesame shall not operate as or be deemed to be a waiver with respect to anyidentical or similar state of facts in existence or occurring theretofore orthereafter):

 

7.1           Payment of Obligations.  The failure or refusal of Borrowers or Guarantor to pay when due:(a) any principal of, or accrued unpaid interest on, the Note; (b) any principalof, or accrued unpaid interest on, Existing Loan or (c) to pay any otherObligations in accordance with the terms of the Loan Documents, or the ExistingLoan Documents, as may be applicable and such failure to pay any otherObligations shall continue for three (3) Business Days after Borrowers orGuarantor have notice thereof.

 

7.2           Certain Covenants.  The failure or refusal of Borrowers or Guarantor to punctuallyand properly perform, observe and comply with any covenant, agreement orcondition contained in: (a) Section 6.1, 6.3, 6.7, 6.9,6.13(a), 6.24 through 6.28, and 6.33 of thisAgreement (providedthat, in the case of Section 6.13(a),such failure or refusal continues for a period in each case of seven (7)Business Days after Borrowers or Guarantor have notice thereof); or (b) theparallel provisions of the Existing Loan Documents.

 

7.3           Other Covenants.  The failure or refusal of Borrowers or Guarantor to punctuallyand properly perform, observe and comply with any covenant, agreement orcondition (other than covenants to pay the Obligations and the covenants listedin Section 7.2) contained in any of: (a) the Loan Documents, andsuch failure or refusal continues for a period of thirty (30) days afterBorrowers or Guarantor have notice thereof; or (b) the parallel provisions ofthe Existing Loan Documents.

 

7.4           Voluntary Debtor Relief.  Borrowers or Guarantor shall (a) execute anassignment for the benefit of creditors, (b) admit in writing their inabilityto pay their debts generally as they become due, (c) voluntarily seek thebenefits of any Debtor Relief Law, or (d) take any action to authorize any ofthe foregoing.

 

7.5           Involuntary Proceedings.  Borrowers or Guarantor shall involuntarily(a) have an order, judgment or decree entered against it by any Tribunalpursuant to any Debtor Relief Law or (b) have a petition filed against itseeking the benefit or benefits provided for by any Debtor Relief Law, and suchorder, judgment, decree or petition is not discharged within 60 days after theentry or filing thereof.

 

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7.6           Attachment.  The failure to have discharged within a period of 30 days afterthe commencement thereof any attachment, sequestration or similar proceedingagainst any of Borrowers’ Property with a value, individually or collectively,in excess of $50,000.

 

7.7           Payment of Judgments.  Borrowers fail to pay any money judgment in excess of $50,000against them or their assets at least ten days prior to the date on which anyof Borrowers’ Property may be sold to satisfy such judgment.

 

7.8           Default Under Other Debt.  Borrowers or Guarantor default in the dueand punctual payment of the principal of or the interest on any indebtednessother than the Obligations and such failure results in the acceleration of suchindebtedness by the holder thereof**.**

 

7.9           Divestment Proceedings.  A petition or complaint is filed before or by any Tribunal,including, but not limited to, the Federal Trade Commission or the UnitedStates Justice Department, seeking to cause Borrowers or Guarantor to divest asignificant portion of its assets pursuant to any antitrust, restraint oftrade, unfair competition, industry regulation or similar Laws, and suchpetition or complaint is not dismissed or discharged within 60 days after itsfiling.

 

7.10         Concealment or Removal of Collateral.  Borrowers conceal or remove, or permit to be concealed orremoved, any part of their real or personal Property with the intent to hinder,delay or defraud one or more of its creditors.

 

7.11         Misrepresentation.  The discovery by Lender that any material statement,representation or warranty in the Loan Documents or in any writing everdelivered pursuant to the Loan Documents is false, misleading or erroneous inany material respect when made or deemed to be repeated.

 

7.12         Validity and Enforceability of LoanDocuments. Any of the Borrowers or Guarantorcontest the validity or enforceability of any Loan Document or deny in writingthat they have any liability or obligations under any Loan Document to whichthey are a party; or any Loan Document shall be declared to be null and void,cease to be in full force and effect or cease establish and maintain any Liengranted pursuant thereto as a perfected, first priority Lien (except forPermitted Liens and releases of Liens made by Lender pursuant to any of theLoan Documents) at any time after its execution and delivery and for anyreason.

 

7.13         ERISA.  (a) Borrowers, Guarantor, any ERISA Affiliate or any of theiragents or representatives shall engage in any conduct which it knewconstituted, or should have known constituted, a Prohibited Transaction which could reasonably be expectedto result in a material liability to Borrowers, Guarantor or any ERISAAffiliate, (b) any material “accumulated funding deficiency” (as defined inSection 302 of ERISA or Section 412 of the Code), whether or not waived,shall exist with respect to any PBGC Plan or Multiple Employer Plan, if suchaccumulated funding deficiency would give rise to a material liability ofBorrowers, Guarantor or any ERISA Affiliate, (c) Borrowers, Guarantor or anyERISA Affiliate shall apply for or be granted a funding waiver under Section302 of ERISA or Section 412 of the Code, which waiver or request for waiver isfor a material amount, (d) a Reportable Event shall occur with respect to anyPBGC Plan or Multiple Employer Plan, which reportable event is likely to resultin the termination of 

 

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suchPBGC Plan or Multiple Employer Plan for purposes of Title IV of ERISA and togive rise to a material liability of Borrowers, Guarantor or any ERISAAffiliate, (e) proceedings shall commence to have a trustee appointed, or atrustee shall be appointed, to terminate or administer a PBGC Plan or MultipleEmployer Plan which proceeding is likely to result in the termination of such PBGCPlan or Multiple Employer Plan and to give rise to a material liability ofBorrowers, Guarantor or any ERISA Affiliate with respect to such termination,(f) a notice of intent to terminate a PBGC Plan or Multiple Employer Plan underSection 4041(c) is filed with the PBGC if such termination would give rise to amaterial liability of Borrowers, Guarantor or any ERISA Affiliate, (g) anyMultiemployer Plan is in reorganization or is insolvent and the circumstancesare such that there could reasonably be a material liability incurred by orimposed upon Borrowers, Guarantor or any ERISA Affiliate, (h) there is acomplete or partial withdrawal from a Multiemployer Plan under circumstancesthat could reasonably subject Borrowers, Guarantor or any ERISA Affiliate tomaterial liability, (i) any Lien arising under Section 4068 of ERISA or Section412(n) of the Code shall attach to the assets or Property of Borrowers,Guarantor or any ERISA Affiliate which could reasonably be expected to resultin a Material Adverse Effect, (j) Borrowers, Guarantor or any ERISAAffiliate shall permit, through action or failure to act, any Pension Plan tofail to meet the requirements of Section 401(a) or 403(a) of the Code andsuch failure gives rise to a material liability of Borrowers, Guarantor or anyERISA Affiliate, or (k) any event or condition described in (a) through (j))above (determined without regard to whether the event or condition taken alonewould or could result in a material liability) shall occur or exist with respectto a PBGC Plan, Multiple Employer Plan or Multiemployer Plan which individuallyor in combination with one or more of any events described in (a) through(j) above (determined without regard to whether the event or conditiontaken alone would or could result in a material liability), if any, wouldlikely subject Borrowers, Guarantor or any ERISA Affiliate to any materialexcise tax, Penalty, addition to tax or other liability.  For purposes of this Section 7.13,an obligation or liability shall be considered material if it results in orcauses a Material Adverse Effect.

 

7.14         Change of Control.  The occurrence of a Change of Control.

 

7.15         Material Adverse Change.  The occurrence of any act, event orcircumstance that is, or with the passage of time is reasonably expected tocause a Material Adverse Effect in the assets, liabilities, financialcondition, contractual obligations or business affairs of Borrowers orGuarantor.

 

SECTION 8.  RIGHTS AND REMEDIES.

 

8.1           Remedies Upon Default.  Should any Default occur and be continuing, Lender may, at itselection, do any one or more of the following: (i) declare the entire unpaidbalance of the Obligations, or any part thereof, immediately due and payable,whereupon it shall be due and payable (and notice of such declaration shallpromptly be given thereafter by it to Borrowers); (ii) terminate its commitmentto lend hereunder, (iii) reduce any claim to judgment; (iv) exercise the Rightsof offset or banker’s Lien against the interest of Borrowers or Guarantor inand to every account and other Property of Borrowers or Guarantor which are inits possession to the extent of the full amount of the Obligations; (v)foreclose any or all Lender Liens or otherwise realize upon any and all of theRights it may have in and to the Collateral, or any part thereof, (vii) presentthe Letters of Credit for payment, and (vii) exercise any and all otherlegal or equitable Rights afforded by the Loan Documents, the Existing LoanDocuments, the Laws of the State of 

 

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Texasor any other jurisdiction as it shall deem appropriate, or otherwise,including, but not limited to, the Right to bring suit or other proceedingsbefore any Tribunal either for specific performance of any covenant orcondition contained in any of the Loan Documents or in aid of the exercise ofany Right granted to it in any of the Loan Documents.

 

8.2           Waivers.  Borrowers and Guarantor hereby waive presentment and demand forpayment, protest, notice of intention to accelerate, notice of acceleration andnotice of protest and nonpayment, and agree that their liability with respectto the Obligations, or any part thereof, shall not be affected by any renewalor extension in the time of payment of the Obligations, by any indulgence or byany release or change in any security for the payment of the Obligations.

 

8.3           Performance by Lender.  If any covenant, duty or agreement of Borrowers or Guarantor isnot performed in accordance with the terms of the Loan Documents or theExisting Loan Documents as applicable, Lender may, at its option perform orattempt to perform, such covenant, duty or agreement on behalf of Borrowers orGuarantor.  In such event, anyreasonable amount incurred by or on behalf of Lender prior to Default, orthereafter any and all amounts incurred by or on behalf of Lender in suchperformance or attempted performance shall be payable by Borrowers or Guarantoron written demand, shall become part of the Obligations, and shall bearinterest at the Default Rate from the date of notice to Borrowers or Guarantorof such expenditure until paid. Notwithstanding the foregoing, it is expressly understood that Lenderdoes not assume and shall never have, except by its express written consent,any liability or responsibility for the performance of any covenant, duty or agreementof Borrowers or Guarantor.

 

8.4           Delegation of Duties and Rights.  Lender may perform any of its duties orexercise any of its Rights under the Loan Documents by or through its officers,directors, employees, attorneys, agents or other representatives.

 

8.5           Lender Not in Control.  None of the covenants or other provisions contained in thisAgreement shall, or shall be deemed to, give Lender the Right to exercisecontrol over the assets (including, without limitation, real Property), affairsor management of Borrowers or Guarantor, the power of Lender being limited tothe Right to exercise the Rights provided in this Section 8.

 

8.6           Waivers by Lender.  The acceptance by Lender at any time and from time to time ofpartial payment on the Obligations shall not be deemed to be a waiver of anyDefault then existing.  No waiver byLender of any Default shall be deemed to be a waiver of any other then-existingor subsequent Default.  No delay oromission by Lender in exercising any Right under the Loan Documents shallimpair such Right or be construed as a waiver thereof or any acquiescencetherein, nor shall any single or partial exercise of any such Right precludeother or further exercise thereof, or the exercise of any other Right under theLoan Documents or otherwise.

 

8.7           Cumulative Rights.  All Rights available to Lender under the Loan Documents arecumulative of and in addition to all other Rights granted to Lender under or inconnection with the Construction Loan Documents, at law or in equity, whetheror not the Obligations are due and payable and whether or not Lender hasinstituted any suit for collection, foreclosure, or other action in connectionwith the Loan Documents or the Construction Loan Documents.

 

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8.8           Application of Proceeds.    Anyand all proceeds ever received by Lender from the exercise of any Rightspertaining to the Obligations shall be applied by Lender to the Obligations inthe order and manner set forth in Section 2.7; providedthatBorrowers and Guarantor shall remain liable to Lender for the deficiency, ifany.

 

8.9           Diminution in Value of Collateral.  Lender shall have no liability orresponsibility whatsoever for any diminution in or loss of value of anyCollateral.

 

8.10         Certain Proceedings.  Borrowers and Guarantor will promptly execute and deliver orcause the execution and delivery of all applications, certificates,instruments, registration statements and all other documents and papers Lendermay request in connection with the obtaining of any consent, approval,registration, qualification, permit, license or authorization of any otherTribunal or other Person necessary or appropriate for the effective exercise ofany Rights under the Loan Documents. Without limiting the generality of the foregoing,  Borrowers and Guarantor agree that in theevent Lender shall exercise its Rights, pursuant to the Loan Documents relatingto Borrowers or Guarantor, to sell, transfer or otherwise dispose of, or vote,consent, operate or take any other action in connection with any of theCollateral, Borrowers and Guarantor shall execute and deliver all applications,certificates, assignments and other documents Lender may request to facilitatesuch actions and shall otherwise promptly, fully, and diligently cooperate withLender and any other necessary Persons in making any application for the priorconsent or approval of any Tribunal or any other Person to the exercise byLender of any of such Rights relating to all or any of the Collateral.  Furthermore, because Borrowers and Guarantoragree that Lender’s Rights at Law for failure of Borrowers and Guarantor tocomply with the provisions of this Section 8.10 would be inadequateand that such failure would not be adequately compensable in damages, Borrowersand Guarantor agree that the covenants of this Section 8.10 may bespecifically enforced.

 

SECTION 9.  MISCELLANEOUS.

 

9.1           Changes in GAAP.  All accounting and financial terms used inany of the Loan Documents and the compliance with each covenant contained inthe Loan Documents which relates to financial matters shall be determined inaccordance with GAAP, except to the extent that a deviation therefrom isexpressly stated in such Loan Documents. Should a change in GAAP require a change in any method of accounting orshould any voluntary change in the accounting methods be permitted pursuant to Section 6.12,then such change shall not result in a Default if, at the time of such change,such Default had not occurred and was not then continuing, based upon theformer methods of accounting used by or on behalf of Borrowers and Guarantor; providedthat, after any such change in accounting methods, the FinancialStatements required to be delivered shall either be (a) prepared in comparativeform, in compliance with the former methods of accounting used prior to suchchange, as well as with the new method or methods of accounting and, for thepurpose of determining whether a Default has occurred, Lender shall look solelyto that portion of such Financial Statements that complies with the formermethods of accounting, or (b) prepared in compliance with such new method ormethods of accounting but accompanied by such information, in form and detailsatisfactory to Lender, that will allow Lender to readily determine the effectof such changes in accounting methods on such Financial Statements, and, forthe purpose of determining whether a Default has occurred, Lender shall looksolely to such Financial 

 

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Statementsas adjusted to reflect compliance with such former method or methods ofaccounting.

 

9.2           Exhibits.  If any Exhibit, which is to be executed and delivered, containsblanks, the Exhibit shall be completed correctly and in accordance with theterms and provisions contained and as contemplated herein prior to, at the timeof, or after the execution and delivery thereof.

 

9.3           Communications.  Unless specifically otherwise provided, whenever any LoanDocument requires or permits any consent, approval, notice, request or demandfrom one party to another, such communication must be in writing (which may beby telex or telecopy) to be effective and shall be deemed to have been given onthe day actually delivered or, if mailed, on the third Business Day after it isenclosed in an envelope, addressed to the party to be notified at the addressstated opposite its signature below (unless changed by notice pursuant hereto),properly stamped, sealed and deposited in the appropriate official postalservice.

 

9.4           Form and Number of Documents.  Each agreement, document, instrument orother writing to be furnished under any provision of this Agreement must be inform and substance and in such number of counterparts as may be satisfactory toLender and its counsel.

 

9.5           Exceptions to Covenants.  Borrowers and Guarantor shall take no actionnor fail to take any action which is permitted as an exception to any of thecovenants contained in any of the Loan Documents relating to Borrowers andGuarantor if such action or omission would result in the breach of any othercovenant contained in any of the Loan Documents.

 

9.6           Survival.  All covenants, agreements, undertakings, representations andwarranties made in any of the Loan Documents shall survive all closings underthe Loan Documents and, except as otherwise indicated. shall not be affected byany investigation made by any party.

 

9.7           GOVERNING LAW.  THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITHTHE LAWS OF THE STATE OF TEXAS; PROVIDED THAT LENDER SHALL RETAIN ALL RIGHTSARISING UNDER FEDERAL LAW. THE LAWS (OTHER THAN CONFLICT-OF-LAWS PROVISIONSTHEREOF) OF THE STATE OF TEXAS AND OF THE UNITED STATES OF AMERICA SHALL GOVERNTHE RIGHTS AND DUTIES OF THE PARTIES HERETO AND THE VALIDITY, CONSTRUCTION,ENFORCEMENT AND INTERPRETATION OF THE LOAN DOCUMENTS, EXCEPT TO THE EXTENTOTHERWISE SPECIFIED IN ANY OF THE LOAN DOCUMENTS.

 

 

9.8           Maximum Interest Rate. It is the intention ofthe Parties to strictly comply with applicable usury Laws, if any; accordingly,it is agreed that notwithstanding any provisions to the contrary in any LoanDocument, in no event shall any Loan Document permit or require the payment,taking, reserving, receiving collection or charging of interest in excess of theHighest Lawful Rate.  If any such excessof interest is called for, contracted for, charged, taken, reserved or receivedunder any Loan Document (or in any communication by Lender or any other Personto Borrowers or Guarantor) or if all or a part of the principal or interestthereof is accelerated, 

 

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prepaidor repaid, so that under any of such circumstances (or any other circumstances)the amount of interest contracted for, charged, taken, reserved or receivedunder any Loan Document on the amount of principal actually outstanding fromtime to time thereunder shall exceed the Highest Lawful Rate, then in any suchevent (a) the provisions of this Section 9.8 shall govern and control,(b) no Person now or hereafter liable for the payment of the Obligation shallbe obligated to pay the amount of such interest to the extent that it is inexcess of the Highest Lawful Rate, (c) any such excess which is or has beencollected or received notwithstanding this paragraph shall be  credited against the then unpaid principalbalance of the Obligation or, if the Obligation has been or would be repaid infull by that credit, refunded to the Person paying the excess, and (d) the provisionsof the applicable Loan Documents, and any communication to Borrowers orGuarantor, shall immediately be deemed reformed and the excess interestreduced, without the necessity of executing any other document, to the HighestLawful Rate under the applicable usury Laws as now or hereafter construed bythe courts having jurisdiction thereof. Without limiting the foregoing, allcalculations of the rate of interest contracted for, charged, collected, taken,reserved or received in connection with the Loan Documents which are made for the purpose of determining whetherthat rate exceeds the Highest Lawful Rate shall be made to the extent permittedby applicable Laws by amortizing, prorating, allocating and spreading duringthe period of the full term of the Loan, including all prior and subsequentrenewals and extensions, all interest at any time contracted for, charged,taken collected, reserved or received. The terms of this paragraph shall bedeemed to be incorporated in every Loan Document and communication relatingthereto.

 

 To the extent the interest rate Laws of theState of Texas are applicable to the Loan Documents for purposes of determiningthe “Highest Lawful Rate,” the applicable interest rate ceiling is the weeklyceiling (formerly the indicated rate ceiling) determined in accordance withTexas Revised Civil Statutes, Title 79, Article 5069-1D.003 (also codified atTexas Finance Code, Section 303.301, and formerly Texas Revised Civil Statutes,Article 5069-1.01), as amended. To the extent the Loan Documents are an openend account as defined in  Texas RevisedCivil Statutes, Title 79, Article 5069-1B.002(14) (also codified at TexasFinance Code, Section 301.001(3), and formerly Texas Revised Civil Statutes,Article 5069-1.01 (f)), as amended, the Lender retains the right to modify the interestrate in accordance with applicable Law. Borrowers, Guarantor and Lender agreethat Texas Finance Code, Chapter 346 (formerly Texas Revised Civil Statutes,Title 79, Chapter 150, which regulates certain revolving loan accounts andrevolving tri-party accounts,  shall notgovern or in any manner apply to the Loan Documents or the Obligation.

 

9.9           Invalid Provisions.  If any provision in any Loan Document is held to be illegal,invalid or unenforceable, such provision shall be fully severable; theappropriate Loan Document shall be construed and enforced as if such provisionhad never comprised a part thereof, and the remaining provisions thereof shallremain in full force and effect and shall not be affected by such provision orby its severance therefrom. Furthermore, in lieu of such provision there shall be addedautomatically as a part of such Loan Document a provision as similar thereto asmay be possible and be legal, valid and enforceable.

 

9.10         Entirety.  THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THEPARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS ORSUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.  The Loan Documents embody the entire writtenagreement between the parties, supersede all prior written agreements andunderstandings, if any, relating to the subject matter hereof (except fordocuments, agreements, and instruments delivered or to be delivered inaccordance with the express 

 

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termshereof) and may be supplemented only by documents delivered or to be deliveredin accordance with the express terms hereof. Any conflict or ambiguity between the terms and provisions herein andterms and provisions in any other Loan Document shall be controlled by theterms and provisions herein.

 

9.11         Amendments, Etc.  No amendment or waiver of any provision of any Loan Document norconsent to any departure therefrom by Borrowers or Guarantor shall be effectiveunless the same shall be in writing and signed by Lender, and then, suchamendment, waiver or consent shall be effective only in the specific instanceand for the specific purpose for which given.

 

9.12         Waivers.  No course of dealing nor any failure or delay by Lender or any ofits respective officers, directors, employees, agents, representatives, orattorneys with respect to exercising any Right of Lender hereunder shalloperate as a waiver thereof.  A waivermust be in writing and signed by Lender to be effective, and such waiver willbe effective only in the specific instance and for the specific purpose forwhich it is given.

 

9.13         Governmental Regulation.  Anything contained in this Agreement to thecontrary notwithstanding, Lender shall not be obligated to extend credit toBorrowers in violation of any Law.

 

9.14         Multiple Counterparts.  This Agreement has been executed in a number of identicalcounterparts, each of which shall be deemed an original for all purposes andall of which constitute, collectively, one Agreement; but, in making proof ofthis Agreement, it shall not be necessary to produce or account for more thanone such counterpart.

 

9.15         Discharge Only Upon Payment In Full;Reinstatement In Certain Circumstances.  The obligations of Borrowers and Guarantor hereunder shall remainin full force and effect until the Obligations shall have been paid andperformed in full.  If at any time anypayment on or in respect of the Obligations is rescinded or must be otherwiserestored or returned upon the insolvency, bankruptcy or reorganization of aBorrower, Guarantor or otherwise, the obligations of a Borrower or Guarantorhereunder with respect to such payment shall be reinstated as though suchpayment has been due but not made at such time.

 

9.16         Waiver by Borrowers and Guarantor.  Borrowers and Guarantor irrevocably waive acceptance hereof, andany other notice not provided for herein, as well as any requirement that anytime any action be taken by any Person against Borrowers, Guarantor or anyCollateral relating to such Borrowers’ or Guarantor’s obligations hereunder.

 

9.17         Successors and Assigns.  This Agreement shall be binding upon, and inure to the benefit ofthe parties hereto and their respective successors and assigns, except thatBorrowers may not, directly or indirectly, assign or transfer, or attempt toassign or transfer, any of their Rights, duties or obligations under any LoanDocuments without the express written consent of Lender, and Lender may nottransfer, pledge, assign or otherwise encumber its commitments or loans, exceptthat Lender may, in the ordinary course of its commercial banking business andin accordance with applicable Law, at any time sell to one or more Personsparticipating interests in the Obligations.

**9.18        ARBITRATION. THE BORROWERS, GUARANTOR ANDLENDER AGREE THAT ALL DISPUTES, CLAIMS AND CONTROVERSIES BETWEEN THEM,**

 

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**OR ANY OF THEIR RESPECTIVE SUCCESSORSAND ASSIGNS, WHETHER INDIVIDUAL, JOINT OR LLASS IN NATURE, ARISING FROM THISAGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS (INCLUDING CONTRACT AND TORTDISPUTES) SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE AMERICAN ARBITRATIONASSOCIATION UPON THE REQUEST OF ANY PARTY. NO ACT TO TAKE OR DISPOSE OF ANYCOLLATERAL SECURING THE OBLIGATIONS SHALL CONSTITUTE A WAIVER OF THISARBITRATION PROVISION OR BE PROHIBITED BY THIS ARBITRATION PROVISION. THE FOREGOINGINCLUDES OBTAINING INJUNCTIVE RELIEF OR A TEMPORARY RESTRAINING ORDER; INVOKINGA POWER OF SALE UNDER ANY OF THE SECURITY DOCUMENTS; OBTAINING A WRIT OFATTACHMENT OR THE IMPOSITION OF A RECEIVER; OR EXERCISING ANY RIGHTS RELATINGTO PERSONAL PROPERTY, INCLUDING TAKING OR DISPOSING OF SUCH PROPERTY WITH ORWITHOUT JUDICIAL PROCESS PURSUANT TO ARTICLE 9 OF THE UCC. ANY DISPUTES, CLAIMSAND CONTROVERSIES CONCERNING THE LAWFULNESS OR REASONABLENESS OF ANY ACT OREXERCISE OF ANY RIGHTS OR ANY RIGHT RELATING TO THE COLLATERAL SECURING THEOBLIGATIONS (INCLUDING, WITHOUT LIMITATION, ANY CLAIM TO RESCIND, REFORM OROTHERWISE MODIFY ANY AGREEMENT RELATING TO THE COLLATERAL SECURING THEOBLIGATIONS) SHALL ALSO BE ARBITRATED; PROVIDED THAT NO ARBITRATOR SHALL HAVETHE RIGHT OR POWER TO ENJOIN OR RESTRAIN ANY ACT OF ANY PARTY.  JUDGMENT UPON ANY AWARD RENDERED BY ANYARBITRATOR MAY BE ENTERED IN ANY COURT HAVING JURISDICTION; PROVIDED THATNOTHING CONTAINED HEREIN SHALL BE DEEMED TO BE A WAIVER BY LENDER OF THE PROTECTIONSAFFORDED TO THE LENDER UNDER 12 USC § 91, TEX. FIN. CODE § 59.007, OR THE LAWSOF ANY OTHER STATE (TO THE EXTENT APPLICABLE TO THE LENDER) OR ANY OTHERPROTECTION PROVIDED TO THE LENDER BY THE LAWS OF THE STATE OF TEXAS, THE UNITEDSTATES. THE STATUTE OF LIMITATIONS, OR ESTOPPEL, LACHES, WAIVER OR SIMILARDOCTRINES THAT WOULD OTHERWISE BE APPLICABLE IN AN ACTION BROUGHT BY A PARTYSHALL BE APPLICABLE IN ANY ARBITRATION PROCEEDING AND THE COMMENCEMENT OF ANYARBITRATION PROCEEDING SHALL BE DEEMED THE COMMENCEMENT OF AN ACTION FOR THESEPURPOSES. THE FEDERAL ARBITRATION ACT SHALL APPLY TO THE CONSTRUCTION,INTERPRETATION AND ENFORCEMENT OF THIS ARBITRATION PROVISION. IF THE FEDERALARBITRATION ACT IS INAPPLICABLE TO ANY SUCH DISPUTE, CLAIM OR CONTROVERSY FORANY REASON, THE ARBITRATION SHALL BE CONDUCTED PURSUANT TO THE TEXAS GENERALARBITRATION ACT, THIS ARBITRATION PROVISION AND THE COMMERCIAL ARBITRATIONRULES OF THE AMERICAN ARBITRATION ASSOCIATION.**

 

**9.19        JURISDICTION AND VENUE. SUBJECT TO THE PROVISIONS OFSECTION 9.18, ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISINGDIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF RELATED TO OR FROM THISAGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE LITIGATED, AT THE SOLEDISCRETION AND ELECTION OF THE LENDER, IN THE COURTS HAVING SITUS IN HOUSTON,HARRIS COUNTY, TEXAS. IN THAT REGARD, THE BORROWERS AND GUARANTOR HEREBY SUBMITTO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN HOUSTON,HARRIS COUNTY, TEXAS, AND HEREBY WAIVES ANY RIGHTS IT**

 

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**MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OFANY LITIGATION BROUGHT AGAINST IT BY THE LENDER IN ACCORDANCEWITH THIS SECTION.**

 

EXECUTEDas of the day and year first mentioned.

 
|                             | BORROWER:                     |
|----------------------------------|-------------------------------|
| Address:                         | GATEWAY PIPELINE COMPANY      |
|                             |                          |
| One  Allen Center                | By:                           |   |
| 500 Dallas Street,  Suite 2615   |                          | Michael T. Fadden, President |
| Houston,  Texas 77002            |                          |
| Phone:  (713) 336-0844      |                          |
| Fax:  (713) 336-0855        |                          |
|                             |                          |
| Address:                         | GATEWAY PROCESSING COMPANY    |
|                             |                          |
| One  Allen Center                | By:                           |   |
| 500 Dallas Street,  Suite 2615   |                          | Michael T. Fadden, President |
| Houston,  Texas 77002            |                          |
| Phone:  (713) 336-0844      |                          |
| Fax:  (713) 336-0855        |                          |
| Address:                         | GATEWAY ENERGY CORPORATION    |
|                             |                          |
| One  Allen Center                | By:                           |   |
| 500 Dallas Street,  Suite 2615   |                          | Michael T. Fadden, President |
| Houston,  Texas 77002            |                          |
| Phone:  (713) 336-0844      |                          |
| Fax:  (713) 336-0855        |                          |
|                             |                          |
|                             |                          |
| Address:                         | SOUTHWEST BANK OF TEXAS, N.A. |
|                             |                          |
| 5  Post Oak Park Office Building |                          |
| 4400  Post Oak Parkway           | By:                           |   |
| Houston,  Texas 77027            | Name:                         | Ken Batson |
| Mail:                            | Title:                        | Assistant Vice President — Energy Lending |
| P.  O. Box 27459                 |                          |
| Houston,  Texas 77227-7459       |                          |
| Phone:  (713) 232-1247      |                          |
| Fax:  (713) 232-5925        |                          |
|                                  |                               |  |  |

 

 

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