Document:

Exhibit 10.2

 

 

 

SECOND
AMENDED AND RESTATED CREDIT AGREEMENT

 

AMONG

 

CYMRI,
L.L.C.

(F/K/A
THE CYMRI CORPORATION)

 

AND

 

TRIUMPH
ENERGY, INC.

collectively,
as Borrowers

 

AND

 

TEXAS
CAPITAL BANK, N.A.

as
Lender

 

Effective
August 5, 2008

 

 

REDUCING
REVOLVING LINE OF CREDIT OF UP TO $25,000,000

 

 

 

 

 

TABLE OF CONTENTS

 

	
   

  	
   

  	
  Page

  
	
  ARTICLE
  I DEFINITIONS AND INTERPRETATION

  	
  1

  
	
  1.1

  	
  Terms Defined
  Above

  	
  1

  
	
  1.2

  	
  Additional
  Defined Terms

  	
  1

  
	
  1.3

  	
  Undefined
  Financial Accounting Terms

  	
  13

  
	
  1.4

  	
  References

  	
  14

  
	
  1.5

  	
  Articles and
  Sections

  	
  14

  
	
  1.6

  	
  Number and
  Gender

  	
  14

  
	
  1.7

  	
  Incorporation of
  Exhibits

  	
  14

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  II TERMS OF FACILITY

  	
  14

  
	
  2.1

  	
  Revolving Line
  of Credit

  	
  14

  
	
  2.2

  	
  Use of Loan
  Proceeds

  	
  15

  
	
  2.3

  	
  Interest

  	
  15

  
	
  2.4

  	
  Repayment of
  Loans and Interest

  	
  15

  
	
  2.5

  	
  Outstanding
  Amounts

  	
  15

  
	
  2.6

  	
  Time, Place, and
  Method of Payments

  	
  15

  
	
  2.7

  	
  Borrowing Base
  Determinations

  	
  16

  
	
  2.8

  	
  Mandatory
  Prepayments

  	
  16

  
	
  2.9

  	
  Voluntary
  Prepayments of Loans

  	
  17

  
	
  2.10

  	
  Commitment Fee

  	
  17

  
	
  2.11

  	
  Facility Fee

  	
  18

  
	
  2.12

  	
  Reimbursement
  for Engineering Expenses

  	
  18

  
	
  2.13

  	
  Loans to Satisfy
  Obligations of Borrowers

  	
  18

  
	
  2.14

  	
  Security
  Interest in Accounts; Right of Offset

  	
  18

  
	
  2.15

  	
  General
  Provisions Relating to Interest

  	
  19

  
	
  2.16

  	
  Letters in Lieu
  of Transfer Orders

  	
  20

  
	
  2.17

  	
  Power of
  Attorney

  	
  20

  
	
  2.18

  	
  Letters of
  Credit

  	
  20

  
	
  2.19

  	
  Letter of Credit
  Fee

  	
  20

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  III CONDITIONS

  	
  21

  
	
  3.1

  	
  Receipt of Loan
  Documents and Other Items

  	
  21

  
	
  3.2

  	
  Each Loan and
  Letter of Credit

  	
  23

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  IV REPRESENTATIONS AND WARRANTIES

  	
  25

  
	
  4.1

  	
  Due
  Authorization

  	
  25

  
	
  4.2

  	
  Existence

  	
  25

  
	
  4.3

  	
  Valid and
  Binding Obligations

  	
  25

  
	
  4.4

  	
  Security
  Instruments

  	
  25

  
	
  4.5

  	
  Title to Assets

  	
  25

  
	
  4.6

  	
  Score and
  Accuracy of Financial Statements

  	
  25

  
	
  4.7

  	
  No Material
  Misstatements

  	
  26

  
	
  4.8

  	
  Liabilities,
  Litigation, and Restrictions

  	
  26

  
	
  4.9

  	
  Authorizations;
  Consents

  	
  26

  
	
  4.10

  	
  Compliance with
  Laws

  	
  26

  

 

i

 

	
  4.11

  	
  ERISA

  	
  26

  
	
  4.12

  	
  Environmental
  Laws

  	
  26

  
	
  4.13

  	
  Compliance with
  Federal Reserve Regulations

  	
  27

  
	
  4.14

  	
  Investment
  Company Act Compliance

  	
  27

  
	
  4.15

  	
  Anti-Terrorism
  Laws

  	
  27

  
	
  4.16

  	
  Proper Filing of
  Tax Returns; Payment of Taxes Due

  	
  28

  
	
  4.17

  	
  Refunds

  	
  28

  
	
  4.18

  	
  Material and Gas
  Contracts

  	
  28

  
	
  4.19

  	
  Intellectual
  Property

  	
  28

  
	
  4.20

  	
  Casualties or
  Taking of Property

  	
  28

  
	
  4.21

  	
  Locations of
  Borrowers

  	
  29

  
	
  4.22

  	
  Subsidiaries

  	
  29

  
	
  4.23

  	
  Purchasers of
  Production

  	
  29

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  V AFFIRMATIVE COVENANTS

  	
  29

  
	
  5.1

  	
  Maintenance and
  Access to Records

  	
  29

  
	
  5.2

  	
  Quarterly
  Financial Statements; Compliance Certificates

  	
  29

  
	
  5.3

  	
  Annual Financial
  Statements

  	
  29

  
	
  5.4

  	
  Oil and Gas
  Reserve Reports

  	
  29

  
	
  5.5

  	
  Title Opinions;
  Title Defects

  	
  30

  
	
  5.6

  	
  Post-Closing
  Item

  	
  30

  
	
  5.7

  	
  Notices of
  Certain Events

  	
  31

  
	
  5.8

  	
  Letters in Lieu
  of Transfer Orders; Division Orders

  	
  32

  
	
  5.9

  	
  Additional
  Information

  	
  32

  
	
  5.10

  	
  Compliance with
  Laws

  	
  32

  
	
  5.11

  	
  Payment of
  Assessments and Charges

  	
  32

  
	
  5.12

  	
  Maintenance of
  Corporate Existence and Good Standing

  	
  32

  
	
  5.13

  	
  Payment of Note;
  Performance of Obligations

  	
  33

  
	
  5.14

  	
  Further
  Assurances

  	
  33

  
	
  5.15

  	
  Initial Fees and
  Expenses of Counsel to Lender

  	
  33

  
	
  5.16

  	
  Subsequent Fees
  and Expenses of Lender

  	
  33

  
	
  5.17

  	
  Operation of Oil
  and Gas Properties

  	
  33

  
	
  5.18

  	
  Maintenance and
  Inspection of Properties

  	
  34

  
	
  5.19

  	
  Maintenance of
  Insurance

  	
  34

  
	
  5.20

  	
  INDEMNIFICATION

  	
  34

  
	
  5.21

  	
  Operating
  Accounts

  	
  35

  
	
  5.22

  	
  Hedging
  Transaction Reports

  	
  35

  
	
  5.23

  	
  [Reserved]

  	
  35

  
	
  5.24

  	
  Production and
  Expense Reports

  	
  35

  
	
  5.25

  	
  Operating Budget
  Forecasts

  	
  35

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  VI NEGATIVE COVENANTS

  	
  36

  
	
  6.1

  	
  Indebtedness

  	
  36

  
	
  6.2

  	
  Contingent
  Obligations

  	
  36

  
	
  6.3

  	
  Liens

  	
  36

  
	
  6.4

  	
  Sales of Assets

  	
  36

  
	
  6.5

  	
  Leasebacks

  	
  37

  
	
  6.6

  	
  Sale or Discount
  of Receivables

  	
  37

  
	
  6.7

  	
  Loans or
  Advances

  	
  37

  

 

ii

 

	
  6.8

  	
  Investments

  	
  37

  
	
  6.9

  	
  Dividends and
  Distributions

  	
  37

  
	
  6.10

  	
  Issuance of
  Stock; Changes in Corporate Structure

  	
  37

  
	
  6.11

  	
  Transactions
  with Affiliates

  	
  38

  
	
  6.12

  	
  Lines of
  Business

  	
  38

  
	
  6.13

  	
  Plan Obligations

  	
  38

  
	
  6.14

  	
  Current Ratio

  	
  38

  
	
  6.15

  	
  EBITDA to Fixed
  Charges

  	
  38

  
	
  6.16

  	
  Tangible Net
  Worth

  	
  38

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  VII EVENTS OF DEFAULT

  	
  38

  
	
  7.1

  	
  Enumeration of
  Events of Default

  	
  38

  
	
  7.2

  	
  Remedies

  	
  40

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  VIII MISCELLANEOUS

  	
  41

  
	
  8.1

  	
  Transfers;
  Participations

  	
  41

  
	
  8.2

  	
  Survival of
  Representations, Warranties, and Covenants

  	
  41

  
	
  8.3

  	
  Notices and
  Other Communications

  	
  41

  
	
  8.4

  	
  Parties in
  Interest

  	
  42

  
	
  8.5

  	
  Rights of Third
  Parties

  	
  42

  
	
  8.6

  	
  Renewals;
  Extensions

  	
  42

  
	
  8.7

  	
  No Waiver;
  Rights Cumulative

  	
  42

  
	
  8.8

  	
  Survival Upon
  Unenforceability

  	
  42

  
	
  8.9

  	
  Amendments;
  Waivers

  	
  42

  
	
  8.10

  	
  Controlling
  Agreement

  	
  43

  
	
  8.11

  	
  Disposition of
  Collateral

  	
  43

  
	
  8.12

  	
  GOVERNING
  LAW

  	
  43

  
	
  8.13

  	
  JURISDICTION
  AND VENUE

  	
  43

  
	
  8.14

  	
  WAIVER
  OF RIGHTS TO JURY TRIAL

  	
  43

  
	
  8.15

  	
  ENTIRE
  AGREEMENT

  	
  44

  
	
  8.16

  	
  CYMRI as Agent

  	
  44

  
	
  8.17

  	
  Amended and
  Restated Agreement

  	
  44

  
	
  8.18

  	
  PATRIOT
  ACT

  	
  44

  
	
  8.19

  	
  Counterparts

  	
  44

  
	
   

  	
   

  	
   

  
	
  LIST OF EXHIBITS

  	
   

  
	
   

  	
   

  
	
  Exhibit I

  	
  Form of Note

  	
   

  
	
  Exhibit II

  	
  Form of Borrowing
  Request

  	
   

  
	
  Exhibit III

  	
  Form of Compliance
  Certificate

  	
   

  
	
  Exhibit IV

  	
  Disclosures

  	
   

  
	
  Exhibit V

  	
  Borrowing Base Oil and
  Gas Properties

  	
   

  
	
  Exhibit VI

  	
  Purchasers of Production

  	
   

  
				

 

iii

 

SECOND AMENDED AND RESTATED CREDIT AGREEMENT

 

THIS SECOND AMENDED AND RESTATED
CREDIT AGREEMENT is made and entered into effective the 5th
day of August, 2008, by and among CYMRI, L.L.C.,
a Nevada limited liability company (F/K/A THE CYMRI CORPORATION, a Texas
corporation) (“CYMRI”)
and TRIUMPH ENERGY, INC., a
Louisiana corporation (“Triumph”)
(each individually, a “Borrower”
and, collectively, the “Borrowers”),
and TEXAS CAPITAL BANK, N.A. (the “Lender”).

 

WITNESSETH:

 

In consideration of the mutual covenants and agreements herein
contained, the Borrowers and the Lender hereby agree as follows:

 

ARTICLE I

 

DEFINITIONS AND
INTERPRETATION

 

1.1           Terms
Defined Above. As used in this Credit Agreement, the terms “Borrower,” “Borrowers,” “CYMRI,” “Triumph”
and “Lender”
shall have the meaning assigned to them hereinabove.

 

1.2           Additional
Defined Terms. As used in this Credit Agreement, each of the following
terms shall have the meaning assigned thereto in this Section, unless the
context otherwise requires:

 

“Affiliate”
means any Person directly or indirectly controlling, or under common control
with, any Borrower and includes any Subsidiary of any Borrower and any “affiliate”
of any Borrower within the meaning of Reg. §240.12b-2 of the Securities
Exchange Act of 1934, as amended, with “control,” as used in this definition,
meaning possession, directly or indirectly, of the power to direct or cause the
direction of management, policies or action through ownership of voting
securities, contract, voting trust, or membership in management or in the group
appointing or electing management or otherwise through formal or informal
arrangements or business relationships.

 

“Agreement”
means this Second Amended and Restated Credit Agreement, as it may be amended,
supplemented, restated or otherwise modified from time to time.

 

“Anti-Terrorism Laws” shall mean any
applicable laws relating to terrorism or money laundering, including Executive
Order No. 13224, the USA PATRIOT Act, the applicable laws comprising or
implementing the Bank Secrecy Act, and the applicable laws administered by the
United States Treasury Department’s Office of Foreign Asset Control (as any of
the foregoing applicable laws may from time to time be amended, renewed,
extended, or replaced).

 

“Assignment of
Notes and Liens – Sterling Bank” means that certain Assignment
of Notes, Liens and Security Interests dated of even date of this Agreement

 

 

from Sterling Bank, to Lender, in form satisfactory to
Lender, in its sole discretion, covering the promissory note, liens and
security interests from Borrowers to Sterling Bank pursuant to the Sterling
Bank Credit Agreement.

 

 “Available Commitment” means, at any
time, an amount equal to the remainder, if any, of (a) the Borrowing Base
in effect at such time minus (b) the
Loan Balance at such time.

 

“Base Rate”
means, at any time, the
prime rate established in The Wall Street
Journal’s “Money Rates”
or similar table.  If multiple prime rates
are quoted in the table, then the highest prime rate will be the Base
Rate.  In the event that the prime rate
is no longer published by The Wall Street
Journal in the “Money Rates”
or similar table, then Lender may select an alternative published index based
upon comparable information as a substitute Base Rate.  Upon the selection of a substitute Base Rate,
the applicable interest rate shall thereafter vary in relation to the
substitute index.  Each change in
any interest rate provided for herein based upon the Base Rate resulting from a
change in the Base Rate shall take effect without notice to the Borrowers at
the time of such change in the Base Rate.

 

“Borrowing Base”
means, at any time with regard to the Borrowing Base Oil and Gas Properties,
the amount determined by the Lender in accordance with Section 2.7 and
then in effect.

 

“Borrowing Base
Oil and Gas Properties” means those Oil and Gas Properties of
Borrowers that are included in the Reserve Reports provided in connection with
this Agreement and the Oil and Gas Properties of Borrowers that will, with
execution of the Loan Documents, be subject to liens created by certain of the
Security Instruments to secure the Obligations, which initial Borrowing Base
Oil and Gas Properties are described in Exhibit V attached hereto and made a
part hereof together with such additional Oil and Gas Properties as are
subsequently added to the Borrowing Base pursuant to Section 2.8,
as such Exhibit V or any exhibit
to any Security Instruments may be amended or supplemented from time to time.

 

“Borrowing
Request” means each written request, in substantially the form
attached hereto as Exhibit II,
by CYMRI to the Lender for a borrowing or prepayment pursuant to Sections 2.1, 2.8 or 2.9, each of which
shall:

 

(a)           be signed by a Responsible Officer of
CYMRI;

 

(b)           specify the amount requested or
prepaid and the date of the borrowing or prepayment (which shall be a Business
Day); and

 

(c)           be delivered to the Lender no later
than 11:00 a.m., Central Standard or Daylight Savings Time, as the case
may be, on the Business Day of the requested borrowing or prepayment.

 

2

 

“Business Day”
means a day other than a Saturday, Sunday, legal holiday for commercial banks
under the laws of the State of Texas, or any other day when banking is
suspended in the State of Texas.

 

“Change of Control”
means, with respect to Guarantor or either Borrower, an event or series of
events by which the holders of the Equity Interests of Guarantor or either
Borrower, as applicable, as of the Closing Date cease to own and control,
directly and indirectly, at least fifty-one percent (51%) of either Guarantor’s
or Borrower’s Equity Interest ownership, as applicable.

 

“Closing Date”
means the effective date of this Agreement when all conditions precedent
hereunder have been satisfied.

 

“Collateral”
means the Mortgaged Property, the Pledged Collateral and the Collateral as
those terms are defined in the Security Instruments and any other Property now
or at any time used or intended as security for the payment or performance of
all or any portion of the Obligations, including pursuant to the Security
Instruments.

 

“Commitment”
means the obligation of the Lender, subject to applicable provisions of this
Agreement, to make Loans to or for the benefit of the Borrowers pursuant to Section 2.1 and
to issue Letters of Credit pursuant to Section 2.18.

 

“Commitment Fee”
means each fee payable to the Lender by the Borrowers pursuant to Section 2.10.

 

“Commitment
Period” means the period from and including the Closing Date to,
but not including, the Maturity Date.

 

“Commodity Hedge
Agreement” means any crude oil, natural gas, or other
hydrocarbon floor, collar, cap, price protection, or swap agreement, in form
and substance between any Borrower and a Person acceptable to the Lender in its
sole discretion.

 

“Commonly
Controlled Entity’ means any Person which is under common
control with any Borrower within the meaning of Section 4001 of ERISA.

 

“Compliance
Certificate” means each certificate, substantially in the form
attached hereto as Exhibit III,
executed by a Responsible Officer of CYMRI and furnished to the Lender from
time to time in accordance with Sections 5.2 and 5.3.

 

“Contingent
Obligation” means, as to any Person, any obligation of such
Person guaranteeing or in effect guaranteeing any Indebtedness, leases,
dividends, or other obligations of any other Person (for purposes of this
definition, a “primary
obligation”) in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, regardless of whether such
obligation is contingent, (a) to purchase any primary obligation or any
Property constituting direct or indirect security therefor, (b) to advance
or supply funds (i) for the purchase or payment of any primary obligation,
or (ii) to maintain working or equity capital of any other Person in
respect of 

 

3

 

any primary obligation, or otherwise to maintain the
net worth or solvency of any other Person, (c) to purchase Property,
securities or services primarily for the purpose of assuring the owner of any
primary obligation of the ability of the Person primarily liable for such
primary obligation to make payment thereof, or (d) otherwise to assure or
hold harmless the owner of any such primary obligation against loss in respect
thereof, with the amount of any Contingent Obligation being deemed to be equal
to the stated or determinable amount of the primary obligation in respect of
which such Contingent Obligation is made or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof as determined by
such Person in good faith.

 

“Current Assets”
means all assets which would, in accordance with GAAP, be included as current
assets, on a consolidated basis, on the balance sheet of the Borrowers as of
the date of calculation.

 

“Current
Liabilities” means all liabilities which would, in accordance
with GAAP, be included as current liabilities, on a consolidated basis, on the
balance sheet of the Borrowers as of the date of calculation.

 

“CYMRI”
has the meaning given to such term in the preamble of this Agreement and
includes each successor and assignee.

 

“Default”
means any event or occurrence which with the lapse of time or the giving of
notice or both would become an Event of Default.

 

“Default Rate”
means a per annum interest rate equal to the Base Rate plus four percent (4%), but in no event
exceeding the Highest Lawful Rate.

 

“Defensible Title” means with
respect to each Property, title that (a) entitles the Person to receive
(free and clear of all royalties appearing or not appearing of record, all
overriding royalties and all net profits interests or other burdens on or
measured by production of Hydrocarbons) not less than the net revenue interest
set forth on Exhibit V (or in such other certificate or writing
provided to Lender representing the interests in the Properties, including,
without limitation, any mortgage) in all Hydrocarbons produced, saved and
marketed from the Property for the productive life of the Property, free and
clear of any Lien other than the Permitted Liens and any Liens, which are in
favor of Lender and its Affiliates or are permitted hereunder; and (b) obligates
such Person to bear costs and expenses relating to the maintenance, development
and operation of such Property in an amount not greater than the working
interest set forth on Exhibit V for the productive life of such
Property.

 

“Dollars”
and “$”
means dollars in lawful currency of the United States of America.

 

“EBITDA”
means, for any period, Net Income for such period plus Interest Expense,
federal and state income taxes, depreciation, depletion, amortization, and
other non-cash expenses, including the effects of FASB 133 and 143 for such
period deducted in the determination of Net Income for such period.

 

4

 

“Environmental
Complaint” means any written complaint, order, directive, claim,
citation, notice of environmental report or investigation, or other notice by
any Governmental Authority or any other Person with respect to (a) air
emissions, (b) spills, releases, or discharges to soils, any improvements
located thereon, surface water, groundwater, or the sewer, septic, waste
treatment, storage, or disposal systems servicing any Property of either
Borrower, (c) solid or liquid waste disposal, (d) the use,
generation, storage, transportation, or disposal of any Hazardous Substance, or
(e) other environmental, health, or safety matters affecting any Property
of either Borrower or the business conducted thereon.

 

“Environmental
Laws” means (a) the following federal laws as they may be
cited, referenced, and amended from time to time: the Clean Air Act, the Clean
Water Act, the Safe Drinking Water Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Endangered Species Act, the
Resource Conservation and Recovery Act, the Occupational Safety and Health Act,
the Hazardous Materials Transportation Act, the Superfund Amendments and
Reauthorization Act, and the Toxic Substances Control Act; (b) any and all
equivalent environmental statutes of any state in which Property of either
Borrower is situated, as they may be cited, referenced and amended from time to
time; (c) any rules or regulations promulgated under or adopted
pursuant to the above federal and state laws; and (d) any other equivalent
federal, state, or local statute or any requirement, rule, regulation, code,
ordinance, or order adopted pursuant thereto, including, without limitation,
those relating to the generation, transportation, treatment, storage,
recycling, disposal, handling, or release of Hazardous Substances.

 

“Equity Interests” means with respect
to any Person, any shares, interests, participation, or other equivalents
(however designated) of corporate stock, membership interests, or partnership
interests (or any other ownership interests) of such Person.

 

“ERISA”
means the Employee Retirement Income Security Act of 1974, as amended from time
to time, and the regulations thereunder and interpretations thereof.

 

“Event of
Default” means any of the events specified in Section 7.1.

 

“Facility Fee”
has the meaning given to such term in Section 2.11 hereof.

 

“Financial
Statements” means statements of the financial condition of the
Borrowers and Guarantor on a consolidated basis and on a consolidating basis as
at the point in time and for the period indicated and consisting of at least
statements of income, retained earnings, changes in equity and cash flow for
such period as well as a balance sheet as of the end of such period for the
Borrowers and Guarantor and, when required by applicable provisions of this
Agreement to be reviewed by certified public accountants acceptable to the
Lender and footnotes to any of the foregoing, all of which shall be prepared in
accordance with GAAP for Borrowers and Guarantor, consistently applied and in
comparative form with respect to the corresponding period of the preceding
fiscal period.

 

5

 

“Floating Rate”
means an interest rate per annum equal to the Base Rate from time to time in
effect plus one percent (1%), but in no event exceeding the Highest Lawful
Rate.

 

“GAAP”
means generally accepted accounting principles established by the Financial
Accounting Standards Board or the American Institute of Certified Public
Accountants and in effect in the United States from time to time.

 

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

 

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

 

“Governing Documents” means, (a) in
the case of a corporation, its certificate of incorporation or formation,
articles of incorporation and bylaws, as amended, (b) in the case of a
limited liability company, its certificate of formation, its limited liability
company agreement, and its operating agreement or regulations (or similar
documentation as denominated under the laws of the jurisdiction in which it is
formed), (c) in the case of a general partnership or joint venture, the
applicable partnership agreement or joint venture agreement, (d) in the
case of a limited partnership, its certificate of formation and partnership
agreement, and (e) in the case of any other entity not specified in this
Agreement, the applicable documentation typically used in the jurisdiction
where such entity has been formed for purposes of initially forming such entity
according to the laws of such jurisdiction and thereafter operating and
managing such entity.

 

“Governmental
Authority” means any nation, country, commonwealth, territory,
government, state, county, parish, municipality, or other political subdivision
and any entity exercising executive, legislative, judicial, regulatory, or
administrative functions of or pertaining to government.

 

“Guarantor” means Stratum
Holdings, Inc., a Nevada corporation.

 

“Guaranty” means an unlimited
guaranty agreement in form and content satisfactory to Lender.

 

“Hazardous
Substances” means flammables, explosives, radioactive materials,
hazardous wastes, asbestos, or any material containing asbestos,
polychlorinated biphenyls (PCBs), toxic substances or related materials,
petroleum, petroleum products, 

 

6

 

associated oil or natural gas exploration, production,
and development wastes, or any substances defined as “hazardous substances,” “hazardous
materials,” “hazardous wastes,” or “toxic substances” under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, the
Superfund Amendments and Reauthorization Act, as amended, the Hazardous
Materials Transportation Act, as amended, the Resource Conservation and
Recovery Act, as amended, the Toxic Substances Control Act, as amended, or any
other law or regulation now or hereafter enacted or promulgated by any
Governmental Authority.

 

“Highest Lawful Rate”
means the maximum non-usurious interest rate, if any (or, if the context so
requires, an amount calculated at such rate), that at anytime or from time to
time may be contracted for, taken, reserved, charged, or received under
applicable laws of the State of Texas or the United States of America,
whichever authorizes the greater rate, as such laws are presently in effect or,
to the extent allowed by applicable law, as such laws may hereafter be in
effect and which allow a higher maximum non-usurious interest rate than such
laws now allow.

 

“Hydrocarbons” means oil, Gas,
drip gasoline, natural gasoline, condensate, distillate, liquid hydrocarbons,
gaseous hydrocarbons, and all products refined or separated therefrom.

 

“Indebtedness”
means, as to any Person, without duplication, (a) all liabilities
(excluding reserves for deferred income taxes, deferred compensation
liabilities, and other deferred liabilities and credits) which in accordance
with GAAP would be included in determining total liabilities as shown on the
liability side of a balance sheet, (b) all obligations of such Person
evidenced by bonds, debentures, promissory notes, or similar evidences of
indebtedness, (c) all other indebtedness of such Person for borrowed
money, and (d) all obligations of others, to the extent any such
obligation is secured by a Lien on the assets of such Person (whether or not
such Person has assumed or become liable for the obligation secured by such
Lien).

 

“Insolvency
Proceeding” means application (whether voluntary or instituted
by another Person) for or the consent to the appointment of a receiver,
trustee, conservator, custodian, or liquidator of any Person or of all or a
substantial part of the Property of such Person, or the filing of a petition
(whether voluntary or instituted by another Person) commencing a case under
Title 11 of the United States Code, seeking liquidation, reorganization, or
rearrangement or taking advantage of any bankruptcy, insolvency, debtor’s
relief, or other similar law of the United States, the State of Texas, or any
other jurisdiction.

 

“Intellectual
Property” means patents, patent applications, trademarks,
tradenames, copyrights, technology, know-how, and processes.

 

“Intercreditor Agreement”
means an intercreditor agreement in connection with Lender’s agreement to share
its Liens on a pari passu basis with a
counterparty under a Permitted Commodity Hedge Agreement, in form and content
satisfactory to Lender.

 

7

 

“Interest
Expense” means, for any period, the total interest expense
(including, without limitation, interest expense attributable to capitalized
leases) of the Borrowers for such period, determined in accordance with GAAP.

 

“Investment”
means, for any Person (a) the acquisition (whether for cash, property,
services or securities or otherwise) of Equity Interests of any other Person or
any agreement to make any such acquisition (including any “short sale” or any
sale of any securities at a time when such securities are not owned by the
Person entering into such short sale), (b) the making of any deposit with,
or advance, loan or capital contribution to, assumption of Indebtedness of,
purchase or other acquisition of any other Indebtedness or equity participation
or interest in, or other extension of credit to, any other Person (including
the purchase of assets from another Person subject to an understanding or
agreement, contingent or otherwise, to resell such assets to such Person, (c) the
purchase or acquisition (in one or a series of transactions) of assets of
another Person that constitutes a business unit, or (d) the entering into
of any guarantee of, or other contingent obligation (including the deposit of
any Equity Interests to be sold) with respect to, Indebtedness or other
liability of any other Person and (without duplication) any amount committed to
be advanced, lent or extended to such Person.

 

“L/C Exposure”
means, at any time, the aggregate maximum amount available to be drawn under
outstanding Letters of Credit at such time.

 

“L/C Limit” means $500,000.

 

“Letter of
Credit” means any standby letter of credit issued by the Lender
for the account of the Borrowers pursuant to Section 2.18.

 

“Letter of
Credit Application” means the standard letter of credit
application employed by the Lender from time to time in connection with Letters
of Credit.

 

“Letter of
Credit Fee” means each fee payable to the Lender by the
Borrowers pursuant to Section 2.19
upon or in connection with the issuance of a Letter of Credit.

 

“Lien”
means any interest in Property securing an obligation owed to, or a claim by, a
Person other than the owner of such Property, whether such interest is based on
common law, statute, or contract, and including, but not limited to, the lien
or security interest arising from a mortgage, encumbrance, pledge, security
agreement, conditional sale or trust receipt, or a lease, consignment, or
bailment for security purposes (other than true leases or true consignments),
liens of mechanics, materialmen, and artisans, maritime liens and reservations,
exceptions, encroachments, easements, rights of way, covenants, conditions,
restrictions, leases, and other title exceptions and encumbrances affecting
Property which secure an obligation owed to, or a claim by, a Person other than
the owner of such Property (for the purpose of this Agreement, the Borrower
shall be deemed to be the owner of any Property which it has acquired or holds
subject to a conditional sale agreement, financing lease, or other arrangement
pursuant to which title to the Property has been retained by or vested in some
other Person for security purposes), and 

 

8

 

the filing or recording of any financing statement or
other security instrument in any public office.

 

“Limitation
Period” means any period while any amount remains owing on the
Note and interest on such amount, calculated at the applicable interest rate,
plus any fees or other sums payable under any Loan Document and deemed to be
interest under applicable law, would exceed the amount of interest which would
accrue at the Highest Lawful Rate.

 

“Loan”
means any loan made by the Lender to or for the benefit of the Borrower
pursuant to this Agreement and any payment made by the Lender under a Letter of
Credit.

 

“Loan Balance”
means, at any time, the outstanding principal balance of the Note at such time,
plus the L/C Exposure at such time.

 

“Loan Documents”
means this Agreement, the Note, the Letters of Credit Applications, the Letters
of Credit, the Security Instruments, the Subordination Agreement and all other
documents and instruments now or hereafter delivered pursuant to the terms of
or in connection with this Agreement, the Note, the Letters of Credit
Applications, the Letters of Credit, or the Security Instruments, and all
renewals and extensions of, amendments and supplements to, and restatements and
other modifications of, any or all of the foregoing from time to time in
effect.

 

“Loan Parties” means the
Borrowers and the Guarantor.

 

“Material
Adverse Effect” means (a) any adverse effect on the
business, operations, properties, financial condition, or prospects of the
Borrowers and the Guarantor, taken as a whole, which materially increases the
risk that any of the Obligations will not be repaid as and when due, or (b) any
material adverse effect upon any material portion of the Collateral in Lender’s
reasonable judgment.

 

“Maturity Date”
means the second anniversary of the Closing Date.

 

“Monthly Borrowing Base Reduction”
is defined in Section 2.7(a).

 

“Net Income”
means, for any period, the net income (or loss) of the Borrower, on a
consolidated basis, for such period, determined in accordance with GAAP.

 

“Net Proceeds”
means (a) with respect to any sale, lease, transfer or other disposition
of any asset by any Person, the aggregate amount of cash and non-cash proceeds
from such transaction received by, or paid to or for the account of, such
Person, net of customary and reasonable out-of-pocket costs, fees, and
expenses, and (b) with respect to the issuance of equity securities, debt
securities, or similar instruments, or the incurrence of Indebtedness, the cash
and non-cash proceeds received from such issuance or incurrence, net of
attorneys’ fees, investment banking fees, accountants fees, underwriting
discounts and commissions and other customary fees and expenses actually
incurred in connection with such issuance. 
Non-cash proceeds include any proceeds 

 

9

 

received by way of deferred payment of principal
calculated on a combined basis as of such time pursuant to a note,
installment receivable, purchase price adjustment receivable, or
otherwise, but only as and when received.

 

“Note”
means the promissory note of the Borrowers, in the form attached hereto as Exhibit I,
together with all renewals, extensions for any period, increases, and
rearrangements thereof.

 

“Obligations”
means, without duplication, (a) all Indebtedness evidenced by the Note, (b) the
Reimbursement Obligations, (c) the undrawn, unexpired amount of all
outstanding Letters of Credit, (d) the obligation of the Borrower for the
payment of Commitment Fees, Letter of Credit Fees, and reimbursement of
engineering expenses, (e) indemnity obligations of Borrowers and (f) all
other obligations and liabilities of the Borrower to the Lender, now existing
or hereafter incurred, under, arising out of or in connection with any Loan
Document, and to the extent that any of the foregoing includes or refers to the
payment of amounts deemed or constituting interest, only so much thereof as
shall have accrued, been earned and which remains unpaid at each relevant time of
determination.

 

“Oil and Gas
Properties” means fee, leasehold, or other interests in or under
mineral estates or oil, gas, and other liquid or gaseous hydrocarbon leases
with respect to Properties situated in the United States or offshore from any
State of the United States, including, without limitation, overriding royalty
and royalty interests, leasehold estate interests, net profits interests,
production payment interests, and mineral fee interests, together with
contracts executed in connection therewith and all tenements, hereditaments,
appurtenances and Properties appertaining, belonging, affixed, or incidental
thereto.

 

“Permitted Commodity Hedge Agreements”
means crude oil, natural gas, or other hydrocarbon Commodity Hedge Agreements; provided that (i) such agreement is in form and
substance and with a Person acceptable to the Lender, in its discretion, (ii) each
transaction under such agreement must also be approved by the Lender, (iii) such
agreements shall not be entered into with respect to Borrowers’ Borrowing Base
Oil and Gas Properties constituting more than 80% of the present value of
estimated future net revenues, computed using a discount factor of 9%, of all
proved developed producing Borrowing Base Oil and Gas Properties, and (iv) that
the floor prices in such agreements are not less than the prices used by the
Lender in its most recent Borrowing Base determination,

 

“Permitted Liens”
means (a) Liens for taxes, assessments, or other governmental charges or
levies not yet due or which (if foreclosure, distraint, sale, or other similar
proceedings shall not have been initiated) are being contested in good faith by
appropriate proceedings, and such reserve as may be required by GAAP shall have
been made therefor, (b) Liens (including, but not limited to, pledges or
deposits) in connection with workers’ compensation, unemployment insurance or
other social security (other than Liens created by Section 4068 of ERISA),
old-age pension, or public liability obligations which are not yet due or which
are being contested in good faith by appropriate 

 

10

 

proceedings, if such reserve as may be required by
GAAP shall have been made therefor, (c) Liens in favor of vendors,
carriers, warehousemen, repairmen, mechanics, workmen, materialmen,
construction, or similar Liens arising by operation of law in the ordinary
course of business in respect of obligations which are not yet due or which are
being contested in good faith by appropriate proceedings, if such reserve as
may be required by GAAP shall have been made therefor, (d) Liens in favor
of operators and non-operators under joint operating agreements or similar
contractual arrangements arising in the ordinary course of the business of the
Borrower to secure amounts owing, which amounts are not yet due or are being
contested in good faith by appropriate proceedings, if such reserve as may be
required by GAAP shall have been made therefor, (e) Liens under production
sales agreements, division orders, operating agreements, and other agreements
customary in the oil and gas business for processing, producing, and selling
hydrocarbons securing obligations not constituting Indebtedness and provided
that such Liens do not secure obligations to deliver hydrocarbons at some
future date without receiving full payment therefor within 90 days of delivery,
(f) easements, rights of way, restrictions, and other similar
encumbrances, and minor defects in the chain of title which are customarily
accepted in the oil and gas financing industry, none of which interfere with
the ordinary conduct of the business of the Borrower or materially detract from
the value or use of the Property to which they apply, (g) Liens in favor
of the Lender, (h) any Liens securing Indebtedness subordinated to the
Obligations pursuant to the Subordination Agreement and (i) pari passu Liens in connection with Permitted Commodity
Hedge Agreements, but subject to an Intercreditor Agreement.

 

“Person”
means an individual, corporation, partnership, trust, unincorporated
organization, government, any agency or political subdivision of any
government, or any other form of entity.

 

“Plan”
means, at any time, any employee benefit plan which is covered by ERISA and in
respect of which the Borrower or any Commonly Controlled Entity is (or, if such
plan were terminated at such time, would under Section 4069 of ERISA be
deemed to be) an “employer” as defined in Section 3(5) of ERISA.

 

“Pledge Agreement” means a
pledge agreement dated of even date of this Agreement executed by Guarantor in
favor of Lender covering the Equity Interests in each Borrower.

 

“Principal
Office” means the principal office of the Lender in Houston,
Texas, presently located at One Riverway, Suite 2450, Houston, Texas
77056.

 

“Property”
means any interest in any kind of property or asset, whether real, personal or
mixed, tangible or intangible.

 

“Purchasers of Production” means the Persons
listed on Exhibit VI
and all other Persons who purchase Hydrocarbons attributable or allocable to
Borrowers’ interests in the Borrowing Base Oil and Gas Properties.

 

11

 

“Rate Management Transaction”
means any rate swap, basis swap, forward rate transaction, commodity swap,
commodity option, equity or equity index swap, equity or equity index option,
bond option, interest rate option, foreign exchange transaction, cap transaction,
floor transaction, collar transaction, forward transaction, currency swap
transaction, cross-currency rate swap transaction, currency option or any other
similar transaction (including any option with respect to any of these
transactions) or any combination thereof, whether linked to on or more interest
rates, foreign currencies, commodity prices, equity prices or other financial
measures.

 

“Regulation D” means
Regulation D of the Board of Governors of the Federal Reserve System, as the
same may be amended or supplemented from time to time.

 

“Regulatory Change”
means the passage, adoption, institution, or amendment of any federal, state,
local, or foreign Requirement of Law (including, without limitation, Regulation
D), or any interpretation, directive, or request (whether or not having the
force of law) of any Governmental Authority or monetary authority charged with
the enforcement, interpretation, or administration thereof, occurring after the
Closing Date and applying to a class of banks including the Lender.

 

“Reimbursement Obligation”
means the obligation of the Borrowers to provide to the Lender or reimburse the
Lender for any amounts payable, paid, or incurred by the Lender with respect to
Letters of Credit.

 

“Release of Hazardous Substances”
means any emission, spill, release, disposal, or discharge, except in
accordance with a valid permit, license, certificate, or approval of the
relevant Governmental Authority, of any Hazardous Substance into or upon (a) the
air, (b) soils or any improvements located thereon, (c) surface water
or groundwater, or (d) the sewer or septic system, or the waste treatment,
storage, or disposal system servicing any Property of either Borrower.

 

“Requirement of Law”
means, as to any Person, the certificate or articles of incorporation and
by-laws, partnership agreements or other organizational or governing documents
of such Person, and any applicable law, treaty, ordinance, order, judgment,
rule, decree, regulation, or determination of an arbitrator, court, or other
Governmental Authority, including, without limitation, rules, regulations,
orders, and requirements for permits, licenses, registrations, approvals, or
authorizations, in each case as such now exist or may be hereafter amended and
are applicable to or binding upon such Person or any of its Property or to
which such Person or any of its Property is subject.

 

“Reserve Report” means
each report delivered to the Lender pursuant to Section 5.4.

 

“Responsible Officer”
means, as to any Person, its President, Chief Executive Officer or Chief
Financial Officer.

 

“Security Instruments”
means the security instruments executed and delivered in satisfaction of the
condition set forth in Section 3.1(f),
and all other documents and instruments at any time executed as security for
all or any portion of the Obligations, as 

 

12

 

such instruments may be amended, restated, supplemented or otherwise
modified from time to time.

 

“Sterling Bank Credit Agreement”
means that certain Credit Agreement dated December 3, 2004 between
Sterling Bank, as lender, and CYMRI and Triumph, as borrowers, as amended by
the First Amendment thereto dated May 22, 2006, the Second Amendment
thereto dated September 7, 2006, the Third Amendment thereto dated November 29,
2007, the Fourth Amendment thereto dated effective December 31, 2007 and
the Fifth Amendment thereto dated March 31, 2008.

 

“Subordination Agreement”
means that certain Subordination Agreement dated as of even date herewith among
the Lender, Borrower, Frank M. Cantrell, Jr. and any other subordination
agreement among the Lender, any Borrower and any Person (other than a Loan
Party) that holds any Indebtedness for borrowed money of either Borrower in
form satisfactory to Lender in its sole discretion.

 

“Subsidiary” means, as
to any Person, other than an individual, of which shares of Equity Interests
having ordinary voting power (other than Equity Interests having such power
only by reason of the happening of a contingency) to elect a majority of the
Governing Body of such Person that are at the time owned, or the management of
which is otherwise controlled, directly or indirectly through one or more
intermediaries, or both, by such Person.

 

“Superfund Site” means
those sites listed on the Environmental Protection Agency National Priority
List and eligible for remedial action or any comparable state registries or
list in any state of the United States.

 

“Transferee” means any
Person to which the Lender has sold, assigned, transferred, or granted a
participation in any of the Obligations, as authorized pursuant to Section 8.1, and
any Person acquiring, by purchase, assignment, transfer, or participation, from
any such purchaser, assignee, transferee, or participant, any part of such
Obligations.

 

“Triumph” has the
meaning given to such term in the preamble of this Agreement and includes each
successor and assignee.

 

“UCC” means the
Uniform Commercial Code as from time to time in effect in the State of Texas.

 

“USA
PATRIOT Act” shall mean the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001, Public Law 107-56, as the same has been, or shall hereafter be, renewed,
extended, amended or replaced.

 

1.3                                 Undefined
Financial Accounting Terms. Undefined financial accounting terms used in
this Agreement shall be defined according to GAAP at the time in effect.

 

13

 

1.4                                 References.  References in this Agreement to Exhibit,
Article, or Section numbers shall be to Exhibits, Articles, or Sections of
this Agreement, unless expressly stated to the contrary.  References in this Agreement to “hereby,” “herein,”
“hereinafter,” “hereinabove,” “hereinbelow,” “hereof,” “hereunder” and words of
similar import shall be to this Agreement in its entirety and not only to the
particular Exhibit, Article, or Section in which such reference appears.

 

1.5                                 Articles
and Sections. This Agreement, for convenience only, has been divided into
Articles and Sections; and it is understood that the rights and other legal
relations of the parties hereto shall be determined from this instrument as an
entirety and without regard to the aforesaid division into Articles and
Sections and without regard to headings prefixed to such Articles or Sections.

 

1.6                                 Number
and Gender.  Whenever the context
requires, reference herein made to the single number shall be understood to
include the plural; and likewise, the plural shall be understood to include the
singular.  Definitions of terms defined
in the singular or plural shall be equally applicable to the plural or
singular, as the case may be, unless otherwise indicated. Words denoting sex
shall be construed to include the masculine, feminine and neuter, when such
construction is appropriate; and specific enumeration shall not exclude the
general but shall be construed as cumulative.

 

1.7                                 Incorporation
of Exhibits. The Exhibits attached to this Agreement are incorporated
herein and shall be considered a part of this Agreement for all purposes.

 

ARTICLE II

 

TERMS OF FACILITY

 

2.1                                 Revolving
Line of Credit.

 

(a)                                  Upon
the terms and conditions (including, without limitation, the right of the
Lender to decline to make any Loan so long as any Default or Event of Default
exists) and relying on the representations and warranties contained in this
Agreement, the Lender agrees, during the Commitment Period, to make Loans, in
immediately available funds at the Principal Office, to or for the benefit of
the Borrowers, from time to time on any Business Day designated by the
Borrowers following receipt by the Lender of a Borrowing Request; provided, however, no Loan shall exceed
the then existing Available Commitment.

 

(b)                                 Subject
to the terms of this Agreement, during the Commitment Period, the Borrowers may
borrow, repay, and reborrow such funds. Except for prepayments made pursuant to
Section 2.8,
each borrowing and prepayment of principal of Loans shall be in an amount at
least equal to $100,000.  Each borrowing
or prepayment shall be deemed a separate borrowing or prepayment for purposes
of the foregoing.

 

(c)                                  The
Loans made under this Section 2.1
shall be made and maintained at the Principal Office and shall be evidenced by
the Note.

 

14

 

2.2                                 Use
of Loan Proceeds.

 

(a)                                  Proceeds
of all Loans shall be used solely for (i) the acquisition and development
of the Borrowing Base Oil and Gas Properties, (ii) payment of fees and
expenses hereunder and (iii) for general corporate purposes.

 

(b)                                 Letters
of Credit shall be used solely for general corporate purposes provided, however, no Letter of Credit may
be used in lieu or in support of stay or appeal bonds.

 

2.3                                 Interest.  Subject to the terms of this Agreement
(including, without limitation, Section 2.15), interest on the Loans shall accrue
and be payable at a rate per annum equal to the Floating Rate. Interest on all
Loans shall be computed on the basis of a year of 365 or 366 days, as the case
may be, and actual days elapsed (including the first day but excluding the last
day) during the period for which payable. Interest provided for herein shall be
calculated on unpaid sums actually advanced and outstanding pursuant to the
terms of this Agreement and only for the period from the date or dates of such
advances until repayment. Notwithstanding the foregoing, interest on past-due
principal and, to the extent permitted by applicable law, past-due interest,
shall accrue at the Default Rate, computed on the basis of a year of 365 or 366
days, as the case may be, and actual days elapsed (including the first day but
excluding the last day) during the period for which payable, and shall be
payable upon demand by the Lender at any time as to all or any portion of such
interest.

 

2.4                                 Repayment
of Loans and Interest.  Accrued and
unpaid interest on the outstanding Loans under the Note shall be due and
payable monthly commencing on the last day of August, 2008, and continuing on
the last day of each calendar month thereafter while any amount of the
outstanding principal balance remains outstanding, the payment in each instance
to be the amount of interest which has accrued and remains unpaid in respect of
the outstanding principal balance.  The
outstanding principal balance on the Note, together with all accrued and unpaid
interest thereon, shall be due and payable on the Maturity Date.

 

2.5                                 Outstanding
Amounts. The outstanding principal balance of the Note reflected by the
notations by the Lender on its records shall be deemed rebuttably presumptive
evidence of the principal amount owing on the Note. The liability for payment
of principal and interest evidenced by the Note shall be limited to principal
amounts actually advanced and outstanding pursuant to this Agreement and
interest on such amounts calculated in accordance with this Agreement.

 

2.6                                 Time,
Place, and Method of Payments.  All
payments required pursuant to this Agreement or the Note shall be made in
lawful money of the United States of America and in immediately available
funds, shall be deemed received by the Lender on the next Business Day
following receipt if such receipt is after 2:00 p.m., Central Standard or
Daylight Savings Time, as the case may be, on any Business Day, and shall be
made at the Principal Office. Except as provided to the contrary herein, if the
due date of any payment hereunder or under the Note would otherwise fall on a
day which is not a Business Day, such date shall be extended to the next
succeeding Business Day, and interest shall be payable for any principal so
extended for the period of such extension.

 

15

 

2.7                                 Borrowing
Base Determinations.

 

(a)                                  The
Borrowing Base as of the Closing Date is acknowledged by the Borrowers and the
Lender to be $3,400,000.  The amount of
the Borrowing Base (as adjusted from time to time under the terms of this
Agreement) shall be reduced by $125,000 on the first day of each month
beginning September 1, 2008 (the “Monthly Borrowing Base
Reduction”).

 

(b)                                 The
Borrowing Base shall be redetermined semi-annually on each May 1 and November 1
of each calendar year beginning November 1, 2008, on the basis of
information supplied by the Borrowers in compliance with the provisions of this
Agreement, including, without limitation, Reserve Reports, and all other
information available to the Lender. In addition, the Lender shall, in the
normal course of business following a request of the Borrowers, redetermine the
Borrowing Base attributable to the Borrowing Base Oil and Gas Properties; provided, however, the Lender shall not be
obligated to respond to more than one such request during any calendar year,
and in no event shall the Lender be required to redetermine the Borrowing Base
more than once in any three-month period, including, without limitation, each
scheduled semi-annual redetermination provided for above.  Notwithstanding the foregoing, the Lender may
at its discretion redetermine the Borrowing Base attributable to the Borrowing
Base Oil and Gas Properties and the amount by which the Borrowing Base shall be
reduced each calendar month as set forth in Section 2.7(a) at any time and
from time to time.

 

(c)                                  Upon
each determination of the Borrowing Base by the Lender, the Lender shall notify
the Borrower in writing of such determination, and the Borrowing Base and the
amount by which the Borrowing Base shall be reduced or increased so
communicated to the Borrowers shall become effective upon such written
notification and shall remain in effect until the next subsequent determination
of the Borrowing Base and the amount by which the Borrowing Base shall be
reduced.  Each time the Borrowing Base is
redetermined by Lender, the Monthly Borrowing Base Reduction shall also be
redetermined.

 

(d)                                 The
Borrowing Base shall represent the determination by the Lender, in accordance
with the applicable definitions and provisions herein contained and its
customary lending practices for loans of this nature, of the value, for loan
purposes, of the Borrowing Base Oil and Gas Properties, subject, in the case of
any increase in the Borrowing Base, to the credit approval process of the
Lender.  Furthermore, the Borrowers
acknowledge that the determination of the Borrowing Base contains an equity
cushion, which is acknowledged by the Borrowers to be essential for the
adequate protection of the Lender.

 

2.8                                 Mandatory
Prepayments.

 

(a)                                  If
at any time the Loan Balance exceeds the Borrowing Base then in effect, the
Borrowers shall, within 30 days of notice from the Lender of such occurrence, (i) prepay,
or make arrangements acceptable to the Lender for the prepayment of, the amount
of such excess for application on the Loan Balance, (ii) provide
additional 

 

16

 

collateral, of character and value satisfactory to the
Lender in its sole discretion, to secure the Obligations by the execution and
delivery to the Lender of security instruments in form and substance
satisfactory to the Lender, or (iii) effect any combination of the
alternatives described in clauses (i) and (ii) of this Section and
acceptable to the Lender in its sole discretion.  In the event that a mandatory prepayment is
required under this Section and the Loan Balance is less than the amount
required to be prepaid, the Borrowers shall repay the entire Loan Balance and,
in accordance with the provisions of the relevant Letter of Credit Applications
executed by the Borrower or otherwise to the satisfaction of the Lender,
deposit with the Lender, as additional collateral securing the Obligations, an
amount of cash, in immediately available funds, equal to the L/C Exposure minus
the Borrowing Base.  The cash deposited
with the Lender in satisfaction of the requirement provided in this Section may
be invested, at the sole discretion of the Lender and then only at the express
direction of the Borrowers as to investment vehicle and maturity (which shall
be no later than the latest expiry date of any then outstanding Letter of
Credit), for the account of the Borrowers in cash or cash equivalent
investments offered by or through the Lender.

 

(b)                                 In
addition to the foregoing, the Borrowers shall immediately prepay the principal
of the Note in an amount equal to:

 

(i)                                     100%
of Net Proceeds from the disposition of any asset, excluding sales permitted
under this Agreement;

 

(ii)                                  100%
of insurance proceeds in excess of $50,000 per occurrence in respect of any
insurance policy required to be maintained by the Borrower under the terms of
this Agreement unless Borrower reinvests such proceeds within ninety (90) days
of any insurable loss to replace the lost or damaged assets;

 

(iii)                               50%
of the Net Proceeds from the sale or issuance (after the date of this
Agreement) of any Equity Interest; and

 

(iv)                              100%
of any Indebtedness incurred by any Borrower, other than Indebtedness permitted
under Section 6.1
hereof.

 

2.9                                 Voluntary
Prepayments of Loans. Subject to applicable provisions of this Agreement,
the Borrower shall have the right at any time or from time to time to prepay
Loans without prepayment penalty provided,
however, (a) the Borrower shall pay all accrued and unpaid
interest on the amounts prepaid, and (b) no such prepayment shall serve to
postpone the repayment when due of any Obligation.

 

2.10                           Commitment
Fee.  In addition to interest on the
Note as provided herein and all other fees payable hereunder and to compensate
the Lender for maintaining funds available, the Borrower shall pay to the
Lender, in immediately available funds, on the first day of September, 2008,
and on the first day of each calendar month thereafter during the Commitment
Period, a fee in the amount of one-quarter percent (0.25%) per annum,
calculated on the basis of a year of 365 or 366 days, as the case may be, and
actual days elapsed (including the first day but 

 

17

 

excluding the last day), on the average daily amount
of the Available Commitment during the preceding month.

 

2.11                           Facility
Fee.  In addition to interest on the
Note as provided herein and all other fees payable hereunder and to compensate
the Lender for the costs of the extension of credit hereunder, the Borrower
shall pay to the Lender (i) on the Closing Date, in immediately available
funds, a facility fee (the “Facility Fee”) in the amount of $17,000 and (ii) a
Facility Fee equal to one-half of one percent (0.5%) on any future increase in
the Borrowing Base over the highest Borrowing Base previously in effect, on the
date of any such Borrowing Base redetermination.

 

2.12                           Reimbursement
for Engineering Expenses.  In
addition to interest and other fees payable hereunder and to compensate the
Lender for the costs of evaluating the Borrowing Base Oil and Gas Properties
and reviewing the Reserve Reports, the Borrower shall reimburse the Lender
$2,500 for all expenses relating to such reviews, in immediately available
funds, on the date of each redetermination of the Borrowing Base, including on
the Closing Date.

 

2.13                           Loans
to Satisfy Obligations of Borrowers. The Lender may, but shall not be
obligated to, make Loans for the benefit of the Borrowers and apply proceeds
thereof to the satisfaction of any condition, warranty, representation, or
covenant of the Borrowers contained in this Agreement or any other Loan
Document.  Any such Loan shall be
evidenced by the Note and shall be made at the Floating Rate.

 

2.14                           Security
Interest in Accounts; Right of Offset. 
As security for the payment and performance of the Obligations, each
Borrower hereby transfers, assigns, and pledges to the Lender and grants to the
Lender a security interest in all funds of each Borrower now or hereafter or
from time to time on deposit with the Lender, with such interest of the Lender
to be retransferred, reassigned, and/or released by the Lender, as the case may
be, at the expense of the Borrowers upon payment in full and complete
performance by the Borrowers of all Obligations. All remedies as secured party
or assignee of such funds shall be exercisable by the Lender upon the
occurrence of any Event of Default, regardless of whether the exercise of any
such remedy would result in any penalty or loss of interest or profit with
respect to any withdrawal of funds deposited in a time deposit account prior to
the maturity thereof. Furthermore, each Borrower hereby grants to the Lender
the right, exercisable at such time as any Obligation shall mature, whether by
acceleration of maturity or otherwise, of offset or banker’s lien against all
funds of the Borrowers now or hereafter or from time to time on deposit with
the Lender, regardless of whether the exercise of any such remedy would result
in any penalty or loss of interest or profit with respect to any withdrawal of
funds deposited in a time deposit account prior to the maturity thereof.

 

18

 

2.15                           General
Provisions Relating to Interest.

 

(a)                                  It
is the intention of the parties hereto to comply strictly with the usury laws
of the State of Texas and the United States of America.  In this connection, there shall never be
collected, charged, or received on the sums advanced hereunder interest in
excess of that which would accrue at the Highest Lawful Rate. For purposes of
Chapter 303 of the Texas Finance Code, the Borrowers agree that the
Highest Lawful Rate shall be the “weekly ceiling” as defined in such Section,
provided that the Lender may also rely, to the extent permitted by applicable
laws of the State of Texas or the United States of America, on alternative
maximum rates of interest under other laws of the State of Texas or the United
States of America applicable to the Lender, if greater.

 

(b)                                 Notwithstanding
anything herein or in the Note to the contrary, during any Limitation Period,
the interest rate to be charged on amounts evidenced by the Note shall be the
Highest Lawful Rate, and the obligation, if any, of the Borrowers for the
payment of fees or other charges deemed to be interest under applicable law
shall be suspended.  During any period or
periods of time following a Limitation Period, to the extent permitted by
applicable laws of the State of Texas or the United States of America, the
interest rate to be charged hereunder shall remain at the Highest Lawful Rate
until such time as there has been paid to the Lender (i) the amount of
interest in excess of that accruing at the Highest Lawful Rate that the Lender
would have received during the Limitation Period had the interest rate remained
at the otherwise applicable rate, and (ii) all interest and fees otherwise
payable to the Lender but for the effect of such Limitation Period.

 

(c)                                  If,
under any circumstances, the aggregate amounts paid on the Note or under this Agreement
or any other Loan Document include amounts which by law are deemed interest and
which would exceed the amount permitted if the Highest Lawful Rate were in
effect, the Borrowers stipulate that such payment and collection will have been
and will be deemed to have been, to the extent permitted by applicable laws of
the State of Texas or the United States of America, the result of mathematical
error on the part of the Borrowers and the Lender; and the Lender shall
promptly refund the amount of such excess (to the extent only of such interest
payments in excess of that which would have accrued and been payable on the
basis of the Highest Lawful Rate) upon discovery of such error by the Lender or
notice thereof from the Borrowers.  In
the event that the maturity of any Obligation is accelerated, by reason of an
election by the Lender or otherwise, or in the event of any required or
permitted prepayment, then the consideration constituting interest under
applicable laws may never exceed the Highest Lawful Rate; and excess amounts
paid which by law are deemed interest, if any, shall be credited by the Lender
on the principal amount of the Obligations, or if the principal amount of the
Obligations shall have been paid in full, refunded to the Borrowers.

 

(d)                                 All
sums paid, or agreed to be paid, to the Lender for the use, forbearance and
detention of the proceeds of any advance hereunder shall, to the extent
permitted by applicable law, be amortized, prorated, allocated, and spread
throughout the full term hereof until paid in full so that the actual rate of
interest is uniform but does not exceed the Highest Lawful Rate throughout the
full term hereof.

 

19

 

2.16                           Letters
in Lieu of Transfer Orders. The Lender agrees that none of the letters in
lieu of transfer or division orders provided by the Borrowers pursuant to Section 3.1(f)(v) or
Section 5.7
will be sent to the addressees thereof prior to the occurrence and continuance
of an Event of Default, at which time the Lender may, at its option and in
addition to the exercise of any of its other rights and remedies, send any or
all of such letters.

 

2.17                           Power
of Attorney.  Each Borrower hereby
designates the Lender as its agent and attorney-in-fact, to act in its name,
place, and stead for the purpose of completing and, upon the occurrence and
continuance of an Event of Default, delivering any and all of the letters in
lieu of transfer orders delivered by the Borrower to the Lender pursuant to Section 3.1(f)(v) or
Section 5.7,
including, without limitation, completing any blanks contained in such letters
and attaching exhibits thereto describing the relevant Collateral. Each
Borrower hereby ratifies and confirms all that the Lender shall lawfully do or
cause to be done by virtue of this power of attorney and the rights granted
with respect to such power of attorney. 
This power of attorney is coupled with the interests of the Lender in
the Collateral, shall commence and be in full force and effect as of the
Closing Date and shall remain in full force and effect and shall be irrevocable
so long as any Obligations remain outstanding or unpaid or any Commitment
exists.  The powers conferred on the
Lender by this appointment are solely to protect the interests of the Lender under
the Loan Documents and shall not impose any duty upon the Lender to exercise
any such powers.  The Lender shall be
accountable only for amounts that it actually receives as a result of the
exercise of such powers and shall not be responsible to the Borrowers or any
other Person for any act or failure to act with respect to such powers, except
for gross negligence or willful misconduct.

 

2.18                           Letters
of Credit.

 

(a)                                  Upon
the terms and conditions (including, without limitation, the right of the
Lender to decline to issue any Letter of Credit so long as any Default or Event
of Default exists) and relying on the representations and warranties contained
in this Agreement, the Lender agrees, during the Commitment Period, to issue
Letters of Credit following the receipt not less than two Business Days prior
to the requested date for issuance of the relevant Letter of Credit, of a
Letter of Credit Application executed by the Borrowers; provided, however, (a) no Letter of
Credit shall have an expiration date which is more than 360 days after the
issuance thereof or subsequent to the Maturity Date, and (b) the Lender
shall not be obligated to issue any Letter of Credit if (i) the face
amount thereof would exceed the Available Commitment, or (ii) after giving
effect to the issuance thereof, the L/C Exposure would exceed the L/C Limit.

 

(b)                                 Should
the Lender be called upon by the beneficiary of any Letter of Credit to honor
all or any portion of the commitment thereunder, whether upon the presentation
of drafts or otherwise, such payment by the Lender on account of such Letter of
Credit shall be treated, for all purposes, as a Floating Rate Loan and an
advance against the Note.

 

2.19                           Letter
of Credit Fee.  In addition to
interest on the Note as provided herein and all other fees payable hereunder,
the Borrowers agree to pay to the Lender, on the date of issuance of each
Letter of Credit, a fee equal to the greater of $750 or two and one-half
percent (2.50%) 

 

20

 

per annum, calculated on the basis of a year of 365 or
366 days, as the case may be, and actual days elapsed (including the first day
but excluding the last day), on the face amount of such Letter of Credit during
the period for which such Letter of Credit is issued; provided, however, in the event such
Letter of Credit is canceled prior to its original expiry date or a payment is
made by the Lender with respect to such Letter of Credit, the Lender shall,
within 30 days after such cancellation or the making of such payment,
rebate to the Borrowers the unearned portion of such fee. The Borrower also
agrees to pay to the Lender on demand its customary letter of credit
transactional fees, including, without limitation, amendment fees, payable with
respect to each Letter of Credit.

 

ARTICLE III

 

CONDITIONS

 

The obligations of the Lender to enter into this Agreement and to make
Loans and issue Letters of Credit are subject to the satisfaction of the
following conditions precedent:

 

3.1                                 Receipt
of Loan Documents and Other Items The Lender shall have no obligation under
this Agreement unless and until all matters incident to the consummation of the
transactions contemplated herein, including, without limitation, the review by
the Lender or its counsel of the title of the Borrowers to their Oil and Gas
Properties, shall be satisfactory to the Lender, and the Lender shall have
received, reviewed, and approved the following documents and other items,
appropriately executed when necessary and, where applicable, acknowledged by one
or more Responsible Officers of the Borrower, all in form and substance
satisfactory to the Lender and dated, where applicable, of even date herewith
or a date prior thereto and acceptable to the Lender:

 

(a)                                  multiple
counterparts of this Agreement as requested by the Lender;

 

(b)                                 the
Note;

 

(c)                                  copies
of the Governing Documents and all amendments thereto of each Borrower and
Guarantor accompanied by a certificate issued by the secretary or an assistant
secretary of each Borrower to the effect that each such copy is correct and
complete;

 

(d)                                 certificates
of incumbency and signatures of all Responsible Officers of each Borrower and
Guarantor who are authorized to execute Loan Documents on behalf of such entity
each such certificate being executed by a Responsible Officer of each Borrower;

 

(e)                                  copies
of corporate or company resolutions approving the Loan Documents and
authorizing the transactions contemplated herein and therein, duly adopted by
the Governing Body of each Borrower and Guarantor accompanied by certificates
of the secretary or an assistant secretary of each Borrower to the effect that
such copies are true and correct copies of resolutions duly adopted at a
meeting or by unanimous consent of the Governing Body of each Borrower and that
such resolutions 

 

21

 

constitute all the resolutions adopted with respect to
such transactions, have not been amended, modified, or revoked in any respect,
and are in full force and effect as of the date of such certificate;

 

(f)                                    multiple
counterparts, as requested by the Lender, of the following Security Instruments
creating, evidencing, perfecting, and otherwise establishing Liens in favor of
the Lender in and to the Collateral or other items described below otherwise
securing the Obligations:

 

(i)                                     (A) Mortgage,
Deed of Trust, Indenture, Security Agreement, Assignment of Production, and
Financing Statement executed by the CYMRI and (B) Act of Mortgage and
Security Agreement executed by Triumph, collectively, covering not less than
90% of the value of all Borrowing Base Oil and Gas Properties of the CYMRI and
Triumph and all improvements, personal property, and fixtures related thereto;

 

(ii)                                  Financing
Statements from each Borrower, as debtor, covering all of their personal
property and fixtures;

 

(iii)                               Security
Agreement executed by the Borrowers pledging accounts, contract rights, and all
other personal property of Borrower;

 

(iv)                              undated
letters, in form and substance satisfactory to the Lender, executed by the
Borrowers to each Purchaser of Production and disburser of the proceeds of
production from or attributable to the Borrowing Base Oil and Gas Properties
listed on Exhibit VI, together
with additional letters with the addressees left blank, authorizing and directing
the addressees to make future payments attributable to production from the
Borrowing Base Oil and Gas Properties directly to the Lender;

 

(v)                                 the
Stock Pledge Agreement from Guarantor covering all of its Equity Interests in
each Borrower, together with (A) the stock or membership certificates
evidencing such Equity Interests, if certificated and (B) blank transfer
powers relating thereto;

 

(vi)                              the
Guaranty executed by Guarantor; and

 

(vii)                           an
executed Assignment of Notes and Liens – Sterling Bank.

 

(g)                                 unaudited
Financial Statements of the Borrower and Guarantor as of March 31, 2008;

 

(h)                                 certificates
dated as of a recent date from the Secretary of State or other appropriate
Governmental Authority evidencing the existence or qualification and good
standing of each Borrower in its respective jurisdiction of formation and in
any other jurisdictions where it does business;

 

22

 

(i)                                     results
of searches of the UCC Records of the Secretary of State of the state of
formation from a source acceptable to the Lender and reflecting no Liens
against any of the Collateral as to which perfection of a Lien is accomplished
by the filing of a financing statement other than in favor of the Lender;

 

(j)                                     confirmation,
acceptable to the Lender, that CYMRI and Triumph have Defensible Title to not
less than 80% of the value of the Borrowing Base Oil and Gas Properties, free
and clear of Liens other than Permitted Liens;

 

(k)                                  all
operating, lease, sublease, royalty, sales, exchange, processing, farmout,
bidding, pooling, unitization, communitization, and other agreements relating
to the Borrowing Base Oil and Gas Properties requested by the Lender;

 

(l)                                     engineering
reports covering the Borrowing Base Oil and Gas Properties;

 

(m)                               the
opinion of Haynes & Boone, LLP, counsel to the Borrowers and
Guarantor, and an opinion of counsel to Triumph that is licensed to practice in
Louisiana, covering the Security Instruments that are required to be filed in
the State of Louisiana regarding, among other things, the perfection of Liens
and enforceability thereof, in the form and substance acceptable to the Lender
in its discretion;

 

(n)                                 certificates
evidencing the insurance coverage required pursuant to Section 5.18;

 

(o)                                 payment
of the initial Facility Fee;

 

(p)                                 payment
of the fees described in Section 5.14;

 

(q)                                 an
executed Subordination Agreement; and

 

(r)                                    such
other agreements, documents, instruments, opinions, certificates, waivers,
consents, and evidence as the Lender may reasonably request.

 

3.2                                 Each
Loan and Letter of Credit.  In
addition to the conditions precedent stated elsewhere herein, the Lender shall
not be obligated to make any Loan or issue any Letter of Credit unless:

 

(a)                                  CYMRI
shall have delivered to the Lender a Borrowing Request at least one Business
Day prior to the requested date for the relevant Loan, or a Letter of Credit
Application at least two Business Days prior to the requested issuance date for
the relevant Letter of Credit and each statement or certification made in such
Borrowing Request or Letter of Credit Application, as the case may be, shall be
true and correct in all material respects on the requested date for such Loan
or the issuance of such Letter of Credit;

 

(b)                                 no
Event of Default or Default shall exist or will occur as a result of the making
of the requested Loan or the issuance of the requested Letter of Credit;

 

23

 

(c)                                  if
requested by the Lender, the Borrowers shall have delivered evidence
satisfactory to the Lender substantiating any of the matters contained in this
Agreement which are necessary to enable the Borrower to qualify for such Loan
or the issuance of such Letter of Credit;

 

(d)                                 the
Lender shall have received, reviewed, and approved such additional documents
and items as described in Section 3.1
as may be requested by the Lender with respect to such Loan or Letter of
Credit;

 

(e)                                  no
Material Adverse Effect shall have occurred;

 

(f)                                    each
of the representations and warranties contained in this Agreement shall be true
and correct (unless they speak to a specific date or are based on facts which
have changed by transactions contemplated or expressly permitted by this
Agreement) and shall be deemed to be repeated by the Borrowers as if made on
the requested date for such Loan or the issuance of such Letter of Credit;

 

(g)                                 all
of the Security Instruments shall be in full force and effect and provide to
the Lender the security intended thereby;

 

(h)                                 neither
the consummation of the transactions contemplated hereby nor the making of such
Loan nor the issuance of such Letter of Credit shall contravene, violate, or
conflict with any Requirement of Law;

 

(i)                                     the
Loan Parties shall hold Defensible Title to the Collateral and be the sole
beneficial owner thereof;

 

(j)                                     the
Lender shall have received the 
reimbursement of all engineering expenses, and other fees payable to the
Lender hereunder and reimbursement from the Borrowers, or special legal counsel
for the Lender shall have received payment from the Borrowers, for (i) all
reasonable fees and expenses of counsel to the Lender for which the Borrowers
are responsible pursuant to applicable provisions of this Agreement and for
which invoices have been presented as of or prior to the date of the relevant
Loan or Letter of Credit Application, and (ii) estimated fees charged by
filing officers and other public officials incurred or to be incurred in
connection with the filing and recordation of any Security Instruments, for
which invoices have been presented as of or prior to the date of the requested
Loan or Letter of Credit Application; and

 

(k)                                  all
matters incident to the consummation of the transactions hereby contemplated
shall be satisfactory to the Lender.

 

24

 

ARTICLE IV

 

REPRESENTATIONS AND WARRANTIES

 

To induce the Lender to enter into this Agreement and to make the Loans
and issue Letters of Credit, each Borrower represents and warrants to the
Lender (which representations and warranties shall survive the delivery of the
Note) that:

 

4.1                                 Due
Authorization. The execution and delivery by the Borrowers of this
Agreement and the borrowings hereunder, the execution and delivery by the
Borrowers of the Note, the repayment of the Note and interest and fees provided
for in the Note and this Agreement, the execution and delivery of the Security
Instruments by the Borrowers and the performance of all obligations of the
Borrowers under the Loan Documents are within the power of the Borrowers, have
been duly authorized by all necessary corporate or company action by the
Borrower, and do not and will not (a) require the consent of any
Governmental Authority, (b) contravene or conflict with any Requirement of
Law, (c) contravene or conflict with any indenture, instrument, or other agreement
to which either Borrower is a party or by which any Property of either Borrower
may be presently bound or encumbered, or (d) result in or require the
creation or imposition of any Lien in, upon or of any Property of either
Borrower under any such indenture, instrument, or other agreement, other than
the Loan Documents.

 

4.2                                 Existence.
Each Borrower is the type of business entity set forth in the preamble hereof
and is duly organized, legally existing, and in good standing under the laws of
its state of formation and is duly qualified as a foreign business entity and
is in good standing in all jurisdictions wherein the ownership of Property or
the operation of its business necessitates same, other than those jurisdictions
wherein the failure to so qualify could not reasonably be expected to have a
Material Adverse Effect.

 

4.3                                 Valid
and Binding Obligations.  All Loan
Documents to which each Borrower and Guarantor is a party, when duly executed
and delivered by each such Borrower and Guarantor, will be the legal, valid,
and binding obligations of each such Borrower and Guarantor, as applicable,
enforceable against each Borrower and Guarantor in accordance with their
respective terms.

 

4.4                                 Security
Instruments.  The provisions of each
Security Instrument executed by the Borrowers and Guarantor are effective to
create in favor of the Lender, a legal, valid, and enforceable Lien in all
right, title, and interest of the Borrowers and Guarantor in the Collateral
described therein, which Liens, assuming the accomplishment of recording and
filing in accordance with applicable laws prior to the intervention of rights
of other Persons, shall constitute fully perfected first-priority Liens on all
right, title, and interest of the Borrowers and Guarantor in the Collateral
described therein.

 

4.5                                 Title
to Assets. The Borrowers and Guarantor have good and indefeasible title to
all of their Properties, free and clear of all Liens except Permitted Liens.

 

4.6                                 Score
and Accuracy of Financial Statements. The consolidated and consolidating
Financial Statements of the Borrowers and Guarantor as of March 31, 2008,
present fairly the 

 

25

 

financial position and results of operations and cash flows of the
Borrower and Guarantor as at the relevant point in time or for the period
indicated, as applicable.  No event or
circumstance has occurred since such dates which could reasonably be expected
to have a Material Adverse Effect.

 

4.7                                 No
Material Misstatements. No information, exhibit, statement, or report
furnished to the Lender by or at the direction of the Borrowers in connection
with this Agreement contains any material misstatement of fact or omits to
state a material fact or any fact necessary to make the statements contained therein
not misleading as of the date made or deemed made.

 

4.8                                 Liabilities,
Litigation, and Restrictions. Other than as listed under the heading “Liabilities”
on Exhibit IV
attached hereto, the Borrowers have no liabilities, direct, or contingent,
which may materially and adversely affect its business or operations or its
ownership of the Collateral.  Except as
set forth under the heading “Litigation” on Exhibit IV hereto, no litigation or
other action of any nature affecting either Borrower or Guarantor is pending
before any Governmental Authority or, to the best knowledge of either Borrower,
threatened against or affecting either Borrower or Guarantor which might
reasonably be expected to result in any impairment of its ownership of any
Collateral or have a Material Adverse Effect. 
To the best knowledge of the Borrowers, after due inquiry, no unusual or
unduly burdensome restriction, restraint or hazard exists by contract,
Requirement of Law, or otherwise relative to the business or operations of
either Borrower or the ownership and operation of the Collateral other than
such as relate generally to Persons engaged in business activities similar to
those conducted by the Borrowers and Guarantor.

 

4.9                                 Authorizations;
Consents.  Except as expressly
contemplated by this Agreement, no authorization, consent, approval, exemption,
franchise, permit, or license of, or filing with, any Governmental Authority or
any other Person is required to authorize or is otherwise required in
connection with the valid execution and delivery by the Borrowers and Guarantor
of the Loan Documents or any instrument contemplated hereby, the repayment by
the Borrowers of the Note and interest and fees provided in the Note and this
Agreement, or the performance by the Borrowers of the Obligations.

 

4.10                           Compliance
with Laws. The Borrowers and the Borrowers’ Property, including, without
limitation, the Borrowing Base Oil and Gas Properties, are in compliance with
all applicable Requirements of Law, including, without limitation,
Environmental Laws, the Natural Gas Policy Act of 1978, as amended, and ERISA,
except to the extent non-compliance with any such Requirements of Law could not
reasonably be expected to have a Material Adverse Effect.

 

4.11                           ERISA.
The Borrowers do not maintain nor have they maintained any Plan. The Borrowers
do not currently contribute to or have any obligation to contribute to or
otherwise have any liability with respect to any Plan.

 

4.12                           Environmental
Laws.  To the best knowledge and
belief of the Borrowers, except as could not reasonably be expected to not have
a Material Adverse Effect, or as described on Exhibit IV under the heading “Environmental
Matters:”

 

26

 

(a)                                  no
Property of either Borrower is currently on or has ever been on, or is adjacent
to any Property which is on or has ever been on, any federal or state list of
Superfund Sites;

 

(b)                                 no
Hazardous Substances have been generated, transported, and/or disposed of by
the Borrower at a site which was, at the time of such generation,
transportation, and/or disposal, or has since become, a Superfund Site;

 

(c)                                  except
in accordance with applicable Requirements of Law or the terms of a valid
permit, license, certificate, or approval of the relevant Governmental
Authority, no Release of Hazardous Substances by either Borrower or from,
affecting, or related to any Property of either Borrower or adjacent to any
Property of either Borrower has occurred; and

 

(d)                                 no
Environmental Complaint has been received by either Borrower.

 

4.13                           Compliance
with Federal Reserve Regulations.  No
transaction contemplated by the Loan Documents is in violation of any
regulations promulgated by the Board of Governors of the Federal Reserve
System, including, without limitation, Regulations T, U, or X.

 

4.14                           Investment
Company Act Compliance.  No Borrower
is, nor is any Borrower directly or indirectly controlled by or acting on
behalf of any Person which is, an “investment company” or an “affiliated person”
of an “investment company” within the meaning of the Investment Company Act of
1940, as amended.

 

4.15                           Anti-Terrorism
Laws.

 

(a)                                  No
Borrower nor any Affiliate of any Borrower is in violation of any
Anti-Terrorism Law or engages in or conspires to engage in any transaction  that evades or avoids, or has the purpose of
evading or avoiding, or attempts to violate, any of the prohibitions set forth
in any Anti-Terrorism Law.

 

(b)                                 No
Borrower has engaged, nor does it intend to engage, in any business or activity
prohibited by the Trading with the Enemy Act.

 

(c)                                  No
Borrower is (A) a Person whose property or interest in property is blocked
or subject to blocking pursuant to Section 1 of Executive Order 13224, (B) engaged
in any dealings or transactions prohibited by Section 2 of Executive Order
13224, or otherwise associated with any such Person in any manner violative of Section 2,
or (C) a Person on the list of Specially Designated Nationals and Blocked
Persons or subject to the limitations or prohibitions under any other U.S.
Department of Treasury’s Office of Foreign Assets Control regulation or
executive order.

 

(d)                                 No part of the proceeds of the Loans will be
used, directly or indirectly, for any payments to any governmental official or
employee, political party, official of a political party, candidate for
political office, or anyone else acting in an official capacity, in order to
obtain, retain or direct business or obtain any improper advantage, in
violation of the United States Foreign Corrupt Practices Act of 1977, as
amended.

 

27

 

4.16                           Proper
Filing of Tax Returns; Payment of Taxes Due.  Each Borrower and Guarantor has duly and
properly filed its United States income tax return and all other tax returns
which are required to be filed and has paid all taxes due except such as are
being contested in good faith and as to which adequate provisions and
disclosures have been made.  The
respective charges and reserves on the books of the Borrowers with respect to
taxes and other governmental charges are adequate.

 

4.17                           Refunds.  Except as described on Exhibit IV under
the heading “Refunds,” no orders of, proceedings pending before, or other
requirements of, the Federal Energy Regulatory Commission, the Texas Railroad
Commission, or any Governmental Authority exist which could result in the
Borrower being required to refund any material portion of the proceeds received
or to be received from the sale of hydrocarbons constituting part of the Borrowing
Base Oil and Gas Properties.

 

4.18                           Material
and Gas Contracts. Except as described on Exhibit IV under the heading “Gas
Contracts,” no Borrower (a) is obligated in any material respect by virtue
of any prepayment made under any contract containing a “take-or-pay” or “prepayment”
provision or under any similar agreement to deliver hydrocarbons produced from
or allocated to any of the Borrowing Base Oil and Gas Properties at some future
date without receiving full payment therefor within 90 days of delivery, and (b) has
produced gas, in any material amount, subject to, and neither Borrower nor any
of the Borrowing Base Oil and Gas Properties are subject to, balancing rights
of third parties or subject to balancing duties under governmental
requirements, except as to such matters for which the Borrower has established
monetary reserves adequate in amount to satisfy such obligations and have
segregated such reserves from other accounts. 
Except as described on Exhibit IV
under the heading “Material Contracts,” no Borrower nor any of its Borrowing
Base Oil and Gas Properties are subject to any contract or agreement which the
default thereunder by a Borrower would cause such Borrower to fail to have
Defensible Title, other than where such failure could not reasonably be
expected to have a Material Adverse Effect.

 

4.19                           Intellectual
Property. The Borrowers own or are licensed to use all Intellectual
Property necessary to conduct all business material to its condition (financial
or otherwise), business, or operations as such business is currently conducted.
No claim has been asserted or is pending by any Person with the respect to the
use of any such Intellectual Property or challenging or questioning the
validity or effectiveness of any such Intellectual Property; and the Borrowers
know of no valid basis for any such claim. The use of such Intellectual
Property by the Borrowers do not infringe on the rights of any Person, except
for such claims and infringements as do not, in the aggregate, give rise to any
material liability on the part of the Borrowers.

 

4.20                           Casualties
or Taking of Property.  Except as
disclosed on Exhibit IV
under the heading “Casualties,” since June 30, 2008,
neither the business nor any Property of either Borrower has been materially
adversely affected as a result of any fire, explosion, earthquake, flood,
drought, windstorm, accident, strike or other labor disturbance, embargo,
requisition or taking of Property, or cancellation of contracts, permits, or
concessions by any Governmental Authority, riot, activities of armed forces, or
acts of God.

 

28

 

4.21                           Locations
of Borrowers.  The principal place of
business and chief executive office of each Borrower is located at the address
set forth in Section 8.3
or at such other location as the Borrowers may have, by proper written notice
hereunder, advised the Lender, provided that such other location is within a
state in which appropriate financing statements from the Borrowers in favor of
the Lender have been filed.

 

4.22                           Subsidiaries.  No Borrower has Subsidiaries except those
described on Exhibit IV
under the heading “Subsidiaries”.

 

4.23                           Purchasers
of Production.  The Persons who are
purchasing the Borrowers’ interests in oil and gas produced from the Borrowing
Base Oil and Gas Properties as of the date of this Agreement are identified on Exhibit VI
attached hereto.

 

ARTICLE V

 

AFFIRMATIVE COVENANTS

 

So long as any Obligation remains outstanding or unpaid or any
Commitment exists, the Borrowers shall:

 

5.1                                 Maintenance
and Access to Records.  Keep adequate
records, in accordance with GAAP, of all their transactions so that at any
time, and from time to time, its true and complete financial condition may be
readily determined, and promptly following the reasonable request of the
Lender, make such records available for inspection by the Lender and, at the
expense of the Borrowers, allow the Lender to make and take away copies
thereof.

 

5.2                                 Quarterly
Financial Statements; Compliance Certificates.  Deliver to the Lender, (a) on or before
the 60th day after the close of each of the first three quarterly
periods of each fiscal year of the Borrowers, a copy of the unaudited Financial
Statements of Guarantor and the Borrowers, on a consolidated basis and on a
consolidating basis, as at the close of such quarterly period and from the
beginning of such fiscal year to the end of such period, such Financial
Statements to be certified by a Responsible Officer of CYMRI as a fair
presentation of the condition of the Borrowers and Guarantor, subject to
changes resulting from normal year-end audit adjustments, and (b) on or
before the 60th day after the close of each fiscal quarter, with the
exception of the last fiscal quarter, a Compliance Certificate.

 

5.3                                 Annual
Financial Statements.  Deliver to the
Lender, on or before the 120th day after the close of each fiscal
year of the Borrowers, a copy of the annual audited Financial Statements of
Guarantor and the annual unaudited Financial Statements of the Borrowers, on a
consolidated basis and on a consolidating basis, satisfactory to the Lender and
a Compliance Certificate.

 

5.4                                 Oil
and Gas Reserve Reports.

 

(a)                                  Deliver
to the Lender no later than April 1 of each year during the term of this
Agreement, engineering reports in form and substance satisfactory to the
Lender, certified by any nationally- or regionally-recognized independent
consulting petroleum engineers acceptable to the Lender as fairly and
accurately setting forth (i) the proven and 

 

29

 

producing, shut-in, behind-pipe, and undeveloped oil
and gas reserves (separately classified as such) attributable to the Borrowing
Base Oil and Gas Properties as of January 1 of the year for which such
reserve reports are furnished, (ii) the aggregate present value of the
future net income with respect to such Borrowing Base Oil and Gas Properties,
discounted at a stated per annum discount rate of proven and producing
reserves, (iii) projections of the annual rate of production, gross
income, and net income with respect to such proven and producing reserves, and (iv) information
with respect to the “take-or-pay,” “prepayment,” and gas-balancing liabilities
of the Borrowers.

 

(b)                                 Deliver
to the Lender no later than October 1 of each year during the term of this
Agreement, engineering reports in form and substance satisfactory to the Lender
prepared by or under the supervision of a Responsible Officer of the Borrower
evaluating the Borrowing Base Oil and Gas Properties as of July 1 of the
year for which such reserve reports are furnished and updating the information
provided in the reports pursuant to Section 5.4(a).

 

(c)                                  Each
of the reports provided pursuant to this Section shall be submitted to the
Lender together with additional data concerning pricing, quantities of
production from the Borrowing Base Oil and Gas Properties, volumes of
production sold, purchasers of production, gross revenues, expenses, and such
other information and engineering and geological data with respect thereto as
the Lender may reasonably request.

 

5.5                                 Title
Opinions; Title Defects.  Cause at
all times the Borrowing Base Oil and Gas Properties comprising at least ninety
percent (90%) of the discounted present value of future net revenue, computed
using a discount factor of 9%,  estimated
to be derived from the proved reserves to be produced from all of the Borrowing
Base Oil and Gas Properties, as set forth in the most recent Reserve Reports
delivered to Lender, to be subject to duly executed and recorded Security
Instruments granting perfected first priority mortgage liens, security
interests and assignments of production therein to the Lender and (b) have
demonstrated to the Lender, by the delivery of title information satisfactory
to the Lender, that Borrowers have Defensible Title, as represented in this
Agreement and the Security instruments, to their Borrowing Base Oil and Gas
Properties that are subject to the Security Instruments comprising at least
eighty-one percent (81%) of the discounted present value of future net revenue,
computed using a discount factor of 9%, 
estimated to be derived from the proved reserves to be produced from all
of the Borrowing Base Oil and Gas Properties, as set forth in the most recent
Reserve Reports delivered to the Lender and, promptly, but in any event within
30 days after notice by the Lender of any defect, material in the opinion of
the Lender in value, in the title of either Borrower to any of its Borrowing
Base Oil and Gas Properties, clear such title defects, and, in the event any
such title defects are not cured in a timely manner, pay all related costs and
fees incurred by the Lender to do so.

 

5.6                                 Post-Closing
Items.  Deliver to the Lender within
ten (10) days after the Closing Date evidence satisfactory to the Lender
that the Estis Well Service, L.L.C. Oil & Gas Lien against Triumph
dated July 19, 2007 and recorded at #305650 of the official public records
of Cameron Parish, Louisiana, has been released of record in the official
public records of said parish.  Borrowers
shall deliver to Lender within ten (10) days after Closing evidence
satisfactory to the Lender that the Submersible Pump Specialists, Inc.
Lien Affidavits against 

 

30

 

CYMRI (a) dated October 17, 2007 and
recorded at Volume 864/Page 440, Volume 864/Page 446 and Volume 864/Page 452,
respectively, in the official public records of Karnes County, Texas, (b) dated
December 18, 2007 and recorded at Volume 867/Page 627, Volume 867/Page 630,
Volume 867/Page 634 and Volume 867/Page 639, respectively, in the
official public records of Karnes County, Texas, (c) dated February 15,
2008 and recorded at Volume 870/Page 774 and Volume 870/Page 779 and
Volume 870/Page 784, respectively, in the official public records of Karnes
County, Texas and (d) dated July 8, 2008 and recorded at Volume 879/Page 643
and Volume 879/Page 651, respectively, in the official public records of
Karnes County, Texas, have been released of record in the official public
records of said county.

 

5.7                                 Notices
of Certain Events. Deliver to the Lender, immediately upon having knowledge
of the occurrence of any of the following events or circumstances, a written
statement with respect thereto, signed by a Responsible Officer of the
Borrowers and setting forth the relevant event or circumstance and the steps
being taken by the Borrowers with respect to such event or circumstance:

 

(a)                                  any
Default or Event of Default;

 

(b)                                 any
default or event of default under any contractual obligation of any Borrower,
or any litigation, investigation, or proceeding between any Borrower and any
Governmental Authority which, in either case, if not cured or if adversely
determined, as the case may be, could reasonably be expected to have a Material
Adverse Effect;

 

(c)                                  any
litigation or proceeding involving any Borrower as a defendant or in which any
Property of any Borrower is subject to a claim and in which the amount involved
is $50,000 or more and which is not covered by insurance or in which injunctive
or similar relief is sought;

 

(d)                                 the
receipt by either Borrower of any written Environmental Complaint;

 

(e)                                  any
actual, proposed, or threatened testing or other investigation by any
Governmental Authority or other Person concerning the environmental condition
of, or relating to, any Property of either Borrower or adjacent to any Property
of either Borrower following any allegation of a violation of an Environmental
Complaint;

 

(f)                                    any
Release of Hazardous Substances by either Borrower or from, affecting, or
related to any Property of either Borrower or adjacent to any Property of
either Borrower except in accordance with applicable Requirements of Law or the
terms of a valid permit, license, certificate, or approval of the relevant
Governmental Authority, or the violation of any Environmental Law, or the
revocation, suspension, or forfeiture of or failure to renew, any permit,
license, registration, approval, or authorization which could reasonably be
expected to have a Material Adverse Effect;

 

(g)                                 the
change in identity or address of any Person remitting to either Borrower
proceeds from the sale of hydrocarbon production from or attributable to any
Borrowing Base Oil and Gas Properties;

 

(h)                                 any
change in the senior management of either Borrower; and

 

31

 

(i)                                     any
other event or condition which could reasonably be expected to have a Material
Adverse Effect.

 

5.8                                 Letters
in Lieu of Transfer Orders; Division Orders.  Promptly upon request by the Lender at any
time and from time to time, and without limitation on the rights of the Lender
pursuant to Sections
2.16 and 2.17,
execute such letters in lieu of transfer orders, in addition to the letters
signed by the Borrowers and delivered to the Lender in satisfaction of the
condition set forth in Section 3.1(f)(v) and/or
division and/or transfer orders as are necessary or appropriate to transfer and
deliver to the Lender proceeds from or attributable to the Borrowing Base Oil
and Gas Properties.

 

5.9                                 Additional
Information.  Furnish to the Lender,
promptly upon the request of the Lender, such additional financial or other
information concerning the assets, liabilities, operations, and transactions of
the Borrowers as the Lender may from time to time request, including, without
limitation, updated lists of additional or new Purchases of Production; and
notify the Lender not less than ten Business Days prior to the occurrence of
any condition or event that may change the proper location for the filing of
any financing statement or other public notice or recording for the purpose of
perfecting a Lien in any Collateral, including, without limitation, any change
in its or Guarantor’s name or the location of its principal place of business
or chief executive office; and upon the request of the Lender, execute, and
cause Guarantor to execute, such additional Security Instruments as may be
necessary or appropriate in connection therewith.

 

5.10                           Compliance
with Laws.  Except to the extent the
failure to comply or cause compliance could not reasonably be expected to have
a Material Adverse Effect, comply with all applicable Requirements of Law,
including, without limitation, (a) the Natural Gas Policy Act of 1978, as
amended, (b) ERISA, (c) Environmental Laws, and (d) all permits,
licenses, registrations, approvals, and authorizations (i) related to any
natural or environmental resource or media located on, above, within, in the
vicinity of, related to or affected by any Property of either Borrower, (ii) required
for the performance of the operations of either Borrower, or (iii) applicable
to the use, generation, handling, storage, treatment, transport, or disposal of
any Hazardous Substances; and cause all employees, crew members, agents,
contractors, subcontractors, and future lessees (pursuant to appropriate lease
provisions) of either Borrower, while such Persons are acting within the scope
of their relationship with either Borrower, to comply with all such
Requirements of Law as may be necessary or appropriate to enable the Borrowers
to so comply.

 

5.11                           Payment
of Assessments and Charges.  Pay all
taxes, assessments, governmental charges, rent, and other Indebtedness which,
if unpaid, might result in a Lien against the Property of either Borrower,
except any of the foregoing being contested in good faith and as to which
adequate reserve in accordance with GAAP has been established or unless failure
to pay could not reasonably be expected to have a Material Adverse Effect.

 

5.12                           Maintenance
of Corporate Existence and Good Standing. 
Except where failure to maintain such existence or qualification could
not reasonably be expected to have a Material Adverse Effect, maintain its
business entity existence and qualification and good standing in its 

 

32

 

jurisdictions of formation and in all jurisdictions
wherein the Property of Borrowers now owned or hereafter acquired or business
now or hereafter conducted necessitates same.

 

5.13                           Payment
of Note; Performance of Obligations. 
Pay the Note according to its terms and do and perform every act and
discharge all of their other Obligations.

 

5.14                           Further
Assurances.  Promptly cure any
defects in the execution and delivery of any of the Loan Documents and all
agreements contemplated thereby, and execute, acknowledge, and deliver such
other assurances and instruments as shall, in the opinion of the Lender, be
necessary to fulfill the terms of the Loan Documents.

 

5.15                           Initial
Fees and Expenses of Counsel to Lender. 
On the Closing Date, promptly reimburse the Lender for all reasonable
fees and expenses, including estimated recording fees, of Porter &
Hedges, L.L.P., special counsel to the Lender, in connection with the
preparation of this Agreement and all documentation contemplated hereby, the
satisfaction of the conditions precedent set forth herein, the filing and
recordation of Security Instruments, and the consummation of the transactions
contemplated in this Agreement.

 

5.16                           Subsequent
Fees and Expenses of Lender.  Upon
request by the Lender, promptly reimburse the Lender (to the fullest extent
permitted by law) for all amounts reasonably expended, advanced, or incurred by
or on behalf of the Lender to satisfy any obligation of the Borrowers under any
of the Loan Documents; to collect the Obligations; to ratify, amend, restate,
or prepare additional Loan Documents, as the case may be; for the filing and
recordation of Security Instruments; to enforce the rights of the Lender under
any of the Loan Documents; and to protect the Properties or business of the
Borrowers and Guarantor, including, without limitation, the Collateral, which
amounts shall be deemed compensatory in nature and liquidated as to amount upon
notice to the Borrowers by the Lender and which amounts shall include, but not
be limited to (a) all court costs, (b) reasonable attorneys’ fees, (c) reasonable
fees and expenses of auditors and accountants incurred to protect the interests
of the Lender, (d) fees and expenses incurred in connection with the
participation by the Lender as a member of the creditors’ committee in a case
commenced under any Insolvency Proceeding, (e) fees and expenses incurred
in connection with lifting the automatic stay prescribed in §362 Title 11 of
the United States Code, and (f) fees and expenses incurred in connection
with any action pursuant to §1129 Title 11 of the United States Code all
reasonably incurred by the Lender in connection with the collection of any sums
due under the Loan Documents, together with interest at the per annum interest
rate equal to the Floating Rate, calculated on a basis of a calendar year of
365 or 366 days, as the case may be, counting the actual number of days
elapsed, on each such amount from the date of notification that the same was
expended, advanced, or incurred by the Lender until the date it is repaid to
the Lender, with the obligations under this Section surviving the
non-assumption of this Agreement in a case commenced under any Insolvency
Proceeding and being binding upon either Borrower and/or a trustee, receiver,
custodian, or liquidator of either Borrower appointed in any such case.

 

5.17                           Operation
of Oil and Gas Properties.  Develop,
maintain, and operate their Oil and Gas Properties in a prudent and workmanlike
manner in accordance with industry standards and every Requirement of Law.

 

33

 

5.18                           Maintenance
and Inspection of Properties. 
Maintain all of its tangible Properties in good repair and condition,
ordinary wear and tear excepted; make all necessary replacements thereof and
operate such Properties in a good and workmanlike manner; and permit any
authorized representative of the Lender to visit and inspect, at the expense of
the Borrowers, any tangible Property of the Borrowers.

 

5.19                           Maintenance
of Insurance.  Maintain insurance
with respect to the Collateral and their businesses against such liabilities,
casualties, risks, and contingencies as is customary in the exploration and
production industry and sufficient to prevent a Material Adverse Effect, and
all such insurance shall be in amounts and from insurers acceptable to the
Lender in its sole discretion, and, upon any renewal of any such insurance and
at other times upon request by the Lender (including on Closing Date), furnish
to the Lender evidence, satisfactory to the Lender of the maintenance of such
insurance.  The Lender shall be named as
a loss payee and additional insured under all insurance required hereunder.

 

5.20                           INDEMNIFICATION.  DEFEND, INDEMNIFY AND HOLD THE LENDER AND ITS
SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS,
ATTORNEYS-IN-FACT, AND AFFILIATES AND EACH TRUSTEE FOR THE BENEFIT OF THE
LENDER (COLLECTIVELY THE “LENDER PARTIES”) UNDER ANY LOAN DOCUMENT HARMLESS
FROM AND AGAINST ANY AND ALL CLAIMS, LOSSES, DAMAGES, LIABILITIES, FINES,
PENALTIES, CHARGES, ADMINISTRATIVE AND JUDICIAL PROCEEDINGS AND ORDERS,
JUDGMENTS, REMEDIAL ACTIONS, REQUIREMENTS AND ENFORCEMENT ACTIONS OF ANY KIND,
AND ALL COSTS AND EXPENSES INCURRED IN CONNECTION THEREWITH (INCLUDING, WITHOUT
LIMITATION, ATTORNEYS’ FEES AND EXPENSES), ARISING DIRECTLY OR INDIRECTLY, IN
WHOLE OR IN PART, FROM (A) THE PRESENCE OF ANY HAZARDOUS SUBSTANCES ON,
UNDER, OR FROM ANY BORROWING BASE OIL AND GAS PROPERTIES OF THE BORROWER,
WHETHER PRIOR TO OR DURING THE TERM HEREOF, (B) ANY ACTIVITY CARRIED ON OR
UNDERTAKEN ON OR OFF ANY BORROWING BASE OIL AND GAS PROPERTIES OF THE
BORROWERS, WHETHER PRIOR TO OR DURING THE TERM HEREOF, AND WHETHER BY THE
BORROWERS OR ANY PREDECESSOR IN TITLE, EMPLOYEE, AGENT, CONTRACTOR, OR
SUBCONTRACTOR OF THE BORROWERS OR ANY OTHER PERSON AT ANY TIME OCCUPYING OR
PRESENT ON SUCH PROPERTY, IN CONNECTION WITH THE HANDLING, TREATMENT, REMOVAL,
STORAGE, DECONTAMINATION, CLEANUP, TRANSPORTATION, OR DISPOSAL OF ANY HAZARDOUS
SUBSTANCES AT ANY TIME LOCATED OR PRESENT ON OR UNDER SUCH PROPERTY, (C) ANY
RESIDUAL CONTAMINATION ON OR UNDER ANY PROPERTY OF THE BORROWERS, (D) ANY
CONTAMINATION OF ANY BORROWING BASE OIL AND GAS PROPERTIES OR NATURAL RESOURCES
ARISING IN CONNECTION WITH THE GENERATION, USE, HANDLING, STORAGE,
TRANSPORTATION OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES BY THE BORROWERS OR ANY
EMPLOYEE, AGENT, CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER WHILE SUCH
PERSONS ARE ACTING WITHIN THE SCOPE OF THEIR RELATIONSHIP WITH THE BORROWERS,
IRRESPECTIVE OF WHETHER ANY OF SUCH ACTIVITIES WERE OR WILL BE UNDERTAKEN IN
ACCORDANCE WITH APPLICABLE REQUIREMENTS OF LAW, OR (E) THE PERFORMANCE AND
ENFORCEMENT OF ANY LOAN DOCUMENT, ANY 

 

34

 

ALLEGATION BY ANY BENEFICIARY OF A LETTER OF CREDIT OF
A WRONGFUL DISHONOR BY THE LENDER OF A CLAIM OR DRAFT PRESENTED THEREUNDER, OR
ANY OTHER ACT OR OMISSION IN CONNECTION WITH OR RELATED TO ANY LOAN DOCUMENT OR
THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING, WITHOUT LIMITATION, ANY OF
THE FOREGOING IN THIS SECTION ARISING FROM NEGLIGENCE, WHETHER SOLE OR
CONCURRENT, ON THE PART OF THE LENDER PARTIES OR ANY OF ITS SHAREHOLDERS,
OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS, ATTORNEYS-IN-FACT, OR
AFFILIATES OR ANY TRUSTEE FOR THE BENEFIT OF THE LENDER UNDER ANY LOAN DOCUMENT
BUT NOT INCLUDING ANY OF THE FOREGOING ARISING FROM THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF THE LENDER PARTIES; WITH THE FOREGOING INDEMNITY
SURVIVING SATISFACTION OF ALL OBLIGATIONS AND THE TERMINATION OF THIS
AGREEMENT, UNLESS ALL SUCH OBLIGATIONS HAVE BEEN SATISFIED WHOLLY IN CASH FROM
THE BORROWERS AND NOT BY WAY OF REALIZATION AGAINST ANY COLLATERAL OR THE
CONVEYANCE OF ANY PROPERTY IN LIEU THEREOF, PROVIDED THAT SUCH INDEMNITY SHALL
NOT EXTEND TO ANY ACT OR OMISSION BY THE LENDER WITH RESPECT TO ANY PROPERTY
SUBSEQUENT TO THE LENDER BECOMING THE OWNER OF SUCH PROPERTY AND WITH RESPECT
TO WHICH PROPERTY SUCH CLAIM, LOSS, DAMAGE, LIABILITY, FINE, PENALTY, CHARGE,
PROCEEDING, ORDER, JUDGMENT, ACTION, OR REQUIREMENT ARISES SUBSEQUENT TO THE
ACQUISITION OF TITLE THERETO BY THE LENDER.

 

5.21                           Operating
Accounts.  Establish and maintain
with Lender all of their principal operating accounts and related deposit
accounts.

 

5.22                           Hedging Transaction Reports.  For each Commodity Hedge Agreement to which
either Borrower is a party, if any, as permitted under this Agreement, deliver
to Lender contemporaneously with the quarterly Financial Statements a detailed
report setting out such Borrower’s (i) position as of the end of such
calendar quarter including, but not limited to, such Borrower’s settlement
payments and receipts during such calendar quarter and settlement payables and
receivables as of the end of such calendar quarter, (ii ) volumes hedged, (iii) prices
at which such volumes were hedged, (iii) the period covered under each
Commodity Hedge Agreement and (iv) any other information which Lender may
request.

 

5.23                           [Reserved].

 

5.24                           Production
and Expense Reports.  Deliver to
Lender, on or before the sixtieth (60th) day after the end of each
calendar month, a production and expense report covering quantities of
production from the Borrowing Base Oil and Gas Properties, volumes of
production sold, Purchasers of Production, gross revenues and expenses
(including lease operating expenses).

 

5.25                           Operating
Budget Forecasts.  Commencing September 30,
2008, and continuing on the last day of each subsequent month, deliver to
Lender with a rolling revenue, lease operating expense, capital expenditure and
general and administrative expense forecast, in form satisfactory to Lender
(the “Operating Budget Forecasts”), by month for the succeeding 

 

35

 

12-month period covering Borrowers’ interests in the
Borrowing Base Oil and Gas Properties. 
The Operating Budget Forecasts will include a brief discussion by
Borrowers of all operating and financial variances from the prior Operating
Budget Forecast delivered to Lender.

 

ARTICLE VI

 

NEGATIVE COVENANTS

 

So long as any Obligation remains outstanding or unpaid or any
Commitment exists, no Borrower will:

 

6.1                                 Indebtedness.  Create, incur, assume, or suffer to exist any
Indebtedness, whether by way of loan or otherwise; provided, however, the foregoing restriction shall not apply
to (a) the Obligations, (b) unsecured accounts payable incurred in
the ordinary course of business, which are not unpaid in excess of 90 days
beyond invoice date or are being contested in good faith and as to which such
reserve as is required by GAAP has been made, accrued or deferred taxes and
other liabilities not constituting borrowed money, (c) Permitted Commodity
Hedge Agreements, (d) Rate Management Transactions, in form and substance
and with a Person and on terms acceptable to the Lender in its sole discretion,
(e) Indebtedness secured by Permitted Liens, (f) any other
Indebtedness subordinated to the Obligation on terms approved by Lender in its
sole discretion, and (g) other unsecured Indebtedness not to exceed, in
the aggregate any time outstanding, an amount equal to $50,000 incurred in the
ordinary course of business.

 

6.2                                 Contingent
Obligations.  Create, incur, assume,
or suffer to exist any Contingent Obligation; provided,
however, the foregoing restriction shall not apply to (a) performance
guarantees and performance surety or other bonds provided in the ordinary
course of business, (b) trade credit incurred or operating leases entered
into in the ordinary course of business, or (c) guarantees or other credit
support by one Loan Party of Indebtedness or other obligations of another Loan
Party.

 

6.3                                 Liens.  Create, incur, assume, or suffer to exist any
Lien on any of its Oil and Gas Properties or any other Property, whether now
owned or hereafter acquired; provided,
however, the foregoing restrictions shall not apply to Permitted
Liens.

 

6.4                                 Sales
of Assets.  Without the prior written
consent of the Lender, sell, transfer, or otherwise dispose of, in one or any
series of transactions, any Collateral or other Property, whether now owned or
hereafter acquired, or enter into any agreement to do so; provided, however, the foregoing
restriction shall not apply to (a) the sale of hydrocarbons or inventory
in the ordinary course of business provided that no contract for the sale of
hydrocarbons shall obligate either Borrower to deliver hydrocarbons produced
from any of the Borrowing Base Oil and Gas Properties at some future date
without receiving full payment therefor within 90 days of delivery, (b) the
sale or other disposition of Property destroyed, lost, worn out, damaged, or
having only salvage value or no longer used or useful in the business of the
Borrower, (c) sales, transfers or dispositions between Loan Parties, (d) sales,
transfers or dispositions of any Property other than Borrowing Base Oil and Gas
Properties, and (e) other sales or dispositions of Borrowing Base Oil and
Gas Properties not to exceed an aggregate purchase price of $100,000 during any
calendar year.

 

36

 

6.5                                 Leasebacks.  Enter into any agreement to sell or transfer
any Borrowing Base Oil and Gas Properties and thereafter rent or lease as
lessee such Property or other Property intended for the same use or purpose as
the Property sold or transferred.

 

6.6                                 Sale
or Discount of Receivables.  Except
to minimize losses on bona fide debts previously contracted, discount or sell
with recourse, or sell for less than the greater of the face or market value
thereof, any of its notes receivable or accounts receivable.

 

6.7                                 Loans
or Advances.  Make or agree to make
or allow to remain outstanding any loans or advances to any Person; provided, however, the foregoing
restrictions shall not apply to (a) advances or extensions of credit in
the form of accounts receivable incurred in the ordinary course of business and
upon terms common in the industry for such accounts receivable, (b) advances
to employees of the Borrowers for the payment of expenses in the ordinary
course of business, or (c) prior to the occurrence of an Event of Default,
(i) advances from one Borrower to the other Borrower, and (ii) advances
to Guarantor for the general and administrative expenses and other general
corporate purposes of Guarantor, provided that such advances by Borrowers for
any calendar month shall not exceed the aggregate combined amount of $25,000.

 

6.8                                 Investments.
Acquire Investments in, or purchase or otherwise acquire all or substantially
all of the assets of, any Person; provided,
however, the foregoing restriction shall not apply to the purchase
or acquisition of (a) Oil and Gas Properties, (b) Investments in the
form of (i) debt securities issued or directly and fully guaranteed or
insured by the United States Government or any agency or instrumentality
thereof, with maturities of no more than one year, (ii) commercial paper
of a domestic issuer rated at the date of acquisition at least P-2 by Moody’s
Investor Service, Inc. or A-2 by Standard & Poor’s Corporation
and with maturities of no more than one year from the date of acquisition, or (iii) repurchase
agreements covering debt securities or commercial paper of the type permitted
in this Section, certificates of deposit, demand deposits, eurodollar time
deposits, overnight bank deposits and bankers’ acceptances, with maturities of
no more than one year from the date of acquisition, issued by or acquired from
or through the Lender or any bank or trust company organized under the laws of
the United States or any state thereof and having capital surplus and undivided
profits aggregating at least $100,000,000.00, (c) other short-term
Investments similar in nature and degree of risk to those described in clause (b) of
this Section, or (d) money-market funds.

 

6.9                                 Dividends
and Distributions.  Declare, pay, or
make, whether in cash or Property of either Borrower, any dividend or
distribution on, or purchase, redeem, or otherwise acquire for value, any share
of any class of its Equity Interests stock at any time, except that (i) Triumph
may make dividends or distributions to Cymri, and (ii) Borrowers may make
such dividends or distributions to Guarantor to the same extent that they are
permitted to make loans and advances to Guarantor pursuant to Section 6.7.

 

6.10                           Issuance
of Stock; Changes in Corporate Structure. Issue or agree to issue
additional shares of Equity Interest, in one or any series of transactions
unless such shares are issued to Guarantor and subject to a contemporaneously
perfected Lien in favor of Lender; enter into any transaction of consolidation,
merger, or amalgamation; liquidate, wind up, or dissolve or 

 

37

 

suffer any liquidation or dissolution or enter or agree to enter into
any arrangement that would result in a Change of Control.

 

6.11                           Transactions
with Affiliates. Directly or indirectly, enter into any transaction
(including the sale, lease, or exchange of Property or the rendering of
service) with any of its Affiliates, other than upon fair and reasonable terms
no less favorable than could be obtained in an arm’s length transaction with a
Person which was not an Affiliate; provided, however,
the foregoing restrictions shall not apply to, prior to the occurrence of an
Event of Default, advances to Guarantor permitted under Section 6.7.

 

6.12                           Lines
of Business.  Expand, on its own or
through any Subsidiary, into any line of business other than those in which the
Borrowers are engaged as of the date hereof.

 

6.13                           Plan
Obligations. Assume or otherwise become subject to an obligation to
contribute to or maintain any Plan or acquire any Person which has at any time
had an obligation to contribute to or maintain any Plan.

 

6.14                           Current
Ratio.  Permit, as of the close of
any fiscal quarter, the ratio of (i) the sum of Current Assets plus the
Available Commitment at such time to (ii) Current Liabilities (but
excluding current maturities under this credit facility) to be less than 1.00
to 1.00.

 

6.15                           EBITDA
to Fixed Charges.  Permit, as of the
close of any fiscal quarter, calculated on a consolidated basis, the ratio of (a) 
EBITDA for such quarter, less taxes paid in cash for such quarter to (b) Fixed
Charges for such quarter to be less than 1.25 to 1.00 beginning with the fiscal
quarter ending September 30, 2008.  “Fixed
Charges” means Interest Expense, plus the amount of required principal
repayments under this credit facility. 
This ratio shall be tested on an annualized basis for the first three
fiscal quarters following the Closing Date and, beginning on the end of the
fourth fiscal quarter following the Closing Date, on a rolling four-quarter
basis.

 

6.16                           Tangible
Net Worth. Permit, as of the close of any fiscal quarter, Borrowers’
combined tangible net worth to be less than seventy-five percent (75%) of their
combined tangible net worth as of June 30, 2008, plus the aggregate total
of seventy-five percent (75%) of Borrowers’ positive Net Income determined on a
fiscal quarterly basis from and after July 1, 2008.

 

ARTICLE VII

 

EVENTS OF DEFAULT

 

7.1                                 Enumeration
of Events of Default.  Any of the
following events shall constitute an Event of Default:

 

(a)                                  Borrowers
default in the payment when due of any installment of principal or interest
under this Agreement or the Note or in the payment when due of any fee or other
sum payable under any Loan Document and such default shall have continued for
five days;

 

38

 

(b)                                 Borrowers
default in the due observance or performance of any of their negative covenants
or obligations under the Loan Documents (including Article VI
hereunder);

 

(c)                                  Borrowers
default in the due observance or performance of any of their affirmative
covenants or obligations under the Loan Documents (including Article V hereunder), and such
default shall continue for 30 days after the earlier of notice thereof to the
Borrowers by the Lender or knowledge thereof by any Borrower;

 

(d)                                 any
representation or warranty made by any Borrower in any of the Loan Documents
proves to have been untrue in any material respect or any representation,
statement (including Financial Statements), certificate, or data furnished or
made to the Lender in connection herewith proves to have been untrue in any
material respect as of the date the facts therein set forth were stated or
certified;

 

(e)                                  default
shall be made by any Borrower (as principal or guarantor or other surety) in
the payment or performance of any bond, debenture, note, Commodity Hedge
Agreement, Rate Management Transaction, or other Indebtedness or under any
credit agreement, loan agreement, indenture, promissory note, or similar
agreement or instrument executed in connection with any of the foregoing, and
such default shall remain unremedied for in excess of the period of grace, if
any, with respect thereto;

 

(f)                                    any
Borrower or Guarantor shall (i) apply for or consent to the appointment of
a receiver, trustee, or liquidator of it or all or a substantial part of its
assets, (ii) file a voluntary petition commencing an Insolvency
Proceeding, (iii) make a general assignment for the benefit of creditors, (iv) be
unable, or admit in writing its inability, to pay its debts generally as they
become due, or (v) file an answer admitting the material allegations of a
petition filed against it in any Insolvency Proceeding;

 

(g)                                 an
order, judgment, or decree shall be entered against any Borrower by any court
of competent jurisdiction or by any other duly authorized authority, on the
petition of a creditor or otherwise, granting relief in any Insolvency
Proceeding or approving a petition seeking reorganization or an arrangement of
its debts or appointing a receiver, trustee, conservator, custodian, or liquidator
of it or all or any substantial part of its assets, and such order, judgment,
or decree shall not be dismissed or stayed within 60 days;

 

(h)                                 the
levy against any significant portion of the Property of any Borrower or
Guarantor, or any execution, garnishment, attachment, sequestration, or other
writ or similar proceeding which is not permanently dismissed or discharged
within 90 days after the levy;

 

(i)                                     a
final and non-appealable order, judgment, or decree shall be entered against
any Borrower for money damages and/or Indebtedness due in an amount in excess
of $500,000, and such order, judgment, or decree shall not be dismissed or
stayed within 60 days;

 

39

 

(j)                                     any
Borrower shall have (i) concealed, removed, or diverted, or permitted to
be concealed, removed, or diverted, any material portion of its Property, with
intent to hinder, delay, or defraud its creditors or any of them, (ii) made
or suffered a transfer of any material portion of its Property which maybe
fraudulent under any bankruptcy, fraudulent conveyance, or similar law, (iii) made
any transfer of its Property to or for the benefit of a creditor at a time when
other creditors similarly situated have not been paid, or (iv) suffered or
permitted, while insolvent, any creditor to obtain a Lien upon any of its
Property through legal proceedings or distraint which is not vacated within 30
days from the date thereof;

 

(k)                                  any
Security Instrument shall for any reason not, or cease to, create valid and perfected
first-priority Liens subject to Permitted Liens against the Collateral
purportedly covered thereby or any Borrower shall assert that any Security
Instrument does not or discontinues to create valid Liens thereunder;

 

(l)                                     the
occurrence of a Material Adverse Effect and the same shall remain unremedied
for in excess of 30 days after notice given by the Lender; or

 

(m)                               the
occurrence of a Change of Control.

 

7.2                                 Remedies.

 

(a)                                  Upon
the occurrence of an Event of Default specified in Sections 7.1(f) or
7.1(g),
immediately and without notice, (i) all Obligations shall automatically
become immediately due and payable, without presentment, demand, protest,
notice of protest, default, or dishonor, notice of intent to accelerate
maturity, notice of acceleration of maturity, or other notice of any kind,
except as may be provided to the contrary elsewhere herein, all of which are
hereby expressly waived by the Borrowers; (ii) the Commitment shall
immediately cease and terminate unless and until reinstated by the Lender in
writing; and (iii) the Lender is hereby authorized at any time and from
time to time, without notice to the Borrowers (any such notice being expressly
waived by the Borrowers), to set-off and apply any and all deposits (general or
special, time or demand, provisional or final) held by the Lender and any and
all other indebtedness at any time owing by the Lender to or for the credit or
account of the Borrowers against any and all of the Obligations although such
Obligations may be unmatured.

 

(b)                                 Upon
the occurrence of any Event of Default other than those specified in Sections 7.1(f) and
7.1(g), (i) the
Lender may, by notice to the Borrower, declare all Obligations immediately due
and payable, without presentment, demand, protest, notice of protest, default,
or dishonor, notice of intent to accelerate maturity, notice of acceleration of
maturity, or other notice of any kind, except as may be provided to the
contrary elsewhere herein, all of which are hereby expressly waived by the
Borrowers; (ii) the Commitment shall immediately cease and terminate
unless and until reinstated by the Lender in writing; and (iii) the Lender
is hereby authorized at any time and from time to time, without notice to the
Borrowers (any such notice being expressly waived by the Borrowers), to set-off
and apply any and all deposits (general or special, time or demand, provisional
or final) held by the Lender and any and all other indebtedness at any time 

 

40

 

owing by the Lender to or for the credit or account of
the Borrowers against any and all of the Obligations although such Obligations
may be unmatured.

 

(c)                                  Upon
the occurrence of any Event of Default, the Lender may, in addition to the
foregoing in this Section, exercise any or all of its rights and remedies
provided by law or pursuant to the Loan Documents.

 

ARTICLE VIII

 

MISCELLANEOUS

 

8.1                                 Transfers;
Participations.  The Lender may not,
without the consent of the Borrowers, at any time, sell, transfer, assign, or
grant participations in the Obligations or any portion thereof; provided, however, (i) that Borrowers’
consent will not be unreasonably withheld and (ii) no such consent shall
be required if an Event of Default has occurred and is continuing.  The Lender may forward to each Transferee and
prospective Transferee all documents and information relating to such
Obligations, whether furnished by the Borrowers or otherwise obtained, as the
Lender determines necessary or desirable. The Borrowers agree that each
Transferee, regardless of the nature of any transfer to it, may exercise all
rights (including, without limitation, rights of set-off) with respect to the
portion of the Obligations held by it as fully as if such Transferee were the
direct holder thereof; subject to any agreements between such Transferee and
the transferor to such Transferee.

 

8.2                                 Survival
of Representations, Warranties, and Covenants.  All representations and warranties of the
Borrowers and all covenants and agreements herein made shall survive the execution
and delivery of the Note and the Security Instruments and shall remain in force
and effect so long as any Obligation is outstanding or any Commitment exists.

 

8.3                                 Notices
and Other Communications. Except as to verbal notices expressly authorized herein,
which verbal notices shall be confirmed in writing, all notices, requests, and
communications hereunder shall be in writing (including by facsimile). Unless
otherwise expressly provided herein, any such notice, request, demand, or other
communication shall be deemed to have been duly given or made when delivered by
hand, or, in the case of delivery by mail, three days following deposit in the
mail, certified mail, return receipt requested, postage prepaid, or, in the
case of facsimile notice, when receipt thereof is acknowledged orally or by
written confirmation report, addressed as follows:

 

(a)                                  if
to the Lender, to:

 

Texas Capital Bank, N.A.

One Riverway, Suite 2450

Houston, Texas 77056

Attention:  Jonathan Gregory

Facsimile: (713) 439-5942

 

(b)                                 if
to the Borrowers, to:

 

CYMRI, L.L.C.

Three Riverway, Suite 1500

Houston, Texas 77056

Attention:  Larry M. Wright

Facsimile:  (713) 975-6271

 

41

 

Any party may, by proper written notice hereunder to the others, change
the individuals or addresses to which such notices to it shall thereafter be
sent.

 

8.4                                 Parties
in Interest.  Subject to the
restrictions on changes in business entity structure set forth in Section 6.10 and
other applicable restrictions contained herein, all covenants and agreements
herein contained by or on behalf of the Borrowers or the Lender shall be
binding upon and inure to the benefit of the Borrowers or the Lender, as the
case may be, and their respective legal representatives, successors, and
assigns.

 

8.5                                 Rights
of Third Parties.  All provisions
herein are imposed solely and exclusively for the benefit of the Lender and the
Borrowers.  No other Person shall have
any right, benefit, priority, or interest hereunder or as a result hereof or
have standing to require satisfaction of provisions hereof in accordance with
their terms, and any or all of such provisions may be freely waived in whole or
in part by the Lender at any time if in its sole discretion it deems it
advisable to do so.

 

8.6                                 Renewals;
Extensions.  All provisions of this
Agreement relating to the Note shall apply with equal force and effect to each
promissory note hereafter executed which in whole or in part represents a
renewal or extension of any part of the Indebtedness of the Borrowers under
this Agreement, the Note, or any other Loan Document.

 

8.7                                 No
Waiver; Rights Cumulative.  No course
of dealing on the part of the Lender, its officers or employees, nor any
failure or delay by the Lender with respect to exercising any of its rights
under any Loan Document shall operate as a waiver thereof.  The rights of the Lender under the Loan
Documents shall be cumulative and the exercise or partial exercise of any such
right shall not preclude the exercise of any other right.  Neither the making of any Loan nor the
issuance of a Letter of Credit shall constitute a waiver of any of the
covenants, warranties, or conditions of the Borrowers contained herein.  In the event the Borrowers are unable to
satisfy any such covenant, warranty, or condition, neither the making of any
Loan nor the issuance of a Letter of Credit shall have the effect of precluding
the Lender from thereafter declaring such inability to be an Event of Default
as hereinabove provided.

 

8.8                                 Survival
Upon Unenforceability.  In the event
any one or more of the provisions contained in any of the Loan Documents or in
any other instrument referred to herein or executed in connection with the
Obligations shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of any Loan Document or of any other
instrument referred to herein or executed in connection with such Obligations.

 

8.9                                 Amendments;
Waivers.  Neither this Agreement nor
any provision hereof may be amended, waived, discharged, or terminated orally,
but only by an instrument in writing signed 

 

42

 

by the party against whom enforcement of the amendment, waiver, discharge,
or termination is sought.

 

8.10                           Controlling
Agreement.  In the event of a
conflict between the provisions of this Agreement and those of any other Loan
Document, the provisions of this Agreement shall control.

 

8.11                           Disposition
of Collateral.  Notwithstanding any
term or provision, express or implied, in any of the Security Instruments, the
realization, liquidation, foreclosure, or any other disposition on or of any or
all of the Collateral shall be in the order and manner and determined in the sole
discretion of the Lender; provided, however,
that in no event shall the Lender violate applicable law or exercise rights and
remedies other than those provided in such Security Instruments or otherwise
existing at law or in equity.

 

8.12                           GOVERNING LAW.  THIS AGREEMENT AND THE NOTE AND THE OTHER
LOAN DOCUMENTS SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS
WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT (I) CHAPTER
345 OF THE TEXAS FINANCE CODE (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN
ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY AND (II) EXCEPT,
WITH REGARD TO THE SECURITY INSTRUMENTS TO THE EXTENT THAT THE LAWS OR ANY
JURISDICTION IN WHICH THE MORTGAGED PROPERTIES NECESSARILY GOVERN.

 

8.13                           JURISDICTION AND VENUE.  ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO,
ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR FROM
THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE LITIGATED, AT THE SOLE
DISCRETION AND ELECTION OF THE LENDER, IN COURTS HAVING SITUS IN HOUSTON,
HARRIS COUNTY, TEXAS.  EACH BORROWER
HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF ANY LOCAL, STATE, OR FEDERAL COURT
LOCATED IN HOUSTON, HARRIS COUNTY, TEXAS, AND HEREBY WAIVES ANY RIGHTS IT MAY HAVE
TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT
AGAINST IT BY THE LENDER IN ACCORDANCE WITH THIS SECTION.

 

8.14                           WAIVER OF RIGHTS TO JURY TRIAL.   EACH BORROWER AND THE LENDER HEREBY
KNOWINGLY, VOLUNTARILY, INTENTIONALLY, IRREVOCABLY, AND UNCONDITIONALLY WAIVE
ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING, COUNTERCLAIM, OR
OTHER LITIGATION THAT RELATES TO OR ARISES OUT OF ANY OF THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT OR THE ACTS OR OMISSIONS OF THE LENDER IN THE ENFORCEMENT
OF ANY OF THE TERMS OR PROVISIONS OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT
OR OTHERWISE WITH RESPECT THERETO. THE PROVISIONS OF THIS SECTION 

 

43

 

ARE A MATERIAL INDUCEMENT FOR THE LENDER ENTERING
INTO THIS AGREEMENT.

 

8.15                           ENTIRE AGREEMENT. THIS AGREEMENT
CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE
SUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES
HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF, INCLUDING,
WITHOUT LIMITATION, THE PROPOSED TERM SHEET DATED JULY 16, 2008, FROM THE
LENDER TO THE BORROWERS FURTHERMORE, IN THIS REGARD, THIS AGREEMENT AND THE
OTHER WRITTEN LOAN DOCUMENTS REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG
THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES.

 

8.16                           CYMRI
as Agent.  Triumph hereby appoints
CYMRI as its agent and attorney-in-fact to execute any certificates, requests
or other documents deliverable under this Agreement in the name of each such
party, collectively as Borrowers, and Lender shall be authorized to rely on any
such executed certificates, requests or other documents as acts of the parties
constituting “Borrowers” without the need of further inquiry or investigation.

 

8.17                           Amended
and Restated Agreement.  This Agreement
amends and restates in its entirety, but does not extinguish, the Sterling Bank
Credit Agreement.  All Security
Instruments, as defined in the Sterling Bank Credit Agreement shall constitute
Security Instruments as defined in this Agreement, and they shall continue to
secure all Obligations of Borrowers hereunder.

 

8.18                           Patriot Act.  The
Lender hereby notifies Borrowers that if Lender is subject to the USA Patriot
Act and pursuant to Section 326 thereof, it is required to obtain, verify
and record information that identifies Borrowers, including the name and
address of Borrowers and other information allowing Lender to identify
Borrowers in accordance with such act.

 

8.19                           Counterparts.  For the convenience of the parties, this
Agreement may be executed in multiple counterparts, each of which for all
purposes shall be deemed to be an original, and all such counterparts shall
together constitute but one and the same Agreement.

 

[Signatures
appear on the following page.]

 

44

 

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

 

	
   

  	
  BORROWER:

  
	
   

  	
   

  
	
   

  	
  CYMRI, L.L.C. (F/K/A THE CYMRI

  CORPORATION)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Larry M. Wright

  
	
   

  	
   

  	
  Larry M. Wright

  
	
   

  	
   

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  TRIUMPH ENERGY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Larry M. Wright

  
	
   

  	
   

  	
  Larry M. Wright

  
	
   

  	
   

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  LENDER:

  
	
   

  	
   

  
	
   

  	
  TEXAS CAPITAL BANK, N.A.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jonathan Gregory

  
	
   

  	
   

  	
  Jonathan Gregory

  
	
   

  	
   

  	
  Executive Vice
  PresidentExhibit 10.3

 

GUARANTY

 

THIS GUARANTY (as amended, restated, or
supplemented, this “Guaranty”) is executed as of August 5, 2008, by
STRATUM HOLDINGS, INC., a Nevada
corporation (“Guarantor”) for the benefit of TEXAS
CAPITAL BANK, N.A. (“Lender”).

 

RECITALS

 

A.                                   CYMRI, L.L.C., a Nevada limited liability
company, and Triumph Energy, Inc., a Louisiana corporation (each
individually, a “Borrower” and collectively, “Borrowers”), and Lender have
entered into that certain Second Amended and Restated Credit Agreement dated
the same date as this Guaranty (as amended, restated, or supplemented, from
time to time, the “Credit Agreement”), together with certain other Loan
Documents, as defined therein.

 

B.                                     Each Borrower
is a wholly-owned Subsidiary of Guarantor and has agreed to enter into this
Guaranty so that Borrowers can receive the benefits of the Credit Agreement.

 

C.                                     It is expressly
understood among Borrowers, Guarantor and Lender that the execution and
delivery of this Guaranty is a condition precedent to the Lender’s obligation
to extend credit under the Credit Agreement.

 

D.                                    Guarantor may
reasonably be expected to benefit directly or indirectly from Borrowers’
execution of the Credit Agreement.

 

NOW, THEREFORE, for valuable consideration,
the receipt and adequacy of which are hereby acknowledged, Guarantor agrees as
follows:

 

1.                                       Definitions.  Each capitalized term used but not defined in
this Guaranty shall have the meaning given that term in the Credit
Agreement.  The following terms shall
have the following meanings as used in this Guaranty:

 

“Attorney Costs” means and includes all
reasonable fees, expenses and disbursements of any law firm or other external
counsel of Lender.

 

“Borrowers” has the
meaning given in Recital A and includes, without limitation, all of Borrowers’
successors and assigns, each Borrower as a debtor-in-possession, and any
receiver, trustee, liquidator, conservator, custodian, or similar party
hereafter appointed for any Borrower or for all or any portion of any Borrower’s
assets pursuant to any liquidation, conservatorship, bankruptcy, moratorium,
rearrangement, receivership, insolvency, reorganization, or similar Debtor
Relief Law from time to time in effect.

 

“Company Indebtedness” means all obligations
of any Borrower or any of its Subsidiaries to Guarantor, whether direct,
indirect, fixed, contingent, liquidated, unliquidated, joint, several, or joint
and several, now existing or arising after the date of this Guaranty, due or to
become due to Guarantor, or held or to be held by Guarantor, whether created
directly or acquired by assignment or otherwise, and whether or not 

 

 

evidenced by written
instrument, including the obligation of a Borrower to Guarantor as a subrogee
of Lender or resulting from Guarantor’s performance under this Guaranty.

 

“Debtor Relief Laws”
means the Bankruptcy Code of the United States, and all other liquidation,
conservatorship, bankruptcy, assignment for the benefit of creditors,
moratorium, rearrangement, receivership, insolvency, reorganization, or similar
debtor relief laws of the United States or other applicable jurisdictions from
time to time in effect and affecting the rights of creditors generally.

 

“Guaranteed Obligation”
means any and all existing and future indebtedness and liabilities of every
kind, nature, and character, direct or indirect, absolute or contingent,
liquidated or unliquidated, voluntary or involuntary, of Borrowers to the
Lender arising under the Credit Agreement and the other Loan Documents,
including the Obligations as defined in the Credit Agreement and any premium
and all interest (including, without limitation, interest accruing before and
after maturity, before and after an Event of Default, and during the pendency
of any bankruptcy, receivership insolvency or other similar proceeding under
any applicable Debtor Relief Law (regardless whether such interest is allowed
in such proceeding)), and any and all costs, attorney and paralegal fees and
expenses reasonably incurred by the Lender (a) in connection with any
waiver, amendment, consent or default under the Loan Documents, or (b) to
enforce Borrowers’, Guarantor’s, or any other obligor’s payment of any portion
of the Guaranteed Obligation.

 

“Lien” means any
mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance,
lien (statutory or other), charge, or preference, priority or other security
interest or preferential arrangement of any kind or nature whatsoever
(including any conditional sale or other title retention agreement, and any
financing lease having substantially the same economic effect as any of the
foregoing).

 

“Paid in Full or Payment in Full” means that
the Guaranteed Obligation is completely paid and the Credit Agreement has been
terminated.

 

2.                                       Guaranty.

 

(a)                                  Guarantor
hereby guarantees to Lender prompt payment of (i) the Guaranteed
Obligation when and as due, and (ii) any and all Attorney Costs reasonably
incurred by Lender in connection with enforcement of the Loan Documents, this
Guaranty, or collecting any portion of the Guaranteed Obligation; provided  however,
that Guarantor shall be liable under this Guaranty only for the maximum amount
of such liability that can be hereby incurred without rendering this Guaranty,
as it relates to the Guarantor, voidable under applicable law relating to
fraudulent conveyance or fraudulent transfer, and not for a greater amount.

 

(b)                                 Upon Lender’s
written demand, Guarantor shall promptly pay to Lender any amount due under
this Guaranty, but, in any event, no later than 5 Business Days (as defined in
the Credit Agreement) after the date of Lender’s written demand.

 

(c)                                  This is an
absolute, unconditional, irrevocable and continuing guaranty of payment (and
not of collection) of the Guaranteed Obligation and the other amounts due 

 

2

 

under this Guaranty, and this Guaranty will remain
in effect until (i) the Guaranteed Obligation is Paid in Full, (ii) the
Credit Agreement has terminated in accordance with its terms, and (iii) the
Obligations under and as defined in the Credit Agreement have been Paid in
Full.  The circumstance that at any time
or from time to time all or any portion of the Guaranteed Obligation may be $0
shall not affect Guarantor’s obligation under this Guaranty.  Guarantor may not rescind or revoke its
obligation to the Lender under this Guaranty.

 

(d)                                 Any amounts
received by Lender under this Guaranty in respect of the Guaranteed Obligation
shall be applied by Lender to the Obligations in accordance with the provisions
of the Credit Agreement.

 

3.                                       Default by
Borrowers.  If an Event
of Default exists, Guarantor shall pay to Lender any and all amounts then due
and payable under this Guaranty on demand and without (a) further notice
of dishonor to Guarantor, (b) any prior notice to Guarantor of the acceptance
by Lender of this Guaranty, (c) any notice having been given to Guarantor
prior to such demand of the creating or incurring of such Indebtedness, or (d) notice
of intent to accelerate or notice of acceleration to Guarantor or
Borrowers.  To enforce such payment by
Guarantor it shall not be necessary for Lender to first or contemporaneously
institute suit or exhaust remedies against any Borrower or others liable on
such Indebtedness, or to enforce rights against any security or collateral ever
given to secure such Indebtedness.

 

4.                                       Amount of
Guaranty and Consideration.  Lender’s books and records showing the amount
of the Guaranteed Obligation shall be admissible in evidence in any action or
proceeding.  In consummating the
transactions contemplated by this Guaranty, Guarantor does not intend to
disturb, delay, hinder, or defraud either its present or future creditors.  Guarantor is familiar with, and has
independently reviewed books and records regarding, the financial condition of
Borrowers and is familiar with the value of the security and support for the
payment and performance of the amounts due under this Guaranty.  Based upon such examination, and taking into
account the fairly discounted value of Guarantor’s contingent obligations under
this Guaranty and the value of the subrogation and contribution claims
Guarantor could make in connection with this Guaranty, and assuming each of the
transactions contemplated by the Credit Agreement is consummated and Borrowers
make full use of the credit facilities thereunder, the present realizable fair
market value of the assets of Guarantor exceeds the total obligations of
Guarantor, and Guarantor is able to pay its obligations as such obligations
mature in the normal course of business. 
Guarantor represents and warrants to Lender that the value of
consideration received and to be received by it is reasonably worth at least as
much as its liability under this Guaranty, and such liability may reasonably be
expected to benefit Guarantor, directly or indirectly.

 

5.                                       Liability for
Other Indebtedness of Borrowers.  If, and only if, Guarantor becomes liable for
any indebtedness owing by Borrowers to the Lender by executing a promissory
note or guaranty, by endorsement, or otherwise, other than under this Guaranty,
such liability shall not be impaired or affected by this Guaranty and the
rights of the Lender under this Guaranty shall be cumulative of any and all
other rights that the Lender may ever have against Guarantor.

 

3

 

6.                                       Subordination.  Guarantor hereby expressly subordinates all
Company Indebtedness to the Payment in Full of the Guaranteed Obligation.  Upon the occurrence and during the
continuance of an Event of Default under the Credit Agreement, Guarantor agrees
not to receive or accept any payment from Borrowers or any of their
Subsidiaries with respect to the Company Indebtedness and, in the event
Guarantor receives any payment on the Company Indebtedness in violation of the
foregoing, Guarantor shall hold any such payment for the benefit of Lender and
promptly turn it over to Lender, in the form received (with any necessary
endorsements), to be applied to the Obligations under the Credit
Agreement.  Upon the occurrence and
during the continuance of an Event of Default under the Credit Agreement, if
Lender so requests, any such Company Indebtedness shall be enforced and all
amounts received by Guarantor shall be received in trust for Lender and the
proceeds thereof shall be paid over to Lender, but without reducing or
affecting in any manner the liability of Guarantor under this Guaranty, except
to the extent such proceeds are applied to the Guaranteed Obligation by Lender.

 

7.                                       Subrogation.  Until the Guaranteed Obligation is Paid in
Full, Guarantor agrees that it will not assert, enforce, or otherwise exercise (a) any
right of subrogation to any of the rights or liens of the Lender or any other
beneficiary against any Borrower, any of their Subsidiaries, or any other
obligor on the Guaranteed Obligation or any Collateral or other security, or (b) any
right of recourse, reimbursement, subrogation, contribution, indemnification,
or similar right against any Borrower, any of its Subsidiaries, or any other
obligor or other guarantor on all or any part of the amounts due under this
Guaranty (whether such rights in clause (a) or
clause (b) arise in equity,
under contract, by statute, under common law, or otherwise).

 

8.                                       Enforceability
of Guaranty; No Release.

 

(a)                                  This Guaranty
shall not be affected by the genuineness, validity, regularity or
enforceability of the Guaranteed Obligation or any instrument or agreement
evidencing any part of the Guaranteed Obligation, or by the existence,
validity, enforceability, perfection, or extent of any collateral securing the
Guaranteed Obligation, or by any fact or circumstance relating to the
Guaranteed Obligation which might otherwise constitute a defense to the
obligations of the Guarantor under this Guaranty.

 

(b)                                 Guarantor
agrees that the Lender may, at any time and from time to time, and without
notice to Guarantor, make any agreement with Borrowers or with any other Person
liable on any of the Guaranteed Obligation or providing collateral as security
for the Guaranteed Obligation, for the extension, renewal, payment, compromise,
discharge or release of the Guaranteed Obligation or any collateral (in whole
or in part), or for any modification or amendment of the terms thereof or of
any instrument or agreement evidencing the Guaranteed Obligation or the
provision of collateral, all without in any way impairing, releasing,
discharging or otherwise affecting the obligations of Guarantor under this
Guaranty.

 

(c)                                  Guarantor
hereby agrees its obligations under the terms of this Guaranty shall not be
released, discharged, diminished, impaired, reduced or otherwise adversely
affected by any of the following: (i) the
Lender’s taking or accepting of any other 

 

4

 

security or guaranty for any or all of the
Guaranteed Obligation; (ii) any release,
surrender, exchange, subordination or loss of any security at any time existing
in connection with any or all of the Guaranteed Obligation;
(iii) any full or partial release of the liability of any other
obligor on the Guaranteed Obligation; (iv) the
insolvency, becoming subject to any Debtor Relief Law, or lack of corporate
power of any Borrower, or any party at any time liable for the payment of any
or all of the Guaranteed Obligation; (v) any
renewal, extension or rearrangement of the payment of any or all of the
Guaranteed Obligation, either with or without notice to or consent of
Guarantor, or any adjustment, indulgence, forbearance, or compromise that may
be granted or given by the Lender to Borrowers, Guarantor, or any other obligor
on the Guaranteed Obligation; (vi) any neglect,
delay, omission, failure or refusal of the Lender to take or prosecute any
action for the collection of all or any part of the Guaranteed Obligation or to
foreclose or take or prosecute any action in connection with any instrument or
agreement evidencing or securing any or all of the Guaranteed Obligation; (vii) any failure of Lender to give Guarantor notice
of any of the foregoing, it being understood that Lender shall not be required
to give Guarantor any notice of any kind under any circumstances with respect
to or in connection with the Guaranteed Obligation, other than any notice
expressly required to be given to Guarantor under this Guaranty, if any; (viii) the act of creating the Guaranteed
Obligation, or any part thereof, is ultra
vires, or the officers creating same exceeded their authority or
violated their fiduciary duties in connection therewith; (ix) any
payment of the Guaranteed Obligation to Lender is held to constitute a
preference under any Debtor Relief Law or if for any other reason Lender is
required to refund such payment or make payment to someone else (and in each
such instance this Guaranty shall be reinstated in an amount equal to such
payment); or (x) any discharge, release, or
other forgiveness of Borrowers’ liability for the payment of the Guaranteed
Obligation.

 

9.                                       Exercise of
Rights and Waiver.

 

(a)                                  No failure by
Lender to exercise, and no delay in exercising, any right or remedy under this
Guaranty shall operate as a waiver thereof. 
The exercise by the Lender of any right or remedy under this Guaranty,
under the Loan Documents, or other instrument, or at law or in equity, shall
not preclude the concurrent or subsequent exercise of any other right or
remedy.  The remedies provided in this
Guaranty are cumulative and not exclusive of any remedies provided by
applicable law or in equity.  The
unenforceability or invalidity of any provision of this Guaranty shall not
affect the enforceability or validity of any other provision herein.

 

(b)                                 The obligations
of Guarantor under this Guaranty are those of primary obligor, and not merely
as surety, and are independent of the Obligations.  Guarantor waives diligence by Lender and
action on delinquency in respect of the Obligations or Guaranteed Obligation or
any part thereof, including any provisions of applicable law requiring the
Lender to exhaust any right or remedy or to take any action against any
Borrower, any of its Subsidiaries, any other guarantor or any other Person
before enforcing this Guaranty against Guarantor.  Guarantor hereby waives all rights by which
it might be entitled to require suit on an accrued right of action in respect
of any of the Guaranteed Obligation or require suit against any Borrower or
others, whether arising pursuant to Section 34.02 of the Texas Business
and Commerce Code, as amended 

 

5

 

(regarding guarantor’s right to require a lender to
sue a borrower on accrued right of action following a guarantor’s written
notice to a lender), Section 17.001 of the Texas Civil Practice and
Remedies Code, as amended (allowing suit against a guarantor without suit
against a borrower, but precluding entry of judgment against a guarantor prior
to entry of judgment against a borrower), Rule 31 of the Texas Rules of
Civil Procedure, as amended (requiring a lender to join a borrower in any suit
against a guarantor unless judgment has been previously entered against a
borrower), or otherwise.

 

(c)                                  Guarantor
waives notice of acceptance of this Guaranty, notice of any loan to which it
may apply, and waives presentment, demand for payment, protest, notice of
dishonor or nonpayment of any loan, notice of intent to accelerate, notice of
acceleration, and notice of any suit or notice of the taking of other action by
the Lender against Borrowers, Guarantor or any other Person and any notice to
any party liable thereon (including Guarantor).

 

10.                                 Stay of Acceleration.  In the event that acceleration of the time
for payment of the Guaranteed Obligation is stayed upon the insolvency,
bankruptcy or reorganization of any Borrower or any other Person, or otherwise,
all such amounts shall nonetheless be payable by Guarantor immediately upon
demand by Lender.

 

11.                                 Expenses.  Guarantor shall pay on demand all reasonable
out-of-pocket expenses (including Attorneys Costs) in any way relating to the
enforcement or protection of Lender’s and the Lender’s rights under this
Guaranty, including any incurred in the preservation, protection or enforcement
of any rights of the Lender in any case commenced by or against Guarantor under
Title 11, United States Code or any similar or successor statute.  The obligations of Guarantor under the
preceding sentence shall survive termination of this Guaranty.

 

12.                                 Amendments.  No provision of this Guaranty may be waived,
amended, supplemented or modified, except by a written instrument executed by
Lender and Guarantor.

 

13.                                 Reliance and Duty to Remain
Informed. Guarantor confirms that it has executed and
delivered this Guaranty after reviewing the terms and conditions of the Credit
Agreement and the other Loan Documents and such other information as it has
deemed appropriate in order to make its own credit analysis and decision to
execute and deliver this Guaranty. Guarantor confirms that it has made its own
independent investigation with respect to Borrowers’ creditworthiness and is
not executing and delivering this Guaranty in reliance on any representation or
warranty by the Lender as to such creditworthiness.  Guarantor expressly assumes all
responsibilities to remain informed of the financial condition of Borrowers and
any circumstances affecting (a) Borrowers’ ability to perform under the
Loan Documents to which Borrowers are parties or (b) any collateral
securing all or any part of the Guaranteed Obligation.

 

14.                                 Change in a Guarantor’s
Status.  Should Guarantor become
insolvent, or fail to pay its debts generally as they become due, or
voluntarily seek, consent to, or acquiesce in the benefit or benefits of any
Debtor Relief Law or become a party to (or be made the subject of) any
proceeding provided for by any Debtor Relief Law (other than as a creditor or
claimant) that could suspend or otherwise adversely affect the rights of the
Lender granted under this Guaranty, then, in any such event, the Guaranteed
Obligation shall be, as between Guarantor and Lender, a 

 

6

 

fully matured, due, and payable obligation of Guarantor to Lender
(without regard to whether Borrowers are then in Default or whether the
Guaranteed Obligation, or any part thereof is then due and owing by Borrowers
to Lender), payable in full by Guarantor to Lender upon demand, which shall be
the estimated amount owing in respect of the contingent claim created under
this Guaranty.

 

15.                                 Representations and
Warranties.  Guarantor
represents and warrants that (a) it is duly organized or formed, validly
existing and in good standing under the applicable laws of the jurisdiction of
its organization, (b) it has all requisite company power and authority and
all requisite governmental licenses, authorizations, consents and approvals to (i) own
its assets and carry on its business and (ii) execute, deliver, and
perform its obligations under this Guaranty, (c) it is duly qualified and
is licensed and in good standing under the applicable laws of each jurisdiction
where its ownership, lease or operation of properties or the conduct of its
business requires such qualification or licenses, except where such failure
would not reasonably be expected to have a Material Adverse Effect, (d) the
execution, delivery and performance of this Guaranty has been duly authorized
by all necessary company action, and do not and will not (i) contravene
the terms of any of its organization documents, (ii) conflict with or
result in any breach or contravention of, or the creation of any lien on any of
its assets under the terms of any agreement, judgment, license, order or permit
applicable to or binding on Guarantor, the violation of which could reasonably
be expected to have a Material Adverse Effect, or (iii) violate any
applicable law the violation of which could reasonably be expected to have a
Material Adverse Effect, (e) except as expressly contemplated by the Loan
Documents and except as has been obtained, no approval, consent, exemption,
authorization, or other action by, or notice to, or filing with, any
Governmental Authority or any other Person is necessary or required in
connection with the execution, delivery or performance by, or enforcement
against, Guarantor, and (f) this Guaranty has been, and when delivered
hereunder, will have been, duly executed and delivered by Guarantor and it
creates a legal, valid and binding obligation of Guarantor, enforceable against
Guarantor, subject to bankruptcy, insolvency, fraudulent conveyance and general
principles of equity.

 

16.                                 Covenants.  Guarantor acknowledges that certain covenants
set forth in the Credit Agreement are in respect of it or shall be imposed upon
it, and Guarantor covenants and agrees to promptly and properly perform,
observe, and comply with each such covenant.

 

17.                                 Offset Claims. 
The Obligations or the Guaranteed Obligation shall not be reduced,
discharged or released because or by reason of any existing or future offset,
claim or defense (except for the defense of Payment in Full of the Guaranteed
Obligation) of Borrowers or any other party against the Lender or against
payment of the Guaranteed Obligation, whether such offset, claim, or defense
arises in connection with the Guaranteed Obligation or otherwise.  Such claims and defenses include, without
limitation, failure of consideration, breach of warranty, fraud, statute of
frauds, bankruptcy, infancy, statute of limitations, lender liability, accord
and satisfaction, and usury.

 

18.                                 Setoff. 
If and to the extent any payment is not made when due under this
Guaranty, Lender may setoff and charge from time to time any amounts so due
against any or all of Guarantor’s accounts or deposits with Lender.

 

7

 

19.                                 Binding Agreement.  This Guaranty is for the benefit of the
Lender and its respective successors and assigns.  Guarantor acknowledges that in the event of
an assignment of the Guaranteed Obligation or any part thereof in accordance
with the Credit Agreement, the rights and benefits under this Guaranty, to the
extent applicable to the Indebtedness so assigned, may be transferred with such
Indebtedness.  This Guaranty is binding
on Guarantor and its successors and permitted assigns, provided that Guarantor may not assign its
rights or obligations under this Guaranty without the prior written consent of
Lender (and any attempted assignment without such consent shall be null and
void).

 

20.                                 Notices. 
All notices required or permitted to be given under this Guaranty, if
any, must be in writing and shall or may, as the case may be, be given in the
same manner as notice is given under the Credit Agreement as follows:

 

If to Lender:

 

Texas Capital Bank

One Riverway, Suite 2450

Houston, Texas  77056

Telephone: 713-439-5911

Facsimile:   713-439-5942

Attention:  Jeff Treadway

 

with a copy to:

 

Porter & Hedges,
L.L.P.

1000 Main Street, 36th
Floor

Houston, Texas 77002

Telephone: 713-226-6660

Facsimile:   713-226-6260

Attention:  Ephraim del Pozo

 

If to Guarantor:

 

Stratum Holdings, Inc.

Three Riverway, Suite 1500

Houston, Texas 77056

Telephone: 713-479-7000

Facsimile: 713-975-6271

Attention:  Larry M. Wright

 

8

 

with a copy to:

 

Haynes & Boone,
LLP

One Houston Center

1221 McKinney Street, Suite 2100

Houston, Texas 77010

Telephone: 713-547-2007

Facsimile: 713-236-5540

Attention:  Bryce Linsenmayer

 

By giving at least 10 days
written notice, any party to this Guaranty shall have the right from time to
time and at any time while this Guaranty is in effect to change its address or
fax number and shall have the right to specify a different address or fax
number within the United States of America or Canada.  Nothing in this Section shall be
construed to require any notice to Guarantor not otherwise expressly required
in this Guaranty.

 

21.                                 Reinstatement and Termination.

 

(a)                                  Notwithstanding anything in this Guaranty to the contrary, this Guaranty
shall continue to be effective or be reinstated, as the case may be, if at any
time any payment of any portion of the Guaranteed Obligation paid by Guarantor
is revoked, terminated, rescinded or reduced or must otherwise be restored or
returned upon the insolvency, bankruptcy or reorganization (including without
limitation pursuant to any Debtor Relief Laws) of any Borrower or any other
Person or otherwise, as if such payment had not been made and whether or not
the Lender is in possession of or has released this Guaranty and regardless of
any prior revocation, rescission, termination or reduction.

 

(b)                                 Subject to clause (a) regarding reinstatement, this Guaranty shall
terminate and be released on the date the Guaranteed Obligation is Paid in
Full, other than obligations that survive termination or assignment of the Loan
Documents, and the Credit Agreement has terminated in accordance with its
terms.

 

(c)                                  Upon termination of the Guaranty pursuant to the provisions of Section 21(b),
Lender shall deliver or cause to be delivered to Guarantor, at Guarantor’s
expense, releases and satisfactions, or transfers without warranty, of all
obligations under this Guaranty and all collateral of Guarantor securing such
Guaranteed Obligation, and Guarantor shall deliver to Lender a general release
of all of Lender’s liabilities and obligations to Guarantor, including under
the Loan Documents (in each case, other than those arising under the
obligations that survive the termination or assignment of the Loan Documents)
and an acknowledgment that the same have been terminated or assigned as to
Guarantor.

 

22.                                 Governing Law. 
THIS GUARANTY IS TO BE CONSTRUED, AND
ITS PERFORMANCE ENFORCED, UNDER TEXAS LAW.

 

23.                                 No Oral Agreements.  THE RIGHTS
AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE DETERMINED SOLELY FROM WRITTEN 

 

9

 

AGREEMENTS, DOCUMENTS, AND INSTRUMENTS, AND ANY PRIOR ORAL AGREEMENTS
BETWEEN THE PARTIES ARE SUPERSEDED BY AND MERGED INTO SUCH WRITINGS.  THIS GUARANTY (AS AMENDED IN WRITING FROM
TIME TO TIME), THE CREDIT AGREEMENT, AND THE OTHER WRITTEN LOAN DOCUMENTS
EXECUTED BY BORROWERS, LENDER OR GUARANTOR (OR BY A BORROWER OR GUARANTOR FOR
THE BENEFIT OF LENDER OR LENDER) REPRESENT THE FINAL AGREEMENT BETWEEN
BORROWERS, GUARANTOR AND LENDER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN THE PARTIES.  THIS SECTION IS
INCLUDED HEREIN, AMONG OTHER REASONS, PURSUANT TO SECTION 26.02 OF THE
TEXAS BUSINESS AND COMMERCE CODE, AS AMENDED FROM TIME TO TIME.

 

[Signature
is on the following page]

 

10

 

This Guaranty is executed on the date first set out above.

 

	
   

  	
   

  	
  GUARANTOR:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  STRATUM HOLDINGS, INC.,

  
	
   

  	
   

  	
  a Nevada
  corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Larry
  M. Wright

  
	
   

  	
   

  	
   

  	
  Larry M.
  Wright

  
	
   

  	
   

  	
   

  	
  Chief
  Executive Officer

  

 

Signature Page to
the Guaranty

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