Document:

EXHIBIT 10.16

THIS CONVERTIBLE PROMISSORY NOTE AND THE SHARES ISSUABLE
UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 (THE “SECURITIES ACT”) OR ANY
SECURITIES LAW OF ANY STATE OF THE UNITED STATES.  THIS CONVERTIBLE PROMISSORY NOTE AND THE
SHARES ISSUABLE UPON CONVERSION HEREOF MAY BE
REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE
SECURITIES ACT AND OTHER APPLICABLE LAWS AND ONLY PURSUANT TO REGISTRATION
UNDER THE SECURITIES ACT, OR PURSUANT TO AN AVAILABLE EXEMPTION FROM
REGISTRATION.

CONVERTIBLE
PROMISSORY NOTE

	
  $450,000.00

  	
  Dallas, Texas

  	
  March 31, 2006

  

 

FOR
VALUE RECEIVED, the undersigned, Earth Biofuels, Inc., a Delaware corporation (“Borrower”), promises to pay to the
order of Tom Groos (“Lender”),
the sum of Four Hundred Fifty Thousand and No/100 Dollars ($450,000.00), with
interest from the date of advancement on the unpaid balance hereof from time to
time remaining unpaid at a rate of 8% per annum, in (i) lawful money of the
United States of America or (ii) equity securities of the Borrower as provided
herein, both principal and interest being payable at the address designated in
numbered paragraph 15 below or at such other place as Lender may, from time to
time, designate in writing.  All interest
under this Note shall be computed on the basis of the actual number of days
elapsed over an assumed year consisting of three hundred sixty-five (365) days.

The
principal of this Note shall mature and be due and payable on April 28, 2007.  Simple interest payable on this Note shall be
payable upon each Conversion Date (as defined below), July 28, 2006, October 28,
2006, January 28, 2007, and on the maturity date, when the principal and
remaining accrued but unpaid interest shall be due and payable.

All
past due principal and accrued interest on this Note shall bear interest from
maturity until paid at the highest (non-usurious) rate for which Borrower may
legally contract under applicable law. 
All payments on past due principal and accrued interest hereunder shall
be payable in lawful money of the United States of America which shall be legal
tender for public and private debts at the time of payment.  As used herein, the term “Holder” shall initially mean Lender,
and shall subsequently mean each person or entity to which this Note is duly
assigned.

This
Note evidences indebtedness incurred by Borrower for interim financing provided
to Borrower.

1.                                       Conversion Option.  All or any portion of the unpaid principal of
this Note, plus accrued interest hereon, shall be convertible, at the option of
Lender, into shares of Common Stock, $0.001 par value, issued by Borrower (the “Common
Stock”).  At the time of any such conversion of
the aggregate of the principal amount and

 1
 

 

accrued interest, or a portion thereof, the rights of
the Lender with respect to such portion of the aggregate of the principal
amount and accrued interest so converted shall cease and the Lender shall be
deemed to have become the record holder of the Common Stock issuable upon such
conversion.  The Borrower covenants with
the Lender that it will at all times reserve and keep available out of its
authorized Common Stock and solely for the purpose of conversion as provided
herein, and conditionally allot to the Lender, such number of shares of Common
Stock as shall then be issuable upon the conversion of this Note.  The Borrower covenants with the Lender that
all shares of Common Stock which shall be so issuable shall be duly and validly
issued as fully-paid and non-assessable.

The Common Stock into which
this Note may be converted shall be referred to herein as the “Conversion Shares.”  The number of Conversion Shares shall be
determined by dividing the Conversion Amount (defined below) by the Conversion
Price Per Share (defined below).  Upon
any such conversion, the Lender shall execute any and all customary and
appropriate documents to implement the foregoing.  Additionally, the Lender shall be entitled to
demand registration rights and piggyback registration rights pursuant to the
Registration Rights Agreement of even date herewith, executed by Borrower and
Lender (“Registration Rights Agreement”).

1.1                                 Definitions.  Unless otherwise specified, for purposes
hereof, the following terms shall have the following meanings:

1.1.1                        “Conversion Amount” means an amount
equal to the then outstanding principal plus any accrued but unpaid interest
under this Note, or such lesser amount as Holder shall determine.

1.1.2                        “Conversion Price Per Share”
means a price per share of Common Stock equal to the lower of (i) $0.50 per
share or (ii) 70% of the volume weighted average price per share of the Common
Stock (“VWAP”).  Notwithstanding the foregoing, the price set
forth in part (i) of the preceding sentence shall be lowered from $0.50 per
share to $0.30 per share if both of the following shall have occurred within
the 10-month time frame commencing 60 days from the date of this note and
ending 12 months from the date of this note: 
(A) the VWAP shall have fallen below $0.50 per share and (B) Borrower
shall have more than 200,000,000 shares of Common Stock issued and
outstanding.  The VWAP shall be determined
as follows:  (x) the daily volume
weighted average price of the Common Stock for such date on the OTC Bulletin
Board as reported by Bloomberg Financial L.P. (based on a trading day from 9:30
a.m. Eastern Time to 4:02 p.m. Eastern Time); (y) if the Common Stock is
not then listed or quoted on the OTC Bulletin Board and if prices for the
Common Stock are then reported in the “Pink Sheets” published by the Pink
Sheets, LLC (or a similar organization or agency succeeding to its functions of
reporting prices), the most recent bid price per share of the Common Stock so
reported; or (z) in all other cases, the fair market value of a share of Common
Stock as determined by an independent appraiser selected in good faith by the
Holder and reasonably acceptable to the Borrower.

1.2                                 Conversion
Procedures.

1.2.1                        Holder may
exercise its conversion right by giving written notice (in the form attached hereto,
the “Conversion Notice”)
to the Borrower of the exercise of such right. 
The conversion of this Note (or such portion thereof as Holder shall
determine)

 2
 

 

will be deemed
to have been effected as of the date of receipt of the Conversion Notice (the “Conversion Date”).  If Holder has exercised its conversion right,
the outstanding principal (or such portion thereof as Holder shall determine)
and any accrued but unpaid interest under this Note shall be automatically
converted into such number of shares of the Common Stock to be issued by
Borrower equaling the quotient of (i) the Conversion Amount, and (ii) the
Conversion Price Per Share.

1.2.2                        Within
five business days of the Conversion Date, the Holder shall surrender this Note
at the principal office of the Borrower, for replacement or cancellation.

1.2.3                        Within
five business days of the surrender of the Note by Holder, the Borrower will
deliver to the converting Holder (a) a certificate or certificates representing
Conversion Shares and (b) a replacement note for the unconverted principal
balance (if any) of this Note.  Borrower
agrees that its issuance of this Note shall constitute full authority to its
officers, agents, and transfer agents who are charged with the duty of
executing and issuing stock certificates to execute and issue the necessary
certificates for shares of Common Stock upon the conversion of this Note.

1.2.4                        On the
Conversion Date, the rights of the Holder of this Note to receive payment of
such portion of the principal and interest as Holder has converted hereunder
will cease and the person or persons in whose name or names any certificate or
certificates for Conversion Shares are to be issued upon such conversion will
be deemed to have become the holder or holders of record of the shares
represented thereby.

1.2.5                        The
issuance of certificates for the Conversion Shares will be made without charge
to the Holder for any issuance tax in respect thereof or other cost incurred by
the Borrower in connection with such conversion and the related issuance of
Conversion Shares.

1.2.6                        If any
fractional interest in Conversion Shares would, except for the provisions of
this Section 1, be deliverable upon any conversion of this Note, in lieu of
delivering the fractional share therefor, the number of Conversion Shares shall
be rounded to the nearest whole number.

2.                                       Adjustment of Conversion Price
Per Share.  The Conversion Price Per Share, the number of
Conversion Shares, and the number and kind of shares or other securities to be
issued upon conversion determined pursuant to Section 1.2, shall be subject to
adjustment from time to time upon the happening of certain events while this
conversion right remains outstanding, as follows:

2.2.1                        Merger, Sale of Assets. 
If the Borrower at any time shall consolidate with or merge into or sell
or convey all or substantially all its assets to any other corporation, this
Note, as to the unpaid principal portion thereof and accrued interest thereon,
shall thereafter be deemed to evidence the right to purchase such number and
kind of shares or other securities and property as would have been issuable or
distributable on account of such consolidation, merger, sale or conveyance,
upon or with respect to the securities

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subject
to the conversion or purchase right immediately prior to such consolidation,
merger, sale or conveyance.  The
foregoing provision shall similarly apply to successive transactions of a
similar nature by any such successor or purchaser.  Without limiting the generality of the
foregoing, the anti-dilution provisions of this Section shall apply to such
securities of such successor or purchaser after any such consolidation, merger,
sale or conveyance.

2.2.2                        Reclassification.  If
the Borrower at any time shall, by reclassification or otherwise, change the Common
Stock into the same or a different number of securities of any class or classes
that may be issued or outstanding, this Note, as to the unpaid principal
portion thereof and accrued interest thereon, shall thereafter be deemed to
evidence the right to purchase an adjusted number of such securities and kind
of securities as would have been issuable as the result of such change with
respect to the Common Stock immediately prior to such reclassification or other
change.

2.2.3                        Stock Splits, Combinations and Dividends.  If the shares of Common Stock are subdivided
or combined into a greater or smaller number of shares of Common Stock, or if a
dividend is paid on the Common Stock in shares of Common Stock, the Conversion
Price shall be proportionately reduced in case of subdivision of shares or
stock dividend or proportionately increased in the case of combination of
shares, in each such case by the ratio which the total number of shares of
Common Stock outstanding immediately after such event bears to the total number
of shares of Common Stock outstanding immediately prior to such event.

Whenever the Conversion Price
Per Share is adjusted pursuant to this Section 2.2, the Borrower shall promptly
mail to the Holder a notice setting forth the Conversion Price Per Share after
such adjustment and setting forth a brief statement of the facts requiring such
adjustment.

3.                                       Optional Prepayment.  This Note may be prepaid by Borrower in whole
or in part without the consent of the Lender and without prepayment penalty of
any kind.

4.                                       Default; Remedies.  For the purposes of this Agreement, an Event
of Default (herein so called) shall have occurred if (i) Borrower shall fail to
pay when due any principal of or interest on this Note, and such failure shall
continue for a period of ten (10) days after the due date, (ii) Borrower shall
have failed to perform any covenant or other obligation contained herein or in
the Registration Rights Agreement, and such failure shall continue for a period
of ten (10) business days after Lender shall have given Borrower written notice
of such failure, (iii) Borrower shall commence a voluntary case or other
proceeding seeking liquidation or reorganization with respect to itself or its
debts under any bankruptcy, insolvency or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator, custodian
or other similar official of it or any substantial part of its property, or
shall consent to any such relief or to the appointment of or taking possession
by any such official in an involuntary case or other proceeding commenced
against it, or shall make a general assignment for the benefit of creditors,
and such case or other proceeding shall remain undismissed and unstayed for a
period of 30 consecutive days; or (iv) an involuntary case or other proceeding
shall be commenced against Borrower seeking liquidation, reorganization or
other relief with respect to it or its debts under any bankruptcy, insolvency
or other similar now or hereafter in

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effect or seeking the appointment of a trustee,
liquidator, receiver, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of 60 consecutive days.

If
Borrower fails or refuses to pay any part of the principal of or interest upon
this Note as the same becomes due, or upon the occurrence of an Event of
Default hereunder, then in any such event the Holder hereof may, at its option
(i) declare the entire unpaid balance of principal and accrued interest on
this Note to be immediately due and payable without notice, (ii) reduce
any claim to judgment, and/or (iii) demand, pursue and enforce any of Lender’s
rights and remedies, pursuant to any applicable law or agreement.  Each right and remedy available to Lender
shall be cumulative of and in addition to each other such right and
remedy.  No delay on the part of Lender
in the exercise of any right or remedy available to Lender shall operate as a
waiver thereof, nor shall any single or partial exercise thereof preclude other
or further exercise thereof or exercise of any other such right or remedy.

5.                                       Representations, Warranties and
Covenants of Borrower.  Borrower represents and warrants that
Borrower has authority and has obtained all approvals and consents necessary to
enter into this Note and Borrower’s execution, delivery, and performance of
this Note will not violate or conflict with the terms of Borrower’s Certificate
of Incorporation.  Borrower will use of
the proceeds of this Note for development of Borrower’s biodiesel plant located
in Durant, Oklahoma, and for fees associated with this Note.  Subject
to the provisions of Regulation FD, upon request of Lender, Borrower shall
provide to Lender such information and materials as Lender may request,
including unaudited monthly and quarterly and audited yearly financial
statements, an annual budget, internal management documents, reports of
operations, reports of adverse developments, copies of any management letters,
communications with shareholders or directors, press releases and registration
statements, and access to all senior managers.

6.               Representations
and Warranties of Lender.

6.1  Suitability.  The Lender is an “accredited investor” as
such term is defined in Regulation D issued by the Securities and Exchange
Commission, and such Lender’s financial condition is such that it is able to
bear the economic risk of its investment in the Note. Lender has such knowledge
and experience in financial and business matters as is necessary to make an
investment in the Note.

6.2  Purchase for Own Account.  This Note is being acquired by Lender for
investment purposes only and not with a view to the distribution of all or any
part thereof.  Lender has no present intention
of selling, transferring, disposing or granting any participation in the Note
and is not a party to any contract, agreement or understanding that would
result in any such sale, transfer or disposition of all or any portion of this
Note.

7.                                       No Waiver; Cumulative Rights.  No delay on the part of the Holder of this
Note in the exercise of any power or right under this Note shall operate as a
waiver thereof, nor shall a single or partial exercise of any power or right
preclude other or further exercise thereof or the exercise of any other power
or right.

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8.                                       Waiver.  Borrower waives demand, presentment, protest,
notice of dishonor, notice of nonpayment, notice of intention to accelerate,
notice of acceleration, notice of protest and any and all lack of diligence or
delay in collection or the filing of suit hereon which may occur, and agrees to
all extensions and partial payments, before or after maturity, without
prejudice to the Holder hereof.

9.                                       Collection Costs.  In the event that, upon an Event of Default,
any amount under this Note is collected in whole or in part through suit,
arbitration or mediation, then and in any such case there shall be added to the
unpaid principal balance hereof all costs of collection, (including, but not
limited to, reasonable attorneys’ fees and expenses) whether or not suit is
filed.

10.                                 Governing Law.  This Note shall be
governed by and construed in accordance with the laws of the State of Texas.  In the event of a dispute involving this Note
or any other instruments executed in connection herewith, the parties
irrevocably agree that exclusive venue for such dispute shall lie in any court
of competent jurisdiction in Dallas County, Texas, and the parties waive any
claim that such forum is inappropriate or inconvenient.

11.                                 Headings.  The headings of the
sections of this Note are inserted for convenience of reference only and shall
not be deemed to constitute a part hereof.

12.                                 Usury.  All agreements
between Borrower and the Holder of this Note, whether now existing or hereafter
arising and whether written or oral, are expressly limited so that in no
contingency or event whatsoever, whether by acceleration of the maturity of
this Note or otherwise, shall the amount paid, or agreed to be paid, to the Holder
hereof for the use, forbearance or detention of the money to be loaned
hereunder or otherwise, exceed the maximum amount permissible under applicable
law.  If from any circumstances
whatsoever fulfillment of any provision of this Note, at the time performance
of such provision shall be due, shall involve transcending the limit of
validity prescribed by law, then ipso facto, the
obligation to be fulfilled shall be reduced to the limit of such validity, and
if from any such circumstances the Holder of this Note shall ever receive
anything of value as interest or deemed interest by applicable law under this
Note or otherwise in an amount that would exceed the highest lawful rate, such
amount that would be excessive interest shall be applied to the reduction of
the principal amount owing under this Note, and not to the payment of interest,
or if such excessive interest exceeds the unpaid balance of principal of this
Note, such excess shall be refunded to Borrower.  In determining whether or not the interest
paid or payable with respect to any indebtedness of Borrower to the Holder
hereof, under any specific contingency, exceeds the highest lawful rate,
Borrower and the Holder hereof shall, to the maximum extent permitted by
applicable law, (i) characterize any nonprincipal payment as an expense, fee or
premium rather than as interest, (ii) amortize, prorate, allocate and spread
the total amount of interest throughout the full term of such indebtedness so
that the actual rate of interest on account of such indebtedness is uniform throughout
the term thereof, and/or (iii) allocate interest between portions of such
indebtedness, to the end that no such portion shall bear interest at a rate
greater than that permitted by law.  The
terms and provisions of this paragraph shall control and supersede every other
conflicting provision of all agreements between Borrower and the Holder hereof.

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13.                                 Successors and Assigns.  All of the
stipulations, promises and agreements in this Note made by or on behalf of
Borrower shall bind the successors and assigns of Borrower, whether so
expressed or not, and inure to the benefit of the successors and assigns of
Borrower and Lender.  Any assignee of
Borrower or Lender shall agree in writing prior to the effectiveness of such
assignment to be bound by the provisions hereof.  The Lender from time to time also may sell to
one or more financial institutions, institutional investors or other persons a
participation interest in all or any undivided portion of the rights, powers,
privileges, remedies and interests of the Lender under this Note.

14.                                 Severability.  In the event any one
or more of the provisions contained in this Note 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 hereof, and
this Note shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.

15.                                 Notices.  All notices and
other communications hereunder shall be in writing or by telecopy, and shall be
deemed to have been duly made when delivered in person or sent by telecopy,
same day or overnight courier, or 72 hours after having been deposited in the
United States registered or certified mail return receipt requested, postage
prepaid, to a party at the address set forth below (which may be changed in
accordance with these notice procedures):

If to Lender:

Name:  Tom Groos

Address:
161 Ottawa St. NW, Suite 502

Grand
Rapids, Michigan 49503

Fax number: (616) 831-6454

If to Borrower:

Earth Biofuels, Inc.

3001 Knox Street, Suite 403

Dallas, TX  75205

Fax Number: (214) 389-9805

Attention:  Chief
Executive Officer

With a copy to:

Roger A. Crabb

Scheef & Stone, LLP

5956 Sherry Lane, Suite 1400

Dallas, TX 
75225

Fax
number:  (214) 706-4242

 7
 

 

THIS NOTE REPRESENTS THE FINAL AGREEMENT BETWEEN
BORROWER AND LENDER CONCERNING THE MATTERS HEREIN AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.

IN
WITNESS WHEREOF, the undersigned have executed this Convertible Promissory Note
on and as of the date first set forth above.

	
   

  	
  BORROWER:

  
	
   

  	
   

  
	
   

  	
  EARTH BIOFUELS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ DENNIS G. MCLAUGHLIN, III

  	
   

  
	
   

  	
  Name:

  	
  Dennis G. McLaughlin, III

  
	
   

  	
  Title:

  	
  Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  LENDER:

  
	
   

  	
   

  
	
   

  	
  Tom Groos

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ TOM GROOS

  	
   

  
	
   

  	
  Tom Groos, individually

  
					

 

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FORM OF

NOTICE OF
CONVERSION

(To be Executed by
the Registered Holder in order to Convert the Note)

The undersigned hereby
irrevocably elects to convert $450,000.00 of the principal amount of the above
Note into shares of Common Stock of Earth Biofuels, Inc. according to the
conditions of such Note, as of the date written below.

	
  Date of Conversion

  	
   

  	
   

  
	
   

  	
   

  
	
  Applicable Conversion Price:

  	
  $0.50

  
	
   

  	
   

  
	
   

  	
   

  
	
  Signature:

  	
   

  	
   

  
	
   

  	
   

  
	
  Printed Name:

  	
  Tom Groos

  
	
   

  	
   

  
	
  Address:

  	
  161 Ottawa St. NW, Suite 502

  
	
   

  	
  Grand Rapids, Michigan 49503

  
								

 

 9Exhibit 10.17

June 13, 2006

PERSONAL AND CONFIDENTIAL

HPS Development, L.L.C.

c/o LOBRANO & LOBRANO, L.L.C.

147 Keating Drive

Post Office Box 208

Belle Chasse, Louisiana 70037

Telephone: (504) 433-3100

Fax: (504) 433-3103

Gentlemen:

The purpose of this Letter
of Intent is to set forth our mutual understanding in connection with the
proposed acquisition, by Earth Biofuels, Inc. (the “Purchaser”), of 50% of the membership
interest (the “Membership Interest”)
in a newly-created limited liability company (“Newco”) that is currently 100% owned by HPS Development,
L.L.C. (“HPS”). upon the
terms and conditions set forth herein. This Letter of Intent shall replace in
its entirety, the letter of intent dated April 24, 2006.

1.         The Transaction. The following is a brief summary of
the proposed transaction (the “Transaction”):

HPS will contribute to Newco, HPS’ ownership of the
following: approximately 50 acres (more or less) of ground in or near to Myrtle
Grove, Plaquemines Parish, Louisiana, together with the improvements situated
thereon, included a closed fuel ethanol distillery built by SPECTRUM in 1988
(located adjacent to the Mississippi River near New Orleans, Louisiana) and the
equipment and other assets associated with such ethanol distillery
(collectively, the “Plant”) and (2) 10 acre tracts of land adjacent
to the plant for the construction and operation of a Bio-diesel plant or
additional storage space if such projects are undertaken by Newco.

The Purchaser will purchase the Membership Interest
from HPS for consideration consisting of a combination of cash and shares of
common stock of Purchaser, as set forth in more detail below.

 

 

2.         Consideration.
The consideration for Purchaser’s acquisition of the Membership Interest from
HPS will be comprised of cash aggregating $50 million, plus shares of common
stock of Purchaser, with such amounts payable as follows:

·                                          On
or about April 24, 2006, a deposit in the amount of $3 million.

·                                          On
or about June 6, 2006 (or upon execution of this Letter of Intent), a deposit
in the amount of $2 million.

·                                          In
the event that the Purchaser and HPS (a) agree on the general terms of the
Transaction as set forth in this Letter of Intent and  (b) HPS subsequently fails to close the Transaction
(other than by reason of a withdrawal of Purchaser from the Transaction), then
the Purchaser may recover from HPS the aggregate $5 million in deposits, as
well as Purchaser’s acquisition expenses.

·                                          On
or about June 19, 2006, the amount of $2 million.

·                                          On
or about July 1, 2006, the amount of $13 million.

·                                          Upon
closing of the Transaction (anticipated to occur by August 1, 2006), the amount
of $30 million (of which $15 million shall be deposited into a separate escrow
agreement for purposes of the cost and performance warranties of HPS, described
broadly below). Also upon closing of the Transaction, the $15 million held in
escrow pending closing of the Transaction is to be released to HPS.

·                                          Upon
closing of the Transaction, the Purchaser will issue to HPS 5,829,005
restricted shares of common stock of Purchaser, said obligation to accrue on
July 1, 2006.

3.         Conditions Precedent.

In addition to the other terms and conditions to be
set forth in the Definitive Agreements, the Closing of the Transaction shall be
conditioned upon:

·                                          Receipt
of reports from each of (a) Turner Construction or another fully-bonded
construction contractor acceptable to each of Purchaser and HPS, (b) Benchmark
Technology or another fully-bonded engineering firm acceptable to each of
Purchaser and HPS and (c) ENGlobal Engineering Inc. or another fully-bonded
engineering firm acceptable to each of Purchaser and HPS; and

·                                          Receipt
of preliminary reports from Luminate or another firm acceptable to Morgan
Keegan & Company, confirming the reports of Turner Construction, Benchmark
Technology and ENGlobal Engineering Inc. to be within the budgetary

 2
 

 

 

and timeline parameters (agreed upon by Purchaser and HPS) for retrofit
of the Plant. The parties recognize and acknowledge that the receipt of
favorable reports from Luminate is a pre-condition to Morgan Keegan &
Company’s ability to secure public financing for retrofit of the Plant and,
accordingly, success of the project contemplated by the Transaction.

·                                          Contemporaneously
with the closing of the Transaction, HPS shall have agreed to lend Newco funds
sufficient to commence the retrofit of the Plant, with the full and prompt
repayment thereof to originate from the public financing underwritten by Morgan
Keegan & Company, the proceeds of which are anticipated to be available
within two to three months of closing of the Transaction.

HPS covenants that it will engage Turner Construction, Benchmark
Technology and ENGlobal Engineering Inc. (or comparable caliber companies
acceptable to each of Purchaser and Morgan Keegan & Company, as contemplated in this Letter of Intent) for
and on behalf of Newco. The costs of such engagements are to be initially
underwritten by HPS, with the full and prompt repayment thereof to originate
from the public financing underwritten by Morgan Keegan & Company.

HPS further covenants that, in order to further the public financing
underwritten by Morgan Keegan & Company, it will give Purchaser and Morgan
Keegan & Company full access to the documentation, communications and other
reporting of Turner Construction, Benchmark Technology and ENGlobal Engineering
Inc. (or comparable caliber companies acceptable to each of Purchaser and
Morgan Keegan & Company).

4.         Definitive Purchase Agreement. The Purchaser and HPS
will negotiate in good faith to execute the Definitive Agreements, containing
customary terms and conditions which shall contain terms consistent with the
terms of this Letter of Intent as well as comprehensive representations and
warranties, covenants, conditions, provisions for indemnification and survival
and other customary terms. Purchaser’s counsel shall draft all Definitive
Agreements and all other agreements necessary to consummate the Transaction.
The Definitive Agreements and all other such agreements must be satisfactory to
the parties to such agreements.

5.         Access. HPS shall make available all information
(financial or otherwise) reasonably requested by or on behalf of the Purchaser,
its financing sources and their respective representatives in connection with
their due diligence review of HPS and the Plant, including at all reasonable
times and upon reasonable notice, access to HPS’ books, records, facilities,
properties, officers, and key employees.

 3
 

 

 

6.         Governance.

Newco’s Operating Agreement shall reflect the following ownership and
management structure:

A total of 1000 Units of Membership Interest, owned as follows:

	
  

  	
   

  	
  Class A

  Voting Units

  	
   

  	
  Class B

  Non-Voting Units

  	
   

  	
  Total Units of

  Membership Interest

  	
   

  
	
  Purchaser

  	
   

  	
  3

  	
   

  	
  497

  	
   

  	
  500

  	
   

  
	
  HPS

  	
   

  	
  3

  	
   

  	
  497

  	
   

  	
  500

  	
   

  
	
  TOTAL

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  1000

  	
   

  

Profits, losses, and distributions shall be allocated
pro-rata to the holders of respective Units of Membership Interest regardless
of class, and the separate classes of Units shall have only the following
differences:

·                                          Each
Class A Voting Unit shall be entitled to one vote, and shall further be
entitled to elect one manager (equivalent to a board of directors); thus, if
there are 6 outstanding Class A Voting Units, there shall be 6 managers.

·                                          The
Operating Agreement shall prohibit Newco from issuing any additional Units of Membership
Interest without the prior unanimous written consent of all of the Class A
Voting Units.

·                                          Management
decisions (including day-to-day operating decisions) shall be made by an
Operating Committee comprised of three managers (at least one of whom is a
manager elected by Purchaser), one to be appointed by HPS and one jointly
appointed with all of whose decisions shall be by consensus of all Operating
Committee members; provided, however, that “Major
Decisions” (as defined in Exhibit A) shall require unanimity
of all of the managers.

7.         HPS Warranties.

Cost Warranty: HPS shall
warrant that the Retrofit Expenses of the Plant will not exceed $40 million.
Retrofit Expenses shall mean those expenses necessary to cause the Plant to
produce a minimum of 60 million gallons (subject to agreed upon deviation) of
marketable ethanol per year, on an annualized basis. Accrual of the Retrofit
Expenses shall terminate upon completion of the Retrofit, per contract
provisions. Should the Retrofit Expenses be $40 million or less, Purchaser
shall immediately consent to a release to HPS of $7.5 million of the funds held
in the HPS Warranty Escrow (herein so called). In the event that the Retrofit
Expenses exceed $40 million, payments to HPS from the

 4
 

 

 

HPS Warranty Escrow shall
be reduced dollar for dollar by the excess Retrofit Expenses over $40 million,
such reduction not to exceed $7.5 million.

Performance Warranty: HPS warrants that the Plant
shall produce a minimum of 60 million gallons (subject to agreed upon
deviation) of marketable ethanol per year, on an annualized basis, with such
measurement to commence 90 days following the initial date of production.
Should such measure deviate from the stated production level, HPS will have
breached its warranty and Purchaser shall be entitled to a distribution from
the HPS Warranty Escrow based on a sliding scale related to the magnitude of
deviation. The parties intend that the structure of this HPS Performance
Warranty shall mirror the performance warranty required of the contractors
engaged to effect the Retrofit.

In the event HPS does not receive distribution of the
full $15 million residing in the HPS Warranty Escrow, HPS shall be entitled to
reimbursement from Newco to the extent Newco is successful in securing payment
from a contractor or pursuant to a performance bond supplied by a contractor.

8.         Confidentiality. The parties shall use best efforts
to maintain, and shall cause their employees and agents to use best efforts to
maintain, any confidential information received from the other party as
confidential.

We look forward to working further with you and moving
ahead with the Transaction.

	
  Very truly yours,

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  EARTH BIOFUELS, INC.,

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Dennis McLaughlin

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Dennis McLaughlin

  	
   

  	
   

  
	
   

  	
   

  	
  President & CEO

  	
   

  	
   

  
								

 

 5
 

 

 

Agreed to and Accepted

this 13 day of June, 2006:

 

 

	
  HPS DEVELOPMENT, LLC

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ John Paul

  	
   

  	
   

  
	
   

  	
   

  	
  John Paul, Manager

  	
   

  
	
   

  	
   

  	
   

  	
   

  
						

 

	
  By:

  	
  /s/ William A.
  Hurst

  	
   

  	
   

  
	
   

  	
   

  	
  William A. Hurst, Manager

  	
   

  
					

 

 

	
  By:

  	
  /s/ Kennett F. Stewart

  	
   

  	
   

  
	
   

  	
   

  	
  Kennett
  F. Stewart, Manager

  	
   

  
					

 

 6
 

 

 

Exhibit A

Major Decisions are the
following:

·                            The
dissolution and winding-up of Newco;

·                            The
sale, exchange, lease, mortgage, assignment, pledge or other transfer of, or
the granting of a security interest in, all
or substantially all of the assets of Newco;

·                            The
merger or consolidation of Newco;

·                            The
filing of a petition for relief under the Federal Bankruptcy Code or under any similar state or federal statutory scheme;

·                            A
material change in the nature of Newco’s business;

·                            The
issuance of an interest in Newco to any Person and the admission of any Person
as a Member, except as otherwise provided in the Operating Agreement; and

·                            Any
amendment of the Operating Agreement.

 

 7

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