Document:

CREDIT AGREEMENT

 

 

 

 

 

 

 

 

 

 

CREDIT AGREEMENT

 

BETWEEN

 

 

GATEWAY PIPELINE COMPANY AND

GATEWAY PROCESSING COMPANY,

as Borrowers,

 

 

GATEWAY ENERGY CORPORATION,

as Guarantor,

 

 

 

 

and

 

 

SOUTHWEST BANK OF TEXAS, N.A.,

as Lender

 

 

 

 

February 21, 2002

 

 

 

 

 

 

 

 

 

 

 

 

	

  TABLE OF CONTENTS

  
	

   

  	

   

  
	

   

  	

   

  
	

  SECTION 1 

  DEFINITIONS

  
	

   

  	

  1.1 Definitions

  
	

   

  	

  1.2 Other Definitional

  Provisions

  
	

   

  	

  1.3 Accounting

  Terms and Determinations

  
	

   

  	

   

  
	

  SECTION

  2  THE TERM

  
	

   

  	

  2.1 Advances

  
	

   

  	

  2.2 Payments

  
	

   

  	

  2.3 Interest Rate

  and Payments

  
	

   

  	

  2.4 Default Rate

  
	

   

  	

  2.5

  Interest Calculations

  
	

   

  	

  2.6

  Voluntary Prepayments

  
	

   

  	

  2.7

  Order of Application

  
	

   

  	

   

  
	

  SECTION

  3  SECURITY

  
	

   

  	

  3.1 Security

  
	

   

  	

  3.2

  Additional Security and Guaranties

  
	

   

  	

  3.3 Security

  Documents

  
	

   

  	

  3.4 Setoff

  
	

   

  	

   

  
	

  SECTION

  4  CONDITIONS PRECEDENT

  
	

   

  	

  4.1 Initial

  Advance

  
	

   

  	

  4.2 The Loan

  Advances

  
	

   

  	

  4.3

  Materiality of Conditions

  
	

   

  	

  4.4

  Waiver of Conditions

  
	

   

  	

   

  
	

  SECTION

  5  WARRANTIES AND REPRESENTATIONS

  
	

   

  	

  5.1

  Existence and Authority

  
	

   

  	

  5.2

  Binding Obligations

  
	

   

  	

  5.3

  Compliance with Laws and Documents

  
	

   

  	

  5.4 Litigation

  
	

   

  	

  5.5 No Consents

  
	

   

  	

  5.6 Location

  
	

   

  	

  5.7 Solvency

  
	

   

  	

  5.8 Debt

  
	

   

  	

  5.9 Fiscal Year

  
	

   

  	

  5.10

  Relationship with Lender

  
	

   

  	

  5.11

  Financial Statements

  
	

   

  	

  5.12 Taxes

  
	

   

  	

  5.13

  Government Regulation

  
	

   

  	

  5.14

  Employee Benefit Plans

  
	

   

  	

  5.15 Purpose of the

  Term Loan Advances

  
	

   

  	

  5.16 Properties; Liens

  
	

   

  	

  5.17

  Environmental Laws: Hazardous Materials

  
	

   

  	

  5.18 Insurance

  
	

   

  	

  5.19

  Operation of Business

  
	

   

  	

  5.20 Margin

  Securities

  
	

   

  	

  5.21 Disclosure

  
	

   

  	

  5.22 Agreements

  
	

   

  	

   

  
	

  SECTION

  6  COVENANTS

  
	

   

  	

  6.1 Use of

  Proceeds

  
	

   

  	

  6.2 Books and

  Records

  
	

   

  	

  6.3

  Items to be Furnished

  
	

   

  	

  6.4 Inspection

  
	

   

  	

  6.5 Taxes

  
	

   

  	

  6.6 Expenses

  

 

i

 

	

   

  	

  6.7

  Maintenance of Existence, Assets and Business

  
	

   

  	

  6.8

  Maintenance of Priority of Lender Liens

  
	

   

  	

  6.9

  Dispositions of Properties

  
	

   

  	

  6.10 Sales

  
	

   

  	

  6.11 Compliance with Laws

  and Documents

  
	

   

  	

  6.12 Fiscal Year and

  Accounting Methods

  
	

   

  	

  6.13 Insurance; Payment of

  Premiums

  
	

   

  	

  6.14

  Environmental Laws

  
	

   

  	

  6.15

  GENERAL INDEMNIFICATION

  
	

   

  	

  8.16 ENVIRONMENTAL

  INDEMNIFICATION

  
	

   

  	

  6.17

  Employee Benefit Plans

  
	

   

  	

  6.18 Notice

  of Litigation

  
	

   

  	

  6.19 Loans, Advances and Investments

  
	

   

  	

  6.20 Transactions with Affiliates

  
	

   

  	

  6.21

  Material Contracts

  
	

   

  	

  6.22 New Business

  
	

   

  	

  6.23 Addresses

  
	

   

  	

  6.24

  Restrictions on Debt

  
	

   

  	

  6.25

  Issuance of Capital Stock

  
	

   

  	

  6.26

  Mergers and Dissolutions

  
	

   

  	

  6.27 Default on

  Debt

  
	

   

  	

  6.28 Distributions

  
	

   

  	

  6.29 Current Ratio

  
	

   

  	

  6.30 Net

  Worth

  
	

   

  	

  6.31 Interest Coverage

  Ratio

  
	

   

  	

  6.32

  Limitation on Liens

  
	

   

  	

   

  
	

  SECTION

  7  DEFAULT

  
	

   

  	

  7.1

  Payment of Obligations

  
	

   

  	

  7.2 Certain

  Covenants

  
	

   

  	

  7.3 Other

  Covenants

  
	

   

  	

  7.4

  Voluntary Debtor Relief

  
	

   

  	

  7.5

  Involuntary Proceedings

  
	

   

  	

  7.6 Attachment

  
	

   

  	

  7.7

  Payment of Judgments

  
	

   

  	

  7.8

  Default Under Other Debt

  
	

   

  	

  7.9

  Divestment Proceedings

  
	

   

  	

  7.10 Concealment or

  Removal of Collateral

  
	

   

  	

  7.11

  Misrepresentation

  
	

   

  	

  7.12

  Validity and Enforceability of Loan Documents

  
	

   

  	

  7.13 ERISA

  
	

   

  	

  7.14 Change

  of Control

  
	

   

  	

  7.15

  Material Adverse Change

  
	

   

  	

   

  
	

  SECTION

  8  RIGHTS AND REMEDIES

  
	

   

  	

  8.1

  Remedies Upon Default

  
	

   

  	

  8.2 Waivers

  
	

   

  	

  8.3

  Performance by Lender

  
	

   

  	

  8.4 Delegation of

  Duties and Rights

  
	

   

  	

  8.5

  Lender Not in Control

  
	

   

  	

  8.6 Waivers

  by Lender

  
	

   

  	

  8.7

  Cumulative Rights

  
	

   

  	

  8.8

  Application of Proceeds

  
	

   

  	

  8.9 Diminution in

  Value of Collateral

  
	

   

  	

  8.10

  Certain Proceedings

  
	

   

  	

   

  
	

  SECTION

  9  MISCELLANEOUS

  
	

   

  	

  9.1 Changes in

  GAAP

  
	

   

  	

  9.2 Exhibits

  
	

   

  	

  9.3

  Communications

  
	

   

  	

  9.4 Form and Number of

  Documents

  

 

ii

 

	

   

  	

  9.5

  Exceptions to Covenants

  
	

   

  	

  9.6 Survival

  
	

   

  	

  9.7 GOVERNING LAW

  
	

   

  	

  9.8

  Maximum Interest Rate

  
	

   

  	

  9.9

  Invalid Provisions

  
	

   

  	

  9.10 Entirety

  
	

   

  	

  9.11 Amendments, Etc

  
	

   

  	

  9.12 Waivers

  
	

   

  	

  9.13

  Governmental Regulation

  
	

   

  	

  9.14

  Multiple Counterparts

  
	

   

  	

  9.15 Discharge Only Upon

  Payment In Full; Reinstatement In Certain Circumstances

  
	

   

  	

  9.16 Waiver by Borrower

  
	

   

  	

  9.17

  Successors and Assigns; Participations; Novation

  

 

 

	

   

  	

  SCHEDULES AND EXHIBITS

  	

   

  
	

   

  	

   

  	

   

  
	

  Schedules

  	

   

  	

   

  
	

   

  	

   

  	

   

  
	

  Schedule

  3.1

  	

   

  	

  Waxahachie

  Contracts and Madisonville Contracts

  
	

   

  	

   

  	

   

  
	

  Schedule

  6.24

  	

   

  	

  Existing

  Debt

  
	

   

  	

   

  	

   

  
	

  Exhibits

  	

   

  	

   

  
	

   

  	

   

  	

   

  
	

  Exhibit

  A

  	

   

  	

  Term

  Note

  
	

  Exhibit

  B

  	

   

  	

  Advance

  Request Notice

  
	

  Exhibit

  C

  	

   

  	

  Compliance

  Certificate

  
	

  Exhibit

  D

  	

   

  	

  Financial

  Report Certificate

  
					

 

 

iii

 

CREDIT AGREEMENT

 

 

THIS

CREDIT AGREEMENT is entered into as of February 21, 2002, between Gateway

Pipeline Company, a Texas corporation (“Pipeline”) and Gateway Processing

Company, a Texas corporation (“Processing”, Pipeline and Processing

collectively “Borrowers”), Gateway Energy Corporation, a Delaware corporation

(“Guarantor”), and Southwest Bank of Texas, N.A., a national banking

association (“Lender”).

 

WITNESSETH:

 

1.             Borrowers desire to establish a One

Million Five Hundred Thousand Dollars ($1,500,000.00) term credit facility with

Lender to finance the construction and mobilization of a pipeline gathering

system near Madisonville, Texas; and

 

2.             Borrowers have requested that

Lender establish, and Lender is willing to establish, this credit facility upon

and subject to the conditions and covenants stated herein.

 

For

a sufficient consideration including, without limitation, the mutual covenants

contained herein, Borrowers and Lender agree as follows:

 

SECTION 1.  DEFINITIONS.

 

1.1           Definitions. 

As used in this Agreement, the following terms have the following

meanings:

 

Affiliate of any Person

means any other Person who directly or indirectly controls, or is controlled

by, or is under common control with, such Person.  For purposes of this definition only, “control,” “controlled by,”

and “under common control with” mean possession, directly or indirectly, of

power to direct or cause the direction of management or policies (whether

through ownership of voting securities, by contract, or otherwise).  Any Person who beneficially owns, directly

or indirectly, 10% or more (in number of votes) of the securities having

ordinary voting power for the election of directors (or individuals performing

similar functions of a Person) and any Person who is an officer or director of

a Person shall be conclusively deemed to control such Person.

 

Agreement means this Credit

Agreement, including the Schedules and Exhibits hereto, as the same may be

amended or supplemented from time to time.

 

Borrowers mean Pipeline,

Processing and their permitted successors and assigns, respectively.

 

Business

Day means any day (other than Saturdays and Sundays) on which commercial

banks are not authorized or required to close in Houston, Texas.

 

Capital

Lease Obligations means, as to any Person, the obligations of such

Person to pay rent or other amounts under a lease of (or other agreement

conveying the right to use) real and/or personal Property, which obligations

are required to be classified and accounted for as a capital lease on a balance

sheet of such Person under GAAP.  For 

 

 

purposes

of this Agreement, the amount of Capital Lease Obligations shall be the

capitalized amount thereof, determined in accordance with GAAP.

 

Capital

Stock means any and all shares, interests, participations, rights or other

equivalents (however designated) of corporate stock.

 

Change

of Control means any of the following events:  (a) any “person” or “group” of persons who

are not currently stockholders or beneficial holders shall have acquired

“beneficial ownership” of more than 25% of the outstanding common stock of the

Borrowers  (within the meaning of

Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, and

the applicable rules and regulations thereunder), or (b) during any period of

12 consecutive months, commencing before or after the date of this Agreement,

Guarantor shall cease for any reason to own one hundred per cent (100%) of the

Capital Stock of each of Pipeline and Processing, subject to the Security

Documents delivered to the Lender contemporaneously herewith.

 

Closing

Date means the date on which all of the conditions precedent in Section 4

have been satisfied.

 

Code means the

Internal Revenue Code of 1986, as amended, and all regulations promulgated and

rulings issued thereunder.

 

Collateral is defined in Section

3.1.

 

Current

Assets means, at any particular time, all amounts which, in conformity with

GAAP, would be included as current assets on a consolidated balance sheet of

Borrowers and Guarantor.

 

Current

Liabilities means, at any particular time, all amounts which, in

conformity with GAAP, would be included as current liabilities on a

consolidated balance sheet of Borrowers and Guarantor.

 

Current

Financials means (a) the audited Financial Statements showing the

consolidated financial condition and results of operations of Borrowers and

Guarantors on a consolidating accounting basis for the year ended on

December 31, 2000, and (b) the unaudited interim Financial Statements

of Borrowers and Guarantor on a consolidating accounting basis dated as of

September 30, 2001.

 

Debt means as to any

Person at any time (without duplication): (a) all obligations of that Person

for borrowed money, (b) all obligations of that Person evidenced by bonds,

notes, debentures, or other similar instruments, (c) all obligations of that

Person to pay the deferred purchase price of Property or services, except trade

accounts payable of that Person arising in the ordinary course of business that

are not past due by more than ninety (90) days, (d) all Capital Lease

Obligations of that Person, (e) all Debt or other obligations of others

Guaranteed by that Person, (f) all obligations secured by a Lien existing on

Property owned by that Person, whether or not the obligations secured thereby

have been assumed by that Person or are non-recourse to the credit of that

Person, (g) all reimbursement obligations of that Person (whether contingent or

otherwise) in respect of letters of credit, bankers’ acceptances, surety or

other bonds and similar instruments, (h) all obligations of that Person to

redeem or retire shares of Capital Stock of that Person, (i) all obligations

and liabilities of that Person in connection with Financial Hedges and 

 

2

 

Hydrocarbon

Hedges, and (j) all liabilities of that Person in respect of unfunded vested

benefits under any Plan; provided, however, that the Debt of any

Person shall not include any liability that (i) was incurred by that Person on

ordinary (or better than ordinary) trade terms to vendors, suppliers, or other

Persons providing goods and services for use by that Person in the ordinary

course of its business or (ii) may be beyond the stated term if that Person

disputes the liability in good faith and maintains adequate reserves therefor

in accordance with GAAP.

 

Debtor

Relief Laws means the Bankruptcy Code of the United States of

America and all other applicable liquidation, conservatorship, bankruptcy,

moratorium, rearrangement, receivership, insolvency, reorganization, fraudulent

transfer or conveyance, suspension of payments or similar Laws from time to

time in effect affecting the Rights of creditors generally.

 

Deed

of Trust means deed of trust, mortgage, assignment, security

agreement and financing statement in form and substance acceptable to the

Lender, and any amendment, extension, modification, renewal or supplement

thereof, delivered or to be delivered by Pipeline hereunder covering the

Waxahachie Contracts and the Waxahachie Distribution System.

 

Default is defined in Section 7.

 

Default

Rate means a per annum rate of interest equal from day to day to the lesser

of (a) ten and one — quarter per cent 

(10.25%) or (b) the Highest Lawful Rate.

 

Environmental

Laws means any and all federal, state, and local laws, regulations, and

requirements regulating, pertaining to, or imposing liability or standards of

conduct concerning any Hazardous Substance or environmental protection,

including, without limitation, the Comprehensive Environmental Response,

Compensation and Liability Act of 1980, 42 U.S.C. § 9601 et seq., the

Resource Conservation and Recovery Act of 1976, 42 U.S.C. § 6901 et seq.,

the Superfund Amendment and Reauthorization Act of 1986, 42 U.S.C. §

11001-11050, the Clean Air Act, 42 U.S.C. 7401 et seq., the Clean Water

Act, 33 U.S.C. § 1251 et seq., and the Toxic Substances Control Act, 15

U.S.C. § 2601 et seq., as such laws, regulations, and requirements may

be amended or supplemented from time to time.

 

Environmental

Liabilities means, as to any Person, all liabilities, obligations,

responsibilities, Remedial Actions, losses, damages, punitive damages,

consequential damages, treble damages, costs, and expenses, (including, without

limitation, all reasonable fees, disbursements and expenses of counsel, expert

and consulting fees and costs of investigation and feasibility studies), fines,

penalties, sanctions, and interest incurred as a result of any claim or demand,

by any Person, whether based in contract, tort, express or implied warranty,

strict liability, criminal or civil statute, including any Environmental Law,

permit, order or agreement with any Governmental Authority or other Person,

arising from environmental, health or safety conditions or the Release or

threatened Release of a Hazardous Substance into the environment.

 

ERISA means the

Employee Retirement Income Security Act of 1974, as amended, and the

regulations promulgated and rulings issued thereunder.

 

3

 

ERISA

Affiliate means any company or trade or business (whether or not

incorporated) which is a member of a group of which the Borrowers and Guarantor

are a member and which is under common control with the Borrowers and Guarantor

within the meaning of Section 414(b) or (c) of the Code.

 

Exhibit means an exhibit

attached hereto unless otherwise specified.

 

Financial

Report Certificate means a certificate substantially in the form of Exhibit

D and containing such other certifications and information as Lender may

reasonably request concerning compliance with the Loan Documents.

 

Financial

Statements means balance sheets, profit and loss statements,

statement of retained earnings and statements of cash flow prepared in

comparative form to the corresponding period of the preceding reporting period.

 

GAAP means generally

accepted accounting principles of the Securities and Exchange Commission, and

to the extent not inconsistent therewith the Accounting Principles Board of the

American Institute of Certified Public Accountants and the Financial Accounting

Standards Board, which are applicable as of the date of the Current Financials.

 

Governmental

Authority means any nation or government, any state or political

subdivision thereof and any entity exercising executive, legislative, judicial,

regulatory, or administrative functions of or pertaining to government.

 

Guarantee by any Person

means any obligation, contingent or otherwise, of such Person directly or

indirectly guaranteeing any Debt or other obligation of any other Person and,

without limiting the generality of the foregoing, any obligation, direct or

indirect, contingent or otherwise, of such Person (a) to purchase or pay (or

advance or supply funds for the purchase or payment of) such Debt or other

obligation (whether arising by virtue of partnership arrangements, by agreement

to keep-well, to purchase assets, goods, securities or services, to

take-or-pay, or to maintain financial statement conditions or otherwise) or (b)

entered into for the purpose of assuring in any other manner the obligee of

such Debt or other obligation of the payment thereof or to protect the obligee

against loss in respect thereof (in whole or in part), provided that the

term Guarantee shall not include obligations under endorsements for collection

or deposit in the ordinary course of business. 

The term “Guarantee” used as a verb has a corresponding meaning.

 

                Guarantor means Gateway

Energy Corporation, and its permitted successors and assigns.

 

                Guaranty means the

continuing guaranty agreement in favor of the Lender in form and substance

acceptable to the Lender, and any amendment, extension, modification, renewal

or supplement thereof, delivered or to be delivered by the Guarantor hereunder.

 

Hazardous

Substance means any hazardous or toxic waste (or any substance

which is listed as such under any Environmental Law).

 

Highest

Lawful Rate means the maximum rate or amount of interest which

Lender is allowed by Law to contract for, charge, take, reserve or receive.

 

4

 

Indemnified

Liabilities is defined in Section 6.15.

 

Indemnified

Parties is defined in Section 6.15.

 

Laws mean all

applicable statutes, laws, ordinances, rules, regulations, orders, writs,

injunctions, or decrees of any Tribunal, and any judicial interpretation

thereof.

 

Lender

Liens means Liens in favor of Lender securing all or any of the Obligations,

including but not limited to Rights in any Collateral created in favor of

Lender.

 

Lender means Southwest

Bank of Texas, N.A. and its successors and assigns.

 

Lien means any lien,

mortgage, security interest, pledge, charge, title retention agreement or

encumbrance of any kind, and any other Right of or arrangement with any

creditor to have his claim satisfied out of any property or assets, or the

proceeds therefrom, prior to the general creditors of the owner thereof.

 

Litigation means any claim,

demand or action conducted or expressly threatened in writing by or before any

Tribunal including, but not limited to, claims or demands by any Person for

actual or claimed breaches of any express or implied conditions or covenants contained

or referred to in any agreement, contract or lease included in the Collateral.

 

Loan means the amount

loaned by Lender to Borrowers under the Loan Documents.

 

Loan

Documents means (a) this Agreement and any certificates

delivered pursuant hereto, (b) any and all notes (including, without

limitation, the Note), the Security Documents and other agreements in favor of

Lender now or hereafter delivered pursuant to this Agreement, and (c) all

future renewals, extensions or restatements of, or amendments or supplements

to, any of the foregoing.

 

Madisonville

Contracts means the gas purchase, treatment and transportation

contracts related to the Madisonville gathering system more particularly

described on Schedule 3.1, for (i) Processing to purchase sour gas at

the wellhead from Redwood Energy Production L.P.’s Ruby Magness Well No. 1 in

the Madisonville Rodessa Field, (ii) Processing to deliver that gas to the

separator installed by Hanover Compression Limited Partnership (“Hanover”) for

the Ruby Magness Well No. 1 for removal of CO2 and H2S at a treatment plant to

be fabricated, installed, operated and owned at a location in the Madisonville

Rodessa field by Hanover, (iii) Pipeline to accept the processed gas at the

tailgate of Hanover’s treatment plant and (iv) Pipeline to transport the

processed gas approximately seven miles on a pipeline to be constructed by

Pipeline for Processing’s account to a delivery point on TXU Lone Star’s

transmission line for marketing.

 

Material

Adverse Effect means any set of circumstances or events which would

reasonably be expected to (a) have any adverse effect upon the validity or

enforceability of any Loan Document, (b) be material and adverse to the

Collateral as a whole, or the financial condition of Borrowers or Guarantor as

represented in the Current Financials, or (c) cause a Default.

 

Maturity

Date is January 31, 2005.

 

5

 

Minimum

Net Operating Margin means the remainder of (a) the gross proceeds received

by each Borrower from the sale of petroleum, natural gas and all other

hydrocarbons produced therefrom or in association therewith (including, without

limitation, all commodities, products, by-products and residual products of

commercial value derived, manufactured or produced from the foregoing) pursuant

to the Waxahachie Contracts and the Madisonville Contracts, minus (b) the sum

of (i) the purchase price paid by each Borrower for the petroleum and natural

gas sold pursuant to the Waxahachie Contracts and the Madisonville Contracts

and (ii) the reasonable and necessary expenses incurred in maintaining and

operating (aa) the Waxahachie Distribution System by Pipeline in connection

with sale of petroleum and natural gas pursuant to the Waxahachie Contracts and

(bb) the Madisonville gathering system in connection with the processing and

sale of petroleum and natural gas pursuant to the Madisonville Contracts. Each

Borrower shall exclude general and administrative expenses from the calculation

of Minimum Net Operating Margin.

 

Multiemployer

Plan means a multiemployer plan as defined in Sections 3(37) or 4001(a)(3)

of ERISA or Section 414(f) of the Code to which the Borrowers, Guarantor

or any ERISA Affiliate is making, or has made, or is accruing, or has accrued,

an obligation to make contributions within the past three (3) calendar years.

 

Multiple

Employer Plan means any employee benefit plan within the meaning of

Section 3(3) of ERISA, other than a Multiemployer Plan, which is subject

to Title IV of ERISA and to which the Borrowers, Guarantor or any ERISA

Affiliate and an employer other than an the Borrower, Guarantor or any ERISA

Affiliate contribute or have an obligation to contribute.

 

Note is defined in Section

2.1.

 

Obligations means all present

and future obligations, indebtedness, and liabilities of Borrowers and

Guarantor to Lender arising pursuant to any of the Loan Documents, whether

direct, indirect, related, unrelated, fixed, contingent, liquidated, or

unliquidated, including, without limitation, the obligation of Borrowers and

the Guarantor to repay the Loan, interest on the Loan, and all fees,

indemnities, costs, and expenses (including attorneys’ fees) provided for in

the Loan Documents which are attributable to the Loan.

 

Payment

Date means the last day of each calendar month during the term hereof, the

first of which shall be February 28, 2002 and continuing on the last day of

each consecutive calendar month thereafter until the Maturity Date.

 

PBGC means the Pension

Benefit Guaranty Corporation or any successor thereof, established pursuant to

ERISA.

 

PBGC

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

 

Pension

Plan means an employee pension benefit plan as defined in Section 3(2)

of ERISA which Borrowers, Guarantor or any ERISA Affiliate sponsors or

maintains, or to which s, Guarantors or any ERISA Affiliate makes, is making or

is obligated to make contributions, excluding any Multiemployer Plan.

   

Permitted

Liens means (a) the Lender Liens, (b)  Liens listed on Schedule      hereto, which Borrowers have disclosed

to Lender, (c) Liens for Taxes, Liens of mechanics and 

 

6

 

materialmen,

and other liens incurred in the ordinary course of business of the Pipeline

Systems that do not exceed  $100,000.00

in the aggregate, (d) Liens securing the payment and performance of leases for

equipment used by Borrowers in the ordinary course of business of the Pipeline

Systems that do not cover or encumber any of Borrowers’ respective Property

except the equipment leased thereunder, (e) 

pledges or deposits made to secure payment of worker’s compensation, or

to participate in any fund in connection with worker’s compensation,

unemployment insurance, pensions or other social security programs, (f)

good-faith pledges or deposits made by (i) Processing to secure performance of

bids or contracts, not in excess of 10% of the aggregate amount due thereunder,

to construct the Madisonville pipeline system in connection with the Gas

Transportation Agreements, or (ii) the Borrowers to obtain certificates of

responsibility or statutory bonds, in the ordinary course of business of the

Pipeline Systems, (g) encumbrances consisting of zoning restrictions, easements

or other restrictions on the use of Property, none of which materially impair

the use of such Property by Borrowers, in the operation of their respective

businesses, and none of which is violated by existing or proposed structures or

land use, and (h) claims and Liens for Taxes due and payable, claims and Liens

upon, and defects of title to, real or personal property, including any

attachment of personal or real property or other legal process prior to

adjudication of a dispute on the merits, claims and Liens of carriers,

landlords, mechanics, materialmen, warehousemen or other like Liens, and

adverse judgments on appeal, so long as the validity or amount thereof is being

contested in good faith and by appropriate and lawful proceedings diligently

conducted, reserves or other appropriate provision (if any) required by GAAP have

been made, levy and execution thereon have been (and continue to be) stayed

(provided that any of the foregoing which burden any Collateral must be

subordinate to all Lender Liens), and they do not materially detract from the

value of the Property of the Person in question, or materially impair the use

thereof in the operation of its business, individually or in the aggregate.

 

Person means any

individual, sole proprietorship, unincorporated organization, corporation,

association, partnership, joint venture, trust, institution, Tribunal or other

entity.

 

Pipeline

Systems mean (i) the pipeline gathering system to be constructed and mobilized

by Processing near Madisonville, Texas in connection with the Gas

Transportation Agreements and (ii) the Waxahachie Distribution System.

 

Plan means any

employee benefit plan as defined in Section 3(3) of ERISA established or

maintained by the Borrowers, Guarantor or any ERISA Affiliate and which is

covered by Title IV of ERISA.

 

Potential

Default means the occurrence of any event which, with notice or lapse of time

or both, would become a Default.

 

 

Prohibited

Transaction is as defined in Section 406 of ERISA or Section 4975

of the Code.

 

Property means property of

all kinds, real, personal or mixed, tangible or intangible (including, without

limitation, all rights relating thereto), whether owned or acquired on or after

the date of this Agreement.

 

7

 

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, with respect to Lender, any change after the date of this

Agreement in United States federal, state, or foreign laws or regulations

(including Regulation D) or the adoption or making after such date of any

interpretations, directives, or requests applying to a class of banks including

Lender of or under any United States federal or state, or any foreign, laws or

regulations (whether or not having the force of law) by any court or

governmental or monetary authority charged with the interpretation or

administration thereof.

 

Release is as defined in

42 U.S.C. § 9601(22).

 

Remedial

Action means all actions required to (a) cleanup, remove, treat, or otherwise address

Hazardous Substances in the environment, (b) prevent the Release or threat of

Release or minimize the further Release of Hazardous Substances so that they do

not migrate or endanger or threaten to endanger public health or welfare or the

environment, or (c) perform pre-remedial studies and investigations and

post-remedial monitoring and care for incidents involving actual or threatened

Releases of Hazardous Substances or actual or potential violations of

Environmental Laws.

 

Reportable

Event is as defined in Section 4043 of ERISA.

 

Rights means rights,

remedies, powers, privileges and benefits.

 

Schedule means a schedule

attached hereto unless specified otherwise.

 

Section means a section

or subsection of this Agreement unless specified otherwise.

 

Security

Agreements means (i) the security agreement in form and substance

acceptable to the Lender, and any amendment, extension, modification, renewal

or supplement thereof, delivered or to be delivered by Guarantor hereunder

covering all of the fully paid and non-assessable Capital Stock of each of the

Borrowers that has been issued and is outstanding, and (ii) the security

agreement in form and substance acceptable to the Lender, and any amendment,

extension, modification, renewal or supplement thereof, delivered or to be

delivered by Borrowers hereunder covering all of the Madisonville Contracts.

 

Security

Documents means, collectively, the Deed of Trust, the Guaranty,

each of the Security Agreements, and all related financing statements and any

other agreement, in form and substance satisfactory to Lender, executed and

delivered by any Person in connection with or pursuant to this Agreement for

the purpose of creating a first priority Lien on any of its Property.

 

Subsidiary with respect to

any Person means (a) a corporation a majority of whose voting stock is at any

time, directly or indirectly, owned by that Person, by one or more Subsidiaries

of that Person, or by that Person and one or more Subsidiaries of that Person,

or (b) any other Person (other than a corporation) in which that Person, a

Subsidiary of that Person, or that Person and one or more Subsidiaries of that

Person, directly or indirectly, at the date of determination thereof, has (i)

at least a majority ownership 

 

8

 

interest

or (ii) the power to elect or direct the election of the majority of the

directors or other governing body of that Person.

 

Tangible

Net Worth means, at any particular time, all amounts which, in

conformity with GAAP, would be included as stockholders’ equity on a balance

sheet of Borrowers or Guarantor, provided, however, there shall

be (i) added thereto the Debt of that Person, calculated in accordance with

GAAP consistently applied, heretofore (or hereafter) incurred, that by the

express terms of the instrument creating or evidencing that Debt (or a

subordination agreement in form and substance acceptable to the Lender) is

validly and effectively made subordinate and subject in the right of payment

and performance to the prior payment of the Obligations to the Lender and (ii)

excluded therefrom (a) any amount at which shares of Capital Stock of either

Borrower appears as an asset on Borrowers’ or Guarantor’s balance sheet, (b)

goodwill, including any amounts, however designated, that represent the excess

of the purchase price paid for assets or stock over the value assigned thereto,

(c) patents, trademarks, trade names, and copyrights, and (d) all other assets

which are properly classified as intangible assets under GAAP.

 

Taxes means all taxes,

assessments, fees, levies, imposts, duties, deductions, withholdings or other

charges of any nature whatsoever from time to time or at any time imposed by

any Law or Tribunal.

 

Tribunal means any (a)

local, state or federal judicial, executive or legislative instrumentality, and

(b) private arbitration board or panel.

 

UCC means the Uniform

Commercial Code as in effect in the applicable jurisdiction.

 

Waxahachie

Contracts means the gas purchase, sale, transportation and other

contracts more particularly described on Schedule 3.1, and any and all

additions, amendments, extension, modification, renewal or supplement thereof,

pursuant to which Pipeline buys, sells and transports natural gas with respect

to the Waxahachie Distribution System on the terms and conditions specified in

each contract.

 

Waxahachie

Distribution System means the contracts, easements, equipment, facilities,

fixtures, real property and any and all other Property of any nature whatsoever

more particularly described in the Deed of Trust, whether (i) now owned or

hereafter acquired by Pipeline, (ii) real, personal or mixed or (iii) situated

on the easements or real property described in the Deed of Trust, or used by

Pipeline in connection with the Waxahachie Contracts.

 

Welfare

Plan means an employee welfare benefit plan as defined in Section 3(l) of

ERISA which Borrowers, Guarantor or any ERISA Affiliate sponsors or maintains,

excluding any Multiemployer Plan.

 

1.2           Other Definitional Provisions.  All definitions contained in this Agreement

are equally applicable to the singular and plural forms of the terms defined.

Each gender shall be deemed to include the other genders, and the singular

shall be deemed to include the plural (and vice versa), as the context requires.

Each representation, warranty and covenant herein shall have independent

significance; and if two representations, warranties or covenants in the Loan

Documents relate to the same subject matter (regardless of the relative levels

of specificity), the maintenance of one representation, 

 

9

 

warranty

or covenant shall not cure, diminish or mitigate the breach of another

representation, warranty or covenant. The words “hereof,” “herein,” and

“hereunder” and words of similar import referring to this Agreement refer to

this Agreement as a whole and not to any particular provision of this

Agreement. The word “include” and its variants mean “include, but not limited

to” and illustrative examples shall not be construed to limit (expressly or by

implication) the matters they illustrate. The captions of articles, sections

and clauses are provided for convenience only, and not as an aid to the

construction of any of the Loan Documents. 

Unless otherwise specified, all Article and Section references pertain

to this Agreement.  Terms used herein

that are defined in the UCC, unless otherwise defined herein, shall have the

meanings specified in the UCC. The Borrowers, Guarantor and the Bank have

participated jointly in the drafting of the Loan Documents. If an ambiguity,

question of intent or question of interpretation arises, the Loan Documents

shall be construed as if drafted jointly by the parties, and no presumption or

burden of proof shall arise favoring or disfavoring any Party by virtue of the

authorship of all or any part of the Loan Documents.

 

1.3           Accounting Terms and Determinations.  Except as otherwise expressly provided

herein, all accounting terms used herein shall be interpreted, and all

financial statements and certificates and reports as to financial matters

required to be delivered to Lender hereunder after the Closing Date shall be

prepared, in accordance with GAAP, on a basis consistent with those used in the

preparation of the financial statements referred to in Section 5.11

hereof.  All calculations made for the

purposes of determining compliance with the provisions of this Agreement shall

be made by application of GAAP, on a basis consistent with those used in the

preparation of the financial statements referred to in Section 5.11

hereof.

 

SECTION 2.  THE TERM

LOAN.

 

2.1           Advances. 

Subject to and in reliance upon the terms, conditions, representations

and warranties in the Loan Documents, Lender hereby agrees to make to

Borrowers, prior to August 31, 2002, in one or more advances, a Loan up to the

aggregate principal amount of One Million Five Hundred Thousand Dollars

($1,500,000.00).  The Loan shall be

evidenced by a promissory note executed by the Borrowers and payable to the

order of Lender substantially in the form of Exhibit A, dated the

Closing Date and maturing on the Maturity Date (the “Note”).

 

(a)

Each advance shall be made following Lender’s receipt of Borrowers’ advance

request notice, substantially in the form attached as Exhibit B hereto,

and all materials specified therein, which shall (i) be irrevocable and binding

on Borrowers, (ii) designate whether the Borrowers will use the advance (aa) to

pay current construction and mobilization costs attributable to the

Madisonville gathering system represented by invoices attached to the notice of

advance or (bb) for working capital purposes that directly or indirectly

benefit the maintenance, mobilization or operation of the Collateral as

described in authorities for expenditure, business plans and other materials

attached to the notice of advance, and (iii) state the amount of each requested

advance, and the date the Lender is requested to make each advance.

 

(b)

The Lender must receive Borrowers’ notices of advance no later than 2:00 p.m.

(Houston, Texas time) (i) one (1) Business Day preceding the Business Day the

Borrowers wish to receive an advance for Madisonville gathering system

construction and mobilization costs and (ii) five (5) Business Days preceding

the Business Day the 

 

10

 

Borrowers

wish to receive an advance for working capital purposes. Each advance shall be

subject to the satisfaction of the applicable conditions precedent in Section

4. Additionally, all working capital advances shall be subject to the

Lender’s prior approval, which shall not be unreasonably withheld.

 

 Lender shall (unless to its actual knowledge

any of the conditions precedent therefor have not been satisfied by Borrowers

or waived by Lender) make each requested advance, as applicable, available to

Borrowers by wire transfer or deposit as directed by Borrowers in the notice of

advance. Each advance shall be reflected by a notation made by Lender in its

business records. The aggregate amount of the advances reflected by the

notations made in Lender’s business records shall be conclusive evidence of the

principal amount owed by Borrowers under the Note, which the Borrowers shall

repay pursuant to Section 2.2.

 

2.2           Payments. 

The Borrowers shall repay the principal and accrued but unpaid interest

of the Loan advanced hereunder in thirty (30) monthly installments of Fifty

Four Thousand Eight Hundred Eighteen and 54/100ths Dollars ($54,818.54),

beginning on August 31, 2002 and continuing on each Payment Date thereafter

until the Maturity Date, with all remaining principal, and accrued but unpaid

interest, being due and payable in full on the Maturity Date; provided that the

Lender and the Borrowers shall adjust the amount of each installment of

principal and interest to provide for level amortization over a thirty month

period if the Lender advances less than the full principal amount of the Loan

on or before August 31, 2002. Each payment on the Obligations must be paid at

Lender’s office, 5 Post Oak Park Place Office Building, 4400 Post Oak Parkway,

Houston, Texas 77027, in funds which are or will be available for immediate use

by Lender by 2:00 p.m. (Houston time) on the day due.  If any action is required or any payment is to be made on a day

which is not a Business Day, then that action or payment may be delayed until

the next succeeding Business Day.  Any

extension of time shall be included in the computation of payments of interest

and fees.  All payments by the Borrowers

of principal of and interest on the Loan, and of all fees and other amounts

payable under any Loan Document, shall be payable without deduction for or on

account of any present or future Taxes or other charges (excluding any

franchise taxes or income taxes imposed on or measured by the overall net

income, assets, net worth or shareholders’ capital of Lender) levied or imposed

by the United States of America (or by any political subdivision or taxing

authority thereof or therein) through withholding or deduction with respect to

any such payments.  If any Taxes or

other charges are so levied or imposed, the Borrowers will make additional

payments in such amounts so that every net payment of principal of and interest

on the Obligations, and of all other amounts payable by it under any Loan

Document, after withholding or deduction for or on account of any such present

or future Taxes or other charges, will not be less than the amount provided for

herein or therein.

 

2.3           Interest Rate and Payments.  The principal of the Loan advanced hereunder

shall bear interest prior to the earlier of the Maturity Date, or Default, at a

fixed rate of seven and one-quarter per cent (7.25%) per annum. The Borrowers

shall pay accrued but unpaid interest on the principal advanced hereunder

beginning on February 28, 2002 and continuing on each Payment Date thereafter

until the Maturity Date.

 

2.4           Default Rate. 

At the option of Lender and to the extent permitted by Law, all past-due

(a) principal of the Loan and accrued interest thereon and (b) any other

amount payable by Borrowers under any of the Loan Documents shall bear interest

from 

 

11

 

the

date due (stated or by acceleration) at the Default Rate until paid, regardless

of whether such payment is made before or after entry of a judgment.

 

2.5           Interest Calculations.  All payments of interest shall be calculated

on the basis of actual number of days (including the first day but excluding

the last day) elapsed but computed as if each calendar year consisted of 365 or

366 days, as the case may be.

 

2.6           Voluntary Prepayments.  Borrowers may, upon one Business Day’s

notice, prepay the outstanding principal of the Loan beginning on July 31,

2002, and from time to time and at any time thereafter prior to the Maturity

Date, in whole or in part; provided, however if the entire

principal balance of the Loan is repaid on or before (a) December 31, 2002, the

Borrowers shall pay a prepayment fee equal to the lesser of (i) one and

one-half per cent (1.5%) of the aggregate principal of the Loan advanced hereunder

through July 31, 2002 or (ii) Twenty Two Thousand Five Hundred  Dollars ($22,500.00) or (b)  December 31, 2003, the Borrowers shall pay a

prepayment fee equal to the lesser of (i) one per cent (1%) of the

aggregate  principal of the Loan

advanced hereunder  through July

31,2002, or (ii) Fifteen Thousand Dollars ($15,000.00). Borrowers shall pay the

fee within ten (10) Business Days following the date that a prepayment fee

becomes due. The Borrowers and Guarantor stipulate that any prepayment fee which

may accrue pursuant to Clause 2.6 (a) is compensation to Lender for

services performed separate and apart from the lending of money or the

provision of credit pursuant to the Loan Documents. The Lender will waive any

prepayment fee that may otherwise become due under this Agreement if the Loan

is repaid pursuant to a new credit facility hereafter established by Lender for

the benefit of the Borrowers; provided that nothing contained in any of the

Loan Documents is intended or shall be construed as a commitment or obligation

for Lender to establish a new credit facility for the Borrowers.   A notice of prepayment shall constitute a

binding obligation of Borrowers to make a prepayment on the date stated

therein.  Prepayments of principal of

the Loan shall be applied to principal installments in inverse order of

maturity, and may not be re-borrowed.

 

2.7           Order of Application.

 

                (a)           So long as no Default has occurred

and is continuing, payments of the Obligations shall be applied in full until

exhausted first to accrued interest, and second to principal of

the Obligations as directed by Borrowers.

 

                (b)           At any time during which a Default

has occurred and is continuing, any payment or prepayment (including proceeds

from the exercise of any Rights under the Loan Documents) shall be applied in

the following order: (i) to expenses for which Lender is entitled to

reimbursement in accordance with Section 6.6 but for which Lender has

not then been reimbursed, (ii) to accrued interest on the Obligations, (iii) to

the principal of the Loan, or (iv) any combination of the foregoing in each

case in the manner Lender deems appropriate.

 

SECTION 3.  SECURITY.

 

3.1           Security.  The

full and complete payment and performance of the Obligations shall be secured

by first priority, perfected Lender Liens in, and assignment of, all of the

issued and outstanding Capital Stock of each of the Borrowers, the Waxahachie

Contracts, the Madisonville Contracts, the Waxahachie Distribution System and

all Property appurtenant thereto as described in the Security Documents

(collectively, 

 

12

 

and together with proceeds and products thereof, the “Collateral”),

each such Lender Lien and assignment to be evidenced by a Security Document.

 

3.2           Additional Security and Guaranties.  Lender may, without notice or demand and

without affecting Borrowers’ obligations under the Loan Documents, from time to

time (a) take from any Person and hold collateral (other than the Collateral)

for the payment and performance of all or any part of the Obligations and

exchange, enforce or release such collateral or any part thereof, and (b)

accept and hold any endorsement or guaranty of payment of all or any part of

the Obligations and release any endorser or guarantor, or any Person who has

given any other security for the payment of all or any part of the Obligations,

or any other Person in any way obligated to pay all or any part of the

Obligations.

 

3.3           Security Documents.  Borrowers and Guarantor shall promptly

execute and cause to be executed such further documents, schedules and

instruments, including without limitation, security agreements, UCC financing

statements, as Lender, in its sole discretion, reasonably deems necessary or

proper to create, evidence, maintain, continue and perfect its Liens on the

Collateral.

 

3.4           Setoff.  If a

Default shall have occurred and be continuing, Lender is hereby authorized at

any time and from time to time, without notice to Borrowers or Guarantor (any

such notice being hereby expressly waived by Borrowers and Guarantor), to set

off and apply any and all deposits (general or special, time or demand,

provisional or final) at any time held and other indebtedness at any time owing

by Lender to or for the credit or the account of Borrowers or Guarantor against

any and all of the obligations of Borrowers or Guarantor now or hereafter

existing under this Agreement or any other Loan Document, irrespective of

whether or not Lender shall have made any demand under this Agreement or such

other Loan Document and although such obligations may be unmatured.  Lender agrees promptly to notify Borrowers

and Guarantor after any such setoff and application, provided that the failure

to give such notice shall not affect the validity of such setoff and application.  The Rights of Lender hereunder are in

addition to other Rights (including, without limitation, other rights of

setoff) which Lender may have.

 

3.5           Notwithstanding that, by the terms of

the various Security Documents, Borrowers are and will be assigning to Lender

all of the “Proceeds” (as defined therein) accruing to the Collateral covered

thereby, so long as no Default has occurred, Borrowers may continue to receive

all of the Proceeds, subject, however, to the Liens created under the Security

Documents, which Liens are hereby affirmed and ratified.  Upon the occurrence of a Default, Lender may

exercise all rights and remedies granted under the Security Documents,

including the right to obtain possession of all of the Proceeds then held by

Borrowers or to receive all other Proceeds directly from the Persons making

payment thereof.  In no case shall

Lender’s failure to collect any of the Proceeds constitute an estoppel, waiver,

remission or release of any of its Rights under the Security Documents, nor

shall any release of any Proceeds by Lender to Borrowers constitute an

estoppel, waiver, remission, or release of any other Proceeds or of any Rights

of Lender to collect other Proceeds thereafter.

 

SECTION 4.  CONDITIONS

PRECEDENT.

 

4.1           Initial Advance.  The obligation of Lender to make the initial advance under this

Agreement is subject to the condition precedent that Lender shall have received

and 

 

13

 

approved

on or before the date of the Advance all of the following, each dated (unless

otherwise indicated) the date hereof, in form and substance satisfactory to

Lender:

 

                (a)           Resolutions.  Resolutions of the Board of Directors of

each of the Borrowers and the Guarantor (certified by their respective Secretary

or Assistant Secretary) which respectively authorize the execution, delivery

and performance by the Borrowers and the Guarantor of the Loan Documents to

which each is a party;

 

                (b)           Incumbency Certificates.  Certificates of incumbency of each of the

Borrowers and the Guarantor (certified by their respective Secretary or

Assistant Secretary) certifying (i) the name of each officer of the Borrowers

or the Guarantor that is authorized to sign this Agreement and each of the

other Loan Documents to which each is a party (including the certificates

contemplated herein) together with specimen signatures of each such officer and

(ii) who will, until replaced by other officers duly authorized for that

purpose, act as the representative of the Borrowers or the Guarantor for the

purposes of signing documents and giving notices and other communications in

connection with the Loan Documents and the transactions contemplated thereby;

 

                (c)           Articles of Incorporation.  True and complete copies of the articles of

incorporation of each of the Borrowers filed with the Secretary of State of

Texas, and certificates of incorporation filed with the Secretary of State of

Delaware and qualification to conduct business filed with the Secretary of

State of Texas of the Guarantor, each certified by the Secretary of the

applicable Person as of the Closing Date or by an authorized public officer

within thirty (30) days of the Closing date;

 

                (d)           Bylaws.  The bylaws of each of the Borrowers and the

Guarantor certified by their respective Secretary or Assistant Secretary to be

complete and in effect on the Closing Date;

 

                (e)           Governmental Certificates.  Certificates of the appropriate government

officials of the States of Delaware and Texas, as applicable to their

respective incorporation and qualification to conduct business of Borrowers and

Guarantor, as to the existence and good standing of each dated within thirty

(30) days prior to the Closing Date;

 

                (f)            Note.  The Note executed by Borrowers;

 

                (g)           Security Documents.  The Security Documents executed by Borrowers

and the Guarantor, as applicable, and filed of record in the appropriate public

records as may be required to perfect a first priority Lien in the Collateral

in Lender;

 

                (h)           Guaranty. The Guaranty

executed by the Guarantor;

 

                (i)            Facility Fee. Lender shall

have received a non-refundable fee equal to one-half of one per cent of the

principal amount of the Note for services rendered, and to be rendered, by

Lender separate and apart from the lending of money or the provision of credit

pursuant to the Loan Documents;

 

                (j)            Fees and Expenses.  Lender shall have received all fees and

expenses (including, without limitation, reasonable fees and expenses of

counsel for Lender) payable by the Borrowers on the Closing Date pursuant to

this Agreement;

 

14

 

                (i)            Compliance Certificate.  A “Compliance Certificate” of the  president, secretary or chief financial

officer of each of the Borrowers and the Guarantor in substantially the form

set out in Exhibit C  hereto in

which such officer certifies to the satisfaction of the conditions set out in

subsections (a), (b) and (c) of Section 4.2 hereof;

 

                (j)            Gas Contracts.  A true and correct copy of each of and the

Waxahachie Contracts and the Madisonville Contracts;

 

                (m)          Insurance. True and correct

copies of certificates or binders of insurance, noting the Lender as loss payee

or additional insured, evidencing Borrower’s compliance with Section 6.13

of the Agreement;

 

                (n)           Material Contracts.  A true and correct copy of every contract

pertaining to the Collateral which either (i) affects the marketability, use or

value, of the Collateral in any material respect or (ii) creates or evidences a

material obligation or material liability on the part of Borrowers which has

not been taken into account in the most recent Financial Statements provided to

Lender (collectively, “Material Contracts”);

 

                (o)           Lien Searches.  The results of Uniform Commercial Code and

other Lien searches showing all financing statements and other Lien instruments

filed against the Borrowers or the Guarantor or any of the Financial Statements

in such public offices as may be identified by Lender, such searches to be as

of a date no more than thirty (30) days prior to the Closing Date; and

 

                (p)           Title Information.  Copies of all title opinions, policies,

reports or other information in the possession or under the control of Pipeline

with respect to the status of title to the Waxahachie Distribution System that

are requested by Lender.

 

Notwithstanding

anything in any of the Loan Documents to the contrary, the Borrowers may not

request, and the Lender shall not advance a principal amount in excess of Five

Hundred Thousand Dollars ($500,000.00) in the initial advance, and any

subsequent advances, unless the Borrower has provided current consents, permits

or other documents reasonably acceptable to the Lender as specified in Section

4.2 (e) below.

 

4.2           The Loan Advances.  The obligation of Lender to make advances

(including the initial advance) is subject to the following additional

conditions precedent:

 

                (a)           No Default.  No Default shall have occurred and be

continuing, or would result from the advance;

 

                (b)           Representations and Warranties.  All of the representations and warranties of

the Borrowers and Guarantor contained in Section 5 hereof and in

the other Loan Documents shall be true and correct in all material respects on

and as of the date of the advance with the same force and effect as if such

representations and warranties had been made on and as of such date;

 

                (c)           No Legal Violation.  The making of the advance will not violate

any law, rule or regulation or any order of any Governmental Authority

applicable to Borrowers or Guarantor;

 

15

 

                (d)           AFEs and invoices. The Lender

shall have received a true and correct copy of all authorities for expenditure,

business plans or other material that relate to working capital expenditures,

and invoices directly or indirectly related to the construction and

mobilization of the Madisonville gathering system, which will be paid by

Borrowers from proceeds of any advance; and

 

                (e)           Additional Documentation. The

Borrower shall furnish copies of consents, permits or other documents

reasonably acceptable to the Lender evidencing Pipeline’s authority to pledge

the EPGT Texas Pipeline easement, and to maintain and operate the Waxahachie

Distribution System across three rail road rights-of-way, all  as described in Schedule 3.1, Part II

as Documents A. 1 (EGPT Texas), A. 5 (Burlington Northern), A. 12 (Southern

Pacific) and A. 20 and 21 (Missouri, Kansas Texas), which shall be issued by an

authorized official of the current owner or owners of the rail road

rights-of-way and contain a specific reference to each rail road crossing

adequate for purposes of identification. Lender shall have also received such

additional  acceptance certificates,

approvals, inspection reports,  lien waivers,

opinions, or other documents as Lender or its legal counsel, may reasonably

request.

 

Each

notice of advance by the Borrowers hereunder shall constitute a representation

and warranty by the Borrowers and Guarantors that (i) the conditions precedent

set forth in Sections 4.2(a), (b) and (c) have been

satisfied (both as of the date of such notice and as of the date of such

borrowing, unless the Borrowers or Guarantor otherwise notify Lender prior to

the date of such borrowing) and (ii) the proceeds of the advance shall only be

used for the purposes stated in the notice of advance and, if applicable,

approved by Lender.

 

4.3           Materiality of Conditions.  Each condition precedent herein is material

to the transactions contemplated herein, and time is of the essence in respect

of each thereof.

 

                4.4           Waiver

of Conditions.  Lender may, at

its election, make any advance without all conditions being satisfied, but this

shall not be deemed to be an estoppel, waiver, remission or release of the

requirement that any conditions precedent be satisfied as a prerequisite for

any subsequent advance, unless Lender specifically waives each such item in

writing.

 

SECTION 5.  WARRANTIES

AND REPRESENTATIONS.

 

Borrowers and Guarantor 

represent and warrant to Lender as follows:

 

5.1           Existence and Authority.  Borrowers are corporations duly organized

and validly existing under the Laws of the State of Texas. Guarantor is a

corporation duly organized and validly existing under the Laws of the State of

Delaware, and qualified to conduct business in the State of Texas. Each

possesses all requisite authority, power, licenses, permits and franchises to

conduct its business as presently conducted, to own its Properties and assets,

and to execute, deliver and comply with the terms of each Loan Document to

which it is a party, except where the failure to so possess could not,

individually or collectively, have a Material Adverse Effect.

 

5.2           Binding Obligations.  The negotiation, preparation, execution and

delivery of this Agreement and the other Loan Documents have been duly

authorized and approved by all necessary corporate action and constitute the

legal, valid and binding obligations of the Borrowers and the Guarantor,

enforceable against Borrowers and the Guarantor in 

 

16

 

accordance

with their respective terms, except as the enforceability thereof may be

limited by applicable Debtor Relief Laws, which may delay the enforcement of

certain remedies, or by general principles of equity (regardless whether

considered in a proceeding in equity or at Law).

 

5.3           Compliance with Laws and Documents.  Borrowers and Guarantor are not, nor will

the execution, delivery and the performance of and compliance with the terms of

this Agreement and the other Loan Documents by the Borrowers or Guarantor cause

any of them to be, in violation of (i) any Laws, other than such violations

which could not, individually or collectively, cause a Material Adverse Effect,

or (ii) their organizational documents. 

The execution, delivery, and the performance of and compliance with the

terms of this Agreement and the other Loan Documents by Borrowers and Guarantor

are consistent with, and will not conflict with, result in any breach of,

constitute a default  under, or result

in the creation or imposition of (or the obligation to create or impose) any

Lien (except pursuant hereto) upon any of the property, assets or revenues of

Borrowers or Guarantor pursuant to the terms of any agreement, contract, deed

of trust, indebtedness, instrument, mortgage, or Law to which Borrowers or

Guarantor are a party or by which Borrowers or Guarantor, or any of their

property, assets or revenue are bound or to which they are subject, excluding

any conflicts, breaches or defaults which individually or collectively could

not have a Material Adverse Effect.

 

5.4           Litigation. 

Borrowers and Guarantor are not involved in, nor aware of the threat of,

any Litigation which could reasonably be expected to have a Material Adverse

Effect, nor are there any outstanding or unpaid judgments against Borrowers

or  Guarantor which could have a

Material Adverse Effect.

 

5.5           No Consents. 

Except as may be contemplated by the Loan Documents, no order, consent,

approval, license, permit, waiver, exemption, authorization of or validation

of, or filing, recording or registration with (except as heretofore have been

obtained or made), or exemption by, any Person or Tribunal is required to

authorize, or is required in connection with, the execution, delivery,

performance, legality, validity, binding effect or enforceability of this

Agreement or any other Loan Document.

 

5.6           Location.  The

chief executive offices of each of the Borrowers and Guarantor are located at

the addresses shown on the signature page(s) hereto.  Each of the Borrowers and Guarantor is entitled to receive

notices hereunder at its chief executive office, notwithstanding that it may

maintain other places of business.

 

5.7           Solvency. Each of Borrowers and Guarantor have

sufficient capital to carry on all business and transactions in which they are

now respectively engaged or are about to engage, are now solvent and will

continue to be solvent after the execution of this Agreement and each other

Loan Document and will be able to pay their respective Debts as they

mature.  The capital of each of the

Borrowers and the Guarantor is not unreasonably small to carry out their

respective businesses as now conducted and as proposed to be conducted,

considering their respective capital needs, projected capital requirements and

capital availability thereof.  Borrowers

and Guarantor do not intend to incur Debts beyond their respective ability to

pay such Debts as they mature (taking into account the timing and amounts of

cash to be received by it and the amounts to be payable on or in respect of its

Debts).

 

17

 

5.8           Debt.  Borrowers

and Guarantor are not directly or indirectly obligated (including, without

limitation, as a guarantor) on any borrowed money other than Debt permitted

under Section 6.24 hereof.

 

5.9           Fiscal Year. 

Each of the Borrowers’ and Guarantor’s fiscal years ends on

December 31.

 

5.10         Relationship with Lender.  No Person who may be deemed to have

“control” of the Borrowers or the Guarantor is an “executive officer,”

“director,” or “principal shareholder” of Lender or any correspondent of

Lender, as such quoted terms are defined in section 215.2 of

Regulation 0 of the Board of Governors of the Federal Reserve System, as

amended.

 

5.11         Financial Statements.  Each of Borrowers’ and Guarantor’s Current

Financials were prepared on an accrual accounting basis and present fairly

Borrowers’ and  Guarantor’s consolidated

financial condition, and the results of their respective operations, as of (and

for the portions of the fiscal year ending on) the dates thereof.  All material liabilities (direct or

indirect, fixed or contingent) of Borrowers and Guarantor as of the dates of

the Current Financials are reflected therein or in the notes thereto.

 

5.12         Taxes.  All Tax

returns and reports of the Borrowers and Guarantor required to be filed have

been filed (or extensions granted), and all Taxes imposed upon Borrowers or

Guarantor which are due and payable have been paid, other than Taxes being

contested in good faith for which the criteria for Permitted Liens have been

satisfied.

 

5.13         Government Regulation.  Borrowers and Guarantor are not (nor is any

transaction contemplated hereunder) subject to regulation under the Public

Utility Holding Company Act of 1935, the Federal Power Act, the Investment

Company Act of 1940, the Interstate Commerce Act (as any of the preceding acts

have been amended), any regulations promulgated by the Office of Foreign Assets

Control as codified in Chapter V of 31 C.F.R. Pipeline is a “utility” as

defined in Chapter 35 of the Texas Business and Commerce Code, as amended; however

Processing and Guarantor  are not

“utilities”.

 

5.14         Employee Benefit Plans. (a) No Pension

Plan of Borrowers or Guarantor has incurred an accumulated funding deficiency

in an amount sufficient to be reasonably likely to have a Material Adverse Effect,

(b) Borrowers and Guarantor have not incurred any liability to the PBGC in

connection with any such Pension Plan which would reasonably be expected to

have a Material Adverse Effect, (c) Borrowers and Guarantor have not withdrawn

in whole or in part from participation in a Multiemployer Plan, and (d) no

Prohibited Transaction or Reportable Event has occurred with respect to a

Pension Plan which would be reasonably likely to have a Material Adverse

Effect.

 

5.15         Purpose of the Term Loan Advances.

 

                (a)           The proceeds of the Loan will only be

used by Borrowers: (a)  to construct and

mobilize the pipeline gathering system near Madisonville, Texas; or (b) for

working capital purposes approved by Lender pursuant to Section 2.1.

 

                (b)           Advances may not be used directly or

indirectly for the payment of dividends on Borrower’s Capital Stock.

 

18

 

                (c)           Advances may not and will not be used

directly or indirectly for the purpose of purchasing or carrying, or for the

purpose of extending credit to others for the purpose of purchasing or

carrying, any “margin stock” as that term is defined in Regulations T, U and X

of the Board of Governors of the Federal Reserve System, as amended, or to

repay any indebtedness which was created for the purpose of purchasing or

carrying margin stock.

 

5.16         Properties;

Liens.

 

                (a)           Borrowers have good and marketable

title to all of their respective Properties including, without limitation, the

Collateral (except for Properties that have been disposed of in the ordinary

course of business, or as permitted under this Agreement, without having a

Material Adverse Effect on either Borrowers’ Tangible Net Worth, or ability to

repay the Obligations as provided herein, respectively).

 

                (b)           Other than Permitted Liens, no liens

encumber (i) Borrowers’ Property including, without limitation, the Collateral

or (ii) the Capital Stock of each Borrower that has been issued to the

Guarantor and is outstanding.

 

5.17         Environmental Laws: Hazardous

Materials.

 

                (a)           Ownership of Borrowers’ Property does

not violate any applicable Law of any Governmental Authority or Tribunal or any

restrictive covenant (recorded or otherwise), including without limitation all

applicable flood disaster laws, water disposal permits, and Environmental Laws

where such violation would have a Material Adverse Effect.

 

                (b)           No notice, notification, demand,

citation, summons or order has been issued to Borrowers, no complaint has been

filed and served on Borrowers,  no

penalty has been assessed against Borrowers and, to the knowledge of Borrowers,

no investigation or review is pending or threatened by any Tribunal or other

Person with respect to (i) any alleged violation of any Environmental Law in

connection with the Borrowers’ Property, or (ii) any alleged failure to have

any permit, certificate, license, approval, registration or authorization

required in connection with the Borrowers’ Property, or (iii) any generation,

treatment, storage, recycling, transportation or disposal or Release (other

than in compliance with Environmental Laws or permits issued thereunder) of any

Hazardous Substance in connection with the Borrowers’ Property where, in each

case, any such event has a Material Adverse Effect.

 

                (c)           Except in compliance with Environmental

Laws and permits issued thereunder, or where it could not have a Material

Adverse Effect, (i) Borrowers, and to their knowledge other Persons, have not

Released any Hazardous Substance on, under or in connection with the Borrowers’

Property and none of their  Property

have been used (whether by Borrowers or any other Person) as a dump site for

any Hazardous Substance; (ii) no polychlorinated biphenyls, urea or

formaldehyde is present in connection with the Borrowers’ Property; (iii) no

asbestos is present in connection with the Borrowers’ Property; (iv) there are

no underground storage tanks, active or abandoned, which have been used to

store or have contained any Hazardous Substance in connection with the

Borrowers’ Property; and (v) no Hazardous Substance has been reported as

present in connection with the Borrower’s Property in a threshold planning

quantity, where such a quantity has been established by Law.

 

19

 

                (d)           Borrowers have not transported or

arranged for the transportation (directly or indirectly) of any Hazardous

Substance to any location which is listed or proposed for listing under any

Environmental Law as a Hazardous Substance site which may lead to claims

against Borrowers for clean-up costs, remedial work, damages to natural

resources or personal injury, in each case having a Material Adverse Effect.

 

                (e)           No oral or written notification of a

Release of a Hazardous Substance has been filed by or on behalf of Borrowers

and none of the Borrowers’ Property is listed or proposed for listing on any

national priority list promulgated pursuant to any Environmental Law.

 

                (f)            There are no Liens on any of the

Borrowers’ Property arising under any Environmental Laws and, to their

knowledge, no actions by any Tribunal have been taken or are in process which

could subject any of the Borrowers’ Property to such Liens, or which would

require any of them to place any notice or restriction relating to the presence

of any Hazardous Substance in any deed to any of the Borrowers’ Property where

such Liens, notices or restrictions have a Material Adverse Effect.

 

                (g)           Borrowers and Guarantor has made

available to Lender all material reports of environmental investigations,

studies, audits, tests, reviews or other analyses conducted by or which are in

their possession relating to the Borrowers’ Property.

 

                (h)           Except as previously disclosed to

Lender in writing, there have been no agreements (or communications related to

agreements) with any Tribunal or any private entity, including, but not limited

to, any prior owners of the Borrowers’ Property relating to liability arising

from, or the violation of, any Environmental Law relating to their Property or

the transportation of any Hazardous Substance to or from their Property, except

for agreements and communications made in the ordinary course of business in

connection with permits, required reports, requirements of any Environmental

Law or inspections of Tribunals having jurisdiction over the Borrowers’

Property.

 

5.18         Insurance. 

Borrowers and Guarantor maintain insurance which complies with Section 6.13.

 

5.19         Operation of Business.  Borrowers and Guarantor possess all

licenses, permits, franchises, patents, copyrights, trademarks, and trade

names, or Rights thereto, reasonably necessary to conduct their businesses

substantially as now conducted and as presently proposed to be conducted except

where the failure to so possess would not individually or in the aggregate,

result in a Material Adverse Effect, and the Borrowers and Guarantor are not in

violation of any valid Rights of others which violation may cause a Material

Adverse Effect with respect to any of the foregoing.

 

5.20         Margin Securities.  The Borrowers and Guarantor are not engaged

principally, or as one of their important activities, in the business of

extending credit for the purpose of purchasing or carrying margin stock (within

the meaning of Regulations  T, U, or X

of the Board of Governors of the Federal Reserve System).

 

5.21         Disclosure. 

No statement, information, report, representation, or warranty made by

the Borrowers or Guarantor in this Agreement or in any other Loan Document or

furnished to Lender in connection with this Agreement or any transaction

contemplated 

 

20

 

hereby

contains any untrue statement of a material fact or omits to state any material

fact necessary to make the statements herein or therein not misleading.  There is no fact, event, or condition known

to the Borrowers or Guarantor which has had a Material Adverse Effect, or which

could reasonably be expected to have a Material Adverse Effect, that has not

been disclosed in writing to Lender.

 

5.22         Agreements. 

The Borrowers and Guarantor are not a party to any indenture, loan, or

credit agreement, or to any lease or other agreement or instrument, or subject

to any charter or corporate restriction that could reasonably be expected to

have a Material Adverse Effect.  The

Borrowers and Guarantor are not in default in any material respect in the

performance, observance, or fulfillment of any of the obligations, covenants,

or conditions contained in any agreement or instrument material to its business

to which they are a party.

 

SECTION 6.  COVENANTS.

 

So

long as (i) Lender is committed to make advances under this Agreement and (ii)

any portion of the Obligations are outstanding, unless Borrowers receive a

prior written notice from Lender that it does not object to a deviation,

Borrowers and Guarantor covenant and agree as follows:

 

6.1           Use of Proceeds. 

Borrowers shall use the proceeds of the Loan only as represented herein.

 

6.2           Books and Records.  Borrowers and Guarantor shall keep, in accordance with GAAP,

proper and complete accounting books, records and accounts, and in respect of the

Borrowers’ Property, Borrowers shall maintain proper and complete contract,

division order, land, title and such other books, files and records as are

usually and customarily maintained by a reasonable and prudent operator of oil

and gas pipelines and, in each instance, will permit Lender to inspect the same

and make and take away copies thereof at reasonable times during normal

business hours.

 

6.3           Items to be Furnished.  Borrowers and Guarantor shall cause the

following to be furnished to Lender:

 

                (a)           As soon as available, but no later

than 150 days after the last day of each fiscal year of Guarantor, Financial

Statements showing the consolidated financial condition and results of

operations of Guarantor and its Subsidiaries as of, and for the year ended on,

such last day, accompanied by (i) the opinion, without material qualification,

by a firm of independent certified public accountants acceptable to Lender,

based on an audit using generally accepted auditing standards, that such

Financial Statements were prepared in accordance with GAAP and present fairly

the financial condition and results of operations of Guarantor and its

Subsidiaries, and (ii) a Financial Report Certificate with respect to such

Financial Statements.

 

                (b)           As soon as available, but no later

than 75 days after the last day of each fiscal quarter of Borrowers and

Guarantor (i) Financial Statements showing the financial condition and results

of operations of Borrowers and Guarantor as of, and for the period from the

beginning of the current fiscal year to, such last day, and a Financial Report

Certificate with respect to such Financial Statements, and (ii) a report from

each of 

 

21

 

the Borrowers summarizing the results of their respective Pipeline

Systems, in form and substance acceptable to the Lender.

 

                (c)           Concurrently with the delivery of

each of the Financial Statements referred to in subparagraphs (a) and (b) of

this Section 6.3, a certificate of the chief financial officer of Borrowers

and Guarantor (i) stating that to the best of such officer’s knowledge, no

Default has occurred and is continuing, or if a Default has occurred and is

continuing, a statement as to the nature thereof and the action that is

proposed to be taken with respect thereto and (ii) showing in reasonable detail

the calculations demonstrating compliance with Sections 6.29, 6.30

and 6.31.

 

                (d)           Promptly after the issuance thereof,

true copies of any order issued by any Tribunal in any Litigation to which

Borrowers or Guarantor are a party, and any 

press release or other statement made available generally by or on

behalf of Borrowers or Guarantor to the public, which relate to any facts or

circumstances that individually or in the aggregate may have a Material Adverse

Effect on any of the Borrowers or Guarantor.

 

                (e)           Notice promptly after Borrowers or

Guarantor know or should know of any change in any fact or circumstance

represented or warranted in any Loan Document which individually or in the

aggregate may have a Material Adverse Effect on any of the Borrowers or

Guarantor, or a Default or Potential Default, 

written notice of the nature thereof and the action Borrowers or

Guarantor has taken, is taking, or proposes to take with respect thereto.

 

                (f)            A summary, or when requested by

Lender, copies, of all material proceedings, hearings or other actions

conducted before any Tribunal in respect of the Collateral and the operations

of Borrowers or Guarantor in respect thereto which relate to any facts or

circumstances that individually or in the aggregate may have a Material Adverse

Effect on any of the Borrowers or Guarantor.

 

                (g)           As soon as possible and in any event

within five (5) Business Days after Borrowers or Guarantor know or should know

that any Reportable Event or Prohibited Transaction has occurred with respect

to any Plan or that the PBGC, Borrowers or Guarantor have instituted or will

institute proceedings under Title IV of ERISA to terminate any Plan, in

each case, which would reasonably be expected to have a Material Adverse

Effect, a certificate of the chief financial officer of Borrowers or Guarantor

setting forth the details as to such Reportable Event or Prohibited Transaction

or Plan termination and the action that Borrowers or Guarantor propose to take

with respect thereto.

 

                (h)           As soon as possible and in any event

within five (5) days after the occurrence thereof, written notice of any matter

that could reasonably be expected to have a Material Adverse Effect.

 

                (i)            Promptly upon request therefor by

Lender, such information (not otherwise required to be furnished under the Loan

Documents) respecting the business affairs, assets, and liabilities of

Borrowers or Guarantor and such opinions, certifications, and documents, in

addition to those mentioned herein, as Lender may reasonably request.

 

6.4           Inspection. 

Borrowers and Guarantor shall allow Lender to inspect any of their

respective assets and to discuss any of their affairs, conditions and finances

with 

 

22

 

their

directors, officers or employees (including Persons working for or on behalf of

either of the Borrowers or Guarantor on a contract basis) from time to time

during reasonable business hours, and Borrowers and Guarantor shall permit

Lender and its authorized agents, if any, access for the purposes of inspecting

the same.  Borrowers and Guarantor

hereby authorize (a) all duly constituted federal, state and municipal

authorities to furnish to Lender copies of any reports of examination of Borrowers

and Guarantor which have been made by such authorities; and (b) Lender,

following a Default or Potential Default, to contact and discuss any of the

Borrowers’ or Guarantor’s affairs, conditions or finances  and.

 

6.5           Taxes. 

Borrowers and Guarantor shall promptly pay when due any and all Taxes

applicable to each of them or their Property, except Taxes for which the

criteria for Permitted Liens have been satisfied, and Borrowers and Guarantor

will not, directly or indirectly, use any portion of the Loan proceeds of any

advance to pay the wages of employees unless a timely payment to or deposit

with the United States of America of all amounts of Tax required to be deducted

and withheld with respect to such wages is also made.

 

6.6           Expenses. 

Borrowers and Guarantor shall pay within 10 days after request (a) all

reasonable costs, fees and expenses paid or incurred by Lender (including, but

not limited to, any additional filing or recording fees and the reasonable fees

and expenses of counsel to Lender) in connection with the negotiation,

preparation and execution of the Loan Documents relating to Borrowers or

Guarantor, and in connection with any amendment, waiver or consent requested by

Borrowers or Guarantor with respect thereto, and (b) all reasonable costs, fees

and expenses paid or incurred by Lender after the occurrence of any Default in

connection with the enforcement of the Obligations, as the case may be, or the

exercise of any Rights (including, but not limited to, reasonable attorneys’

fees and court costs) against it, all of which shall be a part of the

Obligations, as the case may be.

 

6.7           Maintenance of Existence, Assets and

Business.  Borrowers and Guarantor

shall at all times: (a) maintain their existence and authority to transact

business and good standing in all jurisdictions where the failure to so

maintain might have a Material Adverse Effect; (b) maintain all licenses,

permits and franchises necessary for their business where the failure to so

maintain might have a Material Adverse Effect; (c) keep all of their assets

which are useful in and necessary to its business in good working order and

condition and make all necessary repairs thereto and replacements thereof so

that the value and operating efficiency thereof shall at all times be maintained

and preserved; and (d) operate their Property in a prudent manner consistent

with normal industry practices.

 

6.8           Maintenance of Priority of Lender Liens.  Borrowers and Guarantor shall perform such

acts and duly authorize, execute, acknowledge, deliver, file and record such

additional assignments, security agreements, deeds of trust, mortgages,

financing statements and other agreements, documents, instruments and

certificates as Lender may reasonably deem necessary or appropriate in order to

perfect and maintain the Liens under the Security Documents in favor of Lender

and preserve and protect the Rights of Lender under the Loan Documents.  Borrowers shall not, directly or indirectly,

create, incur, or suffer or permit to be created or incurred or to exist any

Lien upon any of their presently unencumbered assets or properties (including,

without limitation, the Madisonville pipeline system to be constructed by

Processing), other than Permitted Liens.

 

23

 

6.9           Dispositions of Properties.

 

                (a)           Without the consent of Lender,

Borrowers will not sell, lease, assign, transfer, or otherwise dispose of

(collectively, a “Disposition”) any of the Borrowers   Property except:

 

                                (i)            Dispositions of inventory (including

oil and gas processed, sold and transported in connection with their Pipeline

Systems) in the ordinary course of business; or

 

                                (ii)           Dispositions of Property no longer

used or useful in the conduct of its business.

 

                (b)           Except as permitted by Section 6.10,

Borrowers will not enter into any contract or agreement affecting Borrowers’

title to or operation of the Borrowers’ Property or the processing, sale or

transportation of oil and gas therefrom, other than:

 

                                (i)            division orders and transfer orders

or other agreements entered into in the ordinary course of business which are

cancelable upon 30 days notice without penalty or liability,

 

                                (ii)           gas processing, purchase, sales or

transportation contracts with a term less than six (6) months entered into in

the ordinary course of business, and

 

                                (iii)          agreements or contracts entered into

in the ordinary course of business which do not, individually or in the

aggregate, materially affect their Pipeline Systems.

 

The

Borrowers may retain the proceeds from any Disposition so long as Borrowers or

Guarantor are not (or immediately after the Disposition will not be) in Default

hereunder.

 

6.10         Sales. 

Borrowers will only sell oil and gas processed, purchased, sold and

transported through Borrowers’  Pipeline

Systems for a commercially reasonable price.

 

6.11         Compliance with Laws and Documents.  Borrowers and Guarantor will not, directly

or indirectly, violate the provisions of any Laws or their organizational

documents and will not amend, modify or terminate any of their organizational

documents where such violation, amendment, modification or termination,

individually or in the aggregate, could cause a Material Adverse Effect.  Borrowers and Guarantor will comply in all

material respects with all material agreements, contracts and instruments

binding upon them or affecting their business, or their Property.

 

6.12         Fiscal Year and Accounting Methods.  After the Closing Date, Borrowers and

Guarantor will not change their fiscal years or methods of accounting (other

than immaterial changes in methods).

 

6.13         Insurance; Payment of Premiums.

 

                (a)           Borrowers shall, at their sole cost

and expense, keep and maintain in respect of the Borrowers’ Property such

insurance as is generally kept and maintained by 

 

24

 

reasonable and prudent operators of oil and gas pipelines, including,

but not limited to, worker’s compensation insurance, property insurance and

general liability insurance.

 

                (b)           All such policies of insurance shall

be in a form, with such deductibles, and with insurers recognized as

financially sound and reputable by prudent business Persons in the same

businesses as Borrowers and acceptable to Lender.  Upon request of Lender, prior to the initial Loan advance, Borrowers

shall deliver to Lender a certificate of insurance for each policy of insurance

required by this Section 6.13 and evidence of payment of all premiums

therefor.  Such policies of insurance

and the certificates evidencing the same shall contain an endorsement, in form

and substance acceptable to Lender, showing Lender as an additional loss

payee.  Such endorsement or an

independent instrument furnished to Lender shall provide that the insurance

companies will give Lender at least 30 days prior written notice before any

such insurance shall be altered or canceled and that no act or default of

Borrowers or any other Person shall affect the Rights of Lender to recover

under such insurance in case of loss or damage.  If no Default has occurred and is continuing, Borrowers may use

the insurance proceeds to repair or replace damaged or destroyed Property

covered by the applicable insurance policy.

 

6.14         Environmental Laws.  Borrowers shall conduct their business so as

to comply with all applicable Environmental Laws and shall promptly take

corrective action to remedy any non-compliance with any Environmental Law,

except where failure to so comply or take such action could not reasonably be

expected to cause a Material Adverse Effect. 

Borrowers shall establish and maintain at their expense a system which,

in their reasonable business judgment, will assure its continued compliance

with Environmental Laws, which system shall include annual reviews of such

compliance by employees or agents who are familiar with the requirements of the

Environmental Laws.

 

6.15         GENERAL INDEMNIFICATION.  BORROWERS SHALL INDEMNIFY, PROTECT AND HOLD

LENDER AND ITS PARENTS, SUBSIDIARIES, DIRECTORS, OFFICERS, EMPLOYEES,

REPRESENTATIVES, AGENTS, SUCCESSORS, ASSIGNS AND ATTORNEYS (COLLECTIVELY, THE “INDEMNIFIED

PARTIES”) HARMLESS FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS,

LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, CLAIMS, PROCEEDINGS,

COSTS, EXPENSES (INCLUDING, WITHOUT LIMITATION, ALL REASONABLE ATTORNEYS’ FEES

AND LEGAL EXPENSES WHETHER OR NOT SUIT IS BROUGHT) AND DISBURSEMENTS OF ANY

KIND OR NATURE WHATSOEVER WHICH MAY AT ANY TIME BE IMPOSED ON, INCURRED BY, OR

ASSERTED AGAINST THE INDEMNIFIED PARTIES, IN ANY WAY RELATING TO OR ARISING OUT

OF THE LOAN DOCUMENTS THAT RELATE TO BORROWERS OR GUARANTOR OR ANY OF THE

TRANSACTIONS CONTEMPLATED THEREIN THAT RELATE TO BORROWERS OR GUARANTOR

(COLLECTIVELY, THE “INDEMNIFIED LIABILITIES”); PROVIDED, HOWEVER,

THAT ALTHOUGH EACH INDEMNIFIED PARTY SHALL HAVE THE RIGHT TO BE INDEMNIFIED

FOR ITS OWN ORDINARY NEGLIGENCE, NO INDEMNIFIED PARTY SHALL HAVE THE RIGHT TO

BE INDEMNIFIED HEREUNDER FOR ITS OWN FRAUD, GROSS NEGLIGENCE OR WILLFUL

MISCONDUCT.  THE PROVISIONS OF AND

UNDERTAKINGS AND INDEMNIFICATION SET FORTH IN THIS SECTION 6.15

SHALL SURVIVE (A) THE SATISFACTION AND PAYMENT OF THE OBLIGATION AND

TERMINATION OF THIS AGREEMENT, AND (B) THE RELEASE OF ANY 

 

25

 

LENDER

LIENS OR THE EXTINGUISHMENT OF SUCH LIENS BY FORECLOSURE OR ACTION IN LIEU

THEREOF.

 

6.16         ENVIRONMENTAL INDEMNIFICATION.  BORROWERS SHALL INDEMNIFY, PROTECT AND HOLD

EACH INDEMNIFIED PARTY HARMLESS FROM AND AGAINST ANY AND ALL LIABILITIES,

OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, CLAIMS,

PROCEEDINGS, COSTS, EXPENSES (INCLUDING, WITHOUT LIMITATION, ALL REASONABLE

ATTORNEYS’ FEES AND LEGAL EXPENSES WHETHER OR NOT SUIT IS BROUGHT) AND

DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY AT ANY TIME BE IMPOSED

ON, INCURRED BY, OR ASSERTED AGAINST SUCH INDEMNIFIED PARTIES, WITH RESPECT TO

OR AS A DIRECT OR INDIRECT RESULT OF THE VIOLATION BY BORROWERS OR GUARANTOR OF

ANY ENVIRONMENTAL LAW; OR WITH RESPECT TO OR AS A DIRECT OR INDIRECT RESULT OF

BORROWERS OR GUARANTORS’ USE, GENERATION, MANUFACTURE, PRODUCTION, STORAGE,

RELEASE, THREATENED RELEASE, DISCHARGE, DISPOSAL OR PRESENCE IN CONNECTION WITH

THE PROPERTIES OF A HAZARDOUS SUBSTANCE INCLUDING, WITHOUT LIMITATION, (A) ALL

DAMAGES OF ANY SUCH USE, GENERATION, MANUFACTURE, PRODUCTION, STORAGE, RELEASE,

THREATENED RELEASE, DISCHARGE, DISPOSAL OR PRESENCE, OR (B) THE COSTS OF ANY

REASONABLY REQUIRED OR NECESSARY ENVIRONMENTAL INVESTIGATION, MONITORING,

REPAIR, CLEANUP OR DETOXIFICATION AND THE PREPARATION AND IMPLEMENTATION OF ANY

CLOSURE, REMEDIAL OR OTHER PLANS.  THE

PROVISIONS OF AND UNDERTAKINGS AND INDEMNIFICATION SET FORTH IN THIS SECTION 6.16

SHALL SURVIVE (X) THE SATISFACTION AND PAYMENT OF THE OBLIGATIONS AND

TERMINATION OF THIS AGREEMENT, AND (Y) THE RELEASE OF ANY LENDER LIENS OR THE

EXTINGUISHMENT OF SUCH LIENS BY FORECLOSURE OR ACTION IN LIEU THEREOF.

 

6.17         Employee Benefit Plans.  Borrowers and Guarantor will not, directly

or indirectly, (a) engage in any Prohibited Transaction which would reasonably

be expected to have a Material Adverse Effect, (b) permit any Pension Plan

established or maintained by Borrowers or Guarantor to ever be subject to

involuntary termination proceedings, or (c) fully or partially withdraw from

any Multiemployer Plan, if such withdrawal would reasonably be expected to have

a Material Adverse Effect.  Borrowers

and Guarantor shall make all required contributions to any Plan subject to

Section 412 of the Code, if failure to do so would reasonably be expected to

have a Material Adverse Effect.

 

6.18         Notice of Litigation.  Promptly after the commencement thereof,

Borrowers  and Guarantor shall provide

notice to Lender of all actions, suits, and proceedings before any Governmental

Authority or Tribunal affecting Borrowers or Guarantor which, if determined

adversely to any of Borrowers or Guarantor, could have a Material Adverse

Effect.

 

6.19         Loans, Advances and Investments.  Borrowers and Guarantor will not, directly

or indirectly, loan, advance or otherwise extend credit to, or contribute

capital to, invest in or purchase or commit to purchase any Capital Stock or

other securities or evidences of indebtedness of, or interests in, any other

Person, other  than (a) investments in obligations of the United

States of America and agencies thereof and obligations guaranteed by the United

States of America maturing within one year from the date of 

 

26

 

acquisition,

(b) certificates of deposit issued by Lender or a commercial institution

organized under the Laws of the United States of America or any state thereof

and having a combined capital, surplus, and undivided profits of not less than

$100,000,000 (as shown in its most recently published statement of condition),

(c) current trade and customer accounts receivable which are for goods

furnished or services rendered in the ordinary course of business, and are

payable in accordance with customary trade terms, (d) stock, obligations, or

securities received in the settlement of debts (created in the ordinary course

of business and in compliance with this Agreement) owing to Borrowers or

Guarantor, (e) loans and advances to officers and employees of Borrowers or

Guarantor in the ordinary course of business not to exceed $25,000 in the

aggregate at any time outstanding, and (f) contracts to purchase and sell oil

and gas in connection with the Pipeline Systems, pipeline interconnect and

operating agreements,  processing

agreements, service contracts, transportation agreements or other similar or customary

arrangements, in each case made or entered into with any other Person in the

ordinary course of their oil and gas pipeline business as a means of gathering,

marketing, processing or transporting oil and gas, provided  that

none of the foregoing shall impair, reduce, dilute, or adversely affect any of

the Borrowers’ Property.

 

6.20         Transactions with Affiliates.  Borrowers will not, directly or indirectly,

enter into any transaction (including, but not limited to, the sale or exchange

of property or the rendering of service) with any of their Affiliates, other

than transactions in the ordinary course of Borrowers’ business and upon

fair and reasonable terms no less favorable than Borrowers could obtain or

could become entitled to in an arm’s-length transaction with a Person which was

not an Affiliate.

 

6.21         Material Contracts.  Borrowers will not enter into or be a party to any agreement for

the purchase of materials, supplies, or other tangible personal property if

such agreement requires Borrowers to pay for such items regardless of their actual

or tendered delivery.  Borrowers will

not materially amend, alter the terms and conditions of or cancel any of their

Material Contracts, except for amendments and alterations which (a) are made by

a Borrower on an arms-length basis in the ordinary course of the Borrowers’

respective businesses, (b) for a price and terms that are no less favorable to

the Borrower than the price and terms incorporated into the Material Contract

as presently existing  and (c) individually

or in the aggregate do not have a Material Adverse Effect on any of the

Borrowers or Guarantor.

 

6.22         New Business. 

Borrowers will not, directly or indirectly, engage in any business other

than the business in which they are presently engaged.

 

6.23         Addresses. 

Borrowers and Guarantor will not change their names or relocate their

chief executive offices or places where their books and records related to

their assets are kept to a county, parish or state other than as indicated on

the signature page(s) hereto, unless Lender is provided 30 days prior written

notice of such proposed change in name or location (such notice of change in

location to include, without limitation, the name of the county or parish and

state of such location).

 

6.24         Restrictions on Debt.  Borrowers and Guarantor will not incur,

create, assume, or permit to exist any Debt, except:

 

                (a)           the Obligations;

 

27

 

                (b)           existing Debt described on Schedule 6.24

hereto;

 

                (c)           Debt secured by Permitted Liens; and

 

                (d)           Extensions, renewals and refinancings

of Debt described in clauses (b) and (c) above, without any increase in

the outstanding principal amount thereof, provided that the other terms and

conditions of such extension, renewal or refinancing are not materially more

onerous than the existing terms and conditions of such Debt.

 

6.25         Issuance of Capital Stock.  In the event that at any time prior to the

time that the Obligations have been paid in full Borrowers shall issue, sell,

assign or otherwise dispose of (i) any shares of any class of their

Capital Stock, (ii) any securities exchangeable for or convertible into or

carrying any rights to acquire any shares of any class of their Capital Stock,

(iii) any options, warrants or any other rights to acquire any shares of

any class of their Capital Stock, (iv) any subordinated debt, or (v) any senior

unsecured debt, the net proceeds thereof shall be paid to the Lender and

applied as set forth in Section 2.7. 

Nothing in this Section 6.25 shall authorize Borrowers or

Guarantor to undergo a Change of Control.

 

6.26         Mergers and Dissolutions.  Borrowers and Guarantor will not, directly

or indirectly, merge or consolidate with any other Person (unless Borrowers or

Guarantor are the surviving corporation) or liquidate, wind up, or dissolve (or

suffer any liquidation or dissolution).

 

6.27         Default on Debt.  Borrowers and Guarantor will not (a) default in the due and

punctual payment of the principal of or the interest on any Debt individually

or in the aggregate exceeding $100,000.00 or (b) become directly or indirectly

obligated (including, without limitation, as a guarantor) on any borrowed money

other than Debt permitted under Section 6.24 hereof. Notwithstanding the

foregoing, Borrowers and Guarantor may dispute, in good faith, their respective

obligations to pay or perform any Debt due (or claimed to be due) by Borrowers

or Guarantor to any Third Person if the Borrowers or Guarantor, as applicable

(a) establish and maintain adequate reserves in accordance with GAAP with

respect thereto if  it should be

determined that the Borrowers or Guarantor are obligated to pay or perform  all or any part of the Debt in dispute, and

(b) implement and diligently prosecute procedures and proceedings as required

under the relevant documents (or in the absence of required dispute resolution

procedures, as may be commercially reasonable) for the orderly resolution of

the dispute.

 

6.28         Distributions. Borrowers shall not, directly or

indirectly, declare, make or pay any dividend or distribution with respect to,

or retire, redeem, purchase, or otherwise acquire for value, any equity

securities or other forms of ownership interests issued by Borrowers.

 

6.29         Current Ratio 

Borrowers will at all times maintain a positive ratio of Current Assets

to Current Liabilities of not less than 1.0 to 1.0; provided that installments

of principal and interest on the Loan shall be excluded from Current

Liabilities as they mature.

 

28

 

6.30         Tangible Net Worth.  Borrowers will at all times maintain positive Tangible Net Worth

of not less than eighty per cent (80%) of their respective Tangible Net Worth

on the Closing Date calculated at the end of each of Borrowers’ fiscal quarters

thereafter.

 

6.31         Minimum Net Operating Margin.

The Borrowers shall maintain a combined Minimum Net Operating Margin (trailing

two consecutive calendar quarters) of not less than Four Hundred Thousand

Dollars ($400,000.00).

 

6.32         Limitation on Liens. Borrowers will not

incur, create, assume, or permit to exist any Lien upon any of their Property

or revenues, whether now owned or hereafter acquired, except Permitted Liens.

 

 

SECTION 7.  DEFAULT.

 

The

term “Default” means the occurrence of any one or more of the following

events (including the passage of time, if any, specified therefor) (provided

that if any such event occurs and Lender subsequently agrees in writing

that it will not exercise any Rights hereunder as a result thereof, the

occurrence of such event shall no longer be deemed a “Default” hereunder

insofar as the state of facts giving rise to such event is concerned, but the

same shall not operate as or be deemed to be a waiver with respect to any

identical or similar state of facts in existence or occurring theretofore or

thereafter):

 

7.1           Payment of Obligations.  The failure or refusal of Borrowers or

Guarantor: (a) to pay when due any principal of, or accrued unpaid interest on,

the Note; or (b) to pay any other Obligations in accordance with the terms of

the Loan Documents and such failure to pay any other Obligations shall continue

for three (3) Business Days after Borrowers or Guarantor have notice thereof.

 

7.2           Certain Covenants.  The failure or refusal of Borrowers or Guarantor to punctually

and properly perform, observe and comply with any covenant, agreement or

condition contained in Section 6.1, 6.3, 6.7, 6.9,

6.13(a), and 6.24 through 6.28 (provided  that,

in the case of Section 6.13(a), such failure or refusal continues

for a period in each case of seven (7) Business Days after Borrowers or

Guarantor have notice thereof).

 

7.3           Other Covenants.  The failure or refusal of Borrowers or Guarantor to punctually

and properly perform, observe and comply with any covenant, agreement or

condition contained in any of the Loan Documents, other than covenants to pay

the Obligations and the covenants listed in Section 7.2, and such

failure or refusal continues for a period of thirty (30) days after Borrowers

or Guarantor have notice thereof.

 

7.4           Voluntary Debtor Relief.  Borrowers or Guarantor shall (a) execute an

assignment for the benefit of creditors, (b) admit in writing their inability

to pay their debts generally as they become due, (c) voluntarily seek the

benefits of any Debtor Relief Law, or (d) take any action to authorize any of

the foregoing.

 

7.5           Involuntary Proceedings.  Borrowers or Guarantor shall involuntarily

(a) have an order, judgment or decree entered against it by any Tribunal

pursuant to any Debtor Relief Law or (b) have a petition filed against it

seeking the benefit or benefits provided for by any Debtor Relief Law, and such

order, judgment, decree or petition is not discharged within 60 days after the

entry or filing thereof.

 

29

 

7.6           Attachment. 

The failure to have discharged within a period of 30 days after the

commencement thereof any attachment, sequestration or similar proceeding

against any of Borrowers’ Property with a value, individually or collectively,

in excess of $50,000.

 

7.7           Payment of Judgments.  Borrowers fail to pay any money judgment in

excess of $50,000 against them or their assets at least ten days prior to the

date on which any of Borrowers’ Property may be sold to satisfy such judgment.

 

7.8           Default Under Other Debt.  Borrowers or Guarantor default in the due

and punctual payment of the principal of or the interest on any indebtedness

other than the Obligations and such failure results in the acceleration of such

indebtedness by the holder thereof.

 

7.9           Divestment Proceedings.  A petition or complaint is filed before or

by any Tribunal, including, but not limited to, the Federal Trade Commission or

the United States Justice Department, seeking to cause Borrowers or Guarantor

to divest a significant portion of its assets pursuant to any antitrust,

restraint of trade, unfair competition, industry regulation or similar Laws,

and such petition or complaint is not dismissed or discharged within 60 days

after its filing.

 

7.10         Concealment or Removal of Collateral.  Borrowers conceal or remove, or permit to be

concealed or removed, any part of their real or personal Property with the

intent to hinder, delay or defraud one or more of its creditors.

 

7.11         Misrepresentation.  The discovery by Lender that any material statement,

representation or warranty in the Loan Documents or in any writing ever

delivered pursuant to the Loan Documents is false, misleading or erroneous in

any material respect when made or deemed to be repeated.

 

7.12         Validity and Enforceability of Loan

Documents. Any of the Borrowers or Guarantor contest the validity or

enforceability of any Loan Document or deny in writing that they have any

liability or obligations under any Loan Document to which they are a party; or

any Loan Document shall be declared to be null and void, cease to be in full

force and effect or cease establish and maintain any Lien granted pursuant

thereto as a perfected, first priority Lien (except for Permitted Liens and

releases of Liens made by Lender pursuant to any of the Loan Documents) at any

time after its execution and delivery and for any reason.

 

7.13         ERISA.  (a)

Borrowers, Guarantor, any ERISA Affiliate or any of their agents or

representatives shall engage in any conduct which it knew constituted, or

should have known  constituted, a

Prohibited Transaction which could reasonably be expected to result in a

material liability to Borrowers, Guarantor or any ERISA Affiliate, (b) any

material “accumulated funding deficiency” (as defined in Section 302 of

ERISA or Section 412 of the Code), whether or not waived, shall exist with

respect to any PBGC Plan or Multiple Employer Plan, if such accumulated funding

deficiency would give rise to a material liability of Borrowers, Guarantor or

any ERISA Affiliate, (c) Borrowers, Guarantor or any ERISA Affiliate shall

apply for or be granted a funding waiver under Section 302 of ERISA or Section

412 of the Code, which waiver or request for waiver is for a material amount,

(d) a Reportable Event shall occur with respect to any PBGC Plan 

 

30

 

or

Multiple Employer Plan, which reportable event is likely to result in the

termination of such PBGC Plan or Multiple Employer Plan for purposes of Title

IV of ERISA and to give rise to a material liability of Borrowers, Guarantor or

any ERISA Affiliate, (e) proceedings shall commence to have a trustee

appointed, or a trustee shall be appointed, to terminate or administer a PBGC

Plan or Multiple Employer Plan which proceeding is likely to result in the

termination of such PBGC Plan or Multiple Employer Plan and to give rise to a

material liability of Borrowers, Guarantor or any ERISA Affiliate with respect

to such termination, (f) a notice of intent to terminate a PBGC Plan or

Multiple Employer Plan under Section 4041(c) is filed with the PBGC if such

termination would give rise to a material liability of Borrowers, Guarantor or

any ERISA Affiliate, (g) any Multiemployer Plan is in reorganization or is

insolvent and the circumstances are such that there could reasonably be a

material liability incurred by or imposed upon Borrowers, Guarantor or any

ERISA Affiliate, (h) there is a complete or partial withdrawal from a

Multiemployer Plan under circumstances that could reasonably subject Borrowers,

Guarantor or any ERISA Affiliate to material liability, (i) any Lien arising

under Section 4068 of ERISA or Section 412(n) of the Code shall attach to the

assets or Property of Borrowers, Guarantor or any ERISA Affiliate which could

reasonably be expected to result in a Material Adverse Effect,

(j) Borrowers, Guarantor or any ERISA Affiliate shall permit, through

action or failure to act, any Pension Plan to fail to meet the requirements of

Section 401(a) or 403(a) of the Code and such failure gives rise to a

material liability of Borrowers, Guarantor or any ERISA Affiliate, or (k) any

event or condition described in (a) through (j)) above (determined without

regard to whether the event or condition taken alone would or could result in a

material liability) shall occur or exist with respect to a PBGC Plan, Multiple

Employer Plan or Multiemployer Plan which individually or in combination with

one or more of any events described in (a) through (j) above (determined

without regard to whether the event or condition taken alone would or could

result in a material liability), if any, would likely subject Borrowers,

Guarantor or any ERISA Affiliate to any material excise tax, Penalty, addition

to tax or other liability.  For purposes

of this Section 7.13, an obligation or liability shall be

considered material if it results in or causes a Material Adverse Effect.

 

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

 

7.15         Material Adverse Change.  The occurrence of any act, event or

circumstance that is, or with the passage of time is reasonably expected to

cause a Material Adverse Effect in the assets, liabilities, financial

condition, contractual obligations or business affairs of Borrowers or

Guarantor.

 

SECTION 8.  RIGHTS AND

REMEDIES.

 

8.1           Remedies Upon Default.  Should any Default occur and be continuing,

Lender may, at its election, do any one or more of the following: (i) declare

the entire unpaid balance of the Obligations, or any part thereof, immediately

due and payable, whereupon it shall be due and payable (and notice of such

declaration shall promptly be given thereafter by it to Borrowers); (ii)

terminate its commitment to lend hereunder, (iii) reduce any claim to judgment;

(iv) exercise the Rights of offset or banker’s Lien against the interest of

Borrowers or Guarantor in and to every account and other Property of Borrowers

or Guarantor which are in its possession to the extent of the full amount of

the Obligations; (v) foreclose any or all Lender Liens or otherwise realize

upon any and all of the Rights it may have in and to the Collateral, or any

part thereof, and (vi) exercise any and all other legal or equitable

Rights afforded by the Loan Documents, the Laws of the 

 

31

 

State

of Texas or any other jurisdiction as it shall deem appropriate, or otherwise,

including, but not limited to, the Right to bring suit or other proceedings

before any Tribunal either for specific performance of any covenant or

condition contained in any of the Loan Documents or in aid of the exercise of

any Right granted to it in any of the Loan Documents.

 

8.2           Waivers. 

Borrowers and Guarantor hereby waive presentment and demand for payment,

protest, notice of intention to accelerate, notice of acceleration and notice

of protest and nonpayment, and agree that their liability with respect to the

Obligations, or any part thereof, shall not be affected by any renewal or

extension in the time of payment of the Obligations, by any indulgence or by

any release or change in any security for the payment of the Obligations.

 

8.3           Performance by Lender.  If any covenant, duty or agreement of

Borrowers or Guarantor is not performed in accordance with the terms of the

Loan Documents, Lender may, at its option perform or attempt to perform, such

covenant, duty or agreement on behalf of Borrowers or Guarantor.  In such event, any reasonable amount

incurred by or on behalf of Lender prior to Default, or thereafter any and all

amounts incurred by or on behalf of Lender in such performance or attempted

performance shall be payable by Borrowers or Guarantor on written demand, shall

become part of the Obligations, and shall bear interest at the Default Rate

from the date of notice to Borrowers or Guarantor of such expenditure until

paid.  Notwithstanding the foregoing, it

is expressly understood that Lender does not assume and shall never have,

except by its express written consent, any liability or responsibility for the

performance of any covenant, duty or agreement of Borrowers or Guarantor.

 

8.4           Delegation of Duties and Rights.  Lender may perform any of its duties or

exercise any of its Rights under the Loan Documents by or through its officers,

directors, employees, attorneys, agents or other representatives.

 

8.5           Lender Not in Control.  None of the covenants or other provisions

contained in this Agreement shall, or shall be deemed to, give Lender the Right

to exercise control over the assets (including, without limitation, real

Property), affairs or management of Borrowers or Guarantor, the power of Lender

being limited to the Right to exercise the Rights provided in this Section 8.

 

8.6           Waivers by Lender.  The acceptance by Lender at any time and from time to time of

partial payment on the Obligations shall not be deemed to be a waiver of any

Default then existing.  No waiver by

Lender of any Default shall be deemed to be a waiver of any other then-existing

or subsequent Default.  No delay or

omission by Lender in exercising any Right under the Loan Documents shall

impair such Right or be construed as a waiver thereof or any acquiescence

therein, nor shall any single or partial exercise of any such Right preclude

other or further exercise thereof, or the exercise of any other Right under the

Loan Documents or otherwise.

 

8.7           Cumulative Rights.  All Rights available to Lender under the Loan Documents are cumulative

of and in addition to all other Rights granted to Lender at law or in equity,

whether or not the Obligations are due and payable and whether or not Lender

has instituted any suit for collection, foreclosure, or other action in

connection with the Loan Documents.

 

32

 

8.8           Application of Proceeds.  Any and all proceeds ever received by Lender

from the exercise of any Rights pertaining to the Obligations shall be applied

by Lender to the Obligations in the order and manner set forth in Section 2.7;

provided  that Borrowers and Guarantor shall remain liable to

Lender for the deficiency, if any.

 

8.9           Diminution in Value of Collateral.  Lender shall have no liability or

responsibility whatsoever for any diminution in or loss of value of any

Collateral.

 

8.10         Certain Proceedings.  Borrowers and Guarantor will promptly

execute and deliver or cause the execution and delivery of all applications,

certificates, instruments, registration statements and all other documents and

papers Lender may request in connection with the obtaining of any consent,

approval, registration, qualification, permit, license or authorization of any

other Tribunal or other Person necessary or appropriate for the effective

exercise of any Rights under the Loan Documents.  Without limiting the generality of the foregoing,  Borrowers and Guarantor agree that in the

event Lender shall exercise its Rights, pursuant to the Loan Documents relating

to Borrowers or Guarantor, to sell, transfer or otherwise dispose of, or vote,

consent, operate or take any other action in connection with any of the

Collateral, Borrowers and Guarantor shall execute and deliver all applications,

certificates, assignments and other documents Lender may request to facilitate

such actions and shall otherwise promptly, fully, and diligently cooperate with

Lender and any other necessary Persons in making any application for the prior

consent or approval of any Tribunal or any other Person to the exercise by

Lender of any of such Rights relating to all or any of the Collateral.  Furthermore, because Borrowers and Guarantor

agree that Lender’s Rights at Law for failure of Borrowers and Guarantor to

comply with the provisions of this Section 8.10 would be inadequate

and that such failure would not be adequately compensable in damages, Borrowers

and Guarantor agree that the covenants of this Section 8.10 may be

specifically enforced.

 

SECTION 9.  MISCELLANEOUS.

 

9.1           Changes in GAAP. 

All accounting and financial terms used in any of the Loan Documents and

the compliance with each covenant contained in the Loan Documents which relates

to financial matters shall be determined in accordance with GAAP, except to the

extent that a deviation therefrom is expressly stated in such Loan Documents.  Should a change in GAAP require a change in

any method of accounting or should any voluntary change in the accounting

methods be permitted pursuant to Section 6.12, then such change

shall not result in a Default if, at the time of such change, such Default had

not occurred and was not then continuing, based upon the former methods of

accounting used by or on behalf of Borrowers and Guarantor; provided  that,

after any such change in accounting methods, the Financial Statements required

to be delivered shall either be (a) prepared in comparative form, in compliance

with the former methods of accounting used prior to such change, as well as

with the new method or methods of accounting and, for the purpose of

determining whether a Default has occurred, Lender shall look solely to that

portion of such Financial Statements that complies with the former methods of

accounting, or (b) prepared in compliance with such new method or methods of

accounting but accompanied by such information, in form and detail satisfactory

to Lender, that will allow Lender to readily determine the effect of such

changes in accounting methods on such Financial Statements, and, for the

purpose of determining whether a Default has occurred, Lender shall look solely

to such Financial Statements as adjusted to reflect compliance with such former

method or methods of accounting.

 

33

 

9.2           Exhibits.  If

any Exhibit, which is to be executed and delivered, contains blanks, the

Exhibit shall be completed correctly and in accordance with the terms and

provisions contained and as contemplated herein prior to, at the time of, or

after the execution and delivery thereof.

 

9.3           Communications. 

Unless specifically otherwise provided, whenever any Loan Document

requires or permits any consent, approval, notice, request or demand from one

party to another, such communication must be in writing (which may be by telex

or telecopy) to be effective and shall be deemed to have been given on the day

actually delivered or, if mailed, on the third Business Day after it is

enclosed in an envelope, addressed to the party to be notified at the address

stated opposite its signature below (unless changed by notice pursuant hereto),

properly stamped, sealed and deposited in the appropriate official postal

service.

 

9.4           Form and Number of Documents.  Each agreement, document, instrument or

other writing to be furnished under any provision of this Agreement must be in

form and substance and in such number of counterparts as may be satisfactory to

Lender and its counsel.

 

9.5           Exceptions to Covenants.  Borrowers and Guarantor shall take no action

nor fail to take any action which is permitted as an exception to any of the

covenants contained in any of the Loan Documents relating to Borrowers and

Guarantor if such action or omission would result in the breach of any other

covenant contained in any of the Loan Documents.

 

9.6           Survival.  All

covenants, agreements, undertakings, representations and warranties made in any

of the Loan Documents shall survive all closings under the Loan Documents and,

except as otherwise indicated. shall not be affected by any investigation made

by any party.

 

9.7           GOVERNING LAW. 

THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS

OF THE STATE OF TEXAS; PROVIDED THAT LENDER SHALL RETAIN ALL RIGHTS ARISING

UNDER FEDERAL LAW. THE LAWS (OTHER THAN CONFLICT-OF-LAWS PROVISIONS THEREOF) OF

THE STATE OF TEXAS AND OF THE UNITED STATES OF AMERICA SHALL GOVERN THE RIGHTS

AND DUTIES OF THE PARTIES HERETO AND THE VALIDITY, CONSTRUCTION, ENFORCEMENT

AND INTERPRETATION OF THE LOAN DOCUMENTS, EXCEPT TO THE EXTENT OTHERWISE

SPECIFIED IN ANY OF THE LOAN DOCUMENTS.

 

 

9.8           Maximum Interest Rate.

It is the intention of the Parties to strictly comply with applicable usury

Laws, if any; accordingly, it is agreed that notwithstanding any provisions to

the contrary in any Loan Document, in no event shall any Loan Document permit

or require the payment, taking, reserving, receiving collection or charging of

interest in excess of the Highest Lawful Rate. 

If any such excess of interest is called for, contracted for, charged,

taken, reserved or received under any Loan Document (or in any communication by

Lender or any other Person to Borrowers or Guarantor) or if all or a part of

the principal or interest thereof is accelerated, prepaid or repaid, so that

under any of such circumstances (or any other circumstances) the amount of

interest contracted for, charged, taken, reserved or received under any Loan

Document 

 

34

 

on

the amount of principal actually outstanding from time to time thereunder shall

exceed the Highest Lawful Rate, then in any such event (a) the provisions of

this Section 9.8 shall govern and control, (b) no Person now or

hereafter liable for the payment of the Obligation shall be obligated to pay

the amount of such interest to the extent that it is in excess of the Highest

Lawful Rate, (c) any such excess which is or has been collected or received

notwithstanding this paragraph shall be 

credited against the then unpaid principal balance of the Obligation or,

if the Obligation has been or would be repaid in full by that credit, refunded

to the Person paying the excess, and (d) the provisions of the applicable Loan

Documents, and any communication to Borrowers or Guarantor, shall immediately

be deemed reformed and the excess interest reduced, without the necessity of

executing any other document, to the Highest Lawful Rate under the applicable

usury Laws as now or hereafter construed by the courts having jurisdiction

thereof. Without limiting the foregoing, all calculations of the rate of

interest contracted for, charged, collected, taken, reserved or received in

connection with the  Loan Documents which

are made for the purpose of determining whether that rate exceeds the Highest

Lawful Rate shall be made to the extent permitted by applicable Laws by

amortizing, prorating, allocating and spreading during the period of the full

term of the Loan, including all prior and subsequent renewals and extensions,

all interest at any time contracted for, charged, taken collected, reserved or

received. The terms of this paragraph shall be deemed to be incorporated in

every Loan Document and communication relating thereto.

 

 To the extent the interest rate Laws of the

State of Texas are applicable to the Loan Documents for purposes of determining

the “Highest Lawful Rate,” the applicable interest rate ceiling is the weekly

ceiling (formerly the indicated rate ceiling) determined in accordance with

Texas Revised Civil Statutes, Title 79, Article 5069-1D.003 (also codified at

Texas Finance Code, Section 303.301, and formerly Texas Revised Civil Statutes,

Article 5069-1.01), as amended. To the extent the Loan Documents are an open

end account as defined in  Texas Revised

Civil Statutes, Title 79, Article 5069-1B.002(14) (also codified at Texas

Finance Code, Section 301.001(3), and formerly Texas Revised Civil Statutes,

Article 5069-1.01 (f)), as amended, the Lender retains the right to modify the

interest rate in accordance with applicable Law. Borrowers, Guarantor and

Lender agree that Texas Finance Code, Chapter 346 (formerly Texas Revised Civil

Statutes, Title 79, Chapter 150, which regulates certain revolving loan accounts

and revolving tri-party accounts,  shall

not govern or in any manner apply to the Loan Documents or the Obligation.

 

9.9           Invalid Provisions.  If any provision in any Loan Document is held to be illegal,

invalid or unenforceable, such provision shall be fully severable; the

appropriate Loan Document shall be construed and enforced as if such provision

had never comprised a part thereof, and the remaining provisions thereof shall

remain in full force and effect and shall not be affected by such provision or

by its severance therefrom. 

Furthermore, in lieu of such provision there shall be added

automatically as a part of such Loan Document a provision as similar thereto as

may be possible and be legal, valid and enforceable.

 

9.10         Entirety.  THE

LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES 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. 

The Loan Documents embody the entire written agreement between the

parties, supersede all prior written agreements and understandings, if any,

relating to the subject matter hereof (except for documents, agreements, and

instruments delivered or to be delivered in accordance with the express terms

hereof) and may be supplemented only by documents delivered or to be delivered

in accordance with the express terms hereof. 

Any conflict or ambiguity between the terms 

 

35

 

and

provisions herein and terms and provisions in any other Loan Document shall be

controlled by the terms and provisions herein.

 

9.11         Amendments, Etc.  No amendment or waiver of any provision of any Loan Document nor

consent to any departure therefrom by Borrowers or Guarantor shall be effective

unless the same shall be in writing and signed by Lender, and then, such

amendment, waiver or consent shall be effective only in the specific instance

and for the specific purpose for which given.

 

9.12         Waivers.  No

course of dealing nor any failure or delay by Lender or any of its respective

officers, directors, employees, agents, representatives, or attorneys with

respect to exercising any Right of Lender hereunder shall operate as a waiver

thereof.  A waiver must be in writing

and signed by Lender to be effective, and such waiver will be effective only in

the specific instance and for the specific purpose for which it is given.

 

9.13         Governmental Regulation.  Anything contained in this Agreement to the

contrary notwithstanding, Lender shall not be obligated to extend credit to

Borrowers in violation of any Law.

 

9.14         Multiple Counterparts.  This Agreement has been executed in a number

of identical counterparts, each of which shall be deemed an original for all

purposes and all of which constitute, collectively, one Agreement; but, in

making proof of this Agreement, it shall not be necessary to produce or account

for more than one such counterpart.

 

9.15         Discharge Only Upon Payment In

Full; Reinstatement In Certain Circumstances.  The obligations of Borrowers and Guarantor hereunder shall remain

in full force and effect until the Obligations shall have been paid and

performed in full.  If at any time any

payment on or in respect of the Obligations is rescinded or must be otherwise

restored or returned upon the insolvency, bankruptcy or reorganization of a

Borrower, Guarantor or otherwise, the obligations of a Borrower or Guarantor

hereunder with respect to such payment shall be reinstated as though such

payment has been due but not made at such time.

 

9.16         Waiver by Borrowers and Guarantor.  Borrowers and Guarantor irrevocably waive

acceptance hereof, and any other notice not provided for herein, as well as any

requirement that any time any action be taken by any Person against Borrowers,

Guarantor or any Collateral relating to such Borrowers’ or Guarantor’s

obligations hereunder.

 

9.17         Successors and Assigns.  This Agreement shall be binding upon, and

inure to the benefit of the parties hereto and their respective successors and

assigns, except that Borrowers may not, directly or indirectly, assign or

transfer, or attempt to assign or transfer, any of their Rights, duties or

obligations under any Loan Documents without the express written consent of

Lender, and Lender may not transfer, pledge, assign or otherwise encumber its

commitments or loans, except that Lender may, in the ordinary course of its

commercial banking business and in accordance with applicable Law, at any time

sell to one or more Persons participating interests in the Obligations.

 

 

EXECUTED

as of the day and year first mentioned.

 

36

 

	

  BORROWER:

  	

   

  	

   

  	

   

  
	

  Address:

  	

   

  	

   

  	

  GATEWAY PIPELINE COMPANY

  
	

   

  	

   

  	

   

  	

   

  
	

  One Allen Center

  	

   

  	

  By:

  	

   

  
	

  500 Dallas Street, Suite 2615
Houston, Texas 77002

  Phone:  (713) 336-0844
Fax: 

  (713) 336-0855

  	

   

  	

   

  	

  Michael T. Fadden, President

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

  Address:

  	

   

  	

   

  	

  GATEWAY PROCESSING COMPANY

  
	

   

  	

   

  	

   

  	

   

  
	

  One Allen Center

  	

   

  	

  By:

  	

   

  
	

  500 Dallas Street, Suite 2615
Houston, Texas 77002
Phone: 

  (713) 336-0844
Fax: 

  (713) 336-0855

  	

   

  	

   

  	

  Michael T. Fadden, President

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

  One Allen Center

  	

   

  	

   

  	

  GATEWAY ENERGY CORPORATION

  
	

  500 Dallas Street, Suite 2615

  	

   

  	

   

  	

   

  
	

  Houston, Texas 77002

  	

   

  	

  By:

  	

   

  
	

  Phone:  (713) 336-0844

  Fax:  (713) 336-0855

  	

   

  	

   

  	

  Michael T. Fadden, President

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

  Address:

  	

   

  	

   

  	

  SOUTHWEST BANK OF TEXAS, N.A.

  
	

   

  	

   

  	

   

  	

   

  
	

  5 Post Oak Park Office

  Building

  	

   

  	

  By:

  	

   

  
	

  4400 Post Oak Parkway

  	

   

  	

  Name:

  	

  Ken Batson 

  
	

  Houston, Texas 77027

  	

   

  	

  Title:

  	

  Assistant Vice President – Energy

  Lending

  
	

  Mail:
P. O. Box 27459
Houston, Texas 77227-7459
Phone: 

  (713) 232-1247  
Fax: 

  (713) 232-5925

  	

   

  	

   

  	

   

  

 

S:\PBCA\SOUTHWESTBANKOFTEXAS\GATEWAY\CREDITAGMT-1MB FINANCIAL BANK, N

EXHIBIT

10.4

 

MB FINANCIAL BANK, N.A.

 

Change in Control Severance Agreement

 

THIS SEVERANCE AGREEMENT,

(the “Agreement”) is entered into this       

day of               ,            (the “Effective Date”), by and

between MB Financial Bank, N.A., a national banking organization (the

“Company”) and                         

(the “Executive”);

 

Witnesseth That:

 

WHEREAS, the Executive is employed by the

Company, and the Company desires to provide protection to Executive in

connection with any change in control of the Company;

 

NOW, THEREFORE, it is hereby agreed by and between the

parties, for good and valuable consideration the receipt and sufficiency of

which are hereby acknowledged, as follows:

 

Article

I.       Establishment and Purpose

 

1.1          Term of the Agreement.  This Agreement will commence on the Effective Date and

remain in effect for an initial term of three years.  The term of this Agreement will be automatically extended for one

year on each anniversary of the Effective Date.  This Agreement will expire at the time described in Section 1.3

below.  In addition, if a Change in

Control occurs while this Agreement is effective, this Agreement will remain

irrevocably in effect for the greater of twenty-four months from the date of

the Change in Control or until all benefits have been paid to the Executive

hereunder, and will then expire.

 

1.2          Purpose of the Agreement. 

The purpose of this Agreement is to advance the interests of the Company

by providing the Executive with an assurance of equitable treatment, in terms

of compensation and economic security, in the event of an acquisition or other

Change in Control of the Company.  An

assurance of equitable treatment will enable the Executive to maintain

productivity and focus during a period of significant uncertainty that is

inherent in an acquisition or other Change in Control.  Further, the Company believes that

Agreements of this kind will aid it in attracting and retaining the highly

qualified, high-performing professionals who are essential to its success.

 

1.3          Contractual Right to Benefits.  This Agreement establishes and vests in the Executive

a contractual right to the benefits to which he or she is entitled hereunder,

enforceable by the Executive against the Company.  However, nothing in this Agreement will require or be deemed to

require the Company to segregate, earmark, or otherwise set aside any funds or

other assets to provide for any payments to be made under it.

 

Subject to Section 3.2, the Company will retain the

right to terminate the Executive’s employment at any time prior to a Change in

Control of the Company.  If the

Executive’s employment is terminated prior to a Change in Control of the

Company, this Agreement will no

 

 

longer be applicable to

the Executive, and any and all rights and obligations of the Company and the

Executive under this Agreement will cease. 

Notwithstanding the foregoing, if the effective date of a Change in

Control occurs within six months following the effective date of an involuntary

termination without Just Cause, the Executive’s termination may be deemed to be

a Qualifying Termination pursuant to Section 3.2 of this Agreement.

 

Article II.               Definitions and Construction

 

2.1          Definitions.  Whenever

used in the Agreement, the following terms have the meanings set forth below

and, when the meaning is intended, the initial letter of the word is

capitalized.

 

(a)                                  “Average

Annual Bonus” means the Executive’s actual average annual bonus earned over the

two complete fiscal years prior to the Effective Date of Termination, or, if

shorter, over the Executive’s entire period of employment.  However, if the Executive’s period of

employment is less than one year, the average bonus will be considered zero.

 

(b)                                 “Base

Salary” means the base rate of compensation paid to the Executive as annual

salary, excluding amounts received under incentive or other bonus plans, as in

effect as of the Effective Date of Termination.  Notwithstanding the foregoing, if the Executive’s Base Salary was

reduced within twenty-four months of the Effective Date of Termination, then

“Base Salary” will mean the Executive’s annual Base Salary as in effect

immediately prior to the reduction

 

(c)                                  “Beneficial

Owner” has the meaning ascribed to that term in Rule 13d-3 of the General Rules

and Regulations under the Securities Exchange Act of 1934, as amended (the

“Exchange Act”), namely, any person, who directly or indirectly, through any

contract, arrangement, understanding or otherwise, has or shares voting power,

which includes the power to vote or direct the voting of securities, and/or

investment power, which includes the power to dispose of, or direct the

disposition of, a security.

 

(d)                                 “Beneficiary”

means the persons or entities designated or deemed designated by the Executive

pursuant to Section 8.2 herein.

 

(e)                                  “Board”

means the Board of Directors of the Company.

 

(f)                                    A “Change in

Control” of the Company will be deemed to occur (as of a particular day, as

specified by the Board) as of the first day any one or more of the events

described in subparagraphs (i) through (iv) occurs.

 

(i)                                     The

Parent ceases to own at least eighty percent of the outstanding capital stock

of the Company.

 

2

 

(ii)                                  Any

Person (other than the Parent or a trustee or other fiduciary holding securities

under an employee benefit plan of the Parent, or a corporation owned directly

or indirectly by the shareholders of the Parent in substantially the same

proportions as their ownership of stock of the Parent) becomes the Beneficial

Owner, directly or indirectly, of securities of the Parent representing more

than thirty percent of the combined voting power of the Parent’s then

outstanding securities.

 

(iii)                               During

any period of twenty-four consecutive months beginning on or after the

Effective Date, individuals who at the beginning of the period constituted the

Board or the Parent Board cease for any reason (other than death, Disability or

voluntary Retirement) to constitute a majority of the Board or of the Parent

Board, respectively.  For this purpose,

any new Director whose election by the Board or Parent Board, or nomination for

election by the Company’s shareholders, was approved by a vote of at least

two-thirds of the Directors then still in office, and who either were Directors

at the beginning of the period or whose election or nomination for election was

so approved, will be deemed to have been a Director at the beginning of any

twenty-four month period under consideration.

 

(iv)                              The

shareholders of the Company or the Parent complete:  (i) a plan of complete liquidation or dissolution of the Company

or Parent; or (ii) an agreement for the sale or disposition of all or

substantially all the Company’s or Parent’s assets; or (iii) a merger,

consolidation or reorganization of the Company or Parent with or involving any

other corporation, other than a merger, consolidation or reorganization that

would result in the voting securities of the Company or Parent outstanding

immediately prior thereto continuing to represent (either by remaining

outstanding or by being converted into voting securities of the surviving

entity) at least seventy percent of the combined voting power of the voting

securities of the Company or Parent (or such surviving entity) outstanding

immediately after such merger, consolidation, or reorganization.

 

(g)                                 “Code”

means the Internal Revenue Code of 1986, as amended.

 

(h)                                 “Company”

means The MB Financial Bank, N.A., a national banking organization, or any

successor thereto that adopts the Agreement, as provided in Section 8.1 herein.

 

3

 

(i)                                     “Compensation

Committee” means the Compensation Committee of the Board of Directors of the

Parent Company.

 

(j)                                     “Director”

means a member of the Board or of the Parent Board, as the case may be.

 

(k)                                  “Disability”

means a physical or mental condition that would entitle the Executive to

benefits under the Company’s long-term disability plan, or if the Company

maintains no such plan, then under the federal Social Security Law.

 

(l)                                     “Effective

Date of Termination” means the date on which a Qualifying Termination occurs

which triggers Severance Benefits hereunder.

 

(m)                               “Exchange

Act” means the Securities Exchange Act of 1934, as amended from time to time,

or any successor to it.

 

(n)                                 “Expiration

Date” means the date the Agreement expires, as provided in Section 1.1 herein.

 

(o)                                 “Good

Reason” means (i) the occurrence of a ten percent or greater reduction in the

aggregate value of the Executive’s annual Base Salary, bonus opportunity, and

benefits excluding profit sharing; (ii) the assignment to the Executive of any

duties inconsistent with, and commonly (in the banking industry) considered

beneath, the Executive’s position, or a change in the Executive’s status,

offices, titles and reporting relationships, authority, duties or

responsibilities, or any other action by the Company, in each case if the

assignment, change or action results in a significant diminution in the

Executive’s position, authority, duties or responsibility; or (iii) a required

relocation of the Executive to a location more than fifty miles from the

Executive’s then existing job location to which the Executive does not consent

to in writing.  In determining whether

an assignment, change or action described in clause (ii) above constitutes Good

Reason, due consideration will be given to the size of the organization and

other facts and circumstances surrounding the Executive’s situation before and

after the assignment, change or action. 

For example, if the Executive is moved to a position that carries a

title generally considered to be of a lower degree, but he or she is working in

a larger division or company than before the change, has more employees

reporting to him or her, or has authority for projects controlling more

dollars, or if other circumstances exist that suggest the Executive’s new

position is not a demotion, then Good Reason will not exist for the Executive

to terminate his or her employment.

 

(p)                                 “Just

Cause” means a termination of the Executive’s employment by the Company, for which

no Severance Benefits are payable, as provided in Article IV.

 

4

 

(q)                                 “Parent”

means MB Financial, Inc., a Maryland corporation, or any direct parent of a

successor of the Company that adopts the Agreement as provided in Section 8.1.

 

(r)                                    “Parent

Board” means the Board of Directors of the Parent.

 

(s)                                  “Person”

means a natural person, company, or government, or a political subdivision,

agency, or instrumentality of a government, including a “group” as defined in

Section 13(d) of the Exchange Act.  When

two or more persons act as a partnership, limited partnership, syndicate or

other group for the purpose of acquiring the securities of the Company, they

will be deemed a Person for purposes of the Agreement.  “Person” will be construed in the same

manner as under Section 3(a)(9) of the Exchange Act, and “group” will be

construed in the same manner as under Section 13(d) of the Exchange Act.

 

(t)                                    “Qualifying

Termination” means any of the events described in Section 3.2, the occurrence

of which triggers the payment of Severance Benefits.

 

(u)                                 “Severance

Benefit” means the payment of severance compensation as provided in Article

III.

 

2.2          Gender and Number. 

Except where otherwise indicated by the context, any masculine term used

herein also includes the feminine, the plural includes the singular, and the

singular includes the plural.

 

2.3          Severability.  If any provision of this Agreement is held to be

illegal or invalid for any reason, the illegality or invalidity will not affect

the remaining parts of this Agreement, and this Agreement will be construed and

enforced as if the illegal or invalid provision had not been included.

 

2.4          Amendment or Termination. 

The material provisions of this Agreement may be amended by written

agreement between the Company and the Executive, approved by at least

two-thirds of the Board holding office at the time of the amendment, without

regard to their presence at the meeting. 

Any agreed amendment of a non-material provision of the Agreement must

be approved by at least one-half of the Board at the time of the amendment,

without regard to their presence at any meeting.  Subject to the final sentence of Section 1.1, the Company may

terminate this Agreement by written resolution of its Board of Directors,

effective as of a date at least twelve months following the date the Company

gives written notice to the Executive of its intent to terminate the Agreement.

 

2.5          Applicable Law. 

To the extent not preempted by the laws of the United States, the laws

of the State of Illinois, without regard to its conflict of laws provisions,

will be the controlling law in all matters relating to this Agreement.

 

5

 

Article III.              Severance Benefits

 

3.1          Right to Severance Benefits. 

Subject to the provisions hereof, the Executive will be entitled to

receive from the Company Severance Benefits as described in Section 3.3 if

there has been a Change in Control of the Company and if any of the events

designated within Section 3.2 occur. 

The Executive will not be entitled to receive Severance Benefits if his

or her employment with the Company ends due to death, disability, voluntary

retirement, a voluntary termination by the Executive without Good Reason, or due

to an involuntary termination by the Company for Just Cause.

 

3.2          Qualifying Terminations. 

The occurrence of any one of the following events within twenty–four

calendar months after a Change in Control of the Company will trigger the

payment of Severance Benefits under this Agreement:

 

(a)           an

involuntary termination of the Executive’s employment without Just Cause;

 

(b)                                 a

voluntary termination of the Executive’s employment with the Company, for Good

Reason;

 

(c)                                  the

failure or refusal of a successor company (including, but not limited to, an

individual, corporation, association, or partnership) to assume the Company’s

obligations under this Agreement, as required by Section 8.1; and

 

(d)                                 a

breach by the Company or any successor company of any of the provisions of this

Agreement.

 

In addition, an involuntary termination without Just

Cause will trigger the payment of Severance Benefits under this Agreement if

the Executive’s employment is terminated by the Company without Just Cause

within six months prior to a Change in Control that actually occurs during the

term of this Agreement and either (i) the termination was at the request or

direction of a Person who has entered into an agreement with the Company the

consummation of which would constitute a Change in Control, or (ii) the

Executive reasonably demonstrates that the termination is otherwise in

connection with or in anticipation of the Change in Control.

 

3.3          Description of Severance Benefits. 

If the Executive becomes entitled to receive Severance Benefits, as

provided in Sections 3.1 and 3.2, the Company will pay to the Executive and

provide him or her with the following:

 

(a)                                  an

amount equal to the Executive’s annual Base Salary multiplied by one

 

(b)                                 an

amount equal to the Executive’s Average Annual Bonus multiplied by one

 

(c)                                  immediate

vesting of the Executive’s benefits, if any, under any and all non-qualified

retirement plans of the Company (or its affiliates) in which the Executive

participates; and

 

6

 

(d)                                 continuation

of the welfare benefits of medical, dental or other health coverage, long–term

disability, and group term life insurance at the same premium cost to the

Executive and at the same coverage level as in effect as of the Executive’s

Effective Date of Termination until the first anniversary of the Effective Date of

Termination, without regard to the federal income tax consequences of that

continuation.

 

The treatment of any options held by the Executive will be subject to

the terms of the plan or plans under which they were granted.  Benefits under subsection 3.3(d) will be

discontinued prior to the end of the first anniversary of the Effective Date of

Termination if the Executive receives substantially similar benefits in the

aggregate from a subsequent employer, as determined by the Compensation

Committee.  Continued medical, dental or

other health benefits under subsection 3.3(d) will count toward any COBRA

continuation coverage period that may apply to the Executive.

 

Article IV.              Just Cause or Retirement

 

4.1          Just Cause.  Nothing

in this Agreement will be construed to prevent the Company from terminating the

Executive’s employment for Just Cause. 

If the Company does so, no Severance Benefits will be payable to the

Executive under this Agreement.

 

Just Cause will be defined to include, but will not be

limited to, willful, malicious conduct by the Executive that is prejudicial to

the best interests of the Company, including theft, embezzlement, the

conviction of a criminal act, disclosure of trade secrets, a gross dereliction

of duty, or other grave misconduct on the part of the Executive that is

injurious to the Company.

 

4.2          Retirement. 

If the Executive’s employment with the Company ends due to voluntary

retirement, the Executive: (i) will not be entitled to receive Severance

Benefits under this Agreement; and (ii) will not be eligible to participate in

a Company-sponsored severance plan or arrangement at any time following his or

her retirement.

 

Article V.               Form and Timing of Severance Benefits

 

5.1          Form and Timing of Severance

Benefits.  The Severance Benefits described in

Sections 3.3(a), (b) and (c) will be paid in cash to the Executive in a single

lump sum as soon as practicable following the Effective Date of Termination,

but in no event more than thirty days after the Effective Date of Termination.

 

The Severance Benefits described in subsection 3.3(d)

will be provided by the Company to the Executive immediately upon the Effective

Date of Termination and will continue to be provided until the first anniversary

of the Effective Date of Termination. 

However, the Severance Benefits described in subsection 3.3(d) will be

discontinued prior to the end of the one-year period immediately upon the

Executive’s receiving similar benefits from a subsequent employer, as

determined by the Compensation Committee.

 

7

 

5.2          Withholding of Taxes.  The Company will withhold from any amounts payable

under this Agreement all Federal, state, city, or other taxes that are legally

required.

 

Article VI.              Parachute

Payments

 

6.1          Excise Tax Cap. 

If a Change in Control of the Company occurs and the Company determines,

pursuant to Code Sections 280G and 4999, that a golden parachute excise tax is

due, the Executive’s Severance Benefits under this Agreement will be limited to

the amount just necessary to avoid the excise tax.

 

6.2          Subsequent Recalculation. 

If the Internal Revenue Service adjusts the computation made by the

Company pursuant to Section 6.1, and that adjustment either is acceptable to

the Company or is finally determined to be correct, so that the Executive is

liable for the payment of an excise tax under Sections 280G and 4999 of the

Code, or so that the Executive does not receive the full benefit he or she

would have received, the Company will reimburse the Executive for the full

amount necessary to make the Executive whole, including the value of Severance

Benefits that were erroneously limited, the value of the excise tax, all

corresponding interest and penalties due to the Internal Revenue Service, and

the Executive’s regular income tax due on these reimbursement payments.

 

Article VII.             Other Rights and Benefits Not

Affected

 

7.1          Other Benefits. 

Except as provided in this Section below, neither the provisions of this

Agreement nor the Severance Benefits provided for hereunder will reduce any

amounts otherwise payable, or in any way diminish the Executive’s rights as an

employee of the Company, whether existing now or hereafter, under any benefit,

incentive, retirement, stock option, stock bonus, stock purchase plan, or any

employment agreement, or other Agreement or arrangement.  Notwithstanding the foregoing, an Executive

who is also a covered employee under a severance plan of the Company or one of

its affiliates will be entitled to receive the severance benefits provided

under this Agreement in lieu of any severance pay provided under that severance

plan.  Benefits provided under this

Agreement will not increase any amounts otherwise payable under any other

arrangement, if that other arrangement does not provide that severance benefits

will be taken into account in determining benefits.

 

7.2          Employment Status. 

This Agreement does not constitute a contract of employment or impose on

the Executive or the Company any obligation to retain the Executive as an

employee, to change the status of the Executive’s employment, or to change the

Company’s policies regarding termination of employment.

 

Article VIII.           Successors

 

8.1          Successors.  The

Company will require any successor (whether direct or indirect, by purchase,

merger, consolidation, or otherwise) of all or substantially all of the

business and/or

 

8

 

assets of the Company or

of any division or subsidiary thereof to expressly assume and agree to perform

this Agreement in the same manner and to the same extent that the Company would

be required to perform it if no such succession had taken place.  Failure of the Company to obtain such an

assumption and agreement prior to the effectiveness of any such succession will

be a breach of this Agreement and will entitle the Executive to compensation

from the Company in the same amount and on the same terms as he or she would be

entitled hereunder if terminated voluntarily for Good Reason, except that, for

the purposes of implementing the foregoing, the date on which any succession

becomes effective will be deemed the Effective Date of Termination.

 

This Agreement will inure to the benefit of and be

enforceable by the Executive’s personal or legal representatives, executors,

administrators, successors, heirs, distributees, devisees, and legatees.  If the Executive dies while any amount would

still be payable to him or her hereunder had he or she continued to live, any such

amount, unless otherwise provided herein, will be paid in accordance with the

terms of this Agreement, to the Executive’s devisee, legatee, or other

designee, or if there is no such designee, to the Executive’s estate.

 

8.2          Beneficiaries.  The Executive’s beneficiary under the qualified

defined contribution plan of the Company or an affiliate in which the Executive

participates will be his or her Beneficiary under this Agreement, unless the

Executive otherwise designates a Beneficiary in the form of a signed writing

acceptable to the Compensation Committee. 

The Executive may make or change such a designation at any time.

 

Article IX.              Administration

 

9.1          Administration.  This Agreement will be administered by the Board, as

advised by the Compensation Committee. 

In that capacity, and with the approval of a majority of the Board for

all actions hereunder, the Compensation Committee, to the extent not contrary

to the express provisions of the Agreement, is authorized in its discretion to

interpret this Agreement, to prescribe and rescind rules and regulations, to

provide conditions and assurances deemed necessary and advisable, to protect

the interests of the Company, and to make all other determinations necessary or

advisable for the administration of this Agreement and similar Agreements.

 

In fulfilling its administrative duties hereunder, the

Compensation Committee may rely on outside counsel, independent accountants, or

other consultants to render advice or assistance.

 

9.2          Indemnification and Exculpation.  The members of the Board, its agents and officers,

directors, and employees of the Company and its affiliates will be indemnified

and held harmless by the Company against and from any and all loss, cost,

liability, or expense that may be imposed upon or reasonably incurred by them

in connection with or resulting from any claim, action, suit, or proceeding to

which they may be a party or in which they may be involved by reason of any

action taken or failure to act under this Agreement and against and from any

and all amounts paid by them in settlement (with the Company’s written

approval) or paid by them in satisfaction of a judgment in any such action,

suit, or proceeding.  The foregoing

provision will

 

9

 

not apply to any person

if the loss, cost, liability, or expense is due to that person’s gross

negligence or willful misconduct.

 

Article X.                Legal Fees and Arbitration

 

10.1        Legal Fees and Expenses. 

The Company (or, in the event of the acquisition of substantially all of

the assets of the Company, the acquirer of those assets) will pay all legal

fees, costs of litigation, and expenses directly related to legal fees and

costs of litigation incurred in good faith by the Executive as a result of the

Company’s refusal to provide the Severance Benefits to which the Executive

becomes entitled under this Agreement, or as a result of the Company’s

contesting the validity, enforceability, or interpretation of this Agreement,

but in each case only if the Executive ultimately prevails in litigation

conducted as a result of the refusal or contest.

 

10.2        Arbitration.  The

Executive and the Company will have the right and option to elect (in lieu of

litigation) to have any dispute or controversy arising under or in connection

with this Agreement settled by arbitration, conducted before a panel of three

arbitrators sitting in a location selected by the Executive within fifty miles

from the location of his or her job, in accordance with rules of the American

Arbitration Association then in effect. 

Judgment may be entered on the award of the arbitrator in any court

having jurisdiction.  All expenses of

arbitration, including the fees and expenses of the counsel for the Executive,

will be split between the Company and the Executive, unless the Executive

prevails, in which case the Company will bear the expenses of the

arbitration.  Notwithstanding the right

of the Executive or the Company to elect to enter into arbitration, the Company

and the Executive may mutually agree to resolve any dispute or controversy

arising under or in connection with the Agreement in a court of law, in lieu of

arbitration.

 

Article XI.              Exclusivity of Severance Benefits

 

11.1        Exclusivity of Severance Benefits. 

If the Company is contractually obligated to pay to the Executive any

severance benefits pursuant to another agreement, plan, program, policy, or any

other change of control agreement, the terms and provisions of the program

under which the aggregate level of severance benefits is the highest (as

determined by the Executive) will operate to completely replace and supersede

the terms and provisions of this Agreement and/or all other programs that

provide for the payment of severance benefits.

 

In Witness Whereof, the Executive has executed this Agreement and the

Company has caused this Agreement to be executed by a resolution of the Board,

as of the day and year first above written.

 

	

  MB FINANCIAL BANK, N.A.

  	

  EXECUTIVE

  
	

   

  	

   

  
	

  By:

  	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  
	

  Its:

  	

   

  	

   

  	

   

  
							

 

10

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