CREDIT AND GUARANTY AGREEMENT dated as of September 8, 2006 among FOOTHILLS RESOURCES, INC., CERTAIN SUBSIDIARIES OF FOOTHILLS RESOURCES, INC., VARIOUS LENDERS, J. ARON & COMPANY, as Lead Arranger and Syndication Agent, and J. ARON & COMPANY, as Administrative Agent ________________________________________________________ $50,000,000 Second Lien Secured Credit Facility ________________________________________________________ TABLE OF CONTENTS

 

This Credit and Guaranty Agreement, dated as of September 8, 2006, is entered into by and among Foothills Resources, Inc., a Nevada corporation (“Company”), certain Subsidiaries of Company, the Lenders (as defined below) party hereto from time to time, J. Aron & Company (“J. Aron”), as Lead Arranger and as Syndication Agent (in such capacities, “Syndication Agent”), J. Aron & Company, as Administrative Agent for such Lenders (together with its permitted successor in such capacity, “Administrative Agent”).

 

 

WHEREAS, capitalized terms used in these Recitals shall have the respective meanings set forth for such terms in Section 1.1 hereof;

 

WHEREAS, Lenders have agreed to extend Loans to Company, the proceeds of which will be used as provided in Section 2.4;

 

WHEREAS, Company and Guarantors have agreed to secure all of the Obligations by granting to Administrative Agent, for the benefit of Secured Parties, an Acceptable Priority on its assets, as provided herein;

 

WHEREAS, to further induce Lenders to enter into this Agreement, Company has agreed to convey the ORRI to Royalty Owner and Company has agreed to issue the Warrants to Warrant Owner; and

 

WHEREAS, Guarantors have agreed to guarantee the Obligations of Company hereunder and to secure their respective Obligations by granting to Administrative Agent, for the benefit of Secured Parties, an Acceptable Priority on their respective assets.

 

NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows:

 

 

1.1 Definitions. The following terms used herein, including in the preamble, recitals, exhibits and schedules hereto, shall have the following meanings:

 

“Acceptable Priority” means, with respect to any Lien purported to be created in any Collateral pursuant to any Security Document, a Lien that is the only Lien to which such Collateral is subject, other than Permitted Liens and subject to the terms of the Intercreditor Agreement; provided that the existence of such Permitted Liens shall not be deemed or construed to evidence Administrative Agent’s or any Lender’s intention to subordinate any of the Obligations to such Permitted Liens, except as expressly provided by the Intercreditor Agreement.

 

 

“Acquisition” means the purchase by Company of the properties and assets described in the Acquisition Documents.

 

“Acquisition Agreements” means collectively, (a) that certain Purchase and Sale Agreement, dated June 21, 2006, between Assignor and Foothills Texas, (b) that certain Purchase and Sale Agreement, dated June 21, 2006, between Assignor and Foothills Texas, (c) that certain letter agreement, dated June 21, 2006, between Assignor and Foothills Texas, relating to the agreements referred to in (a) and (b) above, (d) that certain letter agreement, dated -August 14, 2006, between Assignor and Foothills Texas, relating to the agreements referred to in (a) and (b) above, and (e) that certain letter agreement, dated August 25, 2006, between Assignor and Foothills Texas, relating to the agreements referred to in (a) and (b) above.

 

“Acquisition Documents” means (a) the Acquisition Agreements, and (b) all other agreements, assignments, deeds, conveyances, certificates and other documents and instruments now or hereafter executed and delivered pursuant to the Acquisition Agreements or in connection with the Acquisition.

 

“Adjusted Eurodollar Rate” means, for any Interest Period, (i) the rate per annum (rounded to the nearest 1/100 of 1%) equal to the rate determined by Administrative Agent to be the offered rate which appears on the page of the Telerate Screen which displays an average British Bankers Association Interest Settlement Rate (such page currently being page number 3740 or 3750, as applicable) for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London, England time) on the date that is two Business Days prior to the first day of such Interest Period, or (ii) in the event the rate referenced in the preceding clause (i) does not appear on such page or service or if such page or service shall cease to be available, the rate per annum (rounded to the nearest 1/100 of 1%) equal to the rate determined by Administrative Agent to be the offered rate on such other page or other service which displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London, England time) on the date that is two Business Days prior to the first day of such Interest Period, or (iii) in the event the rates referenced in the preceding clauses (i) and (ii) are not available, the rate per annum (rounded to the nearest 1/100 of 1%) equal to the offered quotation rate to first class banks in the London interbank market by J. Aron for deposits in Dollars (for delivery on the first day of such Interest Period) of amounts in same day funds comparable to the average principal amount of the applicable Loan of Administrative Agent (in its capacity as a Lender, during such Interest Period) with maturities comparable to such Interest Period as of approximately 11:00 a.m. (London, England time) on the date that is two Business Days prior to the first day of such Interest Period.

 

“Administrative Agent” as defined in the preamble hereto.

 

“Affiliate” means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, “control” (including, with correlative meanings, the terms “controlling”, “controlled by” and “under common control with”), as applied to any Person, means the possession, directly or indirectly, of the power (through the ownership of voting securities or by contract or otherwise) (i) to vote 10% or more of the Securities having ordinary voting power for the election of directors of such Person or (ii) to direct or cause the direction of the management and policies of that Person.

 

 

“Agent” means each of Syndication Agent and Administrative Agent.

 

“Agreed Pricing” means:

 

(i) for anticipated sales of Hydrocarbons that are fixed in a firm fixed price sales contract with an investment grade counterparty or a counterparty with an investment grade guarantor (or another counterparty approved by Administrative Agent), the fixed price or prices provided for in such sales contract during the term thereof; and

 

(ii) for anticipated sales of Hydrocarbons that are hedged by a fixed price Hedging Contract with an investment grade counterparty or a counterparty with an investment grade guarantor, the fixed price or prices provided for in such Hedging Contract during the term thereof, as modified by any necessary adjustment specified by Administrative Agent for quality and geographical differentials; and

 

(iii) for anticipated sales of Hydrocarbons that are hedged by a Hedging Contract with an investment grade counterparty or a counterparty with an investment grade guarantor which Hedging Contract provides for a range of prices between a floor and a ceiling, the prices provided for in subsection (iv) below, provided that during the term of such Hedging Contract such prices shall in no event be less than such floor or exceed such ceiling, as such floor and ceiling are modified by any necessary adjustment specified by Administrative Agent for quality and geographical differentials; and

 

(iv) for anticipated sales of Hydrocarbons, if such sales are not hedged by a Hedging Contract or sales contract that is described in paragraphs (i), (ii), or (iii) above, for the date of calculation (or, if such date is not a Business Day, for the first Business Day thereafter), and with any necessary adjustment specified by Administrative Agent for quality and geographical differentials:

 

(a) For the remainder of the current calendar year, the average NYMEX Pricing for the remaining contracts in the current calendar year,

 

(b) For each of the succeeding four complete calendar years, the average NYMEX Pricing for the twelve months in each such calendar year,

 

(c) For the succeeding fifth complete calendar year, and for each calendar year thereafter, the average NYMEX Pricing for the twelve months in such fifth calendar year.

 

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

 

 

“AMI Violation” means the acquisition of any interest (including the acquisition of any interests or rights described in the definition of Oil and Gas Properties) in the Texas Project Area directly or indirectly by any director, officer, or employee of any Credit Party.

 

“ANCF” (or “Adjusted Net Cash Flow”) means the remainder of:

 

(i) the sum, without duplication, of all cash revenues and cash receipts of Company and its Subsidiaries attributable to the Properties in the Texas Project Area (excluding only (a) funds received from Loans hereunder, (b) funds received from Loans under the Revolving Credit Agreement, (c) funds received from capital contributions made to Company, including sales of new Capital Stock and funds received for options or warrants to acquire such Capital Stock, and (d) funds belonging to or received for the credit of third parties, such as royalty, working interest or other interest owners, that are received for transfer or payment to such third parties) during any Calculation Quarter, beginning with the Calculation Quarter which starts September 1, 2006, but effective as of the Closing Date, minus

 

(ii) the sum, without duplication, of all cash payments, net to the interests of Company and its Subsidiaries, made during such Calculation Quarter (excluding any payments financed by funds described in clause (a) or (b) of subparagraph (i) above) for:

 

(a) Direct Taxes paid on Properties or production of Hydrocarbons in the Texas Project Area during such Calculation Quarter,

 

(b) delay rentals and lease bonuses payable during such Calculation Quarter that are included in the Approved Plan of Development,

 

(c) ANCF Capital Expenditures made during such Calculation Quarter,

 

(d) ANCF LOE during such Calculation Quarter,

 

(e) ANCF Overhead Costs during such Calculation Quarter,

 

(f) ANCF Transportation Costs during such Calculation Quarter,

 

(g) interest, fees, expense and principal, if any, paid during such Calculation Quarter in respect of Revolving Indebtedness allowed under Section 6.1(f);

 

(h) payments owing during such Calculation Quarter under Hedging Contracts permitted hereunder; and

 

(i) interest payable during such Calculation Quarter on the Loans, together with the amount of payments, if any, due to Agents and Lenders under Sections 2.9, 5.9, 10.2 or 10.3 hereof or under any similar sections of any other Transaction Documents.

 

This definition of “ANCF” is to be used for the purpose of determining the payments that Company is required to make under Section 2.11 below; neither this definition nor Section 2.11 affects or restricts Lenders’ rights or ability to apply amounts that they receive from the enforcement of their Liens and remedies against Collateral or Lenders’ right to require a different application of funds as a condition to any waiver of or amendment to the Transaction Documents by Lenders (such as any consent to a sale by Company of all or substantially all of its assets).

 

 

“ANCF Capital Expenditures” means (i) capital expenditures made or to be made by Company in the Texas Project Area, to the extent the same either (a) have been approved by Required Lenders at the time in question by means of an Approval Letter, or (b) are included in the Approved Plan of Development, as then in effect; (ii) other capital expenditures not included in the Approved Plan of Development that do not in the aggregate exceed $50,000 in any Calculation Quarter, and (iii) payments on capital leases that are permitted under Section 6.1(d).

 

“ANCF LOE” means (i) leasehold operating expenses with respect to the Texas Project Area in the ordinary course of business of the kind chargeable as direct charges under an Onshore COPAS Accounting Procedure for Joint Operations (1989 form published by the Council of Petroleum Accountants Societies), but in no event shall such leasehold operating expenses exceed those set forth in the Operating Expense Budget and (ii) other field level or lease level charges for operations in the Texas Project Area (excluding ANCF Capital Expenditures and other capital expenditures) that have been approved by Required Lenders at the time in question by means of an Approval Letter.

 

“ANCF Overhead Costs” means (i) Permitted G&A Expense Amounts, and (ii) other costs of Company to the extent such other costs have been approved as ANCF Overhead Costs by Required Lenders at the time in question by means of an Approval Letter.

 

“ANCF Transportation Costs” means (i) the actual costs of gathering, processing and transporting production from the Texas Project Area from the wellhead to the point of sale, provided that all such costs are negotiated with, and paid to, third parties in arms-length transactions on terms which are reasonable in the area of operations for the quality and quantity of such production for the time period negotiated, at the time such prices are agreed to, or (ii) other transportation or marketing costs, to the extent such other transportation and marketing costs have been approved by Required Lenders at the time in question by means of an Approval Letter.

 

“Approval Letter” means a letter given by Administrative Agent on behalf of Required Lenders in the form of Exhibit H.

 

“Approved Plan of Development” or “APOD” means Company’s written plan of development with respect to budgeted capital expenditures (including maximum annual expenditures) and other development activities with respect to the Texas Project Area as described in Exhibit I, as amended and supplemented from time to time with the consent of Required Lenders; provided that no such consent shall be required for amendments, modifications or supplements to the extent, but only to the extent, that any such amendments, modifications or supplements (a) either (i) are administrative or ministerial in nature, or (ii) would make non-material amendments to the timing for the completion of any such development (other than an amendment extending the timing of the substantial completion of the APOD), and (b) do not increase the aggregate permitted budgeted capital expenditures of Company and its Subsidiaries under such written plan.

 

 

“Assignment Agreement” means an Assignment and Assumption Agreement substantially in the form of Exhibit E, with such amendments or modifications as may be approved by Administrative Agent.

 

“Assignor” means TARH E&P Holdings, L.P., a Texas limited partnership.

 

“Authorized Officer” means, as applied to any Person, any individual holding the position of chairman of the board (if an officer), chief executive officer, president or one of its vice presidents (or the equivalent thereof), manager, and such Person’s chief financial officer or treasurer.

 

“Bankruptcy Code” means Title 11 of the United States Code entitled “Bank-ruptcy,” as now and hereafter in effect, or any successor statute.

 

“Beneficiary” means each Agent, each Lender, Royalty Owner and Warrant Owner.

 

“Business Day” means (i) any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of New York or is a day on which banking institutions located in such state are authorized or required by law or other governmental action to close and (ii) as used in the definitions of “Adjusted Eurodollar Rate” and “Quarterly Payment Date”, the term “Business Day” shall mean any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in Dollar deposits in the London interbank market.

 

“Calculation Quarter” means the three calendar month period commencing on the first day of March, June, September, and December of each year.

 

“Capital Stock” means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation), including, without limitation, partnership interests and membership interests, and any and all warrants, rights or options to purchase or other arrangements or rights to acquire any of the foregoing.

 

“Ceiling Amount” means the aggregate amount of Revolving Indebtedness that may be drawn or incurred by Company under the Revolving Credit Agreement in an amount approved from time to time in sole discretion of the Required Lenders. As of the Closing Date, the Ceiling Amount is $0.

 

“Certificate re Non-Bank Status” means a certificate substantially in the form of Exhibit F.

 

“Change of Control” means the occurrence of any of the following events:

 

 

(a) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), shall become, or obtain rights (whether by means or warrants, options or otherwise) to become, the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of more than 50% of the outstanding common stock of the Company or

 

(b) the board of directors of the Company shall cease to consist of a majority of Continuing Directors.

 

“Closing Date” means the date on which the first Loans are made.

 

“Closing Date Certificate” means a Closing Date Certificate substantially in the form of Exhibit G-1.

 

“Closing Date Transactions” means the consummation of the Acquisition on the Closing Date.

 

“Collateral” means, collectively, all of the real, personal and mixed property (including Capital Stock) in which Liens are purported to be granted pursuant to the Security Documents as security for the Obligations.

 

“Commitment” means, as to each Lender, its obligation to make Loans to Company pursuant to Section 2.1 in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender’s name on Annex A or in the Assignment Agreement pursuant to which such Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Agreement. It is expressly understood and agreed that Lenders have no obligation to increase the amount of the commitments set forth on Annex A or such Assignment Agreement, as applicable, and that Lenders’ commitments to make Loans hereunder is determined by reference to such Annex A or such Assignment Agreement, as applicable.

 

“Company” as defined in the preamble hereto.

 

“Compliance Certificate” means a Compliance Certificate substantially in the form of Exhibit C-1.

 

“Consolidated” refers to the consolidation of Company or any other Credit Party, in accordance with GAAP, with its properly consolidated subsidiaries. References herein to a Person’s Consolidated financial statements, financial position, financial condition, liabilities, etc. refer to the consolidated financial statements, financial position, financial condition, liabilities, etc. of such Person and its properly consolidated subsidiaries.

 

“Consolidated Current Assets” as defined in Section 6.10.

 

“Consolidated Current Liabilities” as defined in Section 6.10.

 

“Consolidated Net Income” means, as to any Person or Persons for any period, the gross revenues of such Person or Persons for such period, plus any cash dividends or distributions actually received by such Person or Persons from any other business entity, minus all expenses and other proper charges (including provision for federal, state, local and foreign taxes and franchise taxes but excluding charges for accrued unpaid dividends on preferred stock of such Person or Persons for such period), determined on a Consolidated basis but excluding income (or loss) for such period of any Person if such Person is not a Subsidiary of the Company or any other Credit Party.

 

 

“Continuing Directors” means the directors of the Company on the Closing Date, and each other director, if, in each case, such other director’s nomination for election to the board of directors of the Company is recommended by at least 50% of the then Continuing Directors.

 

“Contractual Obligation” means, as applied to any Person, any provision of any Security issued by that Person or of any indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject.

 

“Contributing Guarantors” as defined in Section 7.2.

 

“Counterpart Agreement” means a Counterpart Agreement substantially in the form of Exhibit K delivered by a Credit Party pursuant to Section 5.14.

 

“Credit Date” means the date of a Credit Extension.

 

“Credit Extension” means the making of a Loan.

 

“Credit Party” means Company and each Subsidiary of Company.

 

“Current Financial Statements” means (a) the financial statements of Company dated as of June 30, 2006 and (b) the pro forma balance sheet of Company as of the Closing Date (after giving effect to the Closing Date Transactions).

 

“Default” means a condition or event that, after notice or lapse of time or both, would constitute an Event of Default.

 

“Deposit Account” means a demand, time, savings, passbook or like account with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a negotiable certificate of deposit, and any other deposit account, as defined in the UCC.

 

“Direct Taxes” means any severance, ad valorem, or other direct taxes on properties owned by any Credit Party or the production therefrom or the proceeds of such production; provided that federal, state, or local income or franchise taxes shall in no event be considered Direct Taxes.

 

“Distribution” means (i) any dividend or other distribution made by a Credit Party on or in respect of any Capital Stock in such Credit Party, or (ii) any payment made by a Credit Party to purchase, redeem, acquire or retire any Capital Stock in such Credit Party.

 

 

“Dollars” and the sign “$” mean the lawful money of the United States of America.

 

“EBITDA” means, for each trailing four Fiscal Quarter period, the sum of (i) the Consolidated Net Income of Company during such period, plus (ii) all interest paid during such period on Indebtedness (including amortization of original issue discount and the interest component of any deferred payment obligations and capital lease obligations) which was deducted in determining such Consolidated Net Income, plus (iii) all provisions for federal, state, local or foreign income or franchise taxes, if any which were deducted in determining such Consolidated Net Income, plus (iv) all depreciation, amortization (including amortization of good will and debt issuance costs), depletion, and other non-cash charges (including any provision for the reduction in the carrying value of assets recorded in accordance with GAAP and including those resulting from the requirements of FASB 133 or 143) which were deducted in determining such Consolidated Net Income, minus (v) all non-cash items of income or gain (including those resulting from the requirements of FASB 133 or 143) which were included in determining such Consolidated Net Income.

 

“Eel River Basin Test Date” means the date on which Foothills California has successfully drilled and completed two wells on the Eel River Properties, in each case (i) with a 90-day sustained daily production rate of at least 400 mcf per day in the Anderson formation or with a 90-day sustained daily production rate of at least 1,000 mcf per day in the Lower Rio Dell formation, and (ii) as confirmed in writing by Required Lenders in their sole discretion.

 

“Eel River Properties” means the Anderson formation and the Lower Rio Dell formation located in Humboldt County, California.

 

“Effective Rate” means, at any time of determination, the per annum rate equal to the Adjusted Eurodollar Rate plus seven percent (7%); provided that such per annum rate shall be automatically increased (a) by one percent (1.0%) per annum on September 22, 2006 if the Required Equity Date has not occurred prior to such date, (b) by an additional one percent (1.0%) per annum on October 23, 2006 if the Required Equity Date has not occurred prior to such date, and (c) by an additional one percent (1.0%) per annum on November 22, 2006 if the Required Equity Date has not occurred prior to such date.

 

“Eligible Assignee” means (i) any Lender or any Affiliate of any Lender, and (ii) any Related Fund (any two or more Related Funds being treated as a single Eligible Assignee for all purposes hereof) or any commercial bank, insurance company, investment or mutual fund or other entity that is an “accredited investor” (as defined in Regulation D under the Securities Act) and which extends credit or buys loans as one of its businesses; provided, no Affiliate of Company shall be an Eligible Assignee.

 

“Eligible Mortgaged Properties” means, collectively, those oil and gas Properties (a) which are owned by Company or any other Credit Party and mortgaged to Administrative Agent to secure the Obligations, (b) for which Administrative Agent has received title opinions or other title information concerning such interests in form, substance and authorship satisfactory to Administrative Agent, (c) are free and clear of all Liens other than Permitted Liens and (d) which are subject to an ORRI Conveyance.

 

 

“Engineering Report” means the Initial Engineering Report and each engineering report hereafter delivered by Company pursuant to Section 5.2(e), provided that each such report hereafter delivered must (a) separately report on Proved Producing Reserves, Proved Developed Nonproducing Reserves, Proved Undeveloped Reserves and probable reserves and separately calculate the NPV of each such category of Proved Reserves for Company’s interest, (b) use Agreed Pricing and a 10% discount factor (or any other pricing assumptions to which Company and Administrative Agent may agree), (c) take into account Company’s actual experiences with leasehold operating expenses and other costs in determining projected leasehold operating expenses and other costs, (d) identify and take into account any “over-produced” or “under-produced” status under gas balancing arrangements, (e) contain information and analysis comparable in scope to that contained in the Initial Engineering Report, and (f) otherwise be in form and substance satisfactory to Administrative Agent.

 

“Environmental Claim” means any investigation, notice, notice of violation, claim, action, suit, proceeding, demand, abatement order or other order or directive (conditional or otherwise), by any Governmental Authority or any other Person, arising (i) pursuant to or in connection with any actual or alleged violation of any Environmental Law; (ii) in connection with any Hazardous Material or any actual or alleged Hazardous Materials Activity; or (iii) in connection with any actual or alleged damage, injury, threat or harm to health, safety, natural resources or the environment.

 

“Environmental Laws” means any and all current or future foreign or domestic, federal or state (or any subdivision of either of them), statutes, ordinances, orders, rules, regulations, judgments, Governmental Authorizations, or any other requirements of Governmental Authorities relating to (i) environmental matters, including those relating to any Hazardous Materials Activity; (ii) the generation, use, storage, transportation or disposal of Hazardous Materials; or (iii) occupational safety and health, industrial hygiene, land use or the protection of human, plant or animal health or welfare, in any manner applicable to Company or any of its Subsidiaries or any of their respective properties.

 

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

 

“ERISA Affiliate” means Company and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control that, together with Company, are treated as a single employer under Section 414 of the Internal Revenue Code.

 

“ERISA Plan” means any employee pension benefit plan subject to Title IV of ERISA maintained by any ERISA Affiliate with respect to which any Credit Party has a fixed or contingent liability.

 

“Event of Default” as defined in Section 8.1.

 

“Excepted Liens” means (i) Liens for taxes, assessments or other governmental charges or levies not yet delinquent or which are being contested as provided in Section 5.7 by appropriate proceedings; (ii) Liens arising in connection with workmen’s compensation, unemployment insurance or other social security, old age pension or public liability obligations not yet due or which are being contested as provided in Section 5.7; (iii) Liens under operating agreements, pooling orders and unitization agreements, and mechanics’, materialmen’s, repairmen’s or other like Liens, with respect to obligations which are not yet due or which are being contested as provided in Section 5.7; (iv) deposits of cash or cash equivalents securing the performance of bids, tenders, surety and appeal bonds, statutory or regulatory obligations, or securing letters of credit which in turn secure such performance, in each case made in the ordinary course of business; (v) minor defects and irregularities in title to any Property, so long as such defects and irregularities neither (A) are Liens which secure Indebtedness or obligations nor (B) materially impair the value of such Property or the use thereof for the purposes for which such Property is held; (vi)  rights of collecting banks having rights of setoff, revocation, refund or chargeback with respect to money or instruments of any Credit Party or on deposit with or in the possession of such banks, (vii) judgment and attachment Liens not giving rise to an Event of Default or inchoate Liens created by or existing from any litigation or legal proceedings that are currently being contested in good faith by appropriate proceedings, promptly utilized and diligently conducted, and for which adequate reserves have been made to the extent required by GAAP, and (viii) Liens arising under the INNEX Farmout Agreement.

 

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute.

 

“First Lien Counterparty” means each of (i) J. Aron & Company and (ii) the Revolving Lenders (or, if applicable, their affiliates), together with their respective successors and assigns under the First Lien Hedging Contracts.

 

“First Lien Hedging Contracts” means each of (i) that certain ISDA Master Agreement dated as of September 8, 2006 by and between Company and J. Aron & Company and the confirmations from time to time executed and delivered thereunder, and (ii) the ISDA Master Agreements, in form and substance and upon such terms as are satisfactory to Required Lenders in all respects, by and between Company and Revolving Lenders (or, if applicable, their affiliates) and the confirmations from time to time executed and delivered thereunder, in each case together with all certificates, documents, instruments or agreements executed and delivered by Company, Parent, or any other Credit Party for the benefit of the respective First Lien Counterparty in connection therewith.

 

“First Lien Hedging Obligations” means all obligations of Company or any Guarantor arising from time to time under the First Lien Hedging Contracts entered into with the First Lien Counterparties.

 

“Fiscal Quarter” means a three-month period ending on the last day of March, June, September, and December of any year.

 

“Fiscal Year” means the fiscal year of Company and its Subsidiaries ending on December 31 of each calendar year.

 

“Foothills California” means Foothills California, Inc., a Delaware corporation.

 

 

“Foothills Oklahoma” means Foothills Oklahoma, Inc., a Delaware corporation.

 

“Foothills Texas” means Foothills Texas, Inc., a Delaware corporation.

 

“Funding Guarantors” as defined in Section 7.2.

 

“Funding Notice” means a notice substantially in the form of Exhibit A.

 

“GAAP” means those generally accepted accounting principles and practices which are recognized as such by the Financial Accounting Standards Board (or any generally recognized successor) and which, in the case of Company and its Consolidated Subsidiaries, are applied for all periods after the date hereof in a consistent manner. If any change in any accounting principle or practice is required by the Financial Accounting Standards Board (or any such successor) in order for such principle or practice to continue as a generally accepted accounting principle or practice, all reports and financial statements required hereunder with respect to Company or with respect to Company and its Consolidated Subsidiaries may be prepared in accordance with such change, but all calculations and determinations to be made hereunder may be made in accordance with such change only after notice of such change is given to each Lender and Required Lenders agree to such change insofar as it affects the accounting of Company or of Company and its Consolidated Subsidiaries.

 

“Governmental Authority” means any federal, state, municipal, national, tribal, Indian nation, or other government, governmental department, commission, board, bureau, court, agency or instrumentality or political subdivision thereof or any entity or officer exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to any government or any court, in each case whether associated with a state of the United States, the United States, an Indian nation, or a foreign entity or government.

 

“Governmental Authorization” means any permit, license, authorization, plan, directive, consent order or consent decree of or from any Governmental Authority.

 

“Guaranteed Obligations” as defined in Section 7.1.

 

“Guarantor” means each present and future Subsidiary of Company.

 

“Guaranty” means the guaranty of each Guarantor set forth in Section 7.

 

“Hazardous Materials” means any substances regulated under any Environmental Law, whether as pollutants, contaminants, or chemicals, or as industrial, toxic or hazardous substances or wastes, or otherwise.

 

“Hazardous Materials Activity” means any past, current, proposed or threatened activity, event or occurrence involving any Hazardous Materials, including the use, manufacture, possession, storage, holding, presence, existence, location, Release, threatened Release, discharge, placement, generation, transportation, processing, construction, treatment, abatement, removal, remediation, disposal, disposition or handling of any Hazardous Materials, and any corrective action or response action with respect to any of the foregoing.

 

 

“Hedging Contract” means (a) any agreement providing for options, swaps, floors, caps, collars, forward sales or forward purchases involving interest rates, commodities or commodity prices, equities, currencies, bonds, or indexes based on any of the foregoing, (b) any option, futures or forward contract traded on an exchange, and (c) any other derivative agreement or other similar agreement or arrangement.

 

“Highest Lawful Rate” means the maximum lawful interest rate, if any, that at any time or from time to time may be contracted for, charged, or received under the laws applicable to any Lender which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow.

 

“Hydrocarbons” means crude oil, natural gas or other liquid or gaseous hydrocarbons.

 

“Indebtedness” of any Person means Liabilities in any of the following categories:

 

(a) Liabilities for borrowed money,

 

(b) Liabilities constituting an obligation to pay the deferred purchase price of property or services,

 

(c) Liabilities evidenced by a bond, debenture, note or similar instrument,

 

(d) Liabilities arising under Hedging Contracts,

 

(e) Liabilities constituting principal under leases capitalized in accordance with GAAP,

 

(f) Liabilities arising under conditional sales or other title retention agreements,

 

(g) Liabilities owing under direct or indirect guaranties of Liabilities of any other Person (other than a Credit Party) or otherwise constituting obligations to purchase or acquire or to otherwise protect or insure a creditor against loss in respect of Liabilities of any such Person (such as obligations under working capital maintenance agreements, agreements to keep well, or agreements to purchase Liabilities, assets, goods, securities or services), but excluding endorsements in the ordinary course of business of negotiable instruments in the course of collection,

 

(h) Liabilities (for example, repurchase agreements, mandatorily redeemable preferred stock and sale/leaseback agreements) consisting of an obligation to purchase or redeem securities or other property, if such Liabilities arises out of or in connection with the sale or issuance of the same or similar securities or property,

 

(i) Liabilities with respect to letters of credit or applications or reimbursement agreements therefor,

 

 

(j) Liabilities with respect to payments received in consideration of oil, gas, or other minerals yet to be acquired or produced at the time of payment (including obligations under “take-or-pay” contracts to deliver gas in return for payments already received and the undischarged balance of any production payment created by such Person or for the creation of which such Person directly or indirectly received payment), or

 

(k) Liabilities with respect to other obligations to deliver goods or services in consideration of advance payments therefor;

 

provided however, that the “Indebtedness” of any Person shall not include Liabilities that were incurred by such Person on ordinary trade terms to vendors, suppliers, or other Persons providing goods and services for use by such Person in the ordinary course of its business, unless and until such Liabilities are outstanding more than 90 days past the incurrence thereof, or if earlier, when due in accordance with its terms.

 

“Indemnified Liabilities” means, collectively, any and all liabilities, obligations, losses, damages (including natural resource damages), penalties, claims (including Environmental Claims), costs (including the costs of any investigation, study, sampling, testing, abatement, cleanup, removal, remediation or other response action necessary to remove, remediate, clean up or abate any Hazardous Materials Activity), expenses and disbursements of any kind or nature whatsoever (including the reasonable and documented fees and disbursements of counsel for Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened by any Person, whether or not any such Indemnitee shall be designated as a party or a potential party thereto, and any fees or expenses incurred by Indemnitees in enforcing this indemnity), whether direct, indirect or consequential and whether based on any federal, state or foreign laws, statutes, rules or regulations (including securities and commercial laws, statutes, rules or regulations and Environmental Laws), on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by, or asserted against any Indemnitee, in any manner relating to or arising out of (i) this Agreement or the other Transaction Documents or the transactions contemplated hereby or thereby (including any grant of Collateral or Lenders’ agreement to make Credit Extensions or the use or intended use of the proceeds thereof, or any enforcement of any of the Transaction Documents (including any sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Guaranty) or any defense against allegations of misconduct by any Indemnitee); (ii) the statements contained in any commitment letter delivered by any Indemnitee to Company with respect to the transactions contemplated by this Agreement; or (iii) any Environmental Claim or any Hazardous Materials Activity relating to or arising from, directly or indirectly, any past or present activity, operation, land ownership, or practice of Company or any of its Subsidiaries.

 

“Indemnitee” as defined in Section 10.3.

 

“Initial Engineering Report” means the reserve engineering report with respect to Company’s Properties prepared as of July 1, 2006 by Cawley, Gillespie & Associates, Inc., a copy of which has been delivered to Administrative Agent.

 

“INNEX Farmout Agreement” means that certain Farmout and Participation Agreement dated as of January 3, 2006 between Foothills California and INNEX California, Inc.

 

 

“Intercreditor Agreement” means the Intercreditor and Control Agreement substantially in the form of Exhibit K (or such other form as may be satisfactory to Required Lenders) among Revolving Agent, Revolving Lenders, First Lien Counterparty, Administrative Agent, Lenders, and Company, as the same may be amended, restated or otherwise modified from time to time.

 

“Interest Expense” means, for each trailing four Fiscal Quarter period, the sum of cash interest payments made on the Loans and cash interest payments made under the Revolving Credit Agreement.

 

“Interest Period” means (a) the period beginning on and including the Closing Date and ending on but not including December 26, 2006, and (b) each subsequent three-month period from and including one Quarterly Payment Date to but not including the next Quarterly Payment Date.

 

“Internal Revenue Code” means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter, and any successor statute.

 

“Investment” means, with respect to any Person, any direct or indirect advance, loan, guarantee of Liabilities or other extension of credit or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such Person of any capital stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by, any other Person.

 

“Law” means any statute, law, regulation, ordinance, rule, treaty, judgment, order, decree, permit, concession, franchise, license, agreement or other governmental restriction of the United States or any state or political subdivision thereof or of any foreign country or any department, province or other political subdivision thereof.

 

“Lender” means each Person listed on the signature pages hereto as a Lender, and any other Person that becomes a party hereto pursuant to an Assignment Agreement.

 

“Liabilities” means, as to any Person, all indebtedness, liabilities and obligations of such Person, whether matured or unmatured, liquidated or unliquidated, primary or secondary, direct or indirect, absolute, fixed or contingent, and whether or not required to be considered pursuant to GAAP.

 

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

 

 

“Loan” means any Loan made by a Lender to Company pursuant to Section 2.1.

 

“Loan Exposure” means, with respect to any Lender, as of any date of determination, the outstanding principal amount of the Loans of such Lender; provided, at any time prior to the making of the initial Loans, the Loan Exposure of any Lender shall be equal to such Lender’s Commitments.

 

“Make-Whole Amount”, as well as certain other terms used in determining the Make-Whole Amount, have the meanings given to such terms in Section 2.12(e).

 

“Margin Stock” as defined in Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time.

 

“Material Adverse Effect” means a material adverse effect on or material adverse development with respect to (i) the business, operations, properties, assets, financial condition or prospects of Company and its Subsidiaries taken as a whole; (ii) the ability of any Credit Party to fully and timely perform its Obligations; (iii) the legality, validity, binding effect or enforceability against a Credit Party of a Transaction Document to which it is a party; or (iv) the rights, remedies and benefits available to, or conferred upon, any Agent, any Lender or any Secured Party under any Transaction Document.

 

“Material Contract” means (a) the Revolving Credit Agreement and all loan documents related thereto, (b) the First Lien Hedging Contract, (c) the Acquisition Documents, (d) the INNEX Farmout Agreement, and (e) any other any contract or other arrangement to which Company or any of its Subsidiaries is a party (other than the Transaction Documents) for which breach, nonperformance, cancellation or failure to renew could reasonably be expected to have a Material Adverse Effect.

 

“Maturity Date” means the earlier of (i) September 7, 2010, and (ii) the date that all Loans shall become due and payable in full hereunder, whether by acceleration or otherwise.

 

“Modified PDNP NPV” means, at any time in question, a percentage, selected by Administrative Agent in its sole discretion from sixty percent (60%) to seventy-five percent (75%) of the NPV of all Proved Developed Nonproducing Reserves attributed to the Eligible Mortgaged Properties in the then most recent Engineering Report, provided that (i) the capital expenditures necessary to bring such reserves into production (as contemplated in such Engineering Report) have actually been scheduled by Company to be made at or prior to the time contemplated in such Engineering Report, and (ii) Company reasonably expects that it will have funds available to make such capital expenditures.

 

“Modified PDP NPV” means, at any time in question, a percentage, selected by Administrative Agent in its sole discretion from seventy-five percent (75%) to one hundred percent (100%) of the NPV of all Proved Developed Producing Reserves attributed to the Eligible Mortgaged Properties in the most recent Engineering Report.

 

 

“Modified Proved NPV” means, at any time in question, the sum of Modified PDP NPV, Modified PDNP NPV, and Modified PUD NPV as each has been most recently determined. No category of reserves other than Proved Reserves shall be taken into account in determining Modified Proved NPV.

 

“Modified PUD NPV” means, at any time in question, a percentage, selected by Administrative Agent in its sole discretion from fifty percent (50%) to seventy percent (70%), of the NPV of all Proved Undeveloped Reserves attributed to the Eligible Mortgaged Properties in the then most recent Engineering Report, provided that (i) the capital expenditures necessary to bring such reserves into production (as contemplated in such Engineering Report) have actually been scheduled by Company to be made at or prior to the time contemplated in such Engineering Report, and (ii) Company reasonably expects that it will have funds available to make such capital expenditures.

 

“Moody’s” means Moody’s Investor Services, Inc., or its successor.

 

“Mortgage” means each deed of trust or mortgage from time to time given by Company or any Guarantor to secure any of the Obligations hereunder or under any of the Security Documents, as each may be amended, supplemented or otherwise modified from time to time.

 

“NAIC” means The National Association of Insurance Commissioners, and any successor thereto.

 

“Non-US Lender” as defined in Section 2.17(c).

 

“Note” means a promissory note in the form of Exhibit B evidencing one or more Loans, as such note may be amended, supplemented or otherwise modified from time to time.

 

“NPV” means, with respect to any Proved Reserves expected to be produced from any undivided interests in oil and gas properties, the net present value, discounted at 10% per annum, of the future net revenues expected to accrue to Company’s or any of its Subsidiary’s interests in such Proved Reserves (after deducting all existing burdens) during the remaining expected economic lives of such Proved Reserves. Each calculation of such expected future net revenues shall be made in accordance with the then existing standards of the Society of Petroleum Engineers, provided that in any event (a) appropriate deductions shall be made for severance and ad valorem taxes, and for operating (including purchasing and injecting water), gathering, transportation and marketing costs required for the production and sale of such reserves, (b) the pricing assumptions and escalations used in determining the NPV for any particular reserves shall be the Agreed Pricing (or any other pricing assumptions to which Company and Required Lenders may agree), and (c) deductions shall be made for capital expenditures (including plugging and abandonment costs) that are included in the Approved Plan of Development or that have otherwise approved in writing by Required Lenders. NPV shall be calculated hereunder in connection with each Engineering Report, either by Company, by Administrative Agent, or by the engineering firm who prepares such Engineering Report; in the event of any conflict, Administrative Agent’s calculation shall be conclusive and final, absent manifest error.

 

 

“NYMEX Pricing” means, as of any date of determination with respect to any month:

 

(i) for crude oil, the closing settlement price for the Light, Sweet Crude Oil futures contract for the first nearby month, and

 

(ii) for natural gas, the closing settlement price for the Henry Hub Natural Gas futures contract for the first nearby month,

 

in each case as published by New York Mercantile Exchange (NYMEX) on its website currently located at www.nymex.com, or any successor thereto (as such price may be corrected or revised from time to time by the NYMEX in accordance with its rules and regulations).

 

“Obligations” means all obligations of every nature of each Credit Party from time to time owed to any Agent (including any former Agent), any Lender, Warrant Owner, Royalty Owner, or any Indemnitee under any Transaction Document, whether for principal, interest (including interest which, but for the filing of a petition in bankruptcy with respect to such Credit Party, would have accrued on any Obligation, whether or not a claim is allowed against such Credit Party for such interest in the related bankruptcy proceeding), fees, expenses, indemnification or otherwise.

 

“Obligee Guarantor” as defined in Section 7.7.

 

“Oil and Gas Properties” means all of the following which are, at the time in question, owned by Company or any of its Subsidiaries: oil, gas and/or mineral leases, oil, gas or mineral properties, mineral servitudes and/or mineral rights of any kind (including, without limitation, mineral fee interests, lease interests, farmout interests, overriding royalty and royalty interests, net profits interests, oil payment interests, production payment interests and other types of mineral interests), and all oil and gas gathering, treating, storage, processing and handling assets.

 

“Operating Expense Budget” means lease operating expenses as set forth in the Initial Engineering Report or such other lease operating expenses as agreed to in writing by Required Lenders after the Closing Date.

 

“Organizational Documents” means (i) with respect to any corporation, its certificate or articles of incorporation or organization, as amended, and its by-laws, as amended, (ii) with respect to any limited partnership, its certificate of limited partnership, as amended, and its partnership agreement, as amended, (iii) with respect to any general partnership, its partnership agreement, as amended, and (iv) with respect to any limited liability company, its articles of organization, as amended, and its operating agreement, as amended. In the event any term or condition of this Agreement or any other Transaction Document requires any Organizational Document to be certified by a secretary of state or similar governmental official, the reference to any such “Organizational Document” shall only be to a document of a type customarily certified by such governmental official.

 

 

“ORRI” means the overriding royalty interest in the Properties conveyed by Company to Royalty Owner pursuant to the ORRI Conveyance.

 

“ORRI Conveyance” means, collectively, the Conveyance of Overriding Royalty Interest executed by Company in favor of Royalty Owner on the Closing Date and the additional conveyances, if any, executed by Company in favor of Royalty Owner pursuant to Section 5.22, in each case, as amended or supplemented from time to time.

 

“PBGC” means the Pension Benefit Guaranty Corporation or any successor thereto.

 

“PDP Collateral Coverage Ratio” means, as of any date of determination, the quotient obtained by dividing the Modified PDP NPV as determined for such day in an Engineering Report, by all Indebtedness of the Credit Parties outstanding at the end of such day, exclusive of any Indebtedness resulting from the application of FASB Statement 133 or 143.

 

“Permitted G&A Expense Amount” means the amount of $125,000 per calendar month; provided that such amount shall be reduced to $62,500 for any month during which a Default or Event of Default exists or existed.

 

“Permitted Investments” means Investments:

 

(a) in open market commercial paper, maturing within 270 days after acquisition thereof, which is rated at least A-1 by S&P or P-1 by Moody’s.

 

(b) in marketable obligations, maturing within 12 months after acquisition thereof, issued or unconditionally guaranteed by the United States of America or an instrumentality or- agency thereof and entitled to the full faith and credit of the United States of America.

 

(c) in demand deposits, and time deposits (including certificates of deposit) maturing within 12 months from the date of deposit thereof, with any office of any national or state bank or trust company which is organized under the Laws of the United States of America or any state therein, which has capital, surplus and undivided profits of at least $500,000,000, and whose certificates of deposit are rated at least Aa3 by Moody’s or AA- by S&P.

 

(d) in repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (b) above entered into with any commercial bank meeting the specifications of clause (c) above.

 

(e) in money market or other mutual funds substantially all of whose assets comprise securities of the types described in clauses (a) through (d) above.

 

“Permitted Liens” means each of the Liens permitted pursuant to Section 6.2.

 

“Person” means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and Governmental Authorities.

 

 

“Post-Default Rate” as defined in Section 2.8.

 

“Principal Office” means, for Administrative Agent, its “Principal Office” as set forth on Appendix B, or such other office as such Person may from time to time designate in writing to Company, Administrative Agent and each Lender.

 

“Pro Rata Share” means, with respect to each Lender, the percentage obtained by dividing (a) the Loan Exposure of that Lender by (b) the aggregate Loan Exposure of all Lenders.

 

“Project” means all drilling and reserve acquisition activities in or relating to the Texas Project Area.

 

“Projected Oil and Gas Production” means the projected production of oil or gas (measured by volume unit or BTU equivalent, not sales price) for the term of a Hedging Contract or a particular month, as applicable, from properties and interests owned by any Credit Party which are located in or offshore of the United States and which have attributable to them Proved Developed Producing Reserves, as such production is projected in the most recent Engineering Report delivered pursuant to Section 5.2(e), after deducting projected production from any properties or interests sold or under contract for sale that had been included in such report and after adding projected production from any properties or interests that had not been reflected in such report but that are reflected in a separate or supplemental reports meeting the requirements of Section 5.2(e) and otherwise are satisfactory to Administrative Agent.

 

“Projections” as defined in Section 4.19.

 

“Properties” means, collectively, those undivided interests in oil and gas properties and interests in other real and personal property (including, without limitation, mineral fee interests, lease interests, farmout interests, overriding royalty and royalty interests, net profit interests, oil payment interests, production payment interests and other types of mineral interests) which are, at the time in question, owned by Company or any of its Subsidiaries.

 

“Proved Collateral Coverage Ratio” means, as of any date of determination, the quotient obtained by dividing the Modified Proved NPV as determined for such day in an Engineering Report, by all Indebtedness of the Credit Parties outstanding at the end of such day, exclusive of any Indebtedness resulting from the application of FASB Statement 133 or 143.

 

“Proved Reserves” means “Proved Reserves” as defined in the Definitions for Oil and Gas Reserves (in this paragraph, the “Definitions”) promulgated by the Society of Petroleum Engineers (or any generally recognized successor) as in effect at the time in question. “Proved Developed Producing Reserves” means Proved Reserves which are categorized as both “Developed” and “Producing” in the Definitions, “Proved Developed Nonproducing Reserves” means Proved Reserves which are categorized as both “Developed” and “Nonproducing” in the Definitions, and “Proved Undeveloped Reserves” means Proved Reserves which are categorized as “Undeveloped” in the Definitions, provided that the following criteria shall also apply to Proved Developed Producing Reserves: (a) no reserves shall be classified as Proved Developed Producing Reserves until a minimum of forty-five (45) days of production have occurred in at least one consecutive period of sixty (60) days following any operation, workover or capital expenditure, and (b) during such forty-five (45) days of production, the well relating to such reserves must be tested a minimum of three (3) times for at least twenty-four (24) hours of continuous duration.

 

 

“Quarterly Payment Date” means the twenty-sixth (26^th) day of each March, June, September and December.

 

“Register” as defined in Section 2.5(b).

 

“Related Fund” means, with respect to any Lender that is an investment fund, any other investment fund that invests in commercial loans and that is managed or advised by the same investment advisor as such Lender or by an Affiliate of such investment advisor.

 

“Release” means any release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching or migration of any Hazardous Material into the indoor or outdoor environment (including the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Material), including the movement of any Hazardous Material through the air, soil, surface water or groundwater.

 

“Required Equity Date” means the date on which Company receives cash proceeds from the sale of its Capital Stock made after the Closing Date in an aggregate amount at least equal to $5,000,000 on terms satisfactory to Required Lenders in all respects.

 

“Required Lenders” means one or more Lenders having or holding Loan Exposure and representing more than fifty percent (50%) of the aggregate Loan Exposure of all Lenders.

 

“Revolving Agent” means a Revolving Lender that is satisfactory to Required Lenders in all respects.

 

“Revolving Credit Agreement” means a credit agreement by and among, Company, the Guarantors, Revolving Agent, and Revolving Lenders, in form and substance and upon such terms as are satisfactory to Required Lenders in all respects, as amended, restated or otherwise modified from time to time in accordance with Section 6.18 hereof.

 

“Revolving Indebtedness” means all Indebtedness owing by Company to Revolving Agent and the Revolving Lenders pursuant to the terms of the Revolving Credit Agreement, together with all interest, fees, and other amounts payable by Company pursuant to the terms thereof.

 

“Revolving Lenders” shall mean the lenders from time to time party to the Revolving Credit Agreement.

 

 

“Royalty Owner” means MTGLQ Investors, L.P., a Delaware limited partnership, together with its successors and assigns.

 

“S&P” means Standard & Poor’s Ratings Group, a division of The McGraw Hill Corporation, or its successor.

 

“Secured Parties” means the Persons to whom any Obligations are at any time owed.

 

“Securities” means any stock, shares, partnership interests, voting trust certificates, certificates of interest or participation in any profit-sharing agreement or arrangement, options, warrants, bonds, debentures, notes, or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as “securities” or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing.

 

“Securities Act” means the Securities Act of 1933, as amended from time to time, and any successor statute.

 

“Security Documents” means the instruments listed in the Security Schedule and all other security agreements, deeds of trust, mortgages, chattel mortgages, pledges, guaranties, financing statements, continuation statements, extension agreements and other agreements or instruments now, heretofore, or hereafter delivered by any Credit Party to Administrative Agent in connection with this Agreement or any transaction contemplated hereby to secure or guarantee the payment of any part of the Obligations.

 

“Security Schedule” means Schedule 1.1 hereto.

 

“Solvency Certificate” means a Solvency Certificate of the chief financial officer of Company substantially in the form of Exhibit G-2.

 

“Solvent” means, with respect to any Credit Party, that as of the date of determination both (i) (a) the sum of such Credit Party’s debt (including contingent liabilities) does not exceed the present fair saleable value of such Credit Party’s present assets; (b) such Credit Party’s capital is not unreasonably small in relation to its business as contemplated on the Closing Date and reflected in the Projections or as contemplated with respect to any transaction contemplated or undertaken after the Closing Date; and (c) such Credit Party has not incurred and does not intend to incur, or believe (nor should it reasonably believe) that it will incur, debts beyond its ability to pay such debts as they become due (whether at maturity or otherwise); and (ii) such Credit Party is “solvent” within the meaning given that term and similar terms under applicable laws relating to fraudulent transfers and conveyances. For purposes of this definition, the amount of any contingent liability at any time shall be computed as the amount that, in light of all of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability (irrespective of whether such contingent liabilities meet the criteria for accrual under Statement of Financial Accounting Standard No. 5).

 

 

“Subsidiary” means, with respect to any Person, any corporation, association, partnership, limited liability company, joint venture, or other business or corporate entity, enterprise or organization which is directly or indirectly (through one or more intermediaries) controlled by or owned fifty percent (50%) or more by such Person.

 

“Syndication Agent” as defined in the preamble hereto.

 

“Tax” means any present or future tax, levy, impost, duty, assessment, charge, fee, deduction or withholding of any nature and whatever called, by whomsoever, on whomsoever and wherever imposed, levied, collected, withheld or assessed; provided, “Tax on the overall net income” or “income Tax” of a Person shall be construed as a reference to a tax imposed by the jurisdiction in which that Person is organized or in which that Person’s applicable principal office (and/or, in the case of a Lender, its lending office) is located or in which that Person (and/or, in the case of a Lender, its lending office) is deemed to be doing business on all or part of the net income, profits or gains (whether worldwide, or only insofar as such income, profits or gains are considered to arise in or to relate to a particular jurisdiction, or otherwise) of that Person (and/or, in the case of a Lender, its applicable lending office).

 

“Termination Event” means (a) the occurrence with respect to any ERISA Plan of (i) a reportable event described in Sections 4043(c)(5) or (6) of ERISA or (ii) any other reportable event described in Section 4043(c) of ERISA other than a reportable event not subject to the provision for 30-day notice to the PBGC pursuant to a waiver by such corporation, or (b) the requirements of Section 4043(b) of ERISA apply with respect to a contributing sponsor, as defined in Section 4001(a)(13) of ERISA, of an ERISA Plan, and an event described in paragraph (9), (10), (11), (12) or (13) of Section 4043(c) of ERISA is reasonably expected to occur with respect to such ERISA Plan within the following 30 days, or (c) the withdrawal of any ERISA Affiliate from an ERISA Plan during a plan year in which it was a “substantial employer” as defined in Section 4001(a)(2) of ERISA, or (d) the filing of a notice of intent to terminate any ERISA Plan or the treatment of any ERISA Plan amendment as a termination under Section 4041 of ERISA, or (e) the institution of proceedings to terminate any ERISA Plan by the PBGC under Section 4042 of ERISA, or (f) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any ERISA Plan.

 

“Texas Project Area” means (i) the Goose Creek Field and Goose Creek East Field in Harris County, Texas, (ii) the Cleveland Field in Liberty County, Texas, and (iii) the Saratoga Field in Hardin County, Texas.

 

“Transaction Document” means any of this Agreement, the Notes (if any), the Guaranty (if any), the Security Documents, the Intercreditor Agreement, the ORRI Conveyance, the Warrants, and all other certificates, documents, instruments or agreements executed and delivered by a Credit Party for the benefit of any Agent, any Lender, Royalty Owner, or Warrant Owner in connection herewith.

 

“UCC” means the Uniform Commercial Code (or any similar or equivalent legislation) as in effect in any applicable jurisdiction.

 

 

“Warrant Owner” means Goldman, Sachs & Co., together with its respective successors and assigns.

 

“Warrants” means the warrants to purchase shares of Company’s Common Stock, $0.001 par value per share issued by Company to Warrant Owner pursuant to that certain Stock Purchase Warrant No. 158 of even date herewith, together with all warrants issued upon transfer, exchange or in replacement thereof.

 

          1.2 Accounting Terms. Except as otherwise expressly provided herein, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. Financial statements and other information required to be delivered by Company to Lenders pursuant to Section 5.2(a), 5.2(b) and 5.2(c) shall be prepared in accordance with GAAP as in effect at the time of such preparation (and delivered together with the reconciliation statements provided for in Section 5.2(e), if applicable).

 

           1.3 Interpretation, etc. Any of the terms defined herein may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. References herein to any Section, Appendix, Schedule or Exhibit shall be to a Section, an Appendix, a Schedule or an Exhibit, as the case may be, hereof unless otherwise specifically provided. The word “or” is not exclusive. The use herein of the word “include” or “including”, when following any general statement, term or matter, shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not nonlimiting language (such as “without limitation” or “but not limited to” or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that fall within the broadest possible scope of such general statement, term or matter.

 

           1.4 Joint Preparation; Construction of Indemnities and Releases. This Agreement and the other Transaction Documents have been reviewed and negotiated by sophisticated parties with access to legal counsel and no rule of construction shall apply hereto or thereto which would require or allow any Transaction Document to be construed against any party because of its role in drafting such Transaction Document. All indemnification and release provisions of this Agreement shall be construed broadly (and not narrowly) in favor of the Persons receiving indemnification or being released.

 

 

            2.1 Loans. Subject to the terms and conditions hereof, each Lender severally agrees to make, on the Closing Date, a Loan to Company in an amount less than or equal to such Lender’s Commitment. Subject to the terms and conditions hereof, Company may make additional borrowings under the Commitments after the Closing Date, pro rata from each Lender, until the entire Commitment of each Lender has been borrowed, provided that (a) each such borrowing must equal or exceed $1,000,000 in the aggregate and (b) no such borrowing may be made after September 7, 2009. Any amount borrowed under this Section 2.1 and subsequently repaid or prepaid may not be reborrowed. Subject to Sections 2.11 and 2.13, all amounts owed hereunder with respect to the Loans shall be paid in full no later than the Maturity Date.

 

           2.2 Borrowing Mechanics. Company shall deliver to Administrative Agent a fully executed Funding Notice as of the Closing Date or five (5) Business Days prior to any subsequent borrowing of Loans. Promptly upon receipt by Administrative Agent of such Funding Notice, Administrative Agent shall notify each Lender of the proposed borrowing. Each Lender shall make its Loan available to Administrative Agent not later than 12:00 p.m. (New York City time) on the date specified in such Funding Notice, by wire transfer of same day funds in Dollars, at Administrative Agent’s Principal Office. Upon satisfaction or waiver of the conditions precedent specified herein, Administrative Agent shall make the proceeds of the Loans available to Company on such date by causing an amount of same day funds in Dollars equal to the proceeds of all such Loans received by Administrative Agent from Lenders to be credited to the account of Company at Administrative Agent’s Principal Office or to such other account as may be designated in writing to Administrative Agent by Company; provided that the proceeds of the Loans available to Company on the Closing Date shall be paid to the order of Company by wire transfer of immediately available funds in the amounts and to the accounts set out on Schedule 2.2. Such wire transfers shall include the payment to Thompson & Knight L.L.P., Administrative Agent’s attorneys, of their reasonable and documented attorneys’ fees, recording costs, and other out-of-pocket transaction costs and expenses incurred on behalf of Administrative Agent in connection with the transactions contemplated hereby.

 

2.3 Pro Rata Shares; Availability of Funds.

 

(a) Pro Rata Shares. All Loans shall be made, and all participations purchased, by Lenders simultaneously and proportionately to their respective Pro Rata Shares, it being understood that no Lender shall be responsible for any default by any other Lender in such other Lender’s obligation to make a Loan requested hereunder or purchase a participation required hereby nor shall any Commitment of any Lender be increased or decreased as a result of a default by any other Lender in such other Lender’s obligation to make a Loan requested hereunder or purchase a participation required hereby.

 

(b) Availability of Funds. Unless Administrative Agent shall have been notified by any Lender prior to the applicable Credit Date that such Lender does not intend to make available to Administrative Agent the amount of such Lender’s Loan requested on such Credit Date, Administrative Agent may assume that such Lender has made such amount available to Administrative Agent on such Credit Date and Administrative Agent may, in its sole discretion, but shall not be obligated to, make available to Company a corresponding amount on such Credit Date. If such corresponding amount is not in fact made available to Administrative Agent by such Lender, Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest thereon, for each day from such Credit Date until the date such amount is paid to Administrative Agent, at the customary rate set by Administrative Agent for the correction of errors among banks for three Business Days and thereafter at a rate equal to the sum of the Effective Rate. If such Lender does not pay such corresponding amount forthwith upon Administrative Agent’s demand therefor, Administrative Agent shall promptly notify Company who shall immediately pay such corresponding amount to Administrative Agent together with interest thereon, for each day from such Credit Date until the date such amount is paid to Administrative Agent, at the Effective Rate. Nothing in this Section 2.5(b) shall be deemed to relieve any Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights that Company may have against any Lender as a result of any default by such Lender hereunder.

 

           2.4 Use of Proceeds. Company will use the proceeds of the Loans made on the Closing Date: (a) to acquire working interests in the Texas Project Area from the Assignors as part of the Closing Date Transactions, (b) to fund the Approved Plan of Development, (c) to pay closing expenses, costs and fees, and (d) for Company’s working capital. The proceeds of the Loans made after the Closing Date shall be applied by Company to implement the Approved Plan of Development and to make other expenditures from time to time approved by Required Lenders. No portion of the proceeds of any Credit Extension shall be used in any manner that causes or might cause such Credit Extension or the application of such proceeds to violate Regulation T, Regulation U or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation thereof or to violate the Exchange Act.

 

2.5 Evidence of Liabilities; Register; Lenders’ Books and Records; Notes. 

 

(a) Lenders’ Evidence of Liabilities. Each Lender shall maintain on its internal records an account or accounts evidencing the Liabilities of Company to such Lender, including the amounts of the Loans made by it and each repayment and prepayment in respect thereof. Any such recordation shall be conclusive and binding on Company, absent manifest error; provided, failure to make any such recordation, or any error in such recordation, shall not affect any Lender’s Commitments or Company’s Obligations in respect of any applicable Loans; and provided further, in the event of any inconsistency between the Register and any Lender’s records, the recordations in the Register shall govern.

 

(b) Register. Administrative Agent shall maintain at its Principal Office a register for the recordation of the names and addresses of Lenders and the Commitments and Loans of each Lender from time to time (the “Register”). The Register shall be available for inspection by Company or any Lender at any reasonable time and from time to time upon reasonable prior notice. Administrative Agent shall record in the Register the Commitments and the Loans, and each repayment or prepayment in respect of the principal amount of the Loans, and any such recordation shall be conclusive and binding on Company and each Lender, absent manifest error; provided, failure to make any such recordation, or any error in such recordation, shall not affect any Lender’s Commitments or Company’s Obligations in respect of any Loan. Company hereby designates J. Aron to serve as Company’s agent solely for purposes of maintaining the Register as provided in this Section 2.5, and Company hereby agrees that, to the extent J. Aron serves in such capacity, J. Aron and its officers, directors, employees, agents and affiliates shall constitute “Indemnitees.”

 

(c) Notes. If so requested by any Lender by written notice to Company (with a copy to Administrative Agent) at least two Business Days prior to the Closing Date, or at any time thereafter, Company shall execute and deliver to such Lender (and/or, if applicable and if so specified in such notice, to any Person who is an assignee of such Lender pursuant to Section 10.6) on the Closing Date (or, if such notice is delivered after the Closing Date, promptly after Company’s receipt of such notice) a Note or Notes to evidence such Lender’s Loans. Any such Note evidencing Loans under the Commitment or the Commitment shall be in the form of Exhibit B.

 

 

2.6 Interest on Loans. 

 

(a) Except as otherwise set forth herein, each Loan shall bear interest on the unpaid principal amount thereof at the Effective Rate from the date made through repayment thereof (whether by acceleration or otherwise).

 

(b) Interest payable on all Loans shall be computed on the basis of a 360-day year, in each case for the actual number of days elapsed in the period during which it accrues. In computing interest on any Loan, the date of the making of such Loan shall be included, and the date of payment of such Loan shall be excluded; provided, if a Loan is repaid on the same day on which it is made, one day’s interest shall be paid on that Loan.

 

(c) Interest on each Loan shall be payable in arrears (i) on and to each Quarterly Payment Date applicable to that Loan; (ii) upon any prepayment of that Loan, whether voluntary or mandatory, to the extent accrued on the amount being prepaid; and (iii) at maturity, including the Maturity Date.

 

(d) On each Quarterly Payment Date, Company shall pay the interest then accrued on the Loans in full in immediately available funds.

 

2.7 [Reserved].  

 

           2.8 Default Interest. Upon the occurrence and during the continuance of an Event of Default, the principal amount of all Loans outstanding and, to the extent permitted by applicable law, any interest payments on the Loans or any fees or other amounts owed hereunder, shall thereafter bear interest (including post-petition interest in any proceeding under the Bankruptcy Code or other applicable bankruptcy laws) payable on demand at a rate that is 2% per annum in excess of the interest rate otherwise payable hereunder with respect to the applicable Loans (the “Post-Default Rate”). Payment of interest at the Post-Default Rate is not, however, a permitted alternative to timely payment, and acceptance of interest at the Post-Default Rate shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Administrative Agent or any Lender.

 

           2.9 Fees. Pursuant to a letter agreement between Company and Administrative Agent, Company has promised to pay to Agents certain fees in the amounts and at the times agreed upon, and Company hereby repeats its promise to pay such fees.

 

           2.10 ANCF Calculation. At least five (5) Business Days prior to each Quarterly Payment Date, Company shall furnish or cause to be furnished to Administrative Agent a schedule (reasonably supported, if requested, by supporting documentation) as of the end of the immediately preceding Calculation Quarter in which Company:

 

(a) calculates the cash revenues and cash receipts received by Company and its Subsidiaries during such Calculation Quarter, determined in accordance with clause (i) of the definition of ANCF;

 

 

(b) calculates the cash payments made by Company and its Subsidiaries during such Calculation Quarter for the expenses described in clauses (ii)(a) through (ii)(h) of the definition of ANCF;

 

(c) calculates the interest in respect of the Loans that will be due on such Quarterly Payment Date; and

 

(d) determines the resulting ANCF.

 

           2.11 ANCF Payment of Principal. On each Quarterly Payment Date, Company will use all Adjusted Net Cash Flow, to the extent thereof, to pay (or prepay) the principal of the Loans, without premium or penalty.

 

2.12 Voluntary Prepayments. 

 

(a) Company may, at its option, upon notice as provided below, prepay at any time and from time to time all of the Loans, or prepay on any Quarterly Payment Date any part of the Loans, at 100% of the principal amount so prepaid plus the Make-Whole Amount determined for the prepayment date with respect to such principal amount, provided that any partial payment on the Loans must not be less than $2,500,000 in the aggregate. Company will give each Lender written notice of each optional prepayment under this Section 2.12 not less than 10 days and not more than 90 days prior to the date fixed for such prepayment. Each such notice shall specify such date (which shall be a Business Day), the aggregate principal amount of the Loans to be prepaid on such date, and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of an executive officer of Company as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, Company shall deliver to each Lender a certificate of an executive officer of Company specifying the Company’s calculation of such Make-Whole Amount as of the specified prepayment date. In the case of each partial prepayment of the Loans, the principal amount of the Loans to be prepaid shall be allocated among all of the Loans at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment. An illustration of the computation of the Make-Whole Amount is reflected in Schedule 2.12.

 

(b) The provisions of Section 2.12(a) shall not apply to any scheduled principal payment under Section 2.11 or to any principal prepayment made with Collateral insurance proceeds pursuant to any mandatory prepayment provision hereof or any Security Document.

 

(c) In the case of each prepayment of Loans pursuant to this Section 2.12, the principal amount of each Loan to be prepaid shall mature and become due and payable on the date fixed for such prepayment (which shall be a Business Day), together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date, unless Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. 

 

 

(d) Any principal prepaid pursuant to Section 2.12(a), (c) or (f) hereof shall be in addition to, and not in lieu of, all payments otherwise required to be paid under the Transaction Documents at the time of such prepayment. Any such prepayments hereof shall be applied first, to any Make-Whole Amount payable under Section 2.12(a), second, to accrued but unpaid interest on the Loans, and third, to outstanding principal on the Loans until paid in full. No prepayment on the Loans shall, until the Loans have been paid in full, have the effect of reducing the mandatory prepayments required under Section 2.121 or Section 2.13.

 

(e) In determining any Make-Whole Amount, the following terms shall have the following meanings:

 

“Make-Whole Amount” means, with respect to any Loan, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Interest Payments with respect to the Called Principal of such Loan, provided that the Make-Whole Amount shall in no event be less than zero.

 

“Called Principal” means, with respect to any Loan, the principal of such Loan that is to be prepaid pursuant to Section 2.12(a).

 

“Discount Rate” means, as of any Settlement Date, the Adjusted Eurodollar Rate determined by using the rate with a three month interest period available two Business Days prior to such Settlement Date.

 

“Discounted Value” means, with respect to any Remaining Scheduled Interest Payments related to the Called Principal of any Loan, the amount obtained by discounting such Remaining Scheduled Interest Payments from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Loans is payable) equal to the Discount Rate.

 

“Remaining Scheduled Interest Payments” means, with respect to the Called Principal of any Loan, all payments of interest that otherwise would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to September 8, 2009, provided that (i) the applicable interest rate for all such interest payments shall be assumed to be the Effective Rate or, if in effect at the applicable time of determination, the Post Default Rate as of the Settlement Date and (ii) if such Settlement Date is not a Quarterly Payment Date then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 2.12(a).

 

“Settlement Date” means, with respect to the Called Principal of any Loan, the date on which such Called Principal is to be prepaid pursuant to Section 2.12(a).

 

(f) The provisions of Section 2.12(a) shall not apply to any principal prepaid from time to time with proceeds of revolving loans received by Company under the Revolving Credit Agreement in an aggregate amount not to exceed $10,000,000; provided that (i) such prepayments may only be made after the Eel River Basin Test Date and before March 31, 2007 and (ii) Company may only make any such prepayment contemporaneously with its receipt of such proceeds. 

 

           2.13 Mandatory Prepayments. In the event that a Change of Control occurs, Company shall give prompt written notice thereof to Lenders. Lenders may at any time, during the period beginning on the date of such Change of Control and ending sixty (60) days after such notice of such Change of Control has been given to Lenders, demand that Company prepay the Loans in full. Any prepayment of principal under this Section 2.13 shall be accompanied by a prepayment premium equal to the greater of (a) the prepayment premium amount that would be due pursuant to Section 2.12 and (b) one percent (1%) times the amount so prepaid.

 

2.14 General Provisions Regarding Payments.

 

(a) All payments by Company of principal, interest, fees and other Obligations shall be made in Dollars in same day funds, without defense, setoff or counterclaim, free of any restriction or condition, and delivered to Administrative Agent not later than 12:00 p.m. (New York City time) on the date due at Administrative Agent’s Principal Office for the account of Lenders; funds received by Administrative Agent after that time on such due date shall be deemed to have been paid by Company on the next succeeding Business Day.

 

(b) All payments in respect of the principal amount of any Loan shall include payment of accrued interest on the principal amount being repaid or prepaid, and all such payments (and, in any event, any payments in respect of any Loan on a date when interest is due and payable with respect to such Loan) shall be applied to the payment of interest before application to principal.

 

(c) Administrative Agent shall promptly distribute to each Lender at such address as such Lender shall indicate in writing, such Lender’s applicable Pro Rata Share of all payments and prepayments of principal and interest due hereunder, together with all other amounts due thereto, including, without limitation, all fees payable with respect thereto, to the extent received by Administrative Agent.

 

(d) Whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest or fees hereunder.

 

(e) Company hereby authorizes Administrative Agent to charge Company’s accounts with Administrative Agent in order to cause timely payment to be made to Administrative Agent of all principal, interest, fees and expenses due hereunder (subject to sufficient funds being available in its accounts for that purpose).

 

(f) Administrative Agent shall deem any payment by or on behalf of Company hereunder that is not made in same day funds prior to 12:00 p.m. (New York City time) on the due date therefore to be a non-conforming payment. Any such payment shall not be deemed to have been received by Administrative Agent until the later of (i) the time such funds become available funds, and (ii) the applicable next Business Day after such funds become available if not available during the preceding Business Day. Administrative Agent shall give prompt telephonic notice to Company and each applicable Lender (confirmed in writing) if any payment is non-conforming. Any non-conforming payment may constitute or become a Default or Event of Default in accordance with the terms of Section 8.1(a). Interest shall continue to accrue on any principal as to which a non-conforming payment is made until such funds become available funds (but in no event less than the period from the date of such payment to the next succeeding applicable Business Day) at the rate determined pursuant to Section 2.8 from the date such amount was due and payable until the date such amount is paid in full.

 

           2.15 Ratable Sharing. As used in this section, “Obligation Category” means the following groups of Obligations: (a) payments due and owing to Lenders under Sections 5.9, 10.2 or 10.3 hereof or under any similar sections of any other Transaction Documents, (b) interest due and payable in respect of the Loans and payment due and owing to Lenders under Section 2.9, and (c) the outstanding principal amount of the Loans. Lenders hereby agree among themselves that if any of them shall, whether by voluntary payment, through the exercise of any right of set-off or banker’s lien, by counterclaim or cross action or by the enforcement of any right under the Transaction Documents or otherwise, or as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code, receive payment or reduction of a proportion of any Obligations in an Obligation Category that are then due and owing to such Lender hereunder or under the other Transaction Documents which is greater than the proportion received by any other Lender in respect of the Obligations in such Obligation Category that are then due and owing to such other Lender, then the Lender receiving such proportionately greater payment shall (a) notify Administrative Agent and each other Lender of the receipt of such payment and (b) apply a portion of such payment to purchase participations (which it shall be deemed to have purchased from each seller of a participation simultaneously upon the receipt by such seller of its portion of such payment) in the Obligations in such Obligation Category then due and owing to the other Lenders so that all such recoveries of Obligations in any Obligation Category shall be shared by all Lenders in proportion to the aggregate Obligations in such Obligation Category that are then due and owing to all of them; provided, if all or part of such proportionately greater payment received by such purchasing Lender is thereafter recovered from such Lender upon the bankruptcy or reorganization of Company or otherwise, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to such purchasing Lender ratably to the extent of such recovery, but without interest. Company expressly consents to the foregoing arrangement and agrees that any holder of a participation so purchased may exercise any and all rights of banker’s lien, set-off or counterclaim with respect to any and all monies owing by Company to that holder with respect thereto as fully as if that holder were owed the amount of the participation held by that holder.

 

2.16 Increased Costs; Capital Adequacy. 

 

(a) Compensation For Increased Costs and Taxes. Subject to the provisions of Section 2.18 (which shall be controlling with respect to the matters covered thereby), in the event that any Lender shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation or order), or any determination of a court or Governmental Authority, in each case that becomes effective after the date hereof, or compliance by such Lender with any guideline, request or directive issued or made after the date hereof by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): (i) subjects such Lender (or its applicable lending office) to any additional Tax (other than any Tax on the overall net income of such Lender) with respect to this Agreement or any of the other Transaction Documents or any of its obligations hereunder or thereunder or any payments to such Lender (or its applicable lending office) of principal, interest, fees or any other amount payable hereunder; (ii) imposes, modifies or holds applicable any reserve (including any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement against assets held by, or deposits or other liabilities in or for the account of, or advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender; or (iii) imposes any other condition (other than with respect to a Tax matter) on or affecting such Lender (or its applicable lending office) or its obligations hereunder or the London interbank market; and the result of any of the foregoing is to increase the cost to such Lender of agreeing to make, making or maintaining Loans hereunder or to reduce any amount received or receivable by such Lender (or its applicable lending office) with respect thereto; then, in any such case, Company shall promptly pay to such Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its sole discretion shall determine) as may be necessary to compensate such Lender for any such increased cost or reduction in amounts received or receivable hereunder. Such Lender shall deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to such Lender under this Section 2.16, which statement shall be conclusive and binding upon all parties hereto absent manifest error.

 

 

(b) Capital Adequacy Adjustment. In the event that any Lender shall have determined that the adoption, effectiveness, phase-in or applicability after the Closing Date of any law, rule or regulation (or any provision thereof) regarding capital adequacy, or any change therein or in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its applicable lending office) with any guideline, request or directive regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of, or with reference to, such Lender’s Loans or Commitment, or participations therein or other obligations hereunder with respect to the Loans to a level below that which such Lender or such controlling corporation could have achieved but for such adoption, effectiveness, phase-in, applicability, change or compliance (taking into consideration the policies of such Lender or such controlling corporation with regard to capital adequacy), then from time to time, within five Business Days after receipt by Company from such Lender of the statement referred to in the next sentence, Company shall pay to such Lender such additional amount or amounts as will compensate such Lender or such controlling corporation on an after-tax basis for such reduction. Such Lender shall deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to Lender under this Section 2.16(b), which statement shall be conclusive and binding upon all parties hereto absent manifest error.

 

 

2.17 Taxes; Withholding, etc. 

 

(a) Payments to Be Free and Clear. All sums payable by any Credit Party hereunder and under the other Transaction Documents shall (except to the extent required by law or permitted by the last sentence of Section 2.17(c)) be paid free and clear of, and without any deduction or withholding on account of, any Tax (other than a Tax on the overall net income of any Lender) imposed, levied, collected, withheld or assessed by or within the United States of America or any political subdivision in or of the United States of America or any other jurisdiction from or to which a payment is made by or on behalf of any Credit Party or by any federation or organization of which the United States of America or any such jurisdiction is a member at the time of payment.

 

(b) Withholding of Taxes. If any Credit Party or any other Person is required by law to make any deduction or withholding on account of any such Tax from any sum paid or payable by any Credit Party to Administrative Agent or any Lender under any of the Transaction Documents: (i) Company shall notify Administrative Agent of any such requirement or any change in any such requirement as soon as Company becomes aware of it; (ii) Company shall pay any such Tax before the date on which penalties attach thereto, such payment to be made (if the liability to pay is imposed on any Credit Party) for its own account or (if that liability is imposed on Administrative Agent or such Lender, as the case may be) on behalf of and in the name of Administrative Agent or such Lender; (iii) the sum payable by such Credit Party in respect of which the relevant deduction, withholding or payment is required shall be increased to the extent necessary to ensure that, after the making of that deduction, withholding or payment, Administrative Agent or such Lender, as the case may be, receives on the due date a net sum equal to what it would have received had no such deduction, withholding or payment been required or made; and (iv) within thirty (30) days after paying any sum from which it is required by law to make any deduction or withholding, and within thirty (30) days after the due date of payment of any Tax which it is required by clause (ii) above to pay, Company shall deliver to Administrative Agent evidence satisfactory to the other affected parties of such deduction, withholding or payment and of the remittance thereof to the relevant taxing or other authority; provided, no such additional amount shall be required to be paid to any Lender under clause (iii) above except to the extent that any change after the date hereof (in the case of each Lender listed on the signature pages hereof on the Closing Date) or after the effective date of the Assignment Agreement pursuant to which such Lender became a Lender (in the case of each other Lender) in any such requirement for a deduction, withholding or payment as is mentioned therein shall result in an increase in the rate of such deduction, withholding or payment from that in effect at the date hereof or at the date of such Assignment Agreement, as the case may be, in respect of payments to such Lender.

 

(c) Evidence of Exemption From U.S. Withholding Tax. Each Lender that is not a United States Person (as such term is defined in Section 7701(a)(30) of the Internal Revenue Code) for U.S. federal income tax purposes (a “Non-US Lender”) shall deliver to Administrative Agent for transmission to Company, on or prior to the Closing Date (in the case of each Lender listed on the signature pages hereof on the Closing Date) or on or prior to the date of the Assignment Agreement pursuant to which it becomes a Lender (in the case of each other Lender), and at such other times as may be necessary in the determination of Company or Administrative Agent (each in the reasonable exercise of its discretion), (i) two original copies of Internal Revenue Service Form W-8BEN or W-8ECI (or any successor forms), properly completed and duly executed by such Lender, and such other documentation required under the Internal Revenue Code and reasonably requested by Company to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of principal, interest, fees or other amounts payable under any of the Transaction Documents, or (ii) if such Lender is not a “bank” or other Person described in Section 881(c)(3) of the Internal Revenue Code and cannot deliver either Internal Revenue Service Form W-8BEN or W-8ECI pursuant to clause (i) above, a Certificate re Non-Bank Status together with two original copies of Internal Revenue Service Form W-8 (or any successor form), properly completed and duly executed by such Lender, and such other documentation required under the Internal Revenue Code and reasonably requested by Company to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of interest payable under any of the Transaction Documents. Each Lender required to deliver any forms, certificates or other evidence with respect to United States federal income tax withholding matters pursuant to this Section 2.17(c) hereby agrees, from time to time after the initial delivery by such Lender of such forms, certificates or other evidence, whenever a lapse in time or change in circumstances renders such forms, certificates or other evidence obsolete or inaccurate in any material respect, that such Lender shall promptly deliver to Administrative Agent for transmission to Company two new original copies of Internal Revenue Service Form W-8BEN or W-8ECI, or a Certificate re Non-Bank Status and two original copies of Internal Revenue Service Form W-8, as the case may be, properly completed and duly executed by such Lender, and such other documentation required under the Internal Revenue Code and reasonably requested by Company to confirm or establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to payments to such Lender under the Transaction Documents, or notify Administrative Agent and Company of its inability to deliver any such forms, certificates or other evidence. Company shall not be required to pay any additional amount to any Non-US Lender under Section 2.17(b)(iii) if such Lender shall have failed (1) to deliver the forms, certificates or other evidence referred to in the second sentence of this Section 2.17(c), or (2) to notify Administrative Agent and Company of its inability to deliver any such forms, certificates or other evidence, as the case may be; provided, if such Lender shall have satisfied the requirements of the first sentence of this Section 2.17(c) on the Closing Date or on the date of the Assignment Agreement pursuant to which it became a Lender, as applicable, nothing in this last sentence of Section 2.17(c) shall relieve Company of its obligation to pay any additional amounts pursuant to Section 2.17(b)(iii) in the event that, as a result of any change in any applicable law, treaty or governmental rule, regulation or order, or any change in the interpretation, administration or application thereof, such Lender is no longer properly entitled to deliver forms, certificates or other evidence at a subsequent date establishing the fact that such Lender is not subject to withholding as described herein.

 

 

           2.18 Measures to Mitigate. Each Lender agrees that, as promptly as practicable after the officer of such Lender responsible for administering its Loans becomes aware of the occurrence of an event or the existence of a condition that would cause such Lender to become entitled to receive payments under Section 2.16 or 2.17, it will, to the extent not inconsistent with the internal policies of such Lender and any applicable legal or regulatory restrictions, use reasonable efforts to (a) make, fund or maintain its Credit Extensions through another office of such Lender, or (b) take such other measures as such Lender may deem reasonable, if as a result thereof the circumstances which would cause the additional amounts which would otherwise be required to be paid to such Lender pursuant to Section 2.16 or 2.17 would be materially reduced and if, as determined by such Lender in its sole discretion, the making, issuing, funding or maintaining of such Commitments or Loans through such other office or in accordance with such other measures, as the case may be, would not otherwise adversely affect such Commitments or Loans or the interests of such Lender; provided, such Lender will not be obligated to utilize such other office pursuant to this Section 2.18 unless Company agrees to pay all incremental expenses incurred by such Lender as a result of utilizing such other office as described in clause (a) above. A certificate as to the amount of any such expenses payable by Company pursuant to this Section 2.18 (setting forth in reasonable detail the basis for requesting such amount) submitted by such Lender to Company (with a copy to Administrative Agent) shall be conclusive absent manifest error.

 

 

 

           3.1 Closing Date. The obligation of any Lender to make a Credit Extension on the Closing Date is subject to the satisfaction, or waiver in accordance with Section 10.5, of the following conditions on or before the Closing Date:

 

(a) Transaction Documents. Administrative Agent shall have received counterparts of each Transaction Document originally executed and delivered by each applicable Credit Party and in such numbers as Administrative Agent or its counsel may reasonably request.

 

(b) Organizational Documents; Incumbency. Administrative Agent shall have received (i) copies of each Organizational Document delivered by each Credit Party, as applicable, and, to the extent applicable, certified as of a recent date by the appropriate governmental official; (ii) signature and incumbency certificates of the officers of such Person executing the Transaction Documents to which it is a party; (iii) resolutions of the Board of Directors or similar governing body of each Credit Party approving and authorizing the execution, delivery and performance of this Agreement and the other Transaction Documents to which it is a party or by which it or its assets may be bound as of the Closing Date, certified as of the Closing Date by its secretary or an assistant secretary as being in full force and effect without modification or amendment; (iv) a good standing certificate from the applicable Governmental Authority of each Credit Party’s jurisdiction of incorporation, organization or formation and in each jurisdiction in which it owns real property Collateral, each dated a recent date prior to the Closing Date; and (v) such other documents as Administrative Agent may reasonably request.

 

(c) Organizational and Capital Structure. The organizational structure and capital structure of Company and its Subsidiaries shall be as set forth on Schedule 3.1.

 

(d) Application of Loan Proceeds. On the Closing Date, Company shall have arranged for appropriate portions of the Loans then to be funded to be paid directly to the Persons who are to receive the Loan proceeds described in clause (a) of Section 2.4.

 

(e) Initial Hedging Contracts. On or prior to the Closing Date, Company shall, on terms satisfactory to Administrative Agent and Syndication Agent, have entered into Hedging Contracts with a counterparty who is rated (or whose credit support provider is rated) at least A by S&P or A2 by Moody’s as specified below:

 

 

Hedging Contracts under which Company will receive, for notional barrels of West Texas Intermediate light sweet crude oil in at least the number of barrels specified in the following table, a swap price of at least the amount specified below:

(f) Governmental Authorizations and Consents. Each Credit Party shall have obtained all Governmental Authorizations and all consents of other Persons, in each case that are necessary or advisable in connection with the transactions contemplated by the Transaction Documents and each of the foregoing shall be in full force and effect and in form and substance reasonably satisfactory to Syndication Agent and Administrative Agent. All applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on the transactions contemplated by the Transaction Documents or the financing thereof and no action, request for stay, petition for review or rehearing, reconsideration, or appeal with respect to any of the foregoing shall be pending, and the time for any applicable agency to take action to set aside its consent on its own motion shall have expired.

 

(g) Acceptable Priority on Oil and Gas Properties. In order to create in favor of Administrative Agent, for the benefit of Secured Parties, a valid and (subject to any filing or recording referred to herein) perfected Acceptable Priority Lien on such Oil and Gas Properties as Administrative Agent might request, Administrative Agent shall have received from Company:

 

(i) fully executed and notarized Mortgages, in proper form for recording in all appropriate places in all applicable jurisdictions, encumbering such Properties; and

 

(ii) an amount necessary to cover all recording and stamp taxes (including mortgage recording and intangible taxes) payable in connection with recording the Mortgages for such Properties in the appropriate real estate records.

 

(h) Personal Property Collateral. In order to create in favor of Administrative Agent, for the benefit of Secured Parties, a valid and (subject to any filing or recording referred to herein) perfected Acceptable Priority security interest in all personal property of the Credit Parties subject to Article 9 of the UCC, Administrative Agent shall have received from Company evidence that each Credit Party shall have taken or caused to be taken any action, executed and delivered or caused to be executed and delivered any agreement, document and instrument and made or caused to be made any other filing and recording (other than as set forth herein) reasonably required by Administrative Agent.

 

 

(i) Environmental Reports. Syndication Agent and Administrative Agent shall have received reports and other information, in form, scope and substance reasonably satisfactory to Syndication Agent and Administrative Agent, regarding environmental matters relating to Company’s material real property assets, which reports shall include a Phase I environmental assessment dated August 1, 2006 prepared by Pilko & Associates, L.P.

 

(j) Financial Statements; Projections; Approved Plan of Development. Lenders shall have received from Company (i) the Current Financial Statements, which shall be in form and substance reasonably satisfactory to Administrative Agent and Syndication Agent, (ii) the Projections, and (iii) the Approved Plan of Development, in form and substance reasonably satisfactory to Administrative Agent and Syndication Agent.

 

(k) Evidence of Insurance. Syndication Agent and Administrative Agent shall have received a certificate from Company’s insurance broker or other evidence reasonably satisfactory to them that all insurance required to be maintained pursuant to Section 5.8 is in full force and effect and that Administrative Agent have been named as additional insured and loss payee thereunder as its interests may appear and to the extent required under Section 5.8.

 

(l) Opinions of Counsel to Credit Parties. Syndication Agent and Administrative Agent shall have received originally executed copies of (i) the favorable written opinions of McGuireWoods LLP, McGinnis, Lochridge & Kilgore, LLP, and Kummer Kaempfer Bonner Renshaw & Farrario, each opining as to such other matters as Administrative Agent or Syndication Agent may reasonably request, dated as of the Closing Date and otherwise in form and substance reasonably satisfactory to Administrative Agent and Syndication Agent (and each Credit Party hereby instructs such counsel to deliver such opinions to Agents and Lenders).

 

(m) Fees. Company shall have paid to Syndication Agent and Administrative Agent the fees payable on the Closing Date that are referred to in Section 2.9.

 

(n) Solvency Certificate. On the Closing Date, Syndication Agent and Administrative Agent shall have received a Solvency Certificate from Company dated the Closing Date and addressed to Syndication Agent, Administrative Agent and Lenders, and in the form of Exhibit G-2 appropriately completed, with appropriate attachments and demonstrating that after giving effect to the consummation of this Agreement and the Acquisition, Company and its Subsidiaries (other than Foothills Oklahoma) are Solvent.

 

(o) Closing Date Certificate. Company shall have delivered to Syndication Agent and Administrative Agent an originally executed Closing Date Certificate, together with all attachments thereto.

 

(p) No Litigation. There shall not exist any action, suit, investigation, litigation or proceeding or other legal or regulatory developments, pending or threatened in any court or before any arbitrator or Governmental Authority that, in the reasonable opinion of Administrative Agent and Syndication Agent, singly or in the aggregate, materially impairs the financing hereunder or any of the other transactions contemplated by the Transaction Documents, or that could have a Material Adverse Effect.

 

 

(q) Completion of Proceedings. All partnership, corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by Administrative Agent or Syndication Agent and its counsel shall be reasonably satisfactory in form and substance to Administrative Agent and Syndication Agent and such counsel, and Administrative Agent, Syndication Agent and such counsel shall have received all such counterpart originals or certified copies of such documents as Administrative Agent or Syndication Agent may reasonably request. Each Lender, by delivering its signature page to this Agreement and funding a Loan on the Closing Date, shall be deemed to have acknowledged receipt of, and consented to and approved, each Transaction Document and each other document required to be approved by any Agent, Required Lenders or Lenders, as applicable on the Closing Date.

 

(r) Reserved.

 

(s) Closing Date Transactions. Administrative Agent shall have received (i) a certificate of an Authorized Officer of Company certifying that Company is concurrently consummating the Closing Date Transactions (with all of the material conditions precedent thereto having been satisfied in all material respects by the parties thereto) and acquiring all of the Oil and Gas Properties contemplated thereby; (ii) copies of the assignments, deeds and leases for all of such Oil and Gas Properties; and (iii) such other related documents and information as Administrative Agent shall have reasonably requested. Company hereby acknowledges and agrees that (i) the consummation of the transactions contemplated under this Agreement and the Closing Date Transactions, including the making of the Loans, are intended to be simultaneous for all intents and purposes, and (ii) each Company shall be deemed to have executed and delivered each Credit Document as set forth in this Section 3.1, including each Security Document, immediately prior to or simultaneously with the making of the Loans hereunder.

 

(t) Equity Contributions. Since August 24, 2006, Company shall have received at least the amount of $22,500,000 from the issuance and sale of new Capital Stock on terms and conditions satisfactory to Administrative Agent in all respects.

 

(u) Due Diligence. Administrative Agent and Lenders shall have completed satisfactory due diligence review of the assets, liabilities, business, operations and condition (financial or otherwise) of Company and its Subsidiaries, including, a review of their Oil and Gas Properties and all legal, financial, accounting, governmental, environmental, tax and regulatory matters, and fiduciary aspects of the proposed financing.

 

(v) Reserved.

 

(w) Acquisition Documents. Each of the representations and warranties made by any party in the Acquisition Documents shall be true and correct in all material respects; and none of such parties shall have failed to perform any obligation or covenant required by the Acquisition Documents to be performed or complied with by it on or before the Closing Date. Simultaneously with making of the Loans on the Closing Date, all transactions under the Acquisition Documents shall have been consummated in compliance with the terms and conditions thereof and all conditions precedent to such consummation shall be fully satisfied.

 

 

(x) Other Documentation. Administrative Agent shall have received all documents and instruments which Administrative Agent has then reasonably requested, in addition to those described in this Section 3.1. All such additional documents and instruments shall be reasonably satisfactory to Administrative Agent in form, substance and date.

 

3.2 Conditions to Each Credit Extension.

 

(a) Conditions Precedent. The obligation of each Lender to make any Loan, on any Credit Date, including the Closing Date, are subject to the satisfaction, or waiver in accordance with Section 10.5, of the following conditions precedent:

 

(i) Administrative Agent shall have received a fully executed and delivered Funding Notice;

 

(ii) as of such Credit Date, the representations and warranties contained herein and in the other Transaction Documents shall be true and correct in all respects on and as of that Credit Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true and correct in all respects on and as of such earlier date; and

 

(iii) as of such Credit Date, no event shall have occurred and be continuing or would result from the consummation of the applicable Credit Extension that would constitute an Event of Default or a Default.

 

Any Agent or Required Lenders shall be entitled, but not obligated to, request and receive, prior to the making of any Credit Extension, additional information reasonably satisfactory to the requesting party confirming the satisfaction of any of the foregoing if, in the good faith judgment of such Agent or Required Lender such request is warranted under the circumstances.

 

(b) Funding Notices. Any Funding Notice shall be executed by an Authorized Officer in a writing delivered to Administrative Agent. In lieu of delivering a Funding Notice, Company may give Administrative Agent telephonic notice by the required time of any proposed borrowing, conversion/continuation; provided each such notice shall be promptly confirmed in writing by delivery of the applicable Funding Notice to Administrative Agent on or before the applicable date of borrowing. Neither Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized on behalf of Company or for otherwise acting in good faith.

 

 

In order to induce Lenders to enter into this Agreement and to make each Credit Extension to be made thereby, each Credit Party represents and warrants to each Agent, Royalty Owner, Warrant Owner and each Lender, on the Closing Date (both immediately prior to and immediately after giving effect to the Closing Date Transactions) and on each Credit Date, that the following statements are true and correct:

 

 

4.1 No Default. No event has occurred and is continuing which constitutes a Default.

 

           4.2 Organization and Good Standing. Each Credit Party is duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization, having all powers required to carry on its business and enter into and carry out the transactions contemplated hereby. Each Credit Party is duly qualified, in good standing, and authorized to do business in all other jurisdictions within the United States wherein the character of the properties owned or held by it or the nature of the business transacted by it makes such qualification necessary. No Credit Party owns or holds any properties or transacts any business in any jurisdiction outside the United States.

 

           4.3 Authorization. Each Credit Party has duly taken all action necessary to authorize the execution and delivery by it of the Transaction Documents to which it is a party and to authorize the consummation of the transactions contemplated thereby and the performance of its obligations thereunder. Company is duly authorized to borrow funds hereunder.

 

           4.4 No Conflicts or Consents. The execution and delivery by the various Credit Parties of the Transaction Documents to which each is a party, the performance by each of its obligations under such Transaction Documents, and the consummation of the transactions contemplated by the various Transaction Documents, do not and will not (a) conflict with any provision of (i) any Law, (ii) the Organizational Documents of any Credit Party, or (iii) any agreement, judgment, license, order or permit applicable to or binding upon any Credit Party, (b) result in the acceleration of any Indebtedness owed by any Credit Party, or (c) result in or require the creation of any Lien upon any assets or properties of any Credit Party except as expressly contemplated in the Transaction Documents. Except as expressly contemplated in the Transaction Documents no consent, approval, authorization or order of, and no notice to or filing with, any Governmental Authority or third party is required in connection with the execution, delivery or performance by any Credit Party of any Transaction Document or any Acquisition Document or to consummate any transactions contemplated hereby and thereby.

 

           4.5 Enforceable Obligations. This Agreement is, and the other Transaction Documents when duly executed and delivered will be, legal, valid and binding obligations of each Credit Party which is a party hereto or thereto, enforceable in accordance with their terms except as such enforcement may be limited by bankruptcy, insolvency or similar Laws of general application relating to the enforcement of creditors’ rights and by general principles of equity.

 

      4.6 Current Financial Statements. Company has heretofore delivered to each Lender true, correct and complete copies of the Current Financial Statements. The Current Financial Statements fairly present Company’s Consolidated financial position at the date thereof in all material respects. Since the date of the Current Financial Statements no Material Adverse Effect has occurred. The Current Financial Statements were prepared in accordance with GAAP.

 

           4.7 Other Obligations and Restrictions. As of the date hereof, no Credit Party has any outstanding Liabilities of any kind (including obligations under farm-in agreements, other obligations to make capital expenditures, contingent obligations, tax assessments, and unusual forward or long-term commitments) which is, in the aggregate, material to Company or material with respect to Company’s Consolidated financial condition and not shown in the Current Financial Statements or disclosed in Schedule 4.7. All obligations of any Credit Party to make capital expenditures to drill or otherwise develop any oil, gas or mineral properties are specified in Schedule 4.7 (by well or project, describing the dollar amount of each such obligation) or in the APOD. Except as shown in the Current Financial Statements or disclosed in Schedule 4.7, no Credit Party is subject to or restricted by any franchise, contract, deed, charter restriction, or other instrument or restriction which is materially likely to cause a Material Adverse Effect.

 

           4.8 Full Disclosure. As of the date of delivery, no certificate, statement or other information delivered herewith or heretofore by any Credit Party to any Lender in connection with the negotiation of this Agreement or in connection with any transaction contemplated hereby contains any untrue statement of a material fact or omits to state any material fact known to any Credit Party (other than industry-wide risks normally associated with the types of businesses conducted by the Credit Parties) necessary to make the statements contained herein or therein not misleading as of the date made or deemed made. There is no fact known to any Credit Party (other than industry-wide risks normally associated with the types of businesses conducted by the Credit Parties) that has not been disclosed to each Lender in writing which is materially likely to cause a Material Adverse Effect. There are no statements or conclusions in any Engineering Report which are based upon or include misleading information or fail to take into account material information regarding the matters reported therein, it being understood that each Engineering Report is necessarily based upon professional opinions, estimates and projections and that Company does not warrant that such opinions, estimates and projections will ultimately prove to have been accurate. Company has heretofore delivered to each Lender true, correct and complete copies of the Initial Engineering Report.

 

           4.9 Litigation. Except as disclosed in the Current Financial Statements or in Schedule 4.9: (a) there are no actions, suits or legal, equitable, arbitrative or administrative proceedings pending, or to the knowledge of any Credit Party threatened, against any Credit Party before any Governmental Authority (i) which could cause a Material Adverse Effect or (ii) purport to affect or pertain to this Agreement or any other Transaction Document, or any of the transactions contemplated hereby or purport to affect or pertain to the Acquisition or any Acquisition Document, and (b) there are no outstanding judgments, injunctions, writs, rulings or orders by any such Governmental Authority against any Credit Party or any Credit party’s partners, directors or officers which could cause a Material Adverse Effect.

 

           4.10 Labor Disputes and Acts of God. Except as disclosed in Schedule 4.10, neither the business nor the properties of any Credit Party has been affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought; storm, hail, earthquake, embargo, act of God or of the public enemy or other casualty (whether or not covered by insurance), which could cause a Material Adverse Effect.

 

           4.11 ERISA Plans and Liabilities. All currently existing ERISA Plans are listed in Schedule 4.11. Except as disclosed in the Current Financial Statements or in Schedule 4.11, no Termination Event has occurred or is reasonably expected to occur with respect to any ERISA Plan and all ERISA Affiliates are in compliance with ERISA and other applicable Laws in all material respects. No ERISA Affiliate is required to contribute to, or has any other absolute or contingent liability in respect of, any “multiemployer plan” as defined in Section 4001 of ERISA. Except as set forth in Schedule 4.11: (a) no “accumulated funding deficiency” (as defined in Section 412(a) of the Internal Revenue Code) exists with respect to any ERISA Plan, whether or not waived by the Secretary of the Treasury or his delegate, and (b) the current value of each ERISA Plan’s benefits does not exceed the current value of such ERISA Plan’s assets available for the payment of such benefits by more than $500,000.

 

 

           4.12 Environmental and Other Laws. Except as disclosed in Schedule 4.12: (a) Credit Parties are conducting their businesses in material compliance with all applicable Laws, including Environmental Laws, and have and are in compliance with all licenses and permits required under any such Laws; (b) none of the operations or properties of any Credit Party is the subject of federal, state or local investigation evaluating whether any material remedial action is needed to respond to a release of any Hazardous Materials into the environment or to the improper storage or disposal (including storage or disposal at offsite locations) of any Hazardous Materials; (c) no Credit Party (and to the best knowledge of Company, no other Person) has filed any notice under any Law indicating that any Credit Party is responsible for the improper release into the environment, or the improper storage or disposal, of any material amount of any Hazardous Materials or that any Hazardous Materials have been improperly released, or are improperly stored or disposed of, upon any property of any Credit Party; (d) no Credit Party has transported or arranged for the transportation of any Hazardous Material to any location which is (i) listed on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, listed for possible inclusion on such National Priorities List by the Environmental Protection Agency in its Comprehensive Environmental Response, Compensation and Liability Information System List, or listed on any similar state list or (ii) the subject of federal, state or local enforcement actions or other investigations which may lead to claims against any Credit Party for clean-up costs, remedial work, damages to natural resources or for personal injury claims (whether under Environmental Laws or otherwise); and (e) no Credit Party otherwise has any known material contingent liability under any Environmental Laws or in connection with the release into the environment, or the storage or disposal, of any Hazardous Materials. Each Credit Party undertook, at the time of its acquisition of each of its material properties, all appropriate inquiry into the previous ownership and uses of the Property and any potential environmental liabilities associated therewith. Each Credit Party’s liability for future plugging and abandonment costs is properly reflected in the Current Financial Statements or in the most recently delivered financial statements pursuant to Section 5.2(b).

 

           4.13 Names and Places of Business. No Credit Party has, during the preceding five years, had, been known by, or used any other trade or fictitious name, except as disclosed in Schedule 4.13. Except as otherwise indicated in Schedule 4.13, the chief executive office and principal place of business of each Credit Party are (and for the preceding five years have been) located at the address of Company set out in Appendix B. Except as indicated in Schedule 4.13, no Credit Party has any other office or place of business. Company has obtained from the Assignors a complete list of all prior names and places of organization or residence during the preceding five years.

 

           4.14 Subsidiaries. Schedule 4.14 correctly sets forth the ownership interest of Company and each of its Subsidiaries in their respective Subsidiaries as of the Closing Date both before and after giving effect to the transactions contemplated herein. Company owns, directly or indirectly, the Capital Stock in each of its Subsidiaries which is indicated in Schedule 4.14 and Company has no other Subsidiary or owns no other Capital Stock in any corporation or other Person. Except as set forth in Schedule 4.14, there is no existing option, warrant, call, right, commitment or other agreement to which Company or any of its Subsidiaries is a party requiring, and there is no Capital Stock of Company or any of its Subsidiaries outstanding which upon conversion or exchange would require, the issuance by Company or any of its Subsidiaries of any other Capital Stock of Company or any of its Subsidiaries or other Securities convertible into, exchangeable for or evidencing the right to subscribe for or purchase, any Capital Stock of Company or any of its Subsidiaries.

 

           4.15 Licenses. Each Credit Party possesses all licenses, permits, franchises, patents, copyrights, trademarks and trade names, and other intellectual property (or otherwise possesses the right to use such intellectual property without violation of the rights of any other Person) which are necessary to carry out its business as presently conducted and as presently proposed to be conducted hereafter, and no Credit Party is in violation in any material respect of the terms under which it possesses such intellectual property or the right to use such intellectual property.

 

           4.16 Government Regulation. Neither Company nor any other Credit Party owing Obligations is subject to regulation under the Federal Power Act, the Investment Company Act of 1940 (as any of the preceding acts have been amended) or any other Law which regulates the incurring by such Person of Indebtedness, including Laws relating to common contract carriers or the sale of electricity, gas, steam, water or other public utility services.

 

           4.17 Solvency. Upon giving effect to the issuance of the Notes and the making of the Loans, the execution of this Agreement, the other Transaction Documents, and the Acquisition Documents by Company and each applicable Credit Party and the consummation of the transactions contemplated hereby and thereby, Company and each other Credit Party (other than Foothills Oklahoma) will be Solvent.

 

           4.18 Taxes. Each Credit Party has filed all United States Federal income tax returns and all other material tax returns that are required to be filed by it and have paid all taxes due pursuant to such returns or pursuant to any assessment received by any Credit Party and all other penalties or charges, other than those being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP. The charges, accruals and revenues on the books of each Credit Party in respect of taxes and other governmental charges are, in the opinion of Company, adequate. No Credit Party has not given or been requested to give a waiver of the statute of limitations relating to the payment of any federal or other taxes, except as listed in Schedule 4.18.

 

           4.19 Projections. On and as of the Closing Date, the Projections of Company and its Subsidiaries for the period Fiscal Year 2006 through and including Fiscal Year 2014 (the “Projections”) are based on good faith estimates and assumptions made by the management of Company; provided, the Projections are not to be viewed as facts and that actual results during the period or periods covered by the Projections may differ from such Projections and that the differences may be material; provided further, as of the Closing Date, management of Company believed that the Projections were reasonable and attainable.

 

           4.20 No Distributions. Since December 31, 2005, neither Company nor any of its Subsidiaries has directly or indirectly declared, ordered, paid or made, or set apart any sum or property for, any Distribution or agreed to do so except as permitted pursuant to Section 6.6 or as disclosed in Schedule 4.20 attached hereto.

 

           4.21 Title to Properties. Each of Company and its Subsidiaries has (i) good and defensible title to (in the case of fee interests in real property and leasehold interests in Oil and Gas Properties), (ii) valid leasehold interests in (in the case of leasehold interests in other real or personal property), and (iii) good title to (in the case of all other personal property), all of their respective properties and assets purported to be subject to the Mortgages and in the most recent financial statements delivered pursuant to Section 5.2, in each case except for assets disposed of since the date of such financial statements in the ordinary course of business or as otherwise permitted under Section 6.5. Except as permitted by this Agreement, all such properties and assets are free and clear of Liens. The ORRI will be conveyed to Royalty Owner by Company, free and clear of any Lien. No Credit Party has granted control over any Deposit Accounts to any Person, other than pursuant to the Revolving Credit Agreement or the First Lien Hedging Contracts, Administrative Agent and the bank with which any Deposit Account is maintained. No Credit Party has any “securities accounts” as defined and described in the UCC.

 

           4.22 No Defaults. Neither Company nor any of its Subsidiaries is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any of its Contractual Obligations, and no condition exists which, with the giving of notice or the lapse of time or both, could constitute such a default, except where the consequences, direct or indirect, of such default or defaults, if any, could not reasonably be expected to have a Material Adverse Effect. Schedule 4.22 contains a true, correct and complete list of all the Material Contracts (other than oil and gas leases) in effect on the Closing Date, and except as described thereon, all such Material Contracts (other than oil and gas leases) are in full force and effect and no defaults currently exist thereunder.

 

           4.23 Margin Stock. Neither Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. No part of the proceeds of the Loans made to such Credit Party will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock or for any purpose that violates, or is inconsistent with, the provisions of Regulation T, U or X of such Board of Governors.

 

           4.24 Certain Fees. No broker’s or finder’s fee or commission will be payable with respect hereto or any of the actions contemplated hereby, other than the fees identified in Schedule 4.24 attached hereto.

 

           4.25 Leases and Contracts; Performance of Obligations. The leases, deeds, and other agreements forming a part of the Oil and Gas Properties of the Credit Parties to which Proved Reserves are attributed in the Initial Engineering Report and each subsequent Engineering Report are in full force and effect. All rents, royalties and other payments due and payable under such leases, deeds, and other agreements have been properly and timely paid other than to the extent such could not reasonably be expected to cause the loss or forfeiture of any such Proved Reserves. No Credit Party is in default with respect to its obligations (and no Credit Party is aware of any default by any third party with respect to such third party’s obligations) under any such leases, deeds, and other agreements, or under any Permitted Liens, or otherwise attendant to the ownership or operation of any part of the Oil and Gas Properties, where such default could adversely affect the ownership or operation of any Oil and Gas Properties to which any such Proved Reserves are attributed. No Credit Party is currently accounting for any royalties, or overriding royalties or other payments out of production, on a basis (other than delivery in kind) less favorable to such Credit Party than proceeds received by such Credit Party (calculated at the well) from sale of production, and no Credit Party has any liability (or alleged liability) to account for the same on any such less favorable basis.

 

 

           4.26  Marketing Arrangements. Except as set forth in Schedule 4.26, no Oil and Gas Property is subject to any contractual or other arrangement (i) whereby payment for production is or can be deferred for a substantial period after the month in which such production is delivered (in the case of oil, not in excess of 60 days, and in the case of gas, not in excess of 90 days) or (ii) whereby payments are made to a Credit Party other than by checks, drafts, wire transfer advises or other similar writings, instruments or communications for the immediate payment of money. Except for production sales contracts, processing agreements, transportation agreements and other agreements relating to the marketing of production that are listed in Schedule 4.26 in connection with the Oil and Gas Properties to which such contract or agreement relates: (i) no Oil and Gas Property is subject to any contractual or other arrangement for the sale, processing or transportation of production (or otherwise related to the marketing of production) which cannot be canceled on 120 days’ (or less) notice and (ii) all contractual or other arrangements for the sale, processing or transportation of production (or otherwise related to the marketing of production) are bona fide arm’s length transactions made on the best terms reasonably available with third parties not affiliated with Credit Parties. Each Credit Party is presently receiving a price for all production from (or attributable to) each Oil and Gas Property covered by a production sales contract or marketing contract listed in Schedule 4.26 that is computed in accordance with the terms of such contract, and no Credit Party is having deliveries of production from such Oil and Gas Property curtailed by any purchaser or transporter of production substantially below such property’s delivery capacity, except for curtailments caused (a) by an act or event of force majeure not reasonably within the control of and not caused by the fault or negligence of a Credit Party and which by the exercise of reasonable diligence such Credit Party is unable to prevent or overcome, and (b) by routine maintenance requirements in the ordinary course of business.

 

           4.27 Right to Receive Payment for Future Production. Except as set forth in Schedule 4.27, no Credit Party, nor any Credit Party’s predecessors in title, has received prepayments (including payments for gas not taken pursuant to “take or pay” or other similar arrangements) for any oil, gas or other hydrocarbons produced or to be produced from any Oil and Gas Properties after the date hereof. Except as set forth in Schedule 4.27, no Oil and Gas Property is subject to any “take or pay”, gas imbalances or other similar arrangement (i) which can be satisfied in whole or in part by the production or transportation of gas from other properties or (ii) as a result of which production from any Oil and Gas Property may be required to be delivered to one or more third parties without payment (or without full payment) therefor as a result of payments made, or other actions taken, with respect to other properties. Except as set forth in Schedule 4.27, there is no Oil and Gas Property with respect to which any Credit Party, or any Credit Party’s predecessors in title, has, prior to the date hereof, taken more (“overproduced”), or less (“underproduced”), gas from the lands covered thereby (or pooled or unitized therewith) than its ownership interest in such Oil and Gas Property would entitle it to take; and Schedule 4.27 accurately reflects, for each well or unit with respect to which such an imbalance is shown thereon to exist, (i) whether such Credit Party is overproduced or underproduced and (ii) the volumes (in cubic feet or British thermal units) of such overproduction or underproduction and the effective date of such information. No Oil and Gas Property is subject at the present time to any regulatory refund obligation and, to the best of Credit Party’s knowledge, no facts exist which might cause the same to be imposed.

 

 

           4.28 Operation of Oil and Gas Properties. The Oil and Gas Properties (and all properties unitized therewith) are being (and, to the extent the same could adversely affect the ownership or operation of the Oil and Gas Properties after the date hereof, have in the past been) maintained, operated and developed in a good and workmanlike manner, in accordance with prudent industry standards and in conformity with all applicable Laws and in conformity with all oil, gas or other mineral leases and other contracts and agreements forming a part of the Oil and Gas Property and in conformity with the Permitted Liens. No Oil and Gas Property is subject to having allowable production after the date hereof reduced below the full and regular allowable (including the maximum permissible tolerance) because of any overproduction (whether or not the same was permissible at the time) prior to the date hereof and none of the wells located on the Oil and Gas Properties (or properties unitized therewith) are or will be deviated from the vertical more than the maximum permitted by applicable laws, regulations, rules and orders, and such wells are bottomed under and producing from, with the well bores wholly within, the Oil and Gas Properties (or, in the case of wells located on properties unitized therewith, such unitized properties). Each Credit Party has all governmental licenses and permits necessary or appropriate to own and operate its Oil and Gas Property, and no Credit Party has received notice of any violations in respect of any such licenses or permits.

 

           4.29 Ad Valorem and Severance Taxes; Litigation. Each Credit Party has paid and discharged all ad valorem taxes assessed against its Oil and Gas Property or any part thereof and all production, severance and other taxes assessed against, or measured by, the production or the value, or proceeds, of the production therefrom. There are no suits, actions, claims, investigations, inquiries, proceedings or demands pending (or, to any Credit Party’s knowledge, threatened) which might affect the Oil and Gas Property, including any which challenge or otherwise pertain to any Credit Party’s title to any Oil and Gas Property or rights to produce and sell oil and gas therefrom.

 

           4.30 Acquisition Closing. After giving effect to each of the transactions under the Acquisition Documents, all representations and warranties made by any Credit Party in any Transaction Document will be true and correct in all respects on and as of the date of consummation of such transactions.  

 

 

 

Each Credit Party covenants and agrees that so long as any Commitment is in effect and until payment in full of all Obligations hereunder and under any Security Documents, each Credit Party shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 5.

 

           5.1 Payment and Performance. Company will pay all amounts due under the Transaction Documents in accordance with the terms thereof and will observe, perform and comply with every covenant, term and condition expressed in the Transaction Documents. Company will cause each other Credit Party to observe, perform and comply with every such term, covenant and condition in any Transaction Document.

 

           5.2 Books, Financial Statements and Reports. Company, acting through or on behalf of the Credit Parties, will at all times maintain full and accurate books of account and records and a standard system of accounting, will maintain its Fiscal Year, and will furnish the following statements and reports to each Lender at Company’s expense:

 

(a) As soon as available, and in any event within one-hundred twenty (120) days after the end of each Fiscal Year, complete Consolidated financial statements of Company together with all notes thereto, prepared in reasonable detail in accordance with GAAP, together with an unqualified opinion, based on an audit using generally accepted auditing standards, by independent certified public accountants selected by Company and acceptable to Required Lenders, stating that such Consolidated financial statements have been so prepared. These financial statements shall contain a Consolidated balance sheet as of the end of such Fiscal Year and Consolidated statements of earnings, of cash flows, and of changes in owners’ equity for such Fiscal Year, each setting forth in comparative form the corresponding figures for the preceding Fiscal Year. In addition, within one-hundred twenty (120) days after the end of each Fiscal Year, Company will furnish a report signed by such accountants (i) containing calculations showing compliance (or non-compliance) at the end of such Fiscal Year with the requirements of Sections 6.10-6.12, inclusive, and Section 6.19, and (ii) further stating that in making their examination and reporting on the Consolidated financial statements described above they did not conclude that any Default existed at the end of such Fiscal Year or at the time of their report, or, if they did conclude that a Default existed, specifying its nature and period of existence. 

 

(b) As soon as available, and in any event within sixty (60) days after the end of each Fiscal Quarter, Company’s Consolidated balance sheet as of the end of such Fiscal Quarter and Consolidated statements of earnings and cash flows for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter, all in reasonable detail and prepared in accordance with GAAP, subject to changes resulting from normal year-end adjustments. In addition, Company will, together with each such set of financial statements and each set of financial statements furnished under subsection (b) of this section, furnish a Compliance Certificate signed by the chief financial officer of Company stating that such financial statements are accurate and complete (subject to normal year-end adjustments), stating that he has reviewed the Transaction Documents, containing calculations showing compliance (or non-compliance) at the end of such Fiscal Quarter with the requirements of Sections 6.10-6.12, inclusive, and Section 6.19, and stating that no Default exists at the end of such Fiscal Quarter or at the time of such certificate or specifying the nature and period of existence of any such Default.

 

 

 

	GUARANTORS:
	FOOTHILLS CALIFORNIA, INC.
	By:	/s/ W. Kirk Bosche
		W. Kirk Bosche
		Assistant Secretary and Chief Financial Officer