-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I2RdCARuWVoKpMHYwU9rzv04LO+PnMFk4gBXzpRToRKWxRizdq+1p1zwzDzTL0iD sAmwXva8EMSQoB2p0TdZhw== 0000950134-00-004714.txt : 20000517 0000950134-00-004714.hdr.sgml : 20000517 ACCESSION NUMBER: 0000950134-00-004714 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXCO RESOURCES INC CENTRAL INDEX KEY: 0000316300 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 741492779 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-09204 FILM NUMBER: 636567 BUSINESS ADDRESS: STREET 1: 5735 PINELAND DR STREET 2: STE 235 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 2143682084 MAIL ADDRESS: STREET 1: 5735 PINELAND DRIVE STREET 2: SUITE 235 CITY: DALLAS STATE: TX ZIP: 75231 10-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------- ------- Commission File Number 0-9204 EXCO RESOURCES, INC. (Exact name of registrant as specified in its charter) TEXAS 74-1492779 (State of incorporation) (I.R.S. Employer Identification No.) 5735 PINELAND DR., SUITE 235 DALLAS, TEXAS 75231 (Address of principal executive offices) (Zip Code) (214) 368-2084 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Class: Common Stock, par value $0.02 per share Outstanding at May 5, 2000: 6,808,906 shares (excludes 8,790 treasury shares) 2 EXCO RESOURCES, INC. INDEX
Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited)..............................................................2 Condensed Consolidated Balance Sheets December 31, 1999 and March 31, 2000..........................................................2 Condensed Consolidated Statements of Operations Three Months Ended March 31, 1999 and 2000....................................................3 Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 1999 and 2000....................................................4 Notes to Condensed Consolidated Financial Statements..........................................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................18 Item 3. Quantitative and Qualitative Disclosure About Market Risk....................................23 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders..........................................25 Item 5. Other Information............................................................................25 Item 6. Exhibits and Reports on Form 8-K.............................................................25 Signatures.....................................................................................................30 Exhibit Index..................................................................................................31
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) EXCO RESOURCES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31, ------------ ------------ 1999 2000 ------------ ------------ (Unaudited, in thousands, except per share data) ASSETS Current assets: Cash and cash equivalents ........................................ $ 9,972 $ 14,393 Accounts receivables: Oil and gas sales ............................................ 824 2,617 Joint interest ............................................... 1,914 612 Interest and other ........................................... 18,818 631 Other ............................................................ 71 417 ------------ ------------ Total current assets .............................. 31,599 18,670 Oil and gas properties (full cost accounting method): Proved developed and undeveloped oil and gas properties .......... 24,177 42,808 Allowance for depreciation, depletion and amortization ........... (5,503) (6,309) ------------ ------------ Oil and gas properties, net ...................................... 18,674 36,499 Office and field equipment, net ............................................. 264 239 Deferred financing costs .................................................... 8 115 Investment in EXUS Energy, LLC .............................................. 257 3 Deferred tax asset .......................................................... -- 130 Other assets ................................................................ 130 130 ------------ ------------ Total assets ...................................... $ 50,932 $ 55,786 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................................. $ 3,870 $ 1,087 Revenues and royalties payable ................................... 1,136 651 Accrued interest payable ......................................... 10 48 Current maturities of long-term debt ............................. 5,001 -- ------------ ------------ Total current liabilities ......................... 10,017 1,786 Long-term debt, less current maturities ..................................... -- 10,555 Deferred income taxes ....................................................... -- 760 Other long-term liabilities ................................................. 227 227 Minority interest in limited partnership .................................... (192) -- Stockholders' equity: Preferred stock, $.01 par value: Authorized shares - 10,000,000 Outstanding shares - None ..................................... -- -- Common stock, $.02 par value: Authorized shares - 25,000,000 Issued and outstanding shares - 6,805,196 and 6,817,696 at December 31, 1999 and March 31, 2000, respectively ......... 136 136 Additional paid-in capital ....................................... 46,941 47,145 Notes receivable - officers ...................................... (1,552) (1,577) Deficit eliminated in quasi-reorganization ....................... (8,799) (8,799) Retained earnings since December 31, 1997 ........................ 4,154 5,628 Treasury stock, at cost: 0 and 8,790 shares at December 31, 1999 and March 31, 2000, respectively ............ -- (75) ------------ ------------ Total stockholders' equity ........................ 40,880 42,458 ------------ ------------ Total liabilities and stockholders' equity ........ $ 50,932 $ 55,786 ============ ============
See accompanying notes. 2 4 EXCO RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, -------------------- 1999 2000 -------- -------- (Unaudited, in thousands, except per share amounts) REVENUES: Oil and natural gas .............................................. $ 669 $ 4,188 Oil hedge ........................................................ -- (162) Other income ..................................................... 315 392 Gain on disposition of property .................................. -- 535 -------- -------- Total revenues ................................................ 984 4,953 COST AND EXPENSES: Oil and gas production ........................................... 368 1,384 Depreciation, depletion and amortization ......................... 294 847 General and administrative ....................................... 474 417 Interest ......................................................... 1 71 -------- -------- Total cost and expenses ....................................... 1,137 2,719 -------- -------- Income (loss) before income taxes ......................................... (153) 2,234 Deferred income tax provision ............................................. -- 760 -------- -------- Net income (loss) ......................................................... $ (153) $ 1,474 ======== ======== Basic and diluted earnings (loss) per share ............................... $ (.02) $ .21 ======== ======== Weighted average number of common and common equivalent shares outstanding: Basic ............................................................ 6,688 6,815 ======== ======== Diluted .......................................................... 6,697 6,845 ======== ========
See accompanying notes. 3 5 EXCO RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, -------------------- 1999 2000 -------- -------- (Unaudited, in thousands) OPERATING ACTIVITIES: Net income (loss) ........................................ $ (153) $ 1,474 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization .......... 294 847 Deferred income taxes ............................. -- 760 Gain on disposition of property and equipment...... -- (535) Effect of changes in: Accounts receivable ............................ (109) 17,697 Other current assets ........................... 46 (346) Accounts payable and other current liabilities.. 149 (8,231) -------- -------- Net cash provided by operating activities ................... 227 11,666 INVESTING ACTIVITIES: Additions to property and equipment ......................... (237) (18,477) Investment in EXCO Energy Investors, L.L.C. ................. (11) -- Investment in Rio Grande, Inc. promissory note .............. 7,451 -- Acquisition of Rio Grande, Inc. ............................. (7,017) -- Proceeds from the dissolution of EXUS Energy, LLC ........... -- 254 Purchase of treasury stock (cost method) .................... -- (75) Distribution to limited partners ............................ -- (2) Proceeds from disposition of property and equipment ......... 28 570 -------- -------- Net cash provided by (used in) investing activities ...... 214 (17,730) FINANCING ACTIVITIES: Proceeds from long-term debt ................................ -- 10,835 Payments on long-term debt .................................. (10) (280) Proceeds from exercise of stock options ..................... -- 75 Interest income on notes receivable - officers .............. -- (26) Deferred financing costs .................................... -- (119) -------- -------- Net cash provided by (used in) financing activities ...... (10) 10,485 -------- -------- Net increase in cash ........................................ 431 4,421 Cash at beginning of period ................................. 21,493 9,972 -------- -------- Cash at end of period ....................................... $ 21,924 $ 14,393 ======== ======== SUPPLEMENTAL CASH FLOWS INFORMATION: Interest paid ............................................... $ 1 $ 14 ======== ======== Income taxes paid ........................................... $ -- $ -- ======== ========
See accompanying notes. 4 6 EXCO RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) 1. BASIS OF PRESENTATION In management's opinion, the accompanying financial statements contain all adjustments (consisting solely of normal recurring accruals) necessary to present fairly the financial position of EXCO Resources, Inc. as of December 31, 1999 and March 31, 2000, the results of operations for the three month periods ended March 31, 1999 and 2000, and the cash flows for the three month periods ended March 31, 1999 and 2000. We have prepared the accompanying unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. We have omitted certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States pursuant to those rules and regulations, although we believe that the disclosures we have made are adequate to make the information presented not misleading. You should read these financial statements in conjunction with our financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 1999. The accompanying condensed consolidated financial statements include the financial statements of EXCO Resources, Inc., Rio Grande Gulfmex, Ltd., and Humphrey-Hill, L.P. renamed Pecos-Gomez, L.P. effective April 14, 2000. The results of operations for the three month period ended March 31, 2000, are not necessarily indicative of the results we expect for the full year. Effective January 1, 1998, we adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income includes net income and other comprehensive income, which includes, but is not limited to, unrealized gains from marketable securities and futures contracts, foreign currency translation adjustments and minimum pension liability adjustments. For the three months ended March 31, 1999 and 2000, our net income (loss) and comprehensive income (loss) were the same. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results from the hedged item on the income 5 7 EXCO RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) statement. Companies must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for fiscal years beginning after June 15, 2000; however, beginning June 16, 1998, companies may implement the statement as of the beginning of any subsequent fiscal quarter. SFAS 133, when adopted by us, cannot be applied retroactively and must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997. We may apply, at our election, SFAS 133 to the derivative instruments listed in (a) and (b) above if they were issued, acquired, or modified before January 1, 1998. We have not yet quantified the impact of adopting SFAS 133 on the financial statements and have not determined the timing of or method of adoption of SFAS 133. 2. QUASI-REORGANIZATION Effective December 31, 1997, we effected a quasi-reorganization by applying approximately $8.8 million of our additional paid-in capital account to eliminate our accumulated deficit. Our board of directors decided to effect a quasi-reorganization given the change in management, the infusion of new equity capital and an increase in our activities. Our accumulated deficit was primarily related to past operations and properties that have been disposed of. We did not adjust the historical carrying values of our assets and liabilities in connection with the quasi-reorganization. 3. EARNINGS PER SHARE Statement of Financial Accounting Standards No. 128, "Earnings per Share" which became effective in 1997, requires presentation of two calculations of earnings per common share. Basic earnings per common share equals net income divided by weighted average common shares outstanding during the period. Diluted earnings per common share equals net income divided by the sum of weighted average common shares outstanding during the period plus any dilutive shares assumed to be issued. Common stock equivalents are shares assumed to be issued if outstanding stock options were in-the-money, and exercised. 4. REVERSE STOCK SPLITS At our 1996 annual meeting of shareholders, our shareholders approved an amendment to our articles of incorporation, authorizing a one-for-five reverse stock split of our common stock, which became effective July 19, 1996. At our 1998 annual meeting of shareholders, our shareholders approved an amendment to our articles of incorporation, authorizing a one-for-two reverse stock split of our common stock, which became effective March 31, 1998. We have 6 8 EXCO RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) adjusted all share and per share numbers retroactively to record the effects of the reverse stock splits. 5. OIL AND NATURAL GAS PROPERTIES We have recorded oil and natural gas properties at cost using the full cost method of accounting, as prescribed by the Securities and Exchange Commission. Under the full cost method, all costs associated with the acquisition, exploration or development of oil and natural gas properties are capitalized as part of the full cost pool. Capitalized costs are limited to the aggregate of the present value of future net reserves plus the lower of cost or fair market value of unproved properties. Depreciation, depletion, and amortization of evaluated oil and natural gas properties is accounted for using the unit-of-production method based on total proved reserves, as determined by independent petroleum reservoir engineers. Sales, dispositions, and other oil and natural gas property retirements are accounted for as adjustments to the full cost pool, with no recognition of gain or loss unless the disposition would significantly alter the amortization rate. 6. BANK OF AMERICA CREDIT AGREEMENTS EXCO Resources, Inc. On February 11, 1998, we entered into a credit facility with NationsBank of Texas, N.A. The credit facility provided for borrowings up to $50 million, subject to borrowing base limitations. On September 21, 1998, we entered into the first amendment to the credit facility with NationsBank, N.A. (successor by merger to NationsBank of Texas, N.A.). The first amendment provides for borrowings up to $150 million, subject to borrowing base limitations, as determined by the lenders from time to time. On February 11, 2000, we entered into the second amendment to the credit facility with Bank of America, N.A. (successor by merger to NationsBank, N.A.). The second amendment provides for a new termination date, an increase in our borrowing base, subject to certain conditions, and an increase in certain thresholds customary for a growing company. Under the credit facility, we are required to pay a fee equal to .25% on any accepted increase in the borrowing base in excess of the previously determined borrowing base and an unused commitment fee of .30% to .425% based on the ratio of outstanding credit to the borrowing base. The maturity date of the credit facility is February 11, 2002. The credit facility provides that if our outstanding credit is less than $5 million, then our interest rate will be LIBOR plus 1.5%. If our outstanding credit is greater than $5 million, then the credit facility provides that our interest rate will be either Bank of America's prime rate or 7 9 EXCO RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) LIBOR plus between 1% and 1.75% based on the ratio of outstanding credit to the borrowing base. There are no scheduled principal payments due on the credit facility until maturity. However, the borrowing base will be redetermined on or around April 1st and October 1st of each year. A borrowing base deficiency is created in the event that the outstanding loan balances exceed the borrowing base, as determined by the lenders in their sole discretion. Upon such event the borrowing base deficiency must be repaid by: (1) mandatory reductions of the deficiency over a period of not more than 6 months; (2) making a lump sum payment equal to the deficiency; or (3) providing additional collateral acceptable to lenders in their sole discretion sufficient to increase the borrowing base and eliminate the deficiency. Borrowings under the credit facility are secured by first and prior liens covering 90% of the recognized value of all proved mineral interests owned by us. The credit facility contains various restrictive covenants, including limitations on the granting of liens, restrictions on the issuance of additional debt, requirements to maintain a net worth of at least $500,000 plus 50% of our consolidated cumulative net income beginning January 1, 1999, and to maintain a current ratio of not less than 1.0 to 1.0, and currently prohibits the payment of dividends on our capital stock. Pecos-Gomez, L.P. See Note 8. Acquisitions - Pecos County Properties Acquisition for a description of the Pecos-Gomez, L.P. credit facility. 7. HEDGING ACTIVITIES In an effort to reduce the effects of the volatility of the price of crude oil and natural gas on our operations, management has adopted a policy of hedging oil and natural gas prices whenever such prices are in excess of the prices anticipated in our operating budget and profit plan through the use of commodity futures, options, and swap agreements. Hedging transactions require the approval of our board of directors. On September 21, 1999, we entered into an oil commodity swap with a counterparty to sell notional volumes of 7,000 Bbls per month at a fixed price of $21.00 per Bbl based on NYMEX pricing. The transaction was effective October 1, 1999, and terminates September 30, 2000. The fair value at March 31, 2000 of the commodity swap was a liability of approximately 8 10 EXCO RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) $204,000 and has been estimated from a quote provided by the counterparty. This liability represents the estimated amount that we would expect to pay to terminate the agreement on March 31, 2000. The following table sets forth our oil prices, both realized before hedge results, and realized including hedge results; and the net effects of settlements of oil price hedges on revenue:
THREE MONTH PERIOD ENDED MARCH 31, -------------------------------- 2000 -------------------------------- Average price per Bbl - realized before hedge results.............. $ 27.38 Average price per Bbl - realized including hedge results........... $ 25.19 Reduction in revenue............................................... $ 162,000
8. ACQUISITIONS We have accounted for the following acquisitions in accordance with APB No. 16, "Business Combinations" where applicable. EXCO Energy Investors, L.L.C. On October 9, 1998, we formed a $50 million joint venture with an institutional investor to acquire oil and natural gas related assets and securities. Under the terms of the joint venture agreement, we were required to contribute 5% of the joint venture's capital expenditures. Related to an investment made by the joint venture, we presented a restructuring plan to National Energy Group, Inc.'s bondholders' committee on February 24, 1999. The proposal consisted of a combination of shares of our common stock and approximately $58 million cash to satisfy all secured and unsecured liabilities and to acquire the assets of National Energy. The plan anticipated no consideration for the preferred or common equity of National Energy. The plan was subject to conditions which included approval by (1) EXCO's board of directors; (2) EXCO's shareholders; (3) EXCO's bank lenders; (4) due diligence and (5) the U. S. Bankruptcy Court. This proposal was not accepted by National Energy, its creditors' constituencies or the U.S. Bankruptcy Court. On November 1, 1999, we participated in an auction of National Energy's oil and natural gas properties. We were not the winning bidder on these assets. The joint venture sold the debt securities of National Energy it owned on November 11, 1999, and was subsequently dissolved 9 11 EXCO RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) on December 3, 1999. We made a pre-tax gain of approximately $65,000 on our investment in the joint venture. Rio Grande, Inc. Acquisition On November 2, 1998, we acquired a promissory note from a Texas bank for $6.4 million which was secured by substantially all of the assets of Rio Grande, Inc., its subsidiaries and affiliated entities. Rio Grande, Inc. was an oil and natural gas producer with principal operations in Texas, Oklahoma, Louisiana, and Mississippi. At the same time we purchased the note, we also entered into an agreement with Rio Grande, Inc. and Rio Grande, Inc.'s sole holder of preferred stock, regarding plans for the ultimate satisfaction of Rio Grande, Inc.'s debt, including the proposed acquisition of Rio Grande, Inc. or its assets by us. On November 12, 1998, Rio Grande, Inc. announced that it had filed for reorganization under Chapter 11 of the Bankruptcy Code. As the largest secured creditor, we had negotiated a plan for financial restructuring with Rio Grande, Inc. and the holder of its preferred stock. On March 5, 1999, the court confirmed the proposed plan. Pursuant to the terms of the plan, Rio Grande, Inc. fully repaid its trade creditors. Several of the subsidiaries or affiliates were merged into Rio Grande, Inc. Then, the outstanding shares of Rio Grande, Inc.'s common and preferred stock were canceled. We were issued new shares of Rio Grande, Inc. as settlement of Rio Grande Inc.'s $13 million secured indebtedness owed to us. The new shares represented all of the outstanding capital stock of Rio Grande, Inc., and we became the owners of Rio Grande, Inc. effective on March 16, 1999. On March 30, 1999, Rio Grande, Inc. was merged into EXCO. The acquisition was recorded as a purchase. Jackson Parish Properties Acquisition and Disposition On June 30, 1999, we formed a joint venture with Venus Exploration, Inc. called EXUS Energy, LLC. On June 30, 1999, EXUS Energy, LLC, a Delaware limited liability company, owned 50% by EXCO and 50% by Venus Exploration, Inc., completed the acquisition from Apache Corporation of certain oil and natural gas properties located in Jackson Parish, Louisiana (the Jackson Parish Properties). Venus is a publicly-held oil and gas exploration company based in San Antonio, Texas. The purchase price, before closing adjustments, was approximately $28.5 million cash, (approximately $27.6 million after contractual adjustments). EXCO and Venus initially capitalized EXUS with $14 million of equity capital, all of which was applied to fund the purchase of the Jackson Parish Properties. EXUS also arranged a credit facility through NationsBank, N.A. to fund $14 million of the Jackson Parish Properties acquisition, additional development drilling of the properties and additional acquisitions. The purchase price was determined based upon arms-length negotiations between Apache Corporation and Venus taking into account reserve estimates and other items customarily considered in acquisitions of this type. 10 12 EXCO RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) Of the initial $14 million of EXUS equity capital, $7 million was provided by EXCO from its cash on hand, and $7 million was provided by Venus from borrowed funds. On June 30, 1999 Venus borrowed $7 million from EXCO under the terms of an $8 million convertible promissory note. A provision of the note provided for a voluntary prepayment on any or all of the note by Venus (subject to a prepayment penalty of 3.57% of the principal prepaid for any prepayment occurring on or prior to July 1, 2000). On December 31, 1999, EXUS conveyed 100% of the leasehold and mineral interests it held in Jackson Parish, Louisiana, to its equity members in proportion to their respective membership interests. Then on December 31, 1999, pursuant to the terms of a Purchase, Sale and Exchange agreement dated December 17, 1999, and subsequent amendment dated December 31, 1999, between EXCO, as seller, and Anadarko Petroleum Corporation, as buyer, EXCO sold to Anadarko the property interests conveyed to it by EXUS. The gross consideration was approximately $18.7 million cash ($18.8 million cash after final adjustments which principally reflect production since October 1, 1999, the effective date of the sale), and oil and gas leasehold interests located in Seward and Meade Counties, Kansas, valued by the parties at $800,000. EXCO recorded a pre-tax gain from the sale of approximately $5.1 million in December 1999, and $535,000 in March 2000. The price was determined through arms-length negotiation between the parties. The instruments of conveyance were executed and delivered into escrow on and dated as of December 31, 1999. The cash consideration was paid to the escrow agent on January 6, 2000. The conveyance documents were delivered by the escrow agent to Anadarko on January 6, 2000. The payment of cash was delayed due to the anticipation of the potential for a Y2K disruption to the banking system. The Jackson Parish Properties which were sold included 17 gross (7.125 net to EXCO's interest) producing wells. EXCO was the named operator of the Jackson Parish Properties. The Jackson Parish Properties sold included approximately 6,410 gross (2,830 net to EXCO's interest) developed acres and approximately 1,530 gross (570 net to EXCO's interest) undeveloped acres. As of October 1, 1999, the Jackson Parish Properties were estimated to contain net total proved reserves to EXCO's interest of 1,340 barrels of oil and natural gas liquids (Bbls) and 32.7 billion cubic feet (Bcf) of gas. Net production to EXCO's interest as of November 1999, was running approximately 85.7 million cubic feet (Mmcf) per month of natural gas, and no barrels of oil or condensate. Anadarko took over operations on January 1, 2000. The proceeds received by EXCO were placed in a tax-deferred escrow account with Texas Escrow Company, Inc. of Dallas, Texas, under terms of a Deferred Exchange Agreement between EXCO and Texas Escrow executed on December 31, 1999. The Exchange Agreement 11 13 EXCO RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) is designed to comply with the like-kind exchange provisions of Section 1031 of the Internal Revenue Code which permits the deferral of gains from a sale of assets if specific like-kind exchange reinvestment criteria are met. If EXCO is successful in meeting the like-kind exchange provisions, some, if not most, of the federal and state tax payments on the gain from the sale of the Jackson Parish Properties will be deferred to future periods. A portion of the assets purchased in Natchitoches Parish, Louisiana, and Val Verde County, Texas, described below, meet the requirements for a like-kind exchange. Therefore, EXCO will be permitted to defer at least some of its gain on the sale of the Jackson Parish Properties. Under terms of the Escrow Agreement For Closing Funds and Closing Documents (the Escrow Agreement) dated December 31, 1999, by and among Anadarko, Venus, EXUS, EXCO, Wells Fargo Bank (Texas), N.A., Texas Escrow and American Escrow Company, the Credit Agreement among EXUS, as borrower, and NationsBank, N.A., as Administrative Agent, was paid in full on January 6, 2000. The payoff amount consisted of $14.2 million of principal, and approximately $28,000 for accrued interest and unused line fees. Also, on December 31, 1999, pursuant to the terms of a separate Purchase and Sale Agreement dated December 17, 1999, between Venus, as seller, and Anadarko, as buyer, Venus sold to Anadarko the property interests conveyed to it by EXUS. The gross consideration was approximately $18.9 million cash ($19.0 million cash after final adjustments which principally reflect production since October 1, 1999, the effective date of the sale). The proceeds received by Venus were placed in an escrow account with American Escrow. Then, under terms of the Escrow Agreement, Venus paid in full $7.0 million of principal, approximately $369,000 of accrued interest, and a $250,000 pre-payment penalty owed to EXCO under terms of the $8 million convertible promissory note made between Venus and EXCO dated June 30, 1999. As a result of the sale, EXUS was dissolved effective December 31, 1999, with a nominal amount of working capital retained to wind-up the affairs of the joint venture. Natchitoches Parish Properties Acquisition On December 31, 1999, under terms of a Purchase and Sale Agreement dated November 16, 1999, which was subsequently amended on December 21, 1999, between Western Gas Resources, Inc., as seller, and EXCO, as buyer, EXCO purchased certain oil and gas assets located in Natchitoches Parish, Louisiana from Western (the Natchitoches Parish Properties) for consideration of $7.8 million cash (approximately $7.2 million after contractual adjustments). All risk of loss and rights associated with the properties were transferred to EXCO on December 31, 1999. The assets include Western's interest in the Black Lake Unit and the Black Lake processing and treating facilities. 12 14 EXCO RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) Of the $7.8 million purchase price, a $5.0 million non-refundable cash deposit was paid by EXCO to Western on December 22, 1999, and a current liability in the form of a note payable to Western in the approximate amount of $2.2 million (reflecting contractual adjustments) was booked by EXCO on December 31, 1999. This note was subsequently paid off on January 7, 2000. The payment of the note payable was delayed due to the anticipation of the potential for a Y2K disruption to the banking system. Of the $7.2 million net purchase price, approximately $1.4 million has been allocated to the plants. The plants are not subject to the like-kind exchange treatment as the cash used for this portion of the purchase was paid directly from EXCO. After deducting the value allocated and paid on the plants, approximately $5.8 million was allocated to the leasehold interests, mineral interests, and equipment. This amount was paid with tax- deferred exchange proceeds held by Texas Escrow. This use of tax-deferred exchange proceeds is in compliance with the like-kind exchange provisions of Section 1031 of the Internal Revenue Code described in EXCO's Form 8-K filed on January 18, 2000, dated December 31, 1999. The price was determined through arms-length negotiation between the parties. The Natchitoches Parish Properties include 29 gross (20.0 net) producing wells out of a total of 75 gross wells. EXCO is the named operator of the Natchitoches Parish Properties and assumed operations of all 75 wells acquired in the transaction. The Natchitoches Parish Properties include approximately 14,250 gross (10,590 net) developed acres and approximately 10,390 gross (8,320 net) undeveloped acres. As of September 1, 1999, the Natchitoches Parish Properties were estimated to contain net reserves of 570,000 barrels of oil and natural gas liquids (Bbls) and 4.5 billion cubic feet (Bcf) of natural gas. EXCO took over operations on January 7, 2000. Val Verde County Properties Acquisition On February 25, 2000, EXCO purchased certain oil and gas assets located in Val Verde County, Texas from RVC Energy, Inc. (the Val Verde County Properties). The Val Verde County Properties include 21 gross (9.8 net) producing wells. EXCO is operator of 18 of the wells acquired in the transaction. The Val Verde County Properties include approximately 5,330 gross (3,370 net) developed acres and approximately 2,030 gross (510 net) undeveloped acres. As of December 31, 1999, total proved reserves net to EXCO's interest included 19.1 Bcf of natural gas. Production for December 1999, net to EXCO's interest was approximately 106 Mmcf of natural gas. The purchase price of $12.2 million cash (approximately $11.4 million after contractual adjustments) was paid from existing working capital and borrowings of $7.1 million under EXCO's credit facility. The effective date of the acquisition was October 1, 1999. These assets qualify as eligible replacement properties under EXCO's tax-deferred exchange agreement. This use of tax-deferred exchange proceeds is in compliance with the like-kind exchange provisions of 13 15 EXCO RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) Section 1031 of the Internal Revenue Code. The price was determined through arms-length negotiation between the parties. Pecos County Properties Acquisition On March 24, 2000, under terms of a purchase and sale agreement dated February 22, 2000, Humphrey-Hill, L.P., a Texas limited partnership (the Partnership), completed the acquisition from the Nebraska Public Gas Agency (Seller) of certain oil and natural gas properties located in Pecos County, Texas (the Pecos County Properties). The Partnership is owned 50% by Taurus Acquisition, Inc. as a limited partner (Taurus is a wholly-owned subsidiary of EXCO), 49% by certain private investors as limited partners and 1% by EXCO as general partner. The Pecos County Properties include 8 gross (4.25 net) producing wells. EXCO is the named operator and assumed operations of 5 of the wells acquired in the transaction. As of January 1, 2000, the Pecos County Properties were estimated to contain 25.1 billion cubic feet of natural gas. The purchase price, before closing adjustments, was approximately $10.2 million cash (approximately $10.1 million after contractual adjustments). The purchase price was paid with $6.6 million drawn under a new credit facility established by the Partnership and $3.5 million of Partnership equity capital. The effective date of the acquisition was January 1, 2000. The purchase price was determined based upon arms-length negotiations between Seller and the Partnership taking into account reserve estimates and other items customarily considered in acquisitions of this type. Limited Partnership Agreement. EXCO, Taurus and the other investors (the Humphrey-Hill Partners) have entered into an Amended and Restated Agreement of Limited Partnership (the Partnership Agreement). The partners share ratably in the profits and losses of the Partnership, subject to special allocations in certain events. The Partnership's principal business purpose is initially the management and development of the Pecos County Properties. The partners have established an area of mutual interest in respect of the Pecos County Properties which governs any additional acquisitions of properties by any partner within the area. Effective April 14, 2000, the Humphrey-Hill Partners entered into a Transfer and Assignment Agreement which transferred Taurus' 50% partnership interest to EXCO (Delaware), Inc., a Delaware corporation. EXCO (Delaware) is a wholly owned subsidiary of EXCO. Also effective April 14, 2000, the partnership name was changed to Pecos-Gomez, L.P. under an Amended and Restated Certificate of Limited Partnership. Subsequently, the Partnership Agreement was amended to reflect the transfer of the Taurus partnership interest and name change. 14 16 EXCO RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) The Partnership is managed by EXCO as general partner. Certain Partnership actions require consent of partners holding 70% of the partnership interests including: merger, sale of all of the Partnership's assets, liquidation, conversion of the legal form of the entity to another form or amending the Partnership Agreement to change any minority partnership interest protection. EXCO and Taurus initially capitalized the Partnership with $3.5 million of equity capital, all of which was applied to fund the purchase of the Pecos County Properties. Upon execution of the Partnership Agreement, the partners agreed that the value of the Partnership's Purchase Agreement was approximately $3.4 million. This value was allocated entirely to the capital accounts of the three private investors who initially formed the Partnership and arranged the Purchase Agreement with the Seller. Accordingly, the Partnership's full cost pool has been increased by $3.4 million. This value will be amortized over the economic reserve life of the Pecos County Properties. The Partnership also arranged a credit facility (discussed in greater detail below) through Bank of America, N.A. to fund a portion of the Pecos County Properties acquisition and to fund additional development drilling of the properties. The Partnership Agreement permits the general partner to call for additional capital contributions from the partners to fund the capital needs of the Partnership. Furthermore, the general partner or well operator may propose a Subsequent Operation (as that term is defined in the Partnership Agreement) on the Pecos County Properties. A "Subsequent Operation" would encompass significant drilling activities such as a new well, recompletion of an existing well or workover project. In the event a partner fails to fund the project, the contributing Humphrey-Hill Partners may elect to proceed with the Subsequent Operation in the Partnership's name, but the project will be funded solely by the contributing partners. In that event, all expenses, losses, gain or income from the project shall be specially allocated solely to the contributing partners until the contributing partners have recouped a sum equal to 300% of the additional capital contribution that would have been funded by the non-contributing partner had it participated in the project. Thereafter, all losses, expenses, gain or income shall be allocated to the partners pro rata according to their equity interest in the Partnership. The Partnership Agreement includes other customary terms including terms governing transfers of partnership interests (including a buy/sell right), voting, meetings and tax matters. Partnership Credit Facility On March 24, 2000, the Partnership entered into a credit facility with Bank of America, N.A. as administrative agent and lender. The credit facility provides for borrowings up to $25 million, subject to borrowing base limitations. All borrowings under the credit facility are secured by a first lien mortgage providing a security interest in substantially all assets owned by the Partnership including all mineral 15 17 EXCO RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) interests. In addition, EXCO has guaranteed the Partnership's obligations under the credit facility. EXCO has pledged its Partnership interest to secure the credit facility. The credit facility provides that if the aggregate outstanding indebtedness of the Partnership is less than 75% of the borrowing base, then advances will bear interest at 1.5% over LIBOR. If the borrowing base usage equals or exceeds 75%, then advances will bear interest at 1.75% over LIBOR. Commencing on August 15, 2000, and continuing quarterly thereafter until maturity, the Partnership shall make mandatory prepayments on the credit facility in an amount equal to 75% of the Partnership's Net Revenues (as defined in the credit facility) for the immediately preceding calendar quarter if NYMEX gas prices for the immediately preceding calendar quarter averaged $3.00 per mmbtu or less, otherwise, the dedication rate is 60%. Each such payment shall be applied first to accrued but unpaid interest and then to principal. However, if a borrowing base deficiency were to exist after giving effect to a redetermination, then the Partnership would have to do one of the following: (1) make a lump sum payment equal to the deficiency; (2) make six consecutive mandatory prepayments of principal on the revolving loan each of which shall be in the amount of one sixth (1/6th) of the amount of the borrowing base deficiency; or (3) provide additional collateral acceptable to the banks in their sole discretion sufficient to increase the borrowing base and eliminate the deficiency. The credit facility matures on March 24, 2003. The next borrowing base redetermination is scheduled for September 1, 2000, and on or about each March 1 and September 1, thereafter. Under the terms of the credit facility, the Partnership must maintain a current ratio of not less than 1.0 to 1.0 at any time. Furthermore, the Partnership must not incur or pay general and administrative expenses in an aggregate amount exceeding $75,000 during the period from March 24, 2000 through December 31, 2000, or $100,000 during any fiscal year thereafter. Additionally, the credit facility contains a number of other covenants affecting the liquidity and capital resources of the Partnership, including restrictions on the ability to incur indebtedness at any time in an amount exceeding $25,000 or to pledge assets outside of the credit facility, and restrictions on the payment of dividends on the equity partnership interests of the Partnership. 16 18 EXCO RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) Pro Forma Results of Operations The following table reflects the pro forma results of operations as though the acquisition of Rio Grande, Inc., the disposition of the Jackson Parish Properties, the addition of the Seward/Meade County Properties, and the acquisitions of the Natchitoches Parish Properties, the Val Verde County Properties, and EXCO's share of the Pecos County Properties, and the related borrowings had been consummated on January 1, 1999.
PRO FORMA THREE MONTHS ENDED MARCH 31, ------------------ 1999 2000 ------- ------- In thousands, except per share data) (Unaudited) Revenues.................................................. $3,387 $4,826 Net income ............................................... $ 241 $1,239 Net income per share...................................... $ .03 $ .18
17 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Before you invest in our common stock, you should be aware that there are various risks associated with an investment. Some of the information in this quarterly report may contain forward-looking statements. We use words such as "may," "will," "expect," "anticipate," "estimate," "believe," "continue" or other similar words to identify forward-looking statements. You should read statements that contain these words carefully because they: (1) discuss future expectations; (2) contain projections of results of operations or of our financial conditions; or (3) state other "forward-looking" information. We believe that it is important to communicate our future expectations to out investors. However, there may be events in the future that we are unable to accurately predict or over which we have no control. When considering our forward- looking statements, you should keep in mind the cautionary statements in this quarterly report and the risk factors contained in our other public filings. The following discussion of the results of operations and financial condition should be read in conjunction with the financial statements and related notes included in this quarterly report. OUR RESULTS OF OPERATIONS Comparison of Three Months Ended March 31, 1999 and 2000 Revenues. Our revenues (excluding the gain on the disposition of the Jackson Parish Properties) for the three month period ended March 31, 2000, increased $3.4 million or 349%, to $4.4 million versus $984,000 for the corresponding period of 1999. The increase in revenues was primarily due to the Rio Grande, Inc., the Natchitoches Parish Properties, the Val Verde County Properties, and the Pecos County Properties acquisitions. We sold 94,200 Bbls of oil during the three months ended March 31, 2000, versus 38,000 Bbls in the corresponding three months of 1999, a 148% increase. We sold 706,200 Mcf of natural gas during the current three months versus 151,300 Mcf in the first quarter of 1999, a 367% increase. The increase in volumes was primarily due to the Rio Grande, Inc., the Natchitoches Parish Properties, the Val Verde County Properties, and the Pecos County Properties acquisitions. The average oil price received (excluding the effect of our oil hedge) during the three months ended March 31, 2000, was $27.38 versus $11.64 for the three months ended March 31, 1999, a $15.74 per barrel or 135% increase. The average natural gas price received during the current three months was $2.39 versus $1.49 for the corresponding three months of the prior year, a $.90 per Mcf or 60% increase. In March 2000, we recorded an additional pre-tax gain of approximately $535,000 from the sale of the Jackson Parish Properties. 18 20 Costs and Expenses. Costs and expenses for the three month period ended March 31, 2000, increased by $1.6 million, or 139%, to $2.7 million as compared to $1.1 million for the corresponding period of 1999. The increase was primarily due to the Rio Grande, Inc., the Natchitoches Parish Properties, the Val Verde County Properties, and the Pecos County Properties acquisitions. Net Income. We had net income for the three months ended March 31, 2000, of approximately $1.5 million compared to a net loss of $153,000 for the corresponding three months of 1999, representing $.21 and ($.02) per basic and diluted share, respectively. LIQUIDITY AND CAPITAL RESOURCES General Consistent with our strategy of acquiring and developing reserves, we have an objective of maintaining financing flexibility. We cannot assure you that cash from operations will be sufficient in the future to meet our stated strategy. Low oil prices may impact our general strategy. In the past, we have utilized a variety of sources of capital to fund our acquisition, development and exploitation programs, and fund our operations. Our general financial strategy is to use cash from operations, bank financing and the issuance of equity securities to service interest when we have outstanding indebtedness, to pay ongoing operating expenses, and to contribute limited amounts toward further development of our existing proved reserves as well as additional acquisitions. We cannot assure you that cash from operations will be sufficient in the future to cover all of these purposes. We have planned development and exploitation activities for our major operating areas. We have budgeted approximately $1.0 million for our development and exploitation activities in the year 2000, of which $1.0 million is discretionary. In addition, we are continuing to evaluate oil and natural gas properties for future acquisition. Historically, we have used the proceeds from the issuance of equity securities and borrowings under our credit facilities to raise cash to fund acquisitions. However, we cannot assure you that funds will be available to us in the future to meet our budgeted capital spending. Furthermore, our ability to borrow other than under our credit facilities is subject to restrictions imposed by our credit facilities. If we cannot secure additional funds for our planned development and exploitation activities, then we will be required to delay or reduce substantially both of these activities. Credit Facility - EXCO Resources, Inc. On February 11, 1998, we entered into a credit facility with NationsBank of Texas, N.A. The credit facility provided for borrowings up to $50 million, subject to borrowing base limitations. On September 21, 1998, we entered into the first amendment to the credit facility with NationsBank, N.A. (successor by merger to NationsBank of Texas, N.A.). The first amendment provides for borrowings up to $150 million, subject to borrowing base limitations, as determined by the lenders from time to time. On February 11, 2000, we entered into the second amendment to the credit facility with Bank of America, N.A. (successor by merger to NationsBank, N.A.). The second amendment provides for a new termination date, an increase in our borrowing base, subject to certain conditions, and an increase in certain thresholds customary 19 21 for a growing company. The bank has sole discretion to determine our borrowing base based on its valuation of our reserves valued semi-annually. The credit facility consists of a regular revolver which on December 31, 1999, had a borrowing base of approximately $5.5 million. On February 17, 2000 our borrowing base was increased to $7.5 million. On February 29, 2000, our borrowing base was increased to $13.0 million. On May 15, 2000, we had $7.1 million drawn and $3.8 million available for borrowing under our credit facility. An additional $1.8 million of the borrowing base will become available upon resolving outstanding title description issues. A portion of the borrowing base is available for the issuance of letters of credit. All borrowings under the credit facility are secured by tangible and intangible assets representing at least 90% of the assessed present value of our oil and natural gas properties. The credit facility provides that if our aggregate outstanding indebtedness is less than $5 million, advances will bear interest at 1.5% over the appropriate LIBOR rate. If our aggregate outstanding indebtedness is greater than $5 million, then our advances will bear interest at 1.0% over LIBOR if the borrowing base usage is less than 50%, 1.25% over LIBOR if the borrowing base usage is between 50-70%, 1.5% over LIBOR if the borrowing base usage is between 70-90%, and 1.75% over LIBOR if the borrowing base usage exceeds 90%. At May 12, 2000, the 6 month LIBOR rate was 6.94%, which would result in an interest rate of approximately 8.19% on any new indebtedness we may incur. At May 15, 2000, the interest rate on our outstanding indebtedness is approximately 7.4%, and is fixed at this rate through July 10, 2000. The credit facility also permits us to repay and reborrow amounts under the credit facility without any penalty, thereby allowing us the flexibility to utilize any available cash to reduce our outstanding indebtedness and thus, our costs of borrowed funds. Under the terms of the credit facility, we must not permit our current ratio of consolidated current assets to our consolidated current liabilities to be less than 1.0 to 1.0 at any time. In addition, we must maintain a tangible net worth of at least $500,000 plus (i) subsequent to December 31, 1998, 50% of our consolidated cumulative net income and (ii) an amount equal to 75% of the net proceeds we receive from the issuance of any equity securities after December 31, 1998. At March 31, 2000 we were required to maintain a tangible net worth of at least $3.6 million. On December 31, 1999, and March 31, 2000, we were in compliance with both the consolidated tangible net worth covenant and the current ratio covenant. No principal amortization will be required during the term of the credit facility as long as the aggregate principal balance does not exceed the borrowing base then in effect. However, if a borrowing base deficiency were to exist after giving effect to a redetermination, then we would have to do one of the following: o eliminate the borrowing base deficiency by making a single mandatory prepayment of principal on the revolving loan in an amount equal to the entire amount of the borrowing base deficiency on the first monthly date following the date on which the borrowing base deficiency is determined to exist; o eliminate the deficiency by making six consecutive mandatory prepayments of principal on the revolving loan each of which shall be in the amount of one sixth (1/6th) of the amount of the borrowing base deficiency commencing on the first monthly date following the date on which the borrowing base deficiency is determined to exist and continuing on each monthly date thereafter; or 20 22 o eliminate the borrowing base deficiency by submitting additional mineral interests to the banks on the first monthly date following the date on which the borrowing base deficiency is determined to exist for evaluation as borrowing base properties which the banks, in their sole discretion, determine have a value sufficient to increase the borrowing base by at least the amount of the borrowing base deficiency. The credit facility matures on February 11, 2002. Our next borrowing base redetermination is scheduled for no later than October 1, 2000, and semi-annually thereafter. We may seek additional borrowing capacity at that time for our development drilling program. However, we cannot assure you that our current development program will result in increased collateral values or that these values will enable us to borrow the funds we need to continue the program. The credit facility contains a number of covenants affecting our liquidity and capital resources, including restrictions on our ability to incur indebtedness at any time in an amount exceeding $100,000 or to pledge assets outside of the credit facility. Credit Facility - Pecos-Gomez, L.P. On March 24, 2000, Pecos-Gomez, L.P. entered into a credit facility with Bank of America, N.A. as administrative agent and lender. The credit facility provides for borrowings up to $25 million, subject to borrowing base limitations. The bank has sole discretion to determine the borrowing base based on its valuation of the Partnership's reserves valued semi-annually. The credit facility consists of a regular revolver, which on March 31, 2000, had a borrowing base of $7.0 million. At March 31, 2000, the Partnership had approximately $249,000 available for borrowing under the credit facility. A portion of the borrowing base is available for the issuance of letters of credit. All borrowings under the credit facility are secured by a first lien mortgage providing a security interest in substantially all assets owned by the Partnership including all mineral interests. In addition, EXCO has guaranteed the Partnership's obligations under the credit facility. EXCO has pledged its Partnership interest to secure the credit facility. The credit facility provides that if the aggregate outstanding indebtedness of the Partnership is less than 75% of the borrowing base, then advances will bear interest at 1.5% over LIBOR. If the borrowing base usage equals or exceeds 75%, then advances will bear interest at 1.75% over LIBOR. Commencing on August 15, 2000, and continuing quarterly thereafter until maturity, the Partnership shall make mandatory prepayments on the credit facility in an amount equal to 75% of the Partnership's Net Revenues (as defined in the credit facility) for the immediately preceding calendar quarter if NYMEX gas prices for the immediately preceding calendar quarter averaged $3.00 per mmbtu or less, otherwise, the dedication rate is 60%. Each such payment shall be applied first to accrued but unpaid interest and then to principal. However, if a borrowing base deficiency were to exist after giving effect to a redetermination, then the Partnership would have to do one of the following: 21 23 o eliminate the borrowing base deficiency by making a single mandatory prepayment of principal on the revolving loan in an amount equal to the entire amount of the borrowing base deficiency on the first monthly date following the date on which the borrowing base deficiency is determined to exist; o eliminate the deficiency by making six consecutive mandatory prepayments of principal on the revolving loan each of which shall be in the amount of one sixth (1/6th) of the amount of the borrowing base deficiency commencing on the first monthly date following the date on which the borrowing base deficiency is determined to exist and continuing on each monthly date thereafter; or o eliminate the borrowing base deficiency by submitting additional mineral interests to the banks on the first monthly date following the date on which the borrowing base deficiency is determined to exist for evaluation as borrowing base properties which the banks, in their sole discretion, determine have a value sufficient to increase the borrowing base by at least the amount of the borrowing base deficiency. The credit facility matures on March 24, 2003. The next borrowing base redetermination is scheduled for September 1, 2000, and on or about each March 1 and September 1, thereafter. The Partnership may seek additional borrowing capacity at that time for its development drilling program. However, there can be no assurance that the current development program of the Partnership will result in increased collateral values or that these values will enable the Partnership to borrow the funds the Partnership needs to continue the program. Under the terms of the credit facility, the Partnership must not permit its consolidated current assets to its consolidated current liabilities to be less than 1.0 to 1.0 at any time. Furthermore, the Partnership must not incur or pay general and administrative expenses in an aggregate amount exceeding $75,000 during the period from March 24, 2000 through December 31, 2000, or $100,000 during any fiscal year thereafter. Additionally, the credit facility contains a number of other covenants affecting the liquidity and capital resources of the Partnership, including restrictions on the ability to incur indebtedness at any time in an amount exceeding $25,000 or to pledge assets outside of the credit facility, and restrictions on the payment of dividends on the equity partnership interests of the Partnership. OUR YEAR 2000 COMPLIANCE As of the date of this report, we have not experienced any significant disruptions to financial or operating activities as a result of the Year 2000 issues. We experienced no internal system disruptions and we are not aware of any failures affecting third parties that conduct operations affecting our business. We will continue to monitor the situation for any internal or third party disruptions, but we do not expect any disruptions. As of March 31, 2000, we have incurred approximately $7,600 in consulting costs for Year 2000 project planning. All software packages requiring an upgrade which had been identified were upgraded. 22 24 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Some of the information below contains forward-looking statements. The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term "market risk" refers to the risk of loss arising from adverse changes in oil and natural gas prices and interest rates earned on cash equivalent investments. The disclosure is not meant to be a precise indicator of expected future losses, but rather an indicator of reasonably possible losses. This forward-looking information provides an indicator of how we view and manage our ongoing market risk exposures. Our market risk sensitive instrument was entered into for hedging purposes, not for trading purposes. Commodity Price Risk Our major market risk exposure is in the pricing applicable to our oil and natural gas production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot market prices for natural gas. Pricing for oil and natural gas production is volatile. In an effort to reduce the effects of the volatility of the price of oil and natural gas on our operations, management has adopted a policy of hedging oil and natural gas prices whenever such prices are in excess of the prices anticipated in our operating budget and profit plan through the use of commodity futures, options, and swap agreements. Hedging transactions require the approval of the board of directors. On September 21, 1999, we entered into an oil commodity swap, accounted for as a derivative commodity instrument, with a counterparty to sell notional volumes of 7,000 Bbls per month at a fixed price of $21.00 per Bbl based on NYMEX pricing. The transaction was effective October 1, 1999, and terminates September 30, 2000. Realized gains or losses from the settlement of the swap are recorded separately in the financial statements as an increase or decrease in total revenues. For a given month when the settlement price exceeds $21.00, then a reduction in total revenues is recorded for the difference between the settlement price and $21.00 multiplied times the notional volume of 7,000 Bbls. Conversely, if the settlement price is less than $21.00, then an increase in total revenues is recorded for the difference between the settlement price and $21.00 multiplied times the notional volume of 7,000 Bbls. For example, for a given month, if the settlement price is $22.00, then total revenues will decrease by $7,000. Conversely, if the settlement price for a given month is $20.00, total revenues will increase by $7,000. The fair value at March 31, 2000 of the commodity swap was a liability of approximately $204,000 and has been estimated from a quote provided by the counterparty. This liability represents the estimated amount that we would expect to pay to terminate the agreement on March 31, 2000. We report average oil prices per Bbl including the effects of oil quality, gathering and transportation costs but excluding the net effect of the oil hedge. The following table sets forth our oil prices, both realized before hedge results and realized including hedge results; and the net effects of settlements of oil price hedges on revenue: 23 25
QUARTER ENDED MARCH 31, ------------- 2000 ------------- Average price per Bbl - realized before hedge results.............. $ 27.38 Average price per Bbl - realized including hedge results........... $ 25.19 Reduction in revenue............................................... $ 162,000
Interest Rate Risk We currently invest a portion of our idle cash in commercial paper which typically mature in 30 to 60 days. Our exposure to changes in the interest rates on these investments is considered to be nominal. As of March 31, 2000, we had $7.5 million face value invested in commercial paper. 24 26 PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held our Annual Meeting of Shareholders on April 26, 2000, at which the shareholders considered the following: (1) the election of eight directors to hold office until the next Annual Meeting of Shareholders or until their successors have been duly qualified and elected. Douglas H. Miller was elected as a director and received 4,693,092 votes for his election, with 6,644 votes withheld. T. W. Eubank was elected as a director and received 4,693,092 votes for his election, with 6,644 votes withheld. J. Douglas Ramsey was elected as a director and received 4,692,092 votes for his election, with 7,644 votes withheld. Jeffrey D. Benjamin was elected as a director and received 4,698,092 votes for his election, with 1,644 votes withheld. Earl E. Ellis was elected as a director and received 4,699,092 votes for his election, with 644 votes withheld. J. Michael Muckleroy was elected as a director and received 4,639,092 votes for his election, with 60,644 votes withheld. Boone Pickens was elected as a director and received 4,692,645 votes for his election, with 7,091 votes withheld. Stephen F. Smith was elected as a director and received 4,699,092 votes for his election, with 644 votes withheld. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein: No. Description of Exhibit 2.1 First Amended Joint Chapter 11 Plan of Reorganization of Rio Grande, Inc., Rio Grande Drilling Company, Rio Grande Desert Oil Company, Rio Grande Offshore, Ltd., and Rio Grande GulfMex, Ltd., dated January 25, 1999 and modified March 4, 1999, previously filed as an exhibit to Rio Grande, Inc.'s Form 8-K/A filed March 23, 1999 and incorporated by reference herein. 2.2 Confirmation Order for the Plan of Reorganization, dated March 4, 1999, previously filed as an exhibit to Rio Grande, Inc.'s Form 8-K/A filed March 23, 1999 and incorporated by reference herein. 2.3 Findings of Fact and Conclusions of Law regarding Confirmation Order (which set forth the March 4, 1999 modifications to the Plan), previously filed 25 27 as an exhibit to Rio Grande, Inc.'s Form 8-K/A filed March 23, 1999 and incorporated by reference herein. 3.1 Restated Articles of Incorporation of EXCO filed as an Exhibit to EXCO's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference herein. 3.2 Bylaws of EXCO, as amended filed as an Exhibit to EXCO's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference herein. 4.1 Restated Articles of Incorporation of EXCO filed as an Exhibit to EXCO's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference herein. 4.2 Restated Bylaws of EXCO, as amended, filed as an Exhibit to EXCO's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference herein. 4.3 Specimen Stock Certificate for the Common Stock of EXCO filed as an Exhibit to EXCO's Pre-Effective Amendment No. 1 to Form S-2 filed on June 2, 1998 and incorporated by reference herein. 10.1 Standby Purchase Commitment between EXCO Resources, Inc. on the one hand and Ares Management, L.P. on behalf of Ares Leveraged Investment Fund, L.P. on the other hand dated July 16, 1998 filed as an Exhibit to EXCO's Form 8-K filed August 25, 1998 and incorporated by reference herein. 10.2 Standby Purchase Commitment between EXCO Resources, Inc. on the one hand and Oaktree Capital Management, LLC on behalf of OCM Principal Opportunities Fund, L.P. on the other hand, dated July 16, 1998 filed as an Exhibit to EXCO's Form 8-K filed August 25, 1998 and incorporated by reference herein. 10.3 Credit Agreement among EXCO Resources, Inc., as borrower, and NationsBank of Texas, N.A., as agent, and financial institutions listed on Schedule I, dated February 11, 1998 filed as an Exhibit to EXCO's Form 8-K filed February 25, 1998 and incorporated by reference herein. 10.4 First Amendment to Credit Agreement among EXCO Resources, Inc., as borrower, NationsBank, N.A. (successor by merger to NationsBank of Texas, N.A.), as agent, and financial institutions listed on Schedule I, dated September 21, 1998, filed as an Exhibit to EXCO's Form 8-K filed September 28, 1998 and incorporated by reference herein. 26 28 10.5 Purchase and Sale Agreement among EXCO Resources, Inc. and Osborne Oil Company, et al., dated January 27, 1998 filed as an Exhibit to EXCO's Form 8-K filed August 25, 1998 and incorporated by reference herein. 10.6 EXCO Energy Investors, L.L.C. Operating Agreement, dated October 9, 1998, filed as an Exhibit to EXCO's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein. 10.7 Purchase and Sale Agreement among EXCO Resources, Inc. and Osborne Oil Company, et al., dated January 27, 1998, filed as an Exhibit to EXCO's Form 8-K dated February 25, 1998 and incorporated by reference herein. 10.8 Stock Purchase Agreement between EXCO Resources, Inc. and Jacobi-Johnson Energy, Inc., dated May 1, 1998, filed as an Exhibit to EXCO's Form 8-K filed May 15, 1998 and incorporated by reference herein. 10.9 EXCO Resources, Inc. 1998 Stock Option Plan, filed as Appendix A to EXCO's Proxy Statement dated March 17, 1998 and incorporated by reference herein. 10.10 Amendment No. 1 to the EXCO Resources, Inc. 1998 Stock Option Plan, filed as Exhibit 10.10 to EXCO's Form 10-Q dated May 17, 1999 and incorporated by reference herein. 10.11 EXCO Resources, Inc. 1998 Director Compensation Plan filed as Appendix D to EXCO's Proxy Statement dated March 16, 1999 and incorporated by reference herein. 10.12 Purchase and Sale Agreement dated June 24, 1998, by and between Humphrey Oil Interests, L.P. on the one hand and EXCO Resources, Inc. on the other, filed as an Exhibit to EXCO's Form 8-K dated June 30, 1998 and incorporated by reference herein. 10.13 Purchase and Sale Agreement dated June 24, 1998, by and between J. M. Hill, Individually and as Trustee, Walter O. Hill, and Steven J. Devos on the one hand and EXCO Resources, Inc. on the other, filed as an Exhibit to EXCO's Form 8-K dated June 30, 1998 and incorporated by reference herein. 10.14 Purchase and Sale Agreement between Apache Corporation as seller, and Venus Exploration, Inc., buyer, dated May 13, 1999, filed as an Exhibit to EXCO's Form 8-K filed July 15, 1999 and incorporated by reference herein. 10.15 Credit Agreement among EXUS Energy, LLC, as borrower, NationsBank, N.A., as administrative agent, and financial institutions listed on Schedule I, dated June 30, 1999, filed as an Exhibit to EXCO's Form 8-K filed July 15, 1999 and incorporated by reference herein. 27 29 10.16 Limited Liability Company Agreement of EXUS Energy, LLC dated June 30, 1999, filed as an Exhibit to EXCO's Form 8-K filed July 15, 1999 and incorporated by reference herein. 10.17 Convertible Promissory Note made by Venus Exploration, Inc. in favor of EXCO Resources, Inc., dated June 30, 1999, filed as an Exhibit to EXCO's Form 8-K filed July 15, 1999 and incorporated by reference herein. 10.18 Pledge Agreement made by Venus Exploration, Inc. for the benefit of EXCO Resources, Inc., dated June 30, 1999, filed as an Exhibit to EXCO's Form 8-K filed July 15, 1999 and incorporated by reference herein. 10.19 Registration Rights Agreement between EXCO Resources, Inc. and Venus Exploration, Inc., dated June 30, 1999, filed as an Exhibit to EXCO's Form 8- K filed July 15, 1999 and incorporated by reference herein. 10.20 Agreement Among Members between EXCO Resources, Inc. and Venus Exploration, Inc., dated June 30, 1999, filed as an Exhibit to EXCO's Form 8- K filed July 15, 1999 and incorporated by reference herein. 10.21 Second Amendment to Credit Agreement among EXCO Resources, Inc., as borrower, Bank of America, N.A. (successor by merger to NationsBank, N.A., successor by merger to NationsBank of Texas, N.A.), as agent, and Bank of America , N.A. (successor by merger to NationsBank, N.A., successor by merger to NationsBank of Texas, N.A.), as the sole bank, dated February 11, 2000 and incorporated by reference herein. 10.22 Purchase, Sale and Exchange Agreement between EXCO Resources, Inc., as seller, and Anadarko Petroleum Corporation, as buyer, dated December 17, 1999, filed as an Exhibit to EXCO's Form 8-K filed January 18, 2000 and incorporated by reference herein. 10.23 Amendment to Purchase, Sale and Exchange Agreement dated as of December 17, 1999, between EXCO Resources, Inc., as seller, and Anadarko Petroleum Corporation, as buyer, dated December 31, 1999, filed as an Exhibit to EXCO's Form 8-K filed January 18, 2000 and incorporated by reference herein. 10.24 Purchase and Sale Agreement between Western Gas Resources, Inc., as seller, and EXCO Resources, Inc., as buyer, dated November 16, 1999, filed as an Exhibit to EXCO's Form 8-K filed January 18, 2000 and incorporated by reference herein. 10.25 Amendment No. 1 to Purchase and Sale Agreement between Western Gas Resources, Inc., as seller, and EXCO Resources, Inc., as buyer, dated December 21, 1999, filed as an Exhibit to this Form 8-K filed January 18, 2000 and incorporated by reference herein. 28 30 10.26 Purchase and Sale Agreement between Nebraska Public Gas Authority as seller, and Humphrey-Hill, L.P., as buyer, dated February 22, 2000 (filed herewith). 10.27 Credit Agreement among Humphrey-Hill, L.P., as borrower, Bank of America, N.A., as administrative agent, and financial institutions listed on Schedule I, dated March 24, 2000 (filed herewith). 10.28 Amended and Restated Agreement of Limited Partnership of Humphrey-Hill, L.P., dated March 24, 2000 (filed herewith). 10.29 Amendment to Amended and Restated Agreement of Limited Partnership of Humphrey-Hill, L.P., dated April 14, 2000 (filed herewith). 16.1 Letter from Belew Averitt LLP regarding change in certifying accountant dated January 20, 1998 filed as an Exhibit to EXCO's Form 8-K filed January 21, 1998 and incorporated by reference herein. 18.1 Letter from Ernst & Young LLP regarding change in accounting principles dated February 11, 1998 filed as an Exhibit to EXCO's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated by reference herein. 27.1 Financial Data Schedule (filed herewith). 99.1 Voting Agreement dated October 30, 1998 between Rio Grande, Inc., Rio Grande Drilling Company, Rio Grande Offshore, Ltd., Rio Grande Desert Oil Company and Rio Grande GulfMex, Ltd. and EXCO Resources, Inc. filed as an Exhibit to Rio Grande, Inc.'s Form 8-K dated November 12, 1998 and incorporated by reference herein. (b) Reports on Form 8-K: Current Report on Form 8-K dated February 25, 2000 filed March 6, 2000 pursuant to Item 2 reporting the acquisition of the Val Verde County Properties. Current Report on Form 8-K dated March 24, 2000 filed April 10, 2000 pursuant to Item 2 reporting the acquisition of the Pecos County Properties and containing Financial Statements to be filed by amendment no later than June 7, 2000. 29 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. EXCO RESOURCES, INC. (Registrant) Date: May 15, 2000 By: /s/ J. DOUGLAS RAMSEY ------------------------------------------ J. Douglas Ramsey Vice President and Chief Financial Officer 30 32 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- 2.1 First Amended Joint Chapter 11 Plan of Reorganization of Rio Grande, Inc., Rio Grande Drilling Company, Rio Grande Desert Oil Company, Rio Grande Offshore, Ltd., and Rio Grande GulfMex, Ltd., dated January 25, 1999 and modified March 4, 1999, previously filed as an exhibit to Rio Grande, Inc.'s Form 8-K/A filed March 23, 1999 and incorporated by reference herein. 2.2 Confirmation Order for the Plan of Reorganization, dated March 4, 1999, previously filed as an exhibit to Rio Grande, Inc.'s Form 8-K/A filed March 23, 1999 and incorporated by reference herein. 2.3 Findings of Fact and Conclusions of Law regarding Confirmation Order (which set forth the March 4, 1999 modifications to the Plan), previously filed as an exhibit to Rio Grande, Inc.'s Form 8-K/A filed March 23, 1999 and incorporated by reference herein. 3.1 Restated Articles of Incorporation of EXCO filed as an Exhibit to EXCO's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference herein. 3.2 Bylaws of EXCO, as amended filed as an Exhibit to EXCO's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference herein. 4.1 Restated Articles of Incorporation of EXCO filed as an Exhibit to EXCO's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference herein. 4.2 Restated Bylaws of EXCO, as amended, filed as an Exhibit to EXCO's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference herein. 4.3 Specimen Stock Certificate for the Common Stock of EXCO filed as an Exhibit to EXCO's Pre-Effective Amendment No. 1 to Form S-2 filed on June 2, 1998 and incorporated by reference herein. 10.1 Standby Purchase Commitment between EXCO Resources, Inc. on the one hand and Ares Management, L.P. on behalf of Ares Leveraged Investment Fund, L.P. on the other hand dated July 16, 1998 filed as an Exhibit to EXCO's Form 8-K filed August 25, 1998 and incorporated by reference herein. 10.2 Standby Purchase Commitment between EXCO Resources, Inc. on the one hand and Oaktree Capital Management, LLC on behalf of OCM Principal
33 Opportunities Fund, L.P. on the other hand, dated July 16, 1998 filed as an Exhibit to EXCO's Form 8-K filed August 25, 1998 and incorporated by reference herein. 10.3 Credit Agreement among EXCO Resources, Inc., as borrower, and NationsBank of Texas, N.A., as agent, and financial institutions listed on Schedule I, dated February 11, 1998 filed as an Exhibit to EXCO's Form 8-K filed February 25, 1998 and incorporated by reference herein. 10.4 First Amendment to Credit Agreement among EXCO Resources, Inc., as borrower, NationsBank, N.A. (successor by merger to NationsBank of Texas, N.A.), as agent, and financial institutions listed on Schedule I, dated September 21, 1998, filed as an Exhibit to EXCO's Form 8-K filed September 28, 1998 and incorporated by reference herein. 10.5 Purchase and Sale Agreement among EXCO Resources, Inc. and Osborne Oil Company, et al., dated January 27, 1998 filed as an Exhibit to EXCO's Form 8-K filed August 25, 1998 and incorporated by reference herein. 10.6 EXCO Energy Investors, L.L.C. Operating Agreement, dated October 9, 1998, filed as an Exhibit to EXCO's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein. 10.7 Purchase and Sale Agreement among EXCO Resources, Inc. and Osborne Oil Company, et al., dated January 27, 1998, filed as an Exhibit to EXCO's Form 8-K dated February 25, 1998 and incorporated by reference herein. 10.8 Stock Purchase Agreement between EXCO Resources, Inc. and Jacobi-Johnson Energy, Inc., dated May 1, 1998, filed as an Exhibit to EXCO's Form 8-K filed May 15, 1998 and incorporated by reference herein. 10.9 EXCO Resources, Inc. 1998 Stock Option Plan, filed as Appendix A to EXCO's Proxy Statement dated March 17, 1998 and incorporated by reference herein. 10.10 Amendment No. 1 to the EXCO Resources, Inc. 1998 Stock Option Plan, filed as Exhibit 10.10 to EXCO's Form 10-Q dated May 17, 1999 and incorporated by reference herein. 10.11 EXCO Resources, Inc. 1998 Director Compensation Plan filed as Appendix D to EXCO's Proxy Statement dated March 16, 1999 and incorporated by reference herein. 10.12 Purchase and Sale Agreement dated June 24, 1998, by and between Humphrey Oil Interests, L.P. on the one hand and EXCO Resources, Inc. on the other, filed as an Exhibit to EXCO's Form 8-K dated June 30, 1998 and incorporated by reference herein.
34 10.13 Purchase and Sale Agreement dated June 24, 1998, by and between J. M. Hill, Individually and as Trustee, Walter O. Hill, and Steven J. Devos on the one hand and EXCO Resources, Inc. on the other, filed as an Exhibit to EXCO's Form 8-K dated June 30, 1998 and incorporated by reference herein. 10.14 Purchase and Sale Agreement between Apache Corporation as seller, and Venus Exploration, Inc., buyer, dated May 13, 1999, filed as an Exhibit to EXCO's Form 8-K filed July 15, 1999 and incorporated by reference herein. 10.15 Credit Agreement among EXUS Energy, LLC, as borrower, NationsBank, N.A., as administrative agent, and financial institutions listed on Schedule I, dated June 30, 1999, filed as an Exhibit to EXCO's Form 8-K filed July 15, 1999 and incorporated by reference herein. 10.16 Limited Liability Company Agreement of EXUS Energy, LLC dated June 30, 1999, filed as an Exhibit to EXCO's Form 8-K filed July 15, 1999 and incorporated by reference herein. 10.17 Convertible Promissory Note made by Venus Exploration, Inc. in favor of EXCO Resources, Inc., dated June 30, 1999, filed as an Exhibit to EXCO's Form 8-K filed July 15, 1999 and incorporated by reference herein. 10.18 Pledge Agreement made by Venus Exploration, Inc. for the benefit of EXCO Resources, Inc., dated June 30, 1999, filed as an Exhibit to EXCO's Form 8-K filed July 15, 1999 and incorporated by reference herein. 10.19 Registration Rights Agreement between EXCO Resources, Inc. and Venus Exploration, Inc., dated June 30, 1999, filed as an Exhibit to EXCO's Form 8- K filed July 15, 1999 and incorporated by reference herein. 10.20 Agreement Among Members between EXCO Resources, Inc. and Venus Exploration, Inc., dated June 30, 1999, filed as an Exhibit to EXCO's Form 8- K filed July 15, 1999 and incorporated by reference herein. 10.21 Second Amendment to Credit Agreement among EXCO Resources, Inc., as borrower, Bank of America, N.A. (successor by merger to NationsBank, N.A., successor by merger to NationsBank of Texas, N.A.), as agent, and Bank of America , N.A. (successor by merger to NationsBank, N.A., successor by merger to NationsBank of Texas, N.A.), as the sole bank, dated February 11, 2000 and incorporated by reference herein. 10.22 Purchase, Sale and Exchange Agreement between EXCO Resources, Inc., as seller, and Anadarko Petroleum Corporation, as buyer, dated December 17, 1999, filed as an Exhibit to EXCO's Form 8-K filed January 18, 2000 and incorporated by reference herein.
35 10.23 Amendment to Purchase, Sale and Exchange Agreement dated as of December 17, 1999, between EXCO Resources, Inc., as seller, and Anadarko Petroleum Corporation, as buyer, dated December 31, 1999, filed as an Exhibit to EXCO's Form 8-K filed January 18, 2000 and incorporated by reference herein. 10.24 Purchase and Sale Agreement between Western Gas Resources, Inc., as seller, and EXCO Resources, Inc., as buyer, dated November 16, 1999, filed as an Exhibit to EXCO's Form 8-K filed January 18, 2000 and incorporated by reference herein. 10.25 Amendment No. 1 to Purchase and Sale Agreement between Western Gas Resources, Inc., as seller, and EXCO Resources, Inc., as buyer, dated December 21, 1999, filed as an Exhibit to this Form 8-K filed January 18, 2000 and incorporated by reference herein. 10.26 Purchase and Sale Agreement between Nebraska Public Gas Authority as seller, and Humphrey-Hill, L.P., as buyer, dated February 22, 2000 (filed herewith). 10.27 Credit Agreement among Humphrey-Hill, L.P., as borrower, Bank of America, N.A., as administrative agent, and financial institutions listed on Schedule I, dated March 24, 2000 (filed herewith). 10.28 Amended and Restated Agreement of Limited Partnership of Humphrey-Hill, L.P., dated March 24, 2000 (filed herewith). 10.29 Amendment to Amended and Restated Agreement of Limited Partnership of Humphrey-Hill, L.P., dated April 14, 2000 (filed herewith). 16.1 Letter from Belew Averitt LLP regarding change in certifying accountant dated January 20, 1998 filed as an Exhibit to EXCO's Form 8-K filed January 21, 1998 and incorporated by reference herein. 18.1 Letter from Ernst & Young LLP regarding change in accounting principles dated February 11, 1998 filed as an Exhibit to EXCO's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated by reference herein. 27.1 Financial Data Schedule (filed herewith). 99.1 Voting Agreement dated October 30, 1998 between Rio Grande, Inc., Rio Grande Drilling Company, Rio Grande Offshore, Ltd., Rio Grande Desert Oil Company and Rio Grande GulfMex, Ltd. and EXCO Resources, Inc. filed as an Exhibit to Rio Grande, Inc.'s Form 8-K dated November 12, 1998 and incorporated by reference herein.
EX-10.26 2 PURCHASE AND SALE AGREEMENT 1 EXHIBIT 10.26 TABLE OF CONTENTS
Page ARTICLE I PURCHASE AND SALE OF ASSETS Section 1.01. Purchased Assets...............................................................................1 Section 1.02. Effective Date.................................................................................2 Section 1.03. Excluded Assets................................................................................2 Section 1.04. Permitted Encumbrances.........................................................................3 PURCHASE PRICE Section 2.01. Consideration..................................................................................4 Section 2.02. Preliminary Settlement Statement...............................................................4 CLOSING Section 3.01. The Closing....................................................................................4 Section 3.02. Seller's Closing Deliveries....................................................................4 Section 3.03. Purchaser's Closing Deliveries.................................................................5 Section 3.04. Payment at Closing.............................................................................5 REPRESENTATIONS AND WARRANTIES Section 4.01. Representations and Warranties of Purchaser....................................................5 Section 4.02. Representations and Warranties of Seller.......................................................6 Section 4.03. Disclaimer.....................................................................................8 OPERATIONS PRIOR TO THE CLOSING DATE Section 5.01. Operation of Properties Pending the Closing Date...............................................9 ARTICLE VI ACCESS TO PURCHASED ASSETS PRIOR TO THE CLOSING DATE Section 6.01. Records and Personnel.........................................................................10
2 ARTICLE VII ASSUMPTION AND INDEMNITY Section 7.01. Seller's Obligations and Liabilities..........................................................10 Section 7.02. Purchaser's Obligations and Liabilities.......................................................10 TITLE MATTERS Section 8.01. Warranty of Title.............................................................................11 Section 8.02. Title Defects.................................................................................11 ENVIRONMENTAL Section 9.01. Availability of Data to Purchaser; Phase I Environmental Audit................................12 Section 9.02. Environmental Defects.........................................................................12 ARTICLE X CONDITIONS TO OBLIGATION TO CLOSE Section 10.01. Conditions to Obligation of Seller............................................................13 Section 10.02. Conditions to Obligation of Purchaser.........................................................14 ARTICLE XI REMEDIES FOR BREACHES OF THIS AGREEMENT OR FOR DEFECTS Section 11.01. Survival of Representations and Warranties....................................................14 Section 11.02. Indemnification Provisions for the Benefit of Purchaser.......................................15 Section 11.03. Indemnification Provisions for Benefit of the Seller..........................................15 Section 11.04. Matters Involving Third Parties...............................................................15 Section 11.05. Determination of Losses.......................................................................16 Section 11.06. Effect of Indemnification Provisions..........................................................16 Section 11.07. Negligence, Etc...............................................................................16 Section 11.08. Concurrent Liability..........................................................................16 ARTICLE XII TERMINATION Section 12.01. Termination of Agreement......................................................................17 Section 12.02. Effect of Termination.........................................................................17
ii 3 ARTICLE XIII POST-CLOSING COVENANTS Section 13.01. Seller's Obligations..........................................................................17 Section 13.02. Purchaser's Obligations.......................................................................18 ARTICLE XIV EFFECT OF CLOSING Section 14.01. Post-Closing Adjustments......................................................................19 ARTICLE XV CONFIDENTIALITY AGREEMENT Section 15.01. Confidentiality...............................................................................21 ARTICLE XVI CASUALTY LOSS AND CONDEMNATION Section 16.01. Casualty Loss.................................................................................22 ARTICLE XVII MISCELLANEOUS Section 17.01. Trial Waivers.................................................................................22 Section 17.02. Binding Arbitration...........................................................................23 Section 17.03. Press Releases and Public Announcements.......................................................24 Section 17.04. Entire Agreement; Amendment...................................................................24 Section 17.05. Successors and Assigns........................................................................24 Section 17.06. Facsimile; Counterparts.......................................................................24 Section 17.07. Headings......................................................................................25 Section 17.08. Governing Law.................................................................................25 Section 17.09. Legal Fees and Costs..........................................................................25 Section 17.10. Schedules, Exhibits and Other Instruments.....................................................25 Section 17.11. Waiver........................................................................................25 Section 17.12. Resignation as Operator.......................................................................25 Section 17.13. Notices.......................................................................................26 Section 17.14. Severability..................................................................................26 Section 17.15. No Third-Party Beneficiaries..................................................................27 Section 17.16. Construction..................................................................................27
iii 4 PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (the "Agreement") is made and entered into the 22nd day of February, 2000, by and between NEBRASKA PUBLIC GAS AGENCY, a body politic and corporate under the laws of the State of Nebraska ("Seller"), and HUMPHREY-HILL, L.P. a Texas limited partnership ("Purchaser"). Seller and Purchaser are sometimes hereinafter referred to individually as a "Party" and collectively as "Parties." Capitalized terms used in this Agreement have the respective meanings ascribed to them or referenced in EXHIBIT A attached hereto. RECITALS A. Seller owns interests in certain oil and gas leases covering certain lands in Pecos County, Texas and in wells and related leasehold equipment located on the leases. B. Purchaser intends and desires to purchase from Seller, and Seller intends and desires to sell to Purchaser, all of Seller's right, title and interest in Pecos County, Texas, pursuant to the terms and conditions set forth herein. NOW THEREFORE, in consideration of the mutual promises, covenants, representations and warranties contained in this Agreement, the Parties agree as follows: ARTICLE I PURCHASE AND SALE OF ASSETS SECTION 1.01. PURCHASED ASSETS. At Closing, in reliance upon the representations, warranties and agreements, and subject to the conditions set forth in this Agreement, Seller shall sell, assign, transfer, convey and deliver to Purchaser, and Purchaser shall purchase from Seller for the consideration set forth in ARTICLE II hereof, all of Seller's right, title and interest in the hereinafter described properties and interests in Pecos County, Texas, as such right, title and interest existed on the Effective Date, excluding the Excluded Assets (as defined in SECTION 1.03 below), but including the following assets (all such assets, rights, title and interests being conveyed to Purchaser hereby are collectively called the "Purchased Assets"): (a) LEASES. Seller's interests in any and all oil and gas leases covering lands lying within the boundaries of the units described on EXHIBIT B attached hereto ("Lands") whether such leases are described on EXHIBIT B together with all mineral, royalty, overriding royalty or other interests in the oil gas and other minerals in the Lands (collectively, the "Leases"); (b) WELLS. Seller's interests in the wells located on the Lands, as set forth on EXHIBIT C attached hereto (collectively, the "Wells"); (c) EQUIPMENT. Seller's interests in the Equipment located on the Lands as set forth on EXHIBIT D attached hereto (collectively, the "Equipment"); 5 (d) UNITS. Seller's interest in the Units covering the Lands and subject to the Leases; (e) LICENSES AND PERMITS. Seller's interest in all licenses and permits which relate to the Leases, Wells, Lands, Equipment and Units (collectively, the "Licenses"); (f) CONTRACTS. Seller's interest in contracts and other instruments (other than bonds posted by Seller) which concern and relate to any of the Leases, Wells, Lands, Units and/or Equipment or the operation thereof, INSOFAR AND ONLY INSOFAR as the same concern or relate to the Purchased Assets, including without limitation, oil, gas and condensate purchase and sale contracts; permits; rights-of-way; easements; servitudes; estates; surface leases; farmin and farmout agreements; division orders and transfer orders; bottom hole agreements; dry hole agreements; area-of mutual interest agreements; salt water disposal agreements; geologic and geophysical agreements; acreage contribution agreements; operating agreements; balancing agreements and unit agreements; pooling agreements; pooling orders; communitization agreements; processing, gathering, compression and transportation agreements; facilities or equipment leases relating thereto or used or held for use in connection with the ownership or operation thereof or with the production, treatment, sale or disposal of Hydrocarbons; and all other contracts and agreements related to the Purchased Assets, including but not limited to the contracts described on EXHIBIT E attached hereto (collectively, the "Contracts"); (g) RECORDS. Seller's Records and, to the extent transferable, all other contract rights, intangible rights (excluding Seller's trademarks and service marks), inchoate rights, choses in action, rights under warranties made by prior owners, manufacturers, vendors or other third parties, and rights accruing under applicable statutes of limitation or prescription, attributable to the Purchased Assets; and (h) PAYMENTS. Seller's interest in all payments, and all rights to receive payments (including without limitation, all royalties, overriding royalties and production payments), with respect to the ownership of the production of Hydrocarbons from, or the conduct of operations with respect to, the Purchased Assets and the interests to be conveyed to Purchaser hereunder, accruing after the Effective Date. SECTION 1.02. EFFECTIVE DATE. The effective date of the transfer of the Purchased Assets (the "Effective Date") and the production and costs attributable thereto shall be January 1, 2000 at 7:00 a.m. Central Standard Time. All payments for production sold prior to the Effective Date shall belong to and shall be paid to Seller, and all payments for production sold on and after the Effective Date shall belong to and shall be paid to Purchaser. SECTION 1.03. EXCLUDED ASSETS. Except as specifically set forth in SECTION 1.01, the following assets, real, personal and mixed, tangible and intangible, owned by Seller or its Affiliates, whether or not associated with or employed in the operations of the Purchased Assets, (collectively "Excluded Assets") are not intended by the Parties to be a part of the sale and purchase contemplated hereunder and are, excepted, reserved and excluded from the Purchased Assets: 2 6 (a) All cash, deposits, checks, funds, accounts receivable, notes receivable, or similar items attributable to the Purchased Assets with respect to any period of time prior to the Effective Date, except for those funds in suspense accounts to be delivered to Purchaser pursuant to SECTION 13.01(b) of this Agreement; (b) All Hydrocarbon production from or attributable to the Purchased Assets with respect to all periods prior to the Effective Date and all proceeds attributable thereto, and all Hydrocarbons that, at the Effective Date, are owned by Seller and are in storage or otherwise held in inventory and all proceeds attributable thereto; and (c) Purchased Assets retained by Seller because of the failure to obtain, comply with or otherwise satisfy a Transfer Requirement. SECTION 1.04. PERMITTED ENCUMBRANCES. Seller shall transfer, convey and assign the Purchased Assets to Purchaser free and clear of any and all liens and encumbrances, except the following (collectively, "Permitted Encumbrances"): (a) liens for taxes not yet due or, if due, being challenged in good faith by appropriate proceedings; (b) materialmen's, mechanic's and other similar liens or charges arising in the ordinary course of business for obligations that are not delinquent and that will be paid or discharged in the ordinary course of business or, if delinquent, that are being contested in good faith in the ordinary course of business; (c) easements, rights-of-way, servitudes, permits, surface leases, and other rights granted to or reserved for third parties in respect of surface operations that do not materially interfere with operations of the portion of the Purchased Assets burdened thereby; (d) rights reserved to or vested in any governmental authority to control or regulate any of the Leases, Wells or Units and all applicable laws, rules, regulations and orders of such authorities; (e) any Title Defects that Purchaser may have expressly waived in writing or which are deemed to have been waived under this Agreement; (f) liens arising under operating agreements, unitization and pooling agreements, orders and statutes and production sales contracts securing amounts not yet due or, if due, being contested in good faith in the ordinary course of business; (g) the terms and conditions of the Leases and the Contracts; (h) royalties, overriding royalties, net profits interests, production payments, reversionary interests, and similar interests; (i) conventional rights of reassignment requiring notice to the holders of the rights prior to surrendering or releasing a leasehold interest; 3 7 (j) calls on production exercisable only at prices substantially equivalent to then current fair market value; and (k) all rights to consent by, required notices to, filings with or other actions by governmental entities in connection with the conveyance of oil and gas leases or interests therein, if they are customarily obtained subsequent to the conveyance. ARTICLE II PURCHASE PRICE SECTION 2.01. CONSIDERATION. The aggregate consideration to be paid by Purchaser to Seller for the Purchased Assets shall be Ten Million Two Hundred Thousand Dollars ($10,200,000.00) ("Purchase Price"). Seller acknowledges receipt of One Hundred Thousand Dollars ($100,000.00) ("Down Payment") from Purchaser which is non-refundable, except as expressly provided in Sections 8.02, 9.02 12.01, 14.01(f) and 16.01, and shall be applied to the Purchase Price at Closing. SECTION 2.02. PRELIMINARY SETTLEMENT STATEMENT. No later than three (3) days before Closing, Seller will deliver to Purchaser a closing settlement statement (the "Preliminary Settlement Statement") setting forth the Purchase Price as adjusted under this Agreement by the Down Payment and by revenue received, operating and maintenance expenses, ad valorem taxes, severance taxes, federal excise and energy taxes, crude oil inventories, state and local sales and use taxes, and other adjustments set forth in this Agreement, to the extent this information is available at Closing (the Purchase Price as adjusted shall be referred to herein as the "Closing Amount"). Seller will use the ad valorem tax liability for the previous year if the liability for the current year is not yet available and determine the oil inventory value at the Effective Date. The Parties shall undertake to agree with respect to the adjustments to the Purchase Price which are set forth on the Preliminary Settlement Statement prior to the Closing. ARTICLE III CLOSING SECTION 3.01. THE CLOSING. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place on March 24, 2000 (or if the conditions to the Closing shall not have been satisfied or waived by such date, then as soon as practicable thereafter, but in no event later than April 30, 2000) (the "Closing Date"), at the offices of Kutak Rock, 717 Seventeenth Street, Suite 2900, Denver, Colorado 80202-3329 or at such other time or place as the Parties hereto shall agree in writing. SECTION 3.02. SELLER'S CLOSING DELIVERIES. Subject to the conditions set forth in this Agreement, at the Closing, simultaneous with Purchaser's deliveries hereunder, Seller shall deliver or cause to be delivered to Purchaser the Conveyance Documents in the form set forth on EXHIBIT F and all other documents, certificates and instruments set forth on EXHIBIT G, all in form and substance reasonably satisfactory to Purchaser and Purchaser's counsel. 4 8 SECTION 3.03. PURCHASER'S CLOSING DELIVERIES. Subject to the conditions set forth in this Agreement, at the Closing, simultaneous with Seller's deliveries hereunder, Purchaser shall deliver or cause to be delivered to Seller all of the documents, certificates and instruments set forth on EXHIBIT H, all in form and substance reasonably satisfactory to Seller and Seller's counsel. SECTION 3.04. PAYMENT AT CLOSING. Purchaser shall deliver the Closing Amount by direct bank or wire transfer to NBC Bank Lincoln, 1248 "O" Street, Lincoln, NE 68501-2409; ABA Routing Number 104000045 for credit to NPGA Revenue Account No. 00637557 Attn: Leslie Gibbens and Roger Mock. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and warrants to Seller, as of the date of this Agreement and as of the Closing Date, as follows: (a) ORGANIZATION OF PURCHASER. Purchaser is a Texas limited partnership, duly organized, validly existing and in good standing under the laws of the State of Texas. (b) AUTHORIZATION OF TRANSACTION. Purchaser has all requisite corporate power and authority to enter into this Agreement and perform its obligations hereunder. This Agreement has been duly executed and delivered by Purchaser and constitutes a legal, valid and binding obligation of it, enforceable against it in accordance with its terms and conditions except as such enforceability may be limited by or subject to (i) any bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Except for (A) consents of, or filings with, the United States Department of Interior or other governmental agency or the applicable state or Indian agencies or authorities in connection with the assignment of any federal, state, or Indian leases or any interest therein, and (B) other Transfer Requirements which are applicable to the transactions contemplated by this Agreement, Purchaser need not give any notice to, make any filing with, or obtain any authorization, consent or approval of, any government or governmental agency or any other person or entity in order to consummate the transactions contemplated by this Agreement. (c) NONCONTRAVENTON. There are no judicial or administrative actions or proceedings pending or, to the best of Purchaser's Knowledge, threatened that question the validity of this Agreement or any action taken or to be taken by Purchaser in connection with this Agreement or that, if adversely determined, would be a Material Adverse Event with respect to Purchaser's ability to perform its obligations under this Agreement. (d) RELIANCE BY PURCHASER. Purchaser acknowledges that in entering into this Agreement, it has relied solely upon the express representations, warranties and 5 9 covenants in this Agreement and its independent investigation of, and judgment with respect to, the aggregate value of the Purchased Assets, and in this regard Purchaser has retained and is relying solely on the advice of its own legal, tax, economic, engineering, geological and geophysical advisors. Purchaser hereby acknowledges and affirms that it has made its own independent investigation, analysis and evaluation of the Purchased Assets (including its own estimate and appraisal of the extent and value of the oil and gas reserves represented by the Purchased Assets). (e) FINANCIAL ABILITY. Purchaser has, and will have upon the Closing Date and thereafter sufficient cash, available lines of credit or other sources of immediately available good funds to enable it to make payment when due of any amounts to be paid by it hereunder and to operate the Purchased Assets and comply with its obligations with respect to the Purchased Assets after the Closing. (f) BROKER'S FEES. Purchaser has incurred no liability, contingent or otherwise, for brokers' or finders' fees with respect to the transactions contemplated by this Agreement for which Seller shall have any responsibility whatsoever. (g) TEXAS DECEPTIVE TRADE PRACTICES ACT WAIVER. Purchaser (i) represents and warrants to Seller that it (A) is acquiring the Purchased Assets for commercial or business use, and (B) has knowledge and experience in financial and business matters such that enable it to evaluate the merits and risks of the transactions contemplated by this Agreement and is not in a significantly disparate bargaining position with respect to Seller; and (ii) hereby unconditionally and irrevocably waives any and all rights or remedies it may have under the Deceptive Trade Practices - Consumer Protection Act of the State of Texas, Tex. Bus. & Com. Code Section 17.41, et seq., other than any of the provisions of Section 17.555 of such Act, if such Act would for any reason be deemed applicable to the transactions contemplated hereby. SECTION 4.02. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and warrants to Purchaser that: (a) ORGANIZATION OF SELLER. Seller is a body politic and corporate, duly organized, validly existing and in good standing under the laws of the State of Nebraska. (b) AUTHORIZATION OF TRANSACTION. Seller has all requisite corporate power and authority to enter in to this Agreement and perform its obligations hereunder. This Agreement has been duly authorized, executed and delivered by Seller and constitutes a legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as such enforceability may be limited by or subject to (i) any bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Except for (A) consents of, or filings with, the United States Department of Interior or other governmental agency or the applicable state or Indian agencies or authorities in connection with the assignment of any federal, state, or Indian leases or any interest therein, and (B) other Transfer Requirements which are applicable to the transactions contemplated by this Agreement, 6 10 Seller need not give any notice to, make any filing with, or obtain any authorization, consent or approval of, any government or governmental agency or any other person or entity in order to consummate the transactions contemplated by this Agreement. (c) NONCONTRAVENTON. There are no judicial or administrative actions, proceedings pending or, to the best of Seller's Knowledge, threatened that question the validity of this Agreement or any action taken or to be taken by Seller in connection with this Agreement or that, if adversely determined, would be a Material Adverse Event with respect to Seller's ability to perform its obligations under this Agreement. (d) BROKER'S FEES. Seller has incurred no liability, contingent or otherwise, for broker's or finder's fees with respect to the transactions contemplated by this Agreement for which Purchaser shall have any responsibility whatsoever. (e) LITIGATION AND CLAIMS. Except as shown on SCHEDULE 4.02(e), since the Effective Date there have not been any, and as of the date of this Agreement, there are no lawsuits, orders, decrees, injunctions or administrative, arbitration or other proceedings, pending or, to the Knowledge of Seller, threatened against Seller related to the Purchased Assets ("Litigation and Claims"). (f) ENCUMBRANCES. Except as shown on SCHEDULE 4.02(f), Seller has not mortgaged, assigned, sold, or otherwise conveyed or encumbered title to the Purchased Assets; and will not do so prior to Closing except as permitted by the terms of this Agreement and Seller is not contesting any liens or charges referred to in SECTION 1.04(b) OR (f). (g) TAXES. Seller has paid or caused to be paid all federal, state, and local taxes, rates and like assessments for periods prior to the Closing Date that have become due and payable which, if not so paid, could result in a lien or encumbrance upon the Purchased Assets, including excise, property, ad valorem, franchise, severance and production taxes; but not including (i) taxes, rates and like assessments which are being contested in good faith, as shown on SCHEDULE 4.02(g), (ii) taxes not yet due and payable and (iii) taxes which are the responsibility of Purchaser. (h) NO VIOLATIONS. Except as listed on SCHEDULE 4.02(h), to Seller's knowledge, Seller has not violated or received notice of probable violation of any state or federal laws, regulations, rules or orders promulgated by any federal, state or local regulatory agency or governmental authority which, if adversely decided, would be a Material Adverse Event with respect to the Purchased Asset or the revenues attributable thereto; (i) TAKE-OR-PAY. Seller has not made and will not make from the date hereof to the Closing Date, any agreement relating to the Purchased Assets which would require Purchaser, following Closing, to (i) deliver gas paid for, but not taken from production, prior to Closing, or (ii) make a cash payment to a buyer of gas for reimbursement or recoupment of prior take-or-pay payments which cannot be accomplished through such buyer taking gas production. 7 11 (j) ROYALTIES. Except as listed on SCHEDULE 4.02(j), to Seller's Knowledge, all rentals, royalties, overriding royalties and other payments in or measured by production to be paid by Seller with respect to the Purchased Assets have been timely, properly and fully paid, except for those funds held in or allocated to suspense accounts in the ordinary course of business which will be remitted to Purchaser pursuant to SECTION 13.01(b) hereof. (k) PERMITS AND LICENSES. Except as listed on SCHEDULE 4.02(k), to the Knowledge of Seller, Seller has obtained and currently holds all permits, licenses, approvals and authorizations which are required under federal, state or local law, rules and regulations in order to own and operate the Purchased Assets and, except for those items referred to in SCHEDULE 4.02(k), no such permit, license, approval or authorization restricts Seller from selling or otherwise transferring to Purchaser Seller's interest in the Purchased Assets. (l) GOVERNMENTAL AUDITS. Except as listed on SCHEDULE 4.02(l), there are no pending or, to the Knowledge of Seller, threatened, audits related to Seller's activities with respect to the Purchased Assets by any local, state or federal department or agency. (m) GAS BALANCES. To the best of Seller's Knowledge, SCHEDULE 4.02(m) lists the status of the gas balances with respect to the Purchased Assets as of the Effective Date. (n) ENVIRONMENTAL MATTERS. Except as listed on SCHEDULE 4.02(n), to the best of Seller's knowledge without inquiry, there exist no Environmental Matters with respect to the Purchased Assets. SECTION 4.03. DISCLAIMER. (a) Seller makes no warranty, and hereby disclaims any warranty, as to the amount, value, quality, or deliverability of petroleum, natural gas, or other reserves attributable to the Purchased Assets or any portions thereof, or any geological, engineering, or other interpretations or economic evaluations of any kind or nature whatsoever. (b) Many of the leasehold estates being sold and purchased hereunder are in existence only by reason of production. While Seller believes said production to be in paying quantities, it makes no representation to that effect. Purchaser must make its own determination as to whether the Leases are currently in force and effect in accordance with their respective provisions. (c) EXCEPT FOR THE WARRANTY PROVIDED IN SECTION 4.02(F) OF THIS AGREEMENT, THE PURCHASED ASSETS SHALL BE ASSIGNED AND CONVEYED BY SELLER TO PURCHASER WITHOUT ANY WARRANTY OF TITLE, EITHER EXPRESS OR IMPLIED, AND WHETHER BY COMMON LAW, STATUTE OR OTHERWISE, EXCEPT THAT SELLER WARRANTS ITS TITLE TO THE PURCHASED ASSETS AGAINST PERSONS OR PARTIES CLAIMING TITLE BY, THROUGH OR UNDER SELLER. 8 12 (d) EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, ALL TANGIBLE PERSONAL PROPERTY, EQUIPMENT, FIXTURES, AND APPURTENANCES CONSTITUTING A PORTION OF THE PURCHASED ASSETS ARE SOLD BY SELLER TO PURCHASER "AS IS" AND "WHERE IS." WITHOUT LIMITATION OF THE GENERALITY OF THE IMMEDIATE PRECEDING SENTENCE, SELLER EXPRESSLY DISCLAIMS AND NEGATES AS TO TANGIBLE PERSONAL PROPERTY, IMPROVEMENTS, AND FIXTURES, ANY REPRESENTATION OR WARRANTY, WHETHER EXPRESS OR IMPLIED, AND WHETHER BY COMMON LAW, STATUTE OR OTHERWISE, AS TO THE MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE, CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, AND/OR CONDITION THEREOF. (e) SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF ANY INFORMATION, RECORDS OR DATA NOW, HERETOFORE, OR HEREAFTER MADE AVAILABLE TO PURCHASER IN CONNECTION WITH THE AGREEMENT, INCLUDING WITHOUT LIMITATION ANY DESCRIPTION OF THE PURCHASED ASSETS, PRICING ASSUMPTIONS, POTENTIAL FOR PRODUCTION OF HYDROCARBONS FROM THE PURCHASED ASSETS, OR ANY OTHER MATTERS CONTAINED IN ANY MATERIAL FURNISHED BY SELLER TO PURCHASER OR ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ADVISORS OR REPRESENTATIVES. (f) The Parties agree that the disclaimers of warranty are "conspicuous" disclaimers for purposes of any applicable law, rule or order. ARTICLE V OPERATIONS PRIOR TO THE CLOSING DATE SECTION 5.01. OPERATION OF PROPERTIES PENDING THE CLOSING DATE. (a) Prior to the Closing Date, Seller agrees, unless specifically waived by Purchaser in writing, to: (i) maintain and operate the Purchased Assets, to the extent Seller is an operator, or to use reasonable efforts to cause the Purchased Assets to be maintained and operated by the operator thereof, in a good and workmanlike manner and in substantially the same manner as Seller has heretofore operated the same, to the extent Seller is an operator; (ii) notify Purchaser of any notice or threatened notice of which Seller becomes aware relating to any default; 9 13 (iii) timely pay all costs and expenses incurred by it in connection with the Purchased Assets subject to repayment by Purchaser for all such costs and expenses incurred by Seller after the Effective Date as set forth in SECTION 7.02 and 14.01; and (iv) not encumber, sell or otherwise dispose of any of the Purchased Assets. (b) Any Authorization for Expenditure ("AFE") circulated to Seller after the date of this Agreement will be transmitted to Purchaser. Seller and Purchaser shall thereafter determine, within the time required by the AFE, whether to consent or go non-consent to the AFE. If Seller determines to go non-consent but Purchaser determines to consent to any such AFE then Purchaser will assume all responsibility with respect to such AFE, including payments required thereunder, regardless of whether or not Purchaser consummates the transaction contemplated by this Agreement. Purchaser shall acquire no right to receive any interest or refund for amounts paid by it if the transaction is not consummated for any reason. However, Purchaser shall be responsible to Seller for any interest forfeited or penalty charged due to Purchaser's decision concerning an AFE. (c) Seller will grant no waiver or consents with respect to any rule or regulation of the Railroad Commission of Texas. ARTICLE VI ACCESS TO PURCHASED ASSETS PRIOR TO THE CLOSING DATE SECTION 6.01. RECORDS AND PERSONNEL. Following the execution hereof, Seller shall afford Purchaser and its duly authorized representatives access at all reasonable times during normal business hours to all books, records, documents and other information concerning the Purchased Assets or relating to Seller's interest therein. ARTICLE VII ASSUMPTION AND INDEMNITY SECTION 7.01. SELLER'S OBLIGATIONS AND LIABILITIES. Seller agrees to pay, perform, fulfill and discharge all legitimate claims, obligations, taxes, costs and expenses relating to Seller's ownership or operation of the Purchased Assets arising prior to the Effective Date, and agrees to indemnify, defend and hold Purchaser harmless from and against any and all Losses, claims, cause of action or judgment of any kind or character with respect to all liabilities and obligations arising out of the ownership or operation of the Purchased Assets that are asserted prior to the Effective Date. SECTION 7.02. PURCHASER'S OBLIGATIONS AND LIABILITIES. From and after the Effective Date, Purchaser shall assume all expenses and responsibility for compliance with the terms of the Leases (including payment of all rentals, minimum royalties or shut-in royalty payments), Wells, Equipment, Units, Licenses, Contracts and any other agreements affecting the Purchased Assets and Purchaser also shall assume all responsibility for compliance with regulatory requirements 10 14 affecting the Purchased Assets, including Environmental Liabilities, Environmental Matters and the obligation to properly plug and abandon the Wells and perform all reclamation requirements (collectively, "Assumed Liabilities"). Purchaser shall provide proof of compliance with local, state and federal bonding requirements at Closing and shall execute all forms required by any governmental authority to transfer operations and responsibility to Purchaser. Purchaser agrees to pay, perform, fulfill and discharge all Losses, claims and obligations relating to the ownership or operation of the Purchased Assets arising from and after the Effective Date, and agrees to indemnify, defend and hold Seller harmless from and against any and all claims, Losses, cause of action or judgment of any kind or character with respect to all liabilities and obligations arising out of the ownership or operation of the Purchased Assets asserted on and after the Effective Date, including without limitation, the Assumed Liabilities and Seller assigns and Purchaser shall be subrogated to any and all claims, rights, causes of action, and warranties against or by any other person or persons, arising out of, in connection with or due under the Leases, Contracts and any other related agreement in existence on the Effective Date. ARTICLE VIII TITLE MATTERS SECTION 8.01. WARRANTY OF TITLE. At the Closing, Seller shall convey to Purchaser all of the Purchased Assets. Such conveyance shall be subject to the Permitted Encumbrances and WITHOUT ANY WARRANTY OF TITLE, EITHER EXPRESS OR IMPLIED, AND WHETHER BY COMMON LAW, STATUTE OR OTHERWISE, except for the warranty provided in SECTION 4.02(f) of this Agreement and except for the warranty of title as to persons claiming by, through and under Seller contained in the Conveyance Documents delivered pursuant to SECTION 3.02. SECTION 8.02. TITLE DEFECTS. Seller has made available to Purchaser all title data in Seller's possession and its lease and well files relating to the Purchased Assets including title opinions, title curative data or any other title data not now in Purchaser's possession. Purchaser shall be responsible for satisfying itself as to the status of title to the Purchased Assets, and any further title examination, investigation or curative efforts that Purchaser may desire to make shall be at Purchaser's sole cost and expense. Purchaser shall promptly notify Seller in writing of any Title Defect, but no later than seven (7) days prior to the Closing Date ("Title Defect Notice"). Seller shall have the right, but not the obligation, to attempt to cure any such Title Defect prior to the Closing Date, and if requested to do so, Purchaser will cooperate with Seller in such regard. Any such Title Defects which are not objected to in writing by Purchaser as aforesaid or if objected to by Purchaser and are not cured by Seller on or before the Closing Date, shall be deemed conclusively to be Permitted Encumbrances. In Purchaser's discretion, however, and upon written notice to Seller on or before the Closing Date, Purchaser can choose not to close based upon its Title Defect Notice and this Agreement shall terminate AB INITIO and Purchaser shall, in such case, be entitled to return of the Down Payment. 11 15 ARTICLE IX ENVIRONMENTAL SECTION 9.01. AVAILABILITY OF DATA TO PURCHASER; PHASE I ENVIRONMENTAL AUDIT. Seller has made available to Purchaser information which is in the possession or control of Seller or to which Seller has access (other than publicly available information to which Purchaser has equal access) and which relates to the environmental condition of the Purchased Assets, which information includes, but shall not be limited to, information regarding crude oil and produced water that may have been spilled or disposed of on-site and the locations thereof, on-site pits and pit closures; on-site burial; land farming; land spreading; underground injection; and on-site solid waste disposal sites. Purchaser also shall have the right, prior to the Closing Date, at its own risk and expense, to conduct or have conducted a Phase I Environmental Audit of the Purchased Assets. To enable Purchaser to conduct the Phase I Environmental Audit, Seller will provide Purchaser (and its representatives) with reasonable access to the Purchased Assets, subject to any third party restrictions on Seller with respect to access to the Purchased Assets, to Seller's books, records, and files relating to the Purchased Assets, and to current employees of Seller. If Purchaser determines to conduct a Phase I Environmental Audit, Purchaser shall treat, and will cause all of its representatives, agents, consultants, contractors, or subcontractors to treat, all information obtained by Purchaser pursuant to the Phase I Environmental Audit as strictly confidential (except to the extent such information is otherwise available to the general public) and will not disclose the results without the prior written consent of Seller, except to the extent that such results are legally required to be disclosed by Purchaser (in which case, Purchaser shall provide Seller with reasonable notice prior to making such disclosure). Seller shall have the right to have a representative present during any inspection of the Purchased Assets and during any interviews of Seller's employees, conducted as a part of the Phase I Environmental Audit, and Purchaser shall coordinate these activities with Seller so as to allow Seller to have a representative present if it so desires. Purchaser shall provide Seller with copies of any Phase I Environmental Audit report not more than five (5) days after Purchaser's receipt of same. Purchaser agrees to release, indemnify, defend, and hold Seller harmless from any fines, penalties or damage to persons or property caused by the activities of Purchaser or its representatives, agents, consultants, contractors or subcontractors in conducting a Phase I Environmental Audit. SECTION 9.02. ENVIRONMENTAL DEFECTS. If Purchaser has Knowledge of the existence of an Environmental Matter discovered in the course of the Phase I Environmental Audit or Purchaser's other environmental due diligence in connection with this transaction, then Purchaser shall advise Seller in writing of such Environmental Matter on or before seven (7) days prior to the Closing Date. Such written notification shall contain a reasonable description of the facts used by Purchaser in making its determination that a breach exists. Purchaser agrees that such written notification to Seller shall be sent to Seller by telecopy or personal delivery as well as by registered or certified mail, return receipt requested and postage prepaid. Prior to Closing, Purchaser and its employees, contractors and consultants shall treat all information regarding any Environmental Matter as confidential and shall not disclose such information to any governmental authority or other third party without Seller's written consent, unless disclosure is required by applicable law (in which case, Purchaser shall provide Seller with reasonable notice prior to making such disclosure). Within three (3) days after Seller's receipt of 12 16 a notice with respect to each Environmental Matter, Seller in its discretion may have the Purchased Asset affected thereby removed from the Purchased Assets and Purchaser and Seller shall agree to adjust the Purchase Price by the value of such Purchased Asset, or Seller may terminate this Agreement, in which event this Agreement will be terminated and rendered void AB INITIO and Purchaser shall in such case be entitled to the return of the Down Payment. However, Purchaser shall have the right to waive all Environmental Matters by notifying Seller in writing, within three (3) days after receipt of notice from Seller relating to Environmental Matters, as set forth herein, that it unequivocally waives all Environmental Matters and will close on the Closing Date. Also, in Purchaser's discretion, however, and upon written notice to Seller and on or before the Closing Date, Purchaser can choose not to close based upon its notice of an Environmental Matter and this Agreement shall terminate AB INITIO and Purchaser shall in such case be entitled to return of the Down Payment. Notwithstanding anything provided in this Agreement to the contrary, the failure of Purchaser to notify Seller in writing of any Environmental Matter as provided herein shall be conclusively deemed waived by Purchaser. ARTICLE X CONDITIONS TO OBLIGATION TO CLOSE SECTION 10.01. CONDITIONS TO OBLIGATION OF SELLER. The obligation of Seller to consummate the transactions to be performed by it in connection with the Closing is subject, at the option of Seller, to satisfaction on or prior to the Closing Date of the following conditions: (a) the representations and warranties set forth in SECTION 4.01 above shall be true and correct in all material respects at and as of the Closing Date as though made as of such date; (b) Purchaser shall have performed or complied with all of its covenants and agreements hereunder in all material respects through Closing; (c) there shall not be any injunction, judgment, order, decree, ruling or charge in effect preventing consummation of any of the transactions contemplated by this Agreement; (d) Purchaser shall have delivered to Seller a certificate to the effect that each of the conditions specified above in SECTION 10.01(a) THROUGH (c) is satisfied; (e) all actions to be taken by Purchaser in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to Seller; (f) prior to the Closing Date, Purchaser shall not have given Seller Notice pursuant to SECTION 8.02, SECTION 9.02, SECTION 14.01(f) or SECTION 16.01 that it has chosen not to Close; (g) as of the Closing Date, there shall not exist any matters that cause or result in unresolved Title Defects or Environmental Matters; and 13 17 (h) as of the Closing Date, the Parties shall have agreed to all of the adjustments to the Purchase Price which are set forth on the Preliminary Settlement Statement. SECTION 10.02. CONDITIONS TO OBLIGATION OF PURCHASER. The obligation of Purchaser to consummate the transactions to be performed by it in connection with the Closing is subject, at the option of Purchaser, to satisfaction on or prior to the Closing Date of the following conditions: (a) the representations and warranties set forth in SECTION 4.02 shall be true and correct in all material respects at and as of the Closing Date as though made as of such date; (b) Seller shall have performed or complied with all of its covenants and agreements hereunder in all material respects through the Closing; (c) there shall not be any injunction, judgment, order, decree, ruling, or charge in effect preventing consummation of any of the transactions contemplated by this Agreement; (d) Seller shall have delivered to Purchaser a certificate to the effect that each of the conditions specified above in SECTION 10.02(a) THROUGH (c) is satisfied; (e) all actions to be taken by Seller in connection with the consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to Purchaser; (f) prior to the Closing Date, Purchaser shall not have given Seller Notice pursuant to SECTION 8.02, SECTION 9.02, SECTION 14.01(f) or SECTION 16.01 that it has chosen not to Close; (g) as of the Closing Date, there shall not exist any matters that cause or result in unresolved Title Defects or Environmental Matters; and (h) as of the Closing Date, the Parties shall have agreed to all of the adjustments to the Purchase Price which are set forth on the Preliminary Settlement Statement. ARTICLE XI REMEDIES FOR BREACHES OF THIS AGREEMENT OR FOR DEFECTS SECTION 11.01. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of Seller contained in SECTION 4.02 and of Purchaser contained in SECTION 4.01 hereof shall survive the Closing for a period of ninety (90) days from the Closing Date (the "Survival Period"). 14 18 SECTION 11.02. INDEMNIFICATION PROVISIONS FOR THE BENEFIT OF PURCHASER. In the event that Seller breaches any of its representations and warranties in SECTION 4.02, then Seller agrees to indemnify and hold harmless Purchaser and its current, former, and future directors, officers, employees and agents, and each of the successors, heirs and executors of any of the foregoing, from and against the entirety of any Losses resulting from or attributable to the breach which Purchaser (or any such other indemnified person in such person's capacity set forth above) shall suffer, provided such claim for indemnification is brought in accordance with the terms of this Agreement within the Survival Period; and further provided that "Losses," as used in this sentence, shall not include, and Seller shall not be responsible or liable for, any death, personal injury or consequential damages in respect of such breach. SECTION 11.03. INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE SELLER. In the event that Purchaser breaches any of its representations and warranties contained in SECTION 4.01 hereof, then Purchaser agrees to indemnify and hold harmless Seller and its current, former, and future directors, officers, employees and agents, and each of the successors, assigns, heirs, and executors of any of the foregoing from and against the entirety of any Losses resulting from or related or attributable to the breach which Seller (or any such other indemnified person in such person's capacity set forth above) shall suffer, provided such claim for indemnification is brought in accordance with the terms of this Agreement within the Survival Period; and further provided that "Losses," as used in this sentence, shall not include, and Purchaser shall not be responsible or liable for, any death, personal injury, or consequential damages in respect of such breach. SECTION 11.04. MATTERS INVOLVING THIRD PARTIES. (a) If any third party shall notify either Party (the "Indemnified Party") with respect to any matter which may give rise to a claim for indemnification against the other Party (the "Indemnifying Party") under this ARTICLE XI or otherwise pursuant to this Agreement, then the Indemnified Party shall promptly (and in any event within ten (10) business days after receiving service of process in a lawsuit, administrative proceeding or arbitration proceeding with respect to the Third Party Claim) notify each Indemnifying Party thereof in writing. Each of the matters described in this SECTION 11.04(a) shall be referred to in this Agreement as a "Third Party Claim." (b) Any Indemnifying Party will have the right to assume and thereafter conduct the defense of the Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party; provided, however, that the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld) unless the judgment or proposed settlement involves only the payment of money damages and does not impose an injunction or other equitable relief upon (or constitute an admission of guilt, liability, fault or responsibility for) the Indemnified Party. The Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless (i) the employment thereof has been specifically authorized in writing by the Indemnifying Party or (ii) the Indemnifying Party failed to assume the defense and employ counsel. 15 19 (c) Unless and until an Indemnifying Party assumes the defense of the Third Party Claim as provided in SECTION 11.04(b) above, the Indemnified Party may defend against the Third Party Claim in any manner it deems reasonably appropriate. (d) In no event will the Indemnified Party consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party (which consent shall not be unreasonably withheld), unless the Indemnified Party waives indemnification with respect to the Third Party Claim so settled and adjudicated. (e) The indemnification obligations of the Seller and Purchaser under this Agreement shall include court costs and attorneys' fees and expenses and costs of investigating, preparing or defending any action or proceeding with respect to any Third Party Claim to the extent such Third Party Claim may give rise to a claim for indemnification under such indemnification obligations of Seller or Purchaser, as the case may be. SECTION 11.05. DETERMINATION OF LOSSES. A claim of an alleged breach will be recoverable only to the extent of Losses actually incurred or paid by the Indemnified Party. The Parties shall make appropriate adjustments for insurance recoveries actually received (net of all costs and expenses incurred in connection with such recoveries) from non-Affiliates in determining Losses for purposes of this ARTICLE XI or ARTICLE XIII. SECTION 11.06. EFFECT OF INDEMNIFICATION PROVISIONS. The Parties acknowledge and agree that the foregoing indemnification provisions in this ARTICLE XI and in ARTICLE XIII shall, following the Closing hereof, be the exclusive remedy of either Party for any breach of the representations and warranties in ARTICLE IV hereof; provided that the foregoing shall not limit the Parties' obligations for any breach of a covenant or agreement contained in any Article other than ARTICLE IV. If a claim for payment of a liquidated amount covered by a Party's indemnification obligations under this Agreement is made in accordance with the terms of this Agreement and is not paid within sixty (60) days after such claim is received by the Party responsible for paying the same, the liquidated amount of such claim shall bear interest at the Agreed Rate from the date such claim was received until paid. SECTION 11.07. NEGLIGENCE, ETC. IT IS EXPRESSLY AGREED THAT SELLER'S AND PURCHASER'S RESPECTIVE INDEMNIFICATION OBLIGATIONS UNDER THIS ARTICLE XI, ARTICLE XIII, OR UNDER ANY OTHER ARTICLE OF THIS AGREEMENT INCLUDE, WITHOUT LIMITATION, LOSSES AND ENVIRONMENTAL LIABILITIES, IF ANY, BASED ON NEGLIGENCE, ALLEGED NEGLIGENCE, GROSS NEGLIGENCE OR ALLEGED GROSS NEGLIGENCE OF SELLER OR PURCHASER, AND THEIR RESPECTIVE AFFILIATES, AND EACH OF THE RESPECTIVE CURRENT OR FORMER DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, STOCKHOLDERS AND CONTROLLING PERSONS OF ANY OF THE FOREGOING. SECTION 11.08. CONCURRENT LIABILITY. THE INDEMNIFICATION AND ASSUMPTION PROVISIONS OF SELLER AND PURCHASER CONTAINED IN THIS 16 20 AGREEMENT SHALL BE APPLICABLE WHETHER OR NOT THE LOSSES IN QUESTION AROSE SOLELY OR IN PART FROM THE ACTIVE, PASSIVE OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF ANY INDEMNIFIED PARTY. SELLER AND PURCHASER ACKNOWLEDGE THAT THIS STATEMENT IS CONSPICUOUS. ARTICLE XII TERMINATION SECTION 12.01. TERMINATION OF AGREEMENT. The Parties may terminate this Agreement at any time prior to the Closing as provided below: (a) by mutual written consent; (b) by written notice from Purchaser to Seller as provided in SECTION 8.02; (c) by written notice from Purchaser to Seller as provided in SECTION 9.02; (d) by written notice from Purchaser to Seller as provided in SECTION 14.01(f); (e) by written notice from Purchaser to Seller as provided in SECTION 16.01; or (f) in the event the Closing shall not occur on or before April 30, 2000, either Purchaser or Seller may terminate this Agreement by giving written notice thereof to the other Party on or after April 30, 2000, and prior to Closing. If Closing fails to occur through no fault of Purchaser, then Purchaser shall be entitled to the return of its Down Payment. SECTION 12.02. EFFECT OF TERMINATION. If a Party terminates this Agreement pursuant to SECTION 12.01 above, such termination shall be the exclusive remedy for the breach by the other Party of any representations, warranties or covenants hereunder, and all rights and obligations of the Parties hereunder shall terminate without any liability or responsibility of a Party to the other Party; provided, however, that the provisions of SECTION 5.01(b) and ARTICLE XV shall survive termination. ARTICLE XIII POST-CLOSING COVENANTS The Parties agree as follows with respect to the period following the Closing: SECTION 13.01. SELLER'S OBLIGATIONS. (a) RECORDS. As soon as practicable after Closing, Seller shall deliver to Purchaser all Records. Seller shall be entitled to retain, or to obtain from Purchaser at Seller's cost, copies of all such information for its records as may be reasonably necessary for Seller to address matters relative to ownership and operation of the 17 21 Purchased Assets, including, without limitation, the preparation of accounting and financial information, the filing of tax returns and the pursuit or defense of litigation. (b) SUSPENSE FUNDS. As soon as practicable after Closing, Seller shall provide Purchaser with a list showing all proceeds from production attributable to the Purchased Assets which are currently held in suspense, and Seller shall transfer to Purchaser all such proceeds. Purchaser shall be responsible for distribution of such proceeds to the parties lawfully entitled thereto and Purchaser agrees to indemnify, defend and hold harmless Seller from and against any and all Losses arising out of or relating to such proceeds. (c) GOVERNMENTAL CONSENTS. At the Closing, Seller shall execute and deliver to Purchaser such assignment of federal, state and Indian leases as require consent to assignment, on the forms required by the governmental or tribal agency having jurisdiction thereof. Purchaser shall promptly file for and obtain the necessary approvals for such assignments. Until such approvals are obtained, Seller shall continue to hold governmental title to such leases as nominee for Purchaser. (d) TRANSITION. Seller agrees to provide such information as may be reasonably requested by Purchaser's personnel to facilitate the orderly transition of accounting responsibilities and to provide information sufficient to enable Purchaser to record liquids revenue, gas revenue, operating expenses, capital expenditures and such other accounting transactions on a detailed property basis or such basis as maintained by Seller. In order to permit Purchaser to verify this information, Purchaser will have the right to review such reports and to conduct an audit of the underlying data for a period of one hundred and eighty (180) calendar days after the Effective Date. SECTION 13.02. PURCHASER'S OBLIGATIONS. (a) RECORDING. Within thirty (30) days following Closing, Purchaser, at its expense, shall record those Conveyance Documents necessary to evidence on the public record that Purchaser has acquired the Purchased Assets and within a reasonable time thereafter, Purchaser shall supply Seller with a true and accurate photocopy of such recorded and filed Conveyance Documents. In the event that Purchaser fails to record any such Conveyance Documents within such time period, Seller may, but shall not be obligated to, record such Conveyance Documents on Purchaser's behalf and at Purchaser's cost (for which Purchaser shall immediately reimburse Seller upon demand). (b) REMOVAL OF NAMES. As soon as reasonably practicable after the Closing, Purchaser shall cause to be removed the names and marks of "Nebraska Public Gas Agency," "NPGA" and any variations and derivations thereof and logos relating thereto from all of the Purchased Assets, and will not thereafter make any use whatsoever of such names, marks, and logos. Purchaser shall return to Seller any signs bearing Seller's name or logo. Purchaser shall indemnify Seller for any Losses Seller suffers as a result of the Purchaser's non-removal of such names or marks after the Closing. 18 22 (c) GEOLOGICAL AND GEOPHYSICAL INFORMATION. Seller reserves the right to use any and all geologic and geophysical information transferred to Purchaser hereunder and Purchaser agrees to cooperate with Seller in granting reasonable access to such information. (d) RESPONSIBILITY FOR ASSUMED LIABILITIES. FROM AND AFTER THE CLOSING DATE, PURCHASER AGREES TO ASSUME AND TO INDEMNIFY AND HOLD HARMLESS SELLER, SELLER'S AFFILIATES, EACH OF THE RESPECTIVE CURRENT, FORMER, AND FUTURE DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS OF ANY OF THE FOREGOING, AND EACH OF THE SUCCESSORS, ASSIGNS, HEIRS, AND EXECUTORS OF ANY OF THE FOREGOING FROM AND AGAINST THE ENTIRETY OF ANY LOSSES RESULTING FROM, ARISING OUT OF, OR ATTRIBUTABLE TO THE ASSUMED LIABILITIES, EXCEPT TO THE EXTENT THE SAME ARE COVERED AND PAID BY BY SELLER'S INSURANCE. ARTICLE XIV EFFECT OF CLOSING SECTION 14.01. POST-CLOSING ADJUSTMENTS. The following terms, provisions and prorations shall be effective at the Closing: (a) REVENUES. All proceeds from production, accounts receivables, notes receivables, income, revenues, monies and other items attributable to the Purchased Assets with respect to any period of time prior to the Effective Date shall belong to and be retained by or paid over to Seller, and all necessary reports with respect to such proceeds shall be filed by Seller. All proceeds from production, accounts receivables, notes receivables, income, revenues, monies and other items attributable to the Purchased Assets with respect to any period of time from and after the Effective Date shall belong to and be retained by or paid over to Purchaser, except for Hydrocarbons that, at the Effective Date, are attributable to the Purchased Assets and are in storage or are otherwise held in inventory and all proceeds attributable thereto, which shall belong to and be retained by or paid over to Seller. (b) EXPENSES. All accounts payable and accrued liabilities for costs and expenses attributable to the Purchased Assets with respect to any period of time prior to the Effective Date, including excise, severance, and similar taxes based on production or royalties, shall be the obligation of and paid by Seller, and all necessary reports with respect to such costs and expenses shall be filed by Seller. All accounts payable and accrued liabilities for direct costs and expenses attributable to the Purchased Assets with respect to any period of time from and after the Effective Date shall be the obligation of and be paid by the Purchaser, and all necessary reports with respect to such costs and expenses shall be filed by Purchaser. (c) AD VALOREM AND PROPERTY TAXES. All ad valorem taxes, real property taxes, personal property taxes and similar obligations shall be apportioned as of the 19 23 Effective Date between Purchaser and Seller. All such taxes allocable to period prior to the Effective Date shall be paid by Seller, and all such Taxes allocable to the Effective Date and thereafter shall be paid by Purchaser. Any refunds of taxes allocable to periods prior to the Effective Date shall be the property of Seller. Purchaser shall file or cause to be filed all required reports and returns incident to such taxes which are due on or after the Effective Date, and shall pay or cause to be paid to the taxing authorities all such taxes reflected on such reports and returns. (d) SALES TAXES, FILING FEES, ETC. The Purchase Price shall be net of any sales taxes or other transfer taxes and Purchaser shall be liable for any such tax, as well as any applicable conveyance, transfer and recording fees, and real estate transfer stamp or taxes imposed upon the sale of the Purchased Assets. If Seller is required by applicable state law to report and pay these taxes or fees, Purchaser shall promptly deliver a check to Seller in full payment thereof. (e) OTHER TAXES. All production, severance or excise taxes, conservation fees and other similar such taxes or fees relating to production attributable to the Purchased Assets prior to the Effective Date shall be paid by Seller and all such taxes and fees relating to such production attributable to the Purchased Assets on and after the Effective Date shall be paid by Purchaser. (f) GAS IMBALANCES. To the Knowledge of Seller, the gas balances as of the Effective Date are as set forth on SCHEDULE 4.02(n). Purchaser shall assume Seller's actual overproduced or underproduced position in the Wells as of the Effective Date, including the responsibility for the payment of royalties on the volume of gas Seller took in excess of its entitlement and any obligation to balance whether in cash or in kind. Upon review of SCHEDULE 4.02(n), Purchaser shall notify Seller in writing, but not later than seven (7) days prior to the Closing Date, if it objects to assuming Seller's actual overproduced or underproduced position in the Wells, as of the Effective Date. If such notice is delivered timely to Seller, Purchaser shall not be required to close and this Agreement shall terminate AB INITIO and Purchaser shall be entitled to return of its Down Payment. (g) PAYMENTS; SHARED OBLIGATIONS. If amounts are received by either Party hereto which, under the terms of this ARTICLE XIV belong to the other Party, such amount shall immediately be paid over to the proper Party. If an invoice or other evidence of an obligation is received which under the terms of this ARTICLE XIV is partially the obligation of Seller and partially the obligation of Purchaser, then the Parties shall consult each other and each Party shall promptly pay its portion of such obligation to the obligee. (h) POST-CLOSING ADJUSTMENTS. As soon as practicable after Closing and, in any event, no later than ninety (90) calendar days after Closing, Seller shall prepare and deliver to Purchaser, in accordance with this Agreement and generally accepted accounting principles, a statement (herein called the "Final Settlement Statement"), setting forth each adjustment proration, or payment that was not finally determined as of the Closing or in accordance with SECTION 14.01(g) above, and showing the calculation of such adjustments. The Final Settlement Statement shall be prepared in accordance with 20 24 customary accounting principles used in the oil and gas industry. As soon as practicable after receipt of the Final Settlement Statement, Purchaser shall deliver to Seller a written report containing any changes that Purchaser proposes be made to the Final Settlement Statement. The Parties shall undertake to agree with respect to the amounts due pursuant to such post-Closing adjustment no later than one hundred and twenty (120) days after the Closing Date. If the parties are unable to reach agreement within ten (10) days of such date, the provisions of SECTION 14.01(i) relating to the arbitration shall control. The date upon which such agreement is reached or upon which the Closing Amount is finally established shall herein be called the "Final Settlement Date." In the event that the Closing Amount as finally established (i) is more than the Purchase Price, Purchaser shall pay Seller or to Seller's account (as designated by Seller) in immediately available federal funds the amount of such difference; or (ii) is less than the Purchase Price, Seller shall pay Purchaser or to Purchaser's account (as designated by Purchaser) in immediately available federal funds the amount of such difference. Payment by Purchaser or Seller shall be made within five (5) days after the Final Settlement Date. (i) ARBITRATION OF FINAL SETTLEMENT STATEMENT. If Seller and Purchaser cannot agree upon the Final Settlement Statement, the parties shall retain the services of a "big six" accounting firm of certified public accountants to act as an arbitrator and to decide all points of disagreement with respect to the Final Settlement Statement, such decision to be binding on both parties. If the Parties are unable to agree upon the designation of such accounting firm, then Seller or Purchaser, or both of them, may in writing request the Judge of the United States District Court for the Northern District of Texas, Dallas Division senior in term of service to appoint an accounting firm as arbitrator. The arbitration shall be conducted under the Texas General Arbitration Act and the rules of the American Arbitration Association ("AAA") to the extent such rules do not conflict with the terms of such Act and the terms hereof. The costs and expenses of the arbitrator, whether the firm designated above, or a third party appointed pursuant to this SECTION 14.01(i), shall be shared equally by Seller and Purchaser. ARTICLE XV CONFIDENTIALITY AGREEMENT SECTION 15.01. CONFIDENTIALITY. Each Party, its Affiliates and their respective directors, officers, managers, partners, employees, agents, representatives, consultants, investors and lenders, agree to keep the terms and conditions of this Agreement and all proprietary and confidential information exchanged between Purchaser and Seller in connection with this Agreement, confidential, and to not disclose such information or the existence of this Agreement without the prior written consent of the other Party, which consent may be withheld at either Party's sole discretion, for a period of the later of one (1) year from the Effective Date or one (1) year from the Closing Date. The foregoing restriction shall not apply to disclosures and information which (a) are required to comply with applicable statutes and regulations; (b) are required to enforce this Agreement; (c) are required to obtain financing related to the transactions contemplated hereby; (d) enter the public domain through a third party who does not thereby breach an obligation of confidentiality; (e) is ascertainable or obtained from public or published information; or (f) are made in association with press releases issued in accordance with 21 25 SECTION 17.03 hereof; or (g) are required in connection with the sale of all or any part of the Purchased Assets by Purchaser. ARTICLE XVI CASUALTY LOSS AND CONDEMNATION SECTION 16.01. CASUALTY LOSS. If, prior to the Closing Date, all or any portion of the Purchased Assets is destroyed by fire or other casualty or is taken in condemnation or under right of eminent domain or proceedings for such purpose are pending or threatened in writing, Purchaser may elect (a) to have the affected Purchased Asset or portion thereof removed from the Purchased Assets, if and only if Purchaser and Seller are able to agree on an appropriate reduction to the Purchase Price for the value of such Purchased Asset or portion thereof and, in which case, Seller shall retain any amounts that have been or will be paid to it by third parties (including insurers) by reason of such destruction or taking; (b) to purchase such Purchased Assets or portions thereof notwithstanding any such destruction, taking or pending or threatened taking (without reduction in the Purchase Price with respect thereto), in which case Seller shall, at the Closing, pay to Purchaser all sums paid to Seller by third parties (including insurers) by reason of the destruction or taking of such Purchased Assets, and shall assign, transfer and set over unto Purchaser all of Seller's right, title and interest in and to any unpaid awards or other amounts due from third parties (including insurers) arising out of the destruction, taking or pending or threatened taking of such Purchased Assets or portions thereof; or (c) upon written notice to Seller, Purchaser may in its discretion terminate this Agreement, in which event this Agreement will be terminated and rendered void AB INITIO and Purchaser shall in such case be entitled to the return of the Down Payment. Prior to Closing, Seller shall not voluntarily compromise, settle or adjust any amounts payable by reason of any destruction, taking or pending or threatened taking as to the Purchased Assets or portions thereof without first obtaining the written consent of Purchaser. ARTICLE XVII MISCELLANEOUS SECTION 17.01. TRIAL WAIVERS. TO THE EXTENT ALLOWED BY LAW, THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY ANY OF THE PARTIES HERETO AGAINST ANY OTHER PARTY OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREIN, THE RELATIONSHIP OF SELLER AND PURCHASER, PURCHASER'S USE OF THE PURCHASED ASSETS, ANY CLAIM FOR INJURY OR DAMAGE, AND/OR ANY EMERGENCY OR STATUTORY REMEDY. THIS WAIVER BY THE PARTIES HERETO OF ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY HAS BEEN NEGOTIATED AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. FURTHERMORE, THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE 22 26 RIGHT THEY MAY HAVE TO SEEK PUNITIVE DAMAGES, CONSEQUENTIAL DAMAGES OR EXEMPLARY DAMAGES FROM THE OTHER WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY EITHER PARTY WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENTS CONTEMPLATED HEREIN OR RELATED HERETO. THE WAIVER BY THE PARTIES OF ANY RIGHT THEY MAY HAVE TO SEEK PUNITIVE DAMAGES, CONSEQUENTIAL DAMAGES OR EXEMPLARY DAMAGES HAS BEEN NEGOTIATED BY THEM AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. SECTION 17.02. BINDING ARBITRATION. (a) ARBITRATION OF DISPUTES. Except for matters necessitating injunctive or other equitable relief, on the request of any Party hereto, whether made before or after the institution of any legal proceeding, any action, dispute, claim or controversy of any kind now existing or hereafter arising between any of the Parties hereto in any way arising out of, pertaining to or in connection with this Agreement, any agreement executed in connection with this Agreement or the relationship between the Parties hereto (a "Dispute") shall be resolved by binding arbitration in accordance with the terms hereof. Any Party may, by summary proceedings, bring an action in court to compel arbitration of any Dispute. (b) GOVERNING RULES. Any arbitration shall be administered by the AAA in accordance with the terms of this Section, the Commercial Arbitration Rules of the AAA, and, to the maximum extent applicable, the Federal Arbitration Act. Judgment on any award rendered by an arbitrator may be entered in any court having jurisdiction. (c) ARBITRATORS. Any arbitration shall be conducted before one arbitrator. The arbitrator shall be a practicing attorney licensed to practice law in the State of Texas who is knowledgeable in the subject matter of the Dispute, selected by agreement between the Parties hereto. If the Parties cannot agree on an arbitrator within thirty (30) calendar days after the request for an arbitration, then the arbitration shall be conducted before three (3) arbitrators; one selected by Seller, one selected by Purchaser, and the third selected by the first two arbitrators. The arbitrator(s) may engage engineers, accountants or other consultants that the arbitrator(s) deem(s) necessary to render a conclusion in the arbitration proceeding. (d) CONDUCT OF ARBITRATION. To the maximum extent practicable, an arbitration proceeding hereunder shall be concluded within one hundred and eighty (180) calendar days of the filing of the Dispute with the AAA. Arbitration proceedings shall be conducted in Dallas, Texas. Arbitrators shall be empowered to impose sanctions and to take such other actions as the arbitrators deem necessary to the same extent a judge could impose sanctions or take such other actions pursuant to the Federal Rules of Civil Procedure and applicable law. At the conclusion of any arbitration proceeding, the arbitrator(s) shall make specific written findings of fact and conclusions of law. The arbitrator(s) shall have the power to award recovery of all costs and fees (including 23 27 reasonable attorneys' fees) to the prevailing party. Each party agrees to keep all Disputes and arbitration proceedings strictly confidential except for disclosure of information required by applicable law. (e) COSTS OF ARBITRATION. All fees of the arbitrator(s) and any engineer, accountant or other consultant engaged by the arbitrator(s), shall be shared by the Parties equally unless otherwise awarded by the arbitrator(s). SECTION 17.03. PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. Neither Party shall issue any press release or make any public announcement relating to the subject matter of this Agreement prior to the Closing without the prior approval of the other Party, which approval shall not be unreasonably withheld; provided, however, that either Party may make any public disclosure it believes in good faith is required by applicable law or any listing or trading agreement concerning its publicly traded securities (in which case the disclosing Party will use its reasonable best efforts to advise the other Party prior to making the disclosure). SECTION 17.04. ENTIRE AGREEMENT; AMENDMENT. This Agreement supersedes all previous contracts and constitutes the entire agreement of whatsoever kind or nature existing between or among the Parties representing the within subject matter and no Party shall be entitled to benefits other than those specified herein. As between or among the Parties, no oral statement or prior written material not specifically incorporated herein shall be of any force and effect. The Parties specifically acknowledge that in entering into and executing this Agreement, the Parties are relying solely upon the representations and agreements contained in this Agreement and no others. All prior representations or agreements, whether written or verbal, not expressly incorporated herein are superseded unless and until made in writing and signed by all Parties hereto. The representations and warranties set forth in this Agreement shall survive Closing and the execution and delivery of all other agreements described, referenced or contemplated herein and shall not be merged herewith or therewith. SECTION 17.05. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of, and be binding upon, the Parties hereto and their respective successors, heirs, representatives and assigns, as the case may be; provided, however, that no Party shall assign or delegate this Agreement or any of the rights or obligations created hereunder without the prior written consent of the other. Nothing in this Agreement shall confer upon any Person not a Party to this Agreement, or the legal representatives of such Person, any rights (including, without limitation, rights as a third party beneficiary) or remedies of any nature or kind whatsoever under or by reason of this Agreement. SECTION 17.06. FACSIMILE; COUNTERPARTS. Signatures on this Agreement may be communicated by facsimile transmission and shall be binding upon the Parties transmitting the same by facsimile transmission. Counterparts with original signatures shall be provided to the other Party within five (5) days of the applicable facsimile transmission; provided, however, that the failure to provide the original counterpart shall have no effect on the validity or binding nature of the Agreement. If executed in counterparts, the Agreement shall be effective as if simultaneously executed. 24 28 SECTION 17.07. HEADINGS. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 17.08. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Texas without giving effect to any choice or conflict of law provision or rule (whether of the State of Texas or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Texas. SECTION 17.09. LEGAL FEES AND COSTS. If either Party elects to incur legal expenses to enforce or interpret any provision of this Agreement, the prevailing Party (as determined by the trier of fact) shall be entitled to recover such legal expenses, including, without limitation, attorneys' fees, costs and necessary disbursements, in addition to any other relief to which such Party shall be entitled. SECTION 17.10. SCHEDULES, EXHIBITS AND OTHER INSTRUMENTS. Each certificate, written disclosure required herein and the Schedules and Exhibits hereto shall be considered a part hereof as if set forth herein in full. The Schedules and Exhibits and all written disclosures hereto shall be updated by Seller as of Closing and are subject to the written approval of Purchaser as of Closing. Any other provision herein to the contrary notwithstanding, the Schedules and all certificates, written disclosures or other instruments provided for herein and not delivered at the time of execution of this Agreement or which are incomplete at the time of execution of this Agreement shall be delivered or completed on or before Closing, and it shall be deemed a condition precedent to Closing hereunder that the Schedules and each such certificate, written disclosure or other instrument shall meet with the approval of the Party to whom the Schedules or such certificate, written disclosure or other instrument is to be delivered hereunder. SECTION 17.11. WAIVER. Any of the terms, provisions, covenants, representations, warranties or conditions hereof may be waived only by written instrument executed by the Party waiving the compliance. The failure of either Party at any time or times to require performance of any provisions hereof shall in no manner affect such Party's right to enforce the same. No waiver by either Party of any condition or of the breach of any term, provision, covenant, representation or warranty contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be construed as a further or continuing waiver of any such condition or breach, or a waiver of any other condition or of the breach of any other term, provision, covenant, representation or warranty. SECTION 17.12. RESIGNATION AS OPERATOR. Within a reasonable period of time following the Closing, Seller shall execute and deliver to Purchaser appropriate letters resigning as the operator of any of the Purchased Assets that Seller is operating and other appropriate documents concerning the transfer of operations. Purchaser acknowledges and agrees that Seller cannot and does not covenant or warrant that Purchaser shall become successor operator of all or any portion of the Purchased Assets, since the Purchased Assets or portions thereof may be subject to unit, pooling, communitization, operating or other agreements which control the appointment of a successor operator; provided, however, that Seller agrees to use its reasonable best efforts to assist Purchaser in becoming successor operator. 25 29 SECTION 17.13. NOTICES. All notices, requests, demands, claims and other communications hereunder will be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to Purchaser: Humphrey-Hill, L.P. 3500 Oak Lawn Avenue, Suite 590 Dallas, Texas 75219 Attention: Charles B. Humphrey J.M. Hill Telephone: (214) 528-9620 x101 Fax: (214) 528-9621 If to Seller: Nebraska Public Gas Agency 1111 "O" Street, 2nd floor Lincoln, Nebraska 68508 Attention: Mr. Roger Mock Telephone: (402) 474-4759 Fax: (402) 474-0473 With Copies to: Kutak Rock LLP 717 17th Street, Suite 2900 Denver, CO 80202 Attention: Robert C. Roth, Jr., Esq. Telephone: (303) 297-2400 Fax: (303) 292-7799 Any Party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Party notice in the manner herein set forth. SECTION 17.14. SEVERABILITY. Any term or provision of this Agreement that is invalid or unenforceable in any situation and in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 26 30 SECTION 17.15. NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns, and other Persons given rights of indemnification hereunder. SECTION 17.16. CONSTRUCTION. The Parties have participated jointly in the negotiating and drafting of this Agreement. In the event ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring either Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the contexts requires otherwise. The word "including" shall mean including, without limitation. If the date specified in this Agreement for giving any notice or taking any action is not a business day (or if the period during which any notices required to be given or any action taken expires on a date which is not a business day) then the date for giving such notice or taking such action (and the expiration date for such period during which notice is required to be given or action taken) shall be the next day which is a business day. [Remainder of page intentionally left blank] 27 31 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written. PURCHASER: HUMPHREY-HILL, L.P. By Humphrey Oil Corp., General Partner /s/ CHARLES B. HUMPHREY --------------------------------------- Charles B. Humphrey, President SELLER: NEBRASKA PUBLIC GAS AGENCY By /s/ RICHARD M. DUXBURY ------------------------------------- Richard M. Duxbury Executive Director 28 32 EXHIBITS AND SCHEDULES EXHIBITS -------- Exhibit A - Definitions Exhibit B - Leases Exhibit C - Wells Exhibit D - Equipment Exhibit E - Contracts Exhibit F - Conveyance Documents Exhibit G - Seller's Deliveries at Closing Exhibit H - Purchaser's Deliveries at Closing SCHEDULES --------- Schedule 4.02(e) Litigation and Claims Schedule 4.02(f) Encumbrances Schedule 4.02(g) Taxes Schedule 4.02(h) Violations Schedule 4.02(j) Royalties Schedule 4.02(k) Permits and Licenses Schedule 4.02(l) Governmental Audits Schedule 4.02(m) Gas Balances Schedule 4.02(n) Environmental Matters 29 33 EXHIBIT A ATTACHED TO AND MADE A PART OF THAT CERTAIN PURCHASE AND SALE AGREEMENT DATED FEBRUARY 22, 2000, BY AND BETWEEN NEBRASKA PUBLIC GAS AGENCY, AS SELLER, AND HUMPHREY-HILL, L.P., AS PURCHASER. DEFINITIONS "AAA" has the meaning set forth in SECTION 14.01(i). "AFE" has the meaning set forth in SECTION 5.01(b). "AFFILIATE," "AFFILIATES" or "AFFILIATED" or any variation thereof means, with respect to any Person, (a) a Person directly or indirectly controlling, controlled by, or under common control with such Person; (b) a Person having common ownership with such Person; (c) a person owning or controlling ten percent (10%) or more of the outstanding voting interests of such Person; (d) an officer, director, manager, or general partner of such Person; or (e) a Person who is an officer, director, manager, general partner, trustee or holder of ten percent (10%) or more of the voting interests of any Person described in clauses (a) through (d) of this sentence. For purposes of this definition, the term "control" refers to possession by a person of the power, direct or indirect, to direct or cause the direction of the management and policies of another person, whether through the ownership of voting securities, by contract or otherwise. "AGREED RATE" means a per annum interest rate equal to the lesser of (a) the Prime Rate of interest as quoted daily (or at such other interval of one week or less) in The Wall Street Journal or (b) the maximum amount of interest allowed by law. If The Wall Street Journal ceases to quote the Prime Rate of interest at least weekly, the referenced rate of interest in (a) above shall be the rate of interest from time to time announced as its prime commercial lending rate by the bank which at the most recent point in time held all or the large portion of the Purchaser's bank debt. "ASSUMED LIABILITIES" has the meaning set forth in SECTION 7.02. "CLOSING" has the meaning set forth in SECTION 3.01. "CLOSING AMOUNT" has the meaning set forth in SECTION 2.03. "CLOSING DATE" has the meaning set forth in SECTION 3.01. "CODE" means the Internal Revenue Code of 1986, as amended. "CONTRACTS" has the meaning set forth in SECTION 1.01(f). "CONVEYANCE DOCUMENTS" means those forms of assignments, bills of sale, deeds and other instruments the Parties agree are necessary or appropriate to convey title to the Purchased Assets from Seller to Purchaser. "DISPUTE" has the meaning set forth in SECTION 17.02(a). 34 "DOWN PAYMENT" has the meaning set forth in SECTION 2.01. "EFFECTIVE DATE" has the meaning ascribed thereto in SECTION 1.02. "ENVIRONMENTAL LAWS" means all federal, state, and local laws, regulations, ordinances, rules, orders and permits relating to the control of any pollutant or protection of the environment, including, without limitation, laws, regulations, ordinances, rules, orders, and permits relating to the emission, discharge, disposal, treatment, recycling, reclamation, permitting, manufacture, processing, distribution, generation, storage, transportation, release or threatened release of, or exposure of persons or property to, Materials of Environment Concern. "ENVIRONMENTAL LIABILITIES" means any and all costs (including remedial, removal, response, abatement, cleanup, investigative, and/or monitoring costs), damages, settlements, expenses (including charges and assessments, and expenses and costs of investigating, preparing or defending any action or proceeding), liens, penalties, fines, taxes, pre-judgment and post-judgment interest, court costs and attorneys' fees incurred or imposed (i) pursuant to any agreement, order, notice of responsibility, directive (including requirements embodied in Environmental Laws), injunction, judgment or similar documents (including settlements) attributable to or arising out of or under Environmental Laws, (ii) pursuant to any claim by a government authority or other entity or person for personal injury, property damage, damage to natural resources, remediation or response costs arising out of or associated with any Environmental Matter, or (iii) pursuant to requirements as of the Closing Date embodied in Environmental Laws. Environmental Liabilities do not include (i) liabilities imposed under statutes enacted after the Closing Date (including the elimination of the exclusion of petroleum from the definition of "hazardous substance" under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 and the elimination of the exclusion of oil and gas exploration, development and production wastes from the definition of "hazardous wastes" under the Resource Conservation and Recovery Act) or (ii) liabilities imposed under regulations promulgated or amended after the Closing Date which implement new requirements. "ENVIRONMENTAL MATTERS" means matters resulting from or attributable to actual, threatened or alleged emissions, discharges or releases of Materials of Environmental Concern into ambient air, surface water, groundwater, or land, or otherwise resulting from or attributable to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern. "EQUIPMENT" means all of the tangible personal property, tools, machinery, materials, pipelines, equipment, fixtures and improvements, which are incident or attributable to the Wells, Leases and/or Lands or with the production, treatment, sale or disposal of Hydrocarbons or water produced therefrom or attributable thereto, on the Effective Date. "EXCLUDED ASSETS" has the meaning set forth in SECTION 1.03. "FINAL SETTLEMENT DATE" has the meaning set forth in SECTION 14.01(h). "FINAL SETTLEMENT STATEMENT" has the meaning set forth in SECTION 14.01(h). 2 35 "GOOD AND DEFENSIBLE TITLE" means, with respect to ownership of Leases attributable to a Well or Unit, a record title that: (a) entitles Seller to receive, throughout the life of a Well or Unit, at least the NRI for such Well or Unit shown in EXHIBIT C, except for decreases in connection with those operations as to which an election is made by Purchaser after Closing or with Purchaser's consent, to become a non-consenting co-owner and decreases resulting from those Wells or Units where Seller is obligated to allow others to make up past underproduction and except for horizontal/vertical Pugh clauses and continuous development clauses in the Leases or related agreements; (b) obligates Seller to bear, throughout the life of a Well or Unit (and the plugging, abandonment and salvage thereof), no greater WI for such Well or Unit than the WI shown therefor in EXHIBIT C, except increases in such WI that result in at least a proportionate increase in Seller's NRI for such Well or Unit (including, without limitation, increases resulting from co-owner nonconsents) and increases that result from contribution requirements with respect to defaulting co-owners; and (c) is free and clear of all liens, security interests, collateral assignments, encumbrances, irregularities and defects except for Permitted Encumbrances. "HYDROCARBONS" means crude oil, natural gas, casinghead gas, coalbed methane, condensate, helium, sulphur, SO(2), CO(2), natural gas liquids and other gaseous and liquid hydrocarbons or any combination thereof. "INDEMNIFIED PARTY" has the meaning set forth in SECTION 11.04. "INDEMNIFYING PARTY" has the meaning set forth in SECTION 11.04. "KNOWLEDGE" means, with respect to a Party hereto, the actual awareness of facts or other information of any officer or manager of such Party in charge of a discrete business area or function having responsibility for the referenced matter, without due inquiry by such officer or manager. "LANDS" has the meaning set forth in SECTION 1.01(a). "LEASES" has the meaning set forth in SECTION 1.01(a). "LICENSES" has the meaning set forth in SECTION 1.01(e). "LITIGATION AND CLAIMS" has the meaning set forth in SECTION 4.02(e). "LOSS" or "LOSSES" means all damages, payments, penalties, fines, assessments, costs, amounts paid in settlement, obligations, taxes, losses (including reductions in the value of Purchased Assets), liabilities, expenses and fees incurred, including court costs and attorneys' fees and expenses and costs of investigating, preparing or defending any action or proceeding. 3 36 "MATERIAL ADVERSE EVENT" means Losses or potential Losses that cause or could cause a reduction in the Purchase Price of more than 25%. "MATERIALS OF ENVIRONMENTAL CONCERN" means any chemical pollutants, contaminants, waste, petroleum waste, used oil, toxic substances, hazardous substances and any other substances that are regulated by any governmental entity under any Environmental Law. "NRI" means a fractional or percentage interest in and to all Hydrocarbons produced from or allocated to a Well after deduction of all lessor's royalties, overriding royalties, and other burdens and payments out of production that burden such fractional or percentage interest in such Well. "ORGANIZATION" means a Person other than a natural person. Organization includes, without limitation, corporations (both nonprofit and other corporations), partnerships (including limited partnerships, general partnerships, limited liability partnerships and limited liability limited partnerships), joint ventures, limited liability companies, trusts, business trusts, cooperatives, unincorporated associations and other business entities, or any foreign trust or foreign business entities, but the term does not include joint tenancies and tenancies by the entirety. "PARTIES" has the meaning set forth in the preface above. "PECOS COUNTY, TEXAS" has the meaning set forth in the Recitals. "PERMITTED ENCUMBRANCES" shall have the meaning ascribed thereto in SECTION 1.04. "PERSON" means an individual, trust, estate or Organization. "PHASE I ENVIRONMENTAL AUDIT" means an assessment of Seller's compliance with Environmental Laws relative to the Purchased Assets consisting of examination of Seller's files and public documents, interviews of personnel of Seller and of other appropriate persons visual inspection of the Purchased Assets and NORM surveys. "PRELIMINARY SETTLEMENT STATEMENT" has the meaning set forth in SECTION 2.03. "PURCHASE PRICE" has the meaning ascribed thereto in SECTION 2.01. "PURCHASED ASSETS" shall have the meaning ascribed thereto in SECTION 1.01. "PURCHASER" has the meaning set forth in the preface to this Agreement. "RECORDS" means all originals, copies, computer tapes and discs, files, records, information or data relating to the Purchased Assets in the possession of Seller, including, without limitation, title records (including abstracts of title, title opinions, certificates of title and title curative documents), accounting records and files, contracts, correspondence, production records, electric logs, core data, pressure data, decline curves, graphical production curves, drilling reports, well completion reports, drill stem test charts and reports, engineering reports, regulatory reports, and all related materials, INSOFAR AND ONLY INSOFAR as the 4 37 foregoing items constitute materials that may be lawfully conveyed to Purchaser (i.e. the materials are not subject to a proprietary agreement precluding their transfer to Purchaser); "SELLER" has the meaning set forth in the preface. The term "Seller" also shall include any wholly-owned subsidiary of Seller that has an interest in the Purchased Assets. "SURVIVAL PERIOD" has the meaning set forth in SECTION 11.01. "THIRD PARTY CLAIM" has the meaning set forth in SECTION 11.04. "TITLE DEFECT" means any lien, security interest, collateral assignment, charge, obligation, encumbrance, irregularity of title or other condition that causes Seller's title to one or more of the Leases (or any portions thereof) to be less than Good and Defensible Title. "TITLE DEFECT NOTICE" has the meaning set forth in SECTION 8.02(b). "TRANSFER REQUIREMENTS" means all consents, approvals, authorizations or permits of, or filings with or notifications to, any third party which must be obtained, made or complied with for or in connection with the transactions contemplated by this Agreement in order (a) for such transactions to be effective, (b) to prevent any termination, cancellation, default, acceleration or change in terms (or any right thereof from arising) under any terms, conditions or provisions of any Asset (or of any agreement, instrument or obligation relating to or burdening any Purchased Asset or any interest therein or portion thereof) as a result of such transactions, or (c) to prevent the creation or imposition of any lien, charge, penalty, restriction, security interest or encumbrance on or with respect to any Purchased Asset or any interest therein or portion thereof (or any right thereof from arising) as a result of such transactions. "UNITS" means all unitization, communitization, pooling agreements, working interest units created by operating agreements, and orders covering the Lands subject to the Leases, or any portion thereof, and the units and pooled or communitized areas created thereby. "WELLS" has the meaning set forth in SECTION 1.1(b). "WI" means a fraction or percentage of the costs and expenses associated with the maintenance, exploration, development, operation and abandonment of a Well. 5 38 EXHIBIT B-1 ATTACHED TO AND MADE A PART OF THAT CERTAIN PURCHASE AND SALE AGREEMENT DATED FEBRUARY 22, 2000, BY AND BETWEEN NEBRASKA PUBLIC GAS AGENCY, AS SELLER, AND HUMPHREY-HILL, L.P., AS PURCHASER. LEASES All of the Seller's right, title and interest in and to the oil gas and mineral leases described in or covered by the following described assignments and unit agreements or covering lands described therein, as of the Effective Date: 1. Assignment, Bill of Sale and Conveyance from Union Pacific Oil and Gas Company to Nebraska Public Gas Agency recorded in Volume 688 at Page 495 of the real property records of Pecos County, Texas. 2. Correction Assignment, Bill of Sale and Conveyance from Union Pacific Oil and Gas Company to Nebraska Public Gas Agency recorded in Volume 694 at Page 130 of said records. 3. Assignment from Value Petroleum, Inc. to Nebraska Public Gas Agency recorded in Volume 694 at Page 144 of said records. 4. Assignment from Headington Penn Corp. to Nebraska Public Gas Agency recorded in Volume 694 at Page 148 of said records. 5. Assignment and Bill of Sale from The Clayton Williams Partnership, Ltd. to Nebraska Public Gas Agency recorded in Volume 702 at Page 497 of said records. said leases being further described on Exhibit B-2 attached hereto. UNITS 6. Gomez South Unit No. 1 - Unitization Agreement dated as of 6-21-72 and recorded in Volume 420 at Page 1 of the real property records of Pecos County, Texas. Gomez #1-A Gomex #1(D) 7. Gomez South Unit No. 2 - Declaration of Pooled Unit dated as of 4-2-73 and recorded in Volume 430 at Page 81 of said records. Gomez #2 8. Gomez South Unit No. 3 - Declaration of Pooled Gas Unit dated as of 3-1-74 and recorded in Volume 449 at Page 331 of said records. Gomez #3A 39 9. FSOC - Leon Gas Unit No. 1 - Declaration of Pooled Unit dated as of 7-28-70 and recorded in Volume 396 at Page 19 of said records and Unitization Agreement dated effective 7-10-70 and recorded in Volume 394 at Page 109 of said records. FSOC - Leon #1 10. FSOC - Dixel Resources Unit No. 1 - Declaration of Pooled Unit dated as of 12-20-71 and recorded in Volume 412 at Page 598 of said records. FSOC Dixel #1 (TA) 11. FSOC - Dixel Resources Unit No. 2 - Declaration of Pooled Unit dated as of 7-15-71 and recorded in Volume 408 at Page III of said records and Unitization Agreement dated effective 7-8-71 and recorded in Volume 407 at Page 567 of said records. FSOC Dixel #2 12. OXY - Sabine Gas Unit - Declaration of Pooled Unit dated as of August 4, 1978 and recorded in Volume 531 at Pages 298, 303, 308, 313, 318 and 323 of said records. Sabine #1 13. Phillips - Dixel Resources Unit - Unitization Agreement dated October 8, 1973, and recorded in Volume 443, at Page 336 of said records. Dixel Resource Unit 2 40 EXHIBIT B-2 ATTACHED TO AND MADE A PART OF THAT CERTAIN PURCHASE AND SALE AGREEMENT DATED FEBRUARY 22, 2000, BY AND BETWEEN NEBRASKA PUBLIC GAS AGENCY, AS SELLER, AND HUMPHREY-HILL, L.P., AS PURCHASER. ALL OF SELLER'S RIGHT, TITLE AND INTEREST IN AND TO THE FOLLOWING DESCRIBED OIL AND GAS LEASES. ALL RECORDING REFERENCES HEREIN ARE TO THE REAL PROPERTY RECORDS OF PECOS COUNTY, TEXAS.
LESSOR LESSEE BOOK PAGE WELL(S) - ------ ------ ---- ---- ------- Jo Ann Montgomery J.B. Wilkinson, Jr. 507 338 Sabine #1 Moore Jack B. Wilkinson Oxy Petroleum, 546 585 Sabine #1 Inc., et al Sabine Corporation Sabine Production 528 43 Sabine #1 Company Mary E. McCampbell W.F. Kissling 524 105 Sabine #1 Montebev, Inc. Sam F. Hurt, Jr. 460 438 Sabine #1 Louise Montgomery Humble Oil & 424 59 Sabine #1 Faulk, et al Refining Company Carl E. Haterius, L.H.& S.A. Olson 215 135 Gomez #1-A et al Drilling Co. Gomez #1-D Hugo B. Haterius, L.H.& S.A. Olson 215 138 Gomez #1-A as Guardian of Drilling Co. Gomez #1-D the Estate of Terrance Edward Haterius G.H. Crone, et ux L.H.& S.A. Olson 208 239 Gomez #1-A Drilling Co. Gomez #1-D G.H. Crone, et ux L.H.& S.A. Olson 208 242 Gomez #1-A Drilling Co. Gomez #1-D
41
LESSOR LESSEE BOOK PAGE WELL(S) - ------ ------ ---- ---- ------- Leon Land & Pecos Exploration 203 69 Gomez #1-A Cattle Company Company Gomez #1-D Leon #1 Dixel #1 Dixel #2 Leon Land & C.H. Priddy 196 281 Leon #1 Cattle Company Dixel #2 Leon Land & C.H. Priddy 196 277 Leon #1 Cattle Company Leon Land & Pecos Exploration 277 271 Gomez #1-A Cattle Company Company Gomez #1-D Edward Dickinson II J.S. Meriwether, Jr. 234 458 Gomez #2 Gomez #3A-1 Edward Dickinson II J.S. Meriwether, Jr. 234 464 Gomez #2 Gomez #3A-1 McMullen Oil J.S. Meriwether, 237 23 Gomez #2 Royalty Company Jr. Gomez #3A-1 Leon Land & Cattle Ladd Petroleum 392 154 Leon #1 Company Corporation Dixel #2 Ft. Stockton Oil Ladd Petroleum 391 489 Leon #1 Company Corporation 393 211 Dixel #1 Dixel #2 Gomez #1-A Gomez #1-D USM Oil Company Clayton W. 392 459 Gomez #2 Williams, Jr. Gomez #1-A Gomez #1-D Gomez #3A-1 Dixel Resources, Inc. Ladd Petroleum 416 717 Gomez #2 Corporation Gomez #3 Gomez #1-A Gomez #1-D
2 42
LESSOR LESSEE BOOK PAGE WELL(S) - ------ ------ ---- ---- ------- Ft. Stockton Oil Ladd Petroleum 416 713 Gomez #2 Company Corporation Gomez #3 Gomez #1-A Gomez #1-D Dixel Resources, Inc. Ladd Petroleum 418 57 Gomez #1-A Corporation Gomez #1-D Eva M. Kirksey Dan V. Rodgers 416 104 Gomez #1-A Gomez #1-D Weimer W. Kirksey Dan V. Rodgers 416 108 Gomez #1-A et al Gomez #1-D Della K. Nolen Dan V. Rodgers 416 112 Gomez #1-A Gomez #1-D Zelda Boozer et al Dan V. Rodgers 416 116 Gomez #1-A Gomez #1-D Dixel Resources, Inc. Southern Union 435 190 Dixel Res. Production Company Dixel Resources Inc. Texas Oil & Gas Corp. 418 15 Gomez #3A-1 Production Company
3 43 EXHIBIT C ATTACHED TO AND MADE A PART OF THAT CERTAIN PURCHASE AND SALE AGREEMENT DATED FEBRUARY 22, 2000, BY AND BETWEEN NEBRASKA PUBLIC GAS AGENCY, AS SELLER, AND HUMPHREY-HILL, L.P., AS PURCHASER. SCHEDULE OF WELLS
WELL WORKING INTEREST NET REVENUE INTEREST - ---- ---------------- -------------------- *FSOC DIXEL RESOURCES #1 .83846700 .72207110 FSOC-DIXEL RESOURCES #2 .73720000 .65580490 GOMEZ SO. UNIT #1 .80743940 .65168940 GOMEZ SO. UNIT #1-A .80743940 .65168940 GOMEZ SO. UNIT #2 .82176000 .62700390 GOMEZ SO. UNIT #3A-1 .41053280 .40110350 *DIXEL RESOURCES UNIT .01779480 .01402510 FSOC-LEON #1 .55000000 .48424110 *SABINE #1 .12685500 .09900440
* THE INTERESTS SET FORTH HEREIN ARE THOSE CONVEYED BY UNION PACIFIC OIL AND GAS COMPANY TO SELLER BY ASSIGNMENT, BILL OF SALE AND CONVEYANCE RECORDED IN VOLUME 688 AT PAGE 495 OF THE REAL PROPERTY RECORDS OF PECOS COUNTY, TEXAS, AND BY CORRECTION ASSIGNMENT, BILL OF SALE AND CONVEYANCE RECORDED IN VOLUME 694 AT PAGE 130 OF SAID RECORDS. AS WITH ALL OF THE WELLS SET FORTH HEREIN, SELLER HAS NOT INDEPENDENTLY VERIFIED THE AMOUNT OF SAID INTERESTS, AND PURCHASER ACKNOWLEDGES AND AGREES THAT IT IS RELYING UPON ITS OWN INVESTIGATION AND DUE DILIGENCE WITH RESPECT TO THE INTERESTS IN ALL OF THE WELLS. 44 EXHIBIT D ATTACHED TO AND MADE A PART OF THAT CERTAIN PURCHASE AND SALE AGREEMENT DATED FEBRUARY 22, 2000, BY AND BETWEEN NEBRASKA PUBLIC GAS AGENCY, AS SELLER, AND HUMPHREY-HILL, L.P., AS PURCHASER. - -------------------------------------------------------------------------------- SCHEDULE OF EQUIPMENT - -------------------------------------------------------------------------------- Seller has not independently verified its interest, if any, in the Equipment, and Purchaser acknowledges and agrees that it is relying upon its own investigation and due diligence with respect to the Equipment. GOMEZ FIELD PECOS COUNTY, TEXAS FSOC-Dixel Resources #1 - ----------------------- 10,000 # Well Head 500 Bbl Steel Water Tank 250 Bbl Open Top Fiberglass Water Tank Gomez S. Unit #1 - ---------------- 10,000 # Well Head 300 Bbl Fiberglass Open Top Tank Gomez S. Unit #1-A - ------------------ 10,000 # Well Head Gomez S. Unit #2 - ---------------- 10,000 # Well Head Gomez S. Unit # 3A-1 - -------------------- 10,000 # Well Head 300 Bbl Fiberglass open Top Water Tank 45 EXHIBIT E ATTACHED TO AND MADE A PART OF THAT CERTAIN PURCHASE AND SALE AGREEMENT DATED FEBRUARY 22, 2000, BY AND BETWEEN NEBRASKA PUBLIC GAS AGENCY, AS SELLER, AND HUMPHREY-HILL, L.P., AS PURCHASER. CONTRACTS Seller has not independently verified its interest, if any, in the following Contracts, and Purchaser acknowledges and agrees that it is relying upon its own investigation and due diligence with respect to the Contracts. 1. JOINT OPERATING AGREEMENT BY AND BETWEEN FOREST OIL CORPORATION, AS OPERATOR AND LADD PETROLEUM CORPORATION, ET AL, AS NON-OPERATORS DATED MARCH 5, 1971 AND AMENDED BY AMENDMENT TO OPERATING AGREEMENT DATED OCTOBER 3, 1985, COVERING THE FSOC-LEON #1 UNIT. 2. JOINT OPERATING AGREEMENT BY AND BETWEEN LADD PETROLEUM CORPORATION, AS OPERATOR AND PETRO-LEWIS CORPORATION, AS NON-OPERATOR DATED JULY 13, 1971, COVERING THE FSOC-DIXEL RESOURCES #1 AND #2. 3. JOINT OPERATING AGREEMENT BY AND BETWEEN LADD PETROLEUM CORPORATION, AS OPERATOR, AND CLAYTON W. WILLIAMS, JR., ET AL, AS NON-OPERATORS DATED MAY 31, 1972 COVERING THE GOMEZ SOUTH UNIT #1. 4. JOINT OPERATING AGREEMENT BY AND BETWEEN LADD PETROLEUM CORPORATION, AS OPERATOR AND FLUOR CORPORATION, AS NON-OPERATOR DATED JULY 19, 1972, COVERING THE GOMEZ SOUTH UNIT #1. 5. JOINT OPERATING AGREEMENT BY AND BETWEEN LADD PETROLEUM CORPORATION, AS OPERATOR AND DIXEL RESOURCES INCORPORATED, AS NON-OPERATOR DATED NOVEMBER 1, 1972, COVERING THE FSOC-DIXEL RESOURCES UNIT #2 . 6. JOINT OPERATING AGREEMENT BY AND BETWEEN AMOCO PRODUCTION COMPANY, AS OPERATOR, AND PHILLIPS PETROLEUM COMPANY, ET AL AS NON-OPERATORS DATED APRIL 26, 1973, COVERING THE DIXEL RESOURCES UNIT. 7. JOINT OPERATING AGREEMENT BY AND BETWEEN LADD PETROLEUM CORPORATION, AS OPERATOR AND TEXAS OIL & GAS CORPORATION, ET AL, AS NON-OPERATORS DATED NOVEMBER 13, 1973, AS AMENDED BY AMENDMENT TO OPERATING AGREEMENT DATED DECEMBER 30, 1974, AS AMENDED BY AMENDMENT TO OPERATING AGREEMENT DATED FEBRUARY 4, 1976 AND AS AMENDED BY LETTER FROM GETTY OIL COMPANY TO LADD PETROLEUM CORPORATION DATED APRIL 23, 1974, COVERING THE GOMEZ SOUTH UNIT #3A-1. 8. JOINT OPERATING AGREEMENT BY AND BETWEEN LADD PETROLEUM CORPORATION, AS OPERATOR AND FLUOR OIL AND GAS CORPORATION, ET AL, AS NON-OPERATORS DATED DECEMBER 1, 1973, COVERING THE GOMEZ SOUTH UNIT #2. 46 9. JOINT OPERATING AGREEMENT BY AND BETWEEN CITIES SERVICE OIL AND GAS CORPORATION, AS OPERATOR, AND EXXON CORPORATION, ET AL AS NON-OPERATORS DATED AUGUST 29, 1986, COVERING THE SABINE UNIT #1. 10. AGREEMENT BY AND BETWEEN MORAN EXPLORATION, INC., AS OPERATOR, AND HUNT PETROLEUM CORPORATION, ET AL, AS NON-OPERATORS DATED MARCH 19, 1979. 11. GAS PURCHASE AGREEMENT DATED MARCH 1, 1996, BY AND BETWEEN WESTERN GAS RESOURCES, INC., AS BUYER, AND NEBRASKA PUBLIC GAS AGENCY, AS SELLER. 12. GAS SERVICE AGREEMENT DATED MAY 5, 1998, BY AND BETWEEN NEBRASKA PUBLIC GAS AGENCY AND WESTERN GAS RESOURCES, INC. 13. GOMEZ FIELD MANAGEMENT AGREEMENT BY AND BETWEEN CIMA RESOURCES, L.L.C. AND NEBRASKA PUBLIC GAS AGENCY DATED SEPTEMBER 9, 1997. 14. SALTWATER DISPOSAL AGREEMENT DATED MAY 22, 1998, FULLY EXECUTED ON JUNE 9, 1998, BETWEEN NEBRASKA PUBLIC GAS AGENCY ("NPGA") AND DALLAS OPERATING COMPANY ("DOC"), ASSIGNED BY DOC TO DIAMOND G PRODUCTION EFFECTIVE JANUARY 1, 2000. 15. GAS COMPRESSOR EQUIPMENT MASTER RENTAL AND SERVICING AGREEMENT DATED AUGUST 12, 1999, BETWEEN HANOVER COMPRESSOR COMPANY, AS LESSOR, AND NEBRASKA PUBLIC GAS AGENCY, AS LESSEE. 2 47 EXHIBIT F CONVEYANCE DOCUMENTS ASSIGNMENT, BILL OF SALE AND CONVEYANCE THIS ASSIGNMENT, BILL OF SALE AND CONVEYANCE (this "Assignment") executed by NEBRASKA PUBLIC GAS AGENCY, a public body corporate and politic under the laws of the State of Nebraska, whose address is 1111 "O" Street, 2nd Floor, Lincoln, Nebraska 68508 (hereinafter called "Assignor") to HUMPHREY-HILL, L.P. a Texas limited partnership whose address is 3500 Oak Lawn Avenue, Suite 590, Dallas, TX 75219 (hereinafter called "Assignee"), dated effective at 7:00 a.m., Central Standard Time, on January 1, 2000 (hereinafter called the "Effective Date"). Assignor and Assignee are sometimes referred to collectively herein as the "Parties" or each individually as a "Party." Capitalized terms used but not otherwise defined herein shall have the meanings set forth in that certain Asset Purchase and Sale Agreement, dated February 22, 2000 (the "Agreement"), by and between Assignor and Assignee. ARTICLE I CONVEYANCE OF ASSETS SECTION 1.01. CONVEYANCE. Assignor, for $10.00 and other good and valuable consideration in hand paid by Assignee, the receipt and sufficiency of which are hereby acknowledged and confessed, by these presents does hereby GRANT, BARGAIN, SELL, CONVEY, ASSIGN, TRANSFER, SET OVER AND DELIVER unto Assignee: All of Assignor's right, title and interest in and to the hereinafter described properties and interests in Pecos County, Texas, as such right, title and interest existed on the Effective Date, excluding the Excluded Assets (as defined below), but including the following assets (all such assets, rights, title and interests being conveyed to Purchaser hereby are collectively called the ("Purchased Assets"): (a) Assignor's interests in any and all oil and gas leases covering land lying within the boundaries of the units described on EXHIBIT A attached hereto ("Lands"), whether such leases are described on EXHIBIT A, together with all mineral, royalty, overriding royalty or other interests in the oil, gas and other minerals in the Lands (collectively, the "Leases"); (b) Assignor's interests in the wells located on the Lands, as set forth in EXHIBIT B attached hereto (collectively, the "Wells"); (c) Assignor's interest in the Equipment located on the Lands as set forth on EXHIBIT C attached hereto (collectively, the "Equipment"); (d) Assignor's interests in the Units covering the Lands and subject to the Leases; 48 (e) Assignor's interest in all licenses and permits which relate to the Leases, Wells, Lands, Equipment and Units (collectively, the "Licenses"); (f) Assignor's interest in contracts and other instruments (other than bonds posted by Assignor) which concern and relate to any of the Leases, Wells, Lands, Units and/or Equipment or the operation thereof, INSOFAR AND ONLY INSOFAR as the same concern or relate to the Purchased Assets, including without limitation, oil, gas and condensate purchase and sale contracts; permits; rights-of-way; easements; servitudes; estates; surface leases; farming and farmout agreements; division orders and transfer orders; bottom hole agreements; dry hole agreements; area-of mutual interest agreements; salt water disposal agreements; geologic and geophysical agreements; acreage contribution agreements; operating agreements; balancing agreements and unit agreements; pooling agreements; pooling orders; communitization agreements; processing, gathering, compression and transportation agreements; facilities or equipment leases relating thereto or used or held for use in connection with the ownership or operation thereof or with the production, treatment, sale or disposal of Hydrocarbons; and all other contracts and agreements related to the Purchased Assets, including but not limited to the contracts described on EXHIBIT D attached hereto (collectively, the "Contracts"); (g) Assignor's Records and, to the extent transferable, all other contract rights, intangible rights (excluding Assignor's trademarks and service marks), inchoate rights, choses in action, rights under warranties made by prior owners, manufacturers, vendors or other third parties, and rights accruing under applicable statutes of limitation or prescription, attributable to the Purchased Assets; and (h) Assignor's interest in all payments, and all rights to receive payments, including without limitation, all royalties, overriding royalties and production payments, with respect to the ownership of the production of Hydrocarbons from or the conduct of operations with respect to the Purchased Assets and the interest to be conveyed to Assignee hereunder accruing after the Effective Date. SECTION 1.02. EXCLUDED ASSETS. Except as specifically set forth above, the following assets, real, personal and mixed, tangible and intangible, owned by Assignor or its Affiliates, whether or not associated with or employed in the operations of the Purchased Assets (collectively, "Excluded Assets"), are not intended by the Parties to be a part of the sale and purchase contemplated hereunder and Assignor hereby EXCEPTS and RESERVES from this Assignment in favor of itself, its successors and assigns, forever, the following Excluded Assets: (a) all cash, deposits, checks, funds, accounts receivable, notes receivable or similar items attributable to the Purchased Assets with respect to any period of time prior to the Effective Date, except for those funds in suspense accounts to be delivered to Assignee pursuant to the Agreement; and (b) all Hydrocarbon production from or attributable to the Purchased Assets with respect to all periods prior to the Effective Date and all proceeds attributable thereto, 2 49 and all Hydrocarbons that, at the Effective Date, are owned by Assignor and are in storage or otherwise held in inventory and all proceeds attributable thereto. ARTICLE II DISCLAIMER OF REPRESENTATIONS AND WARRANTIES, PERMITTED ENCUMBRANCES SECTION 2.01. DISCLAIMER OF REPRESENTATIONS AND WARRANTIES. (a) EXCEPT AS EXPRESSLY SET FORTH IN THE AGREEMENT, THE PURCHASED ASSETS ARE ASSIGNED AND CONVEYED TO ASSIGNEE WITHOUT ANY WARRANTY OF TITLE EITHER EXPRESS OR IMPLIED, AND WHETHER BY COMMON LAW, STATUTE OR OTHERWISE, EXCEPT THAT ASSIGNOR HEREBY WARRANTS ITS TITLE TO THE PURCHASED ASSETS AGAINST PERSONS OR PARTIES CLAIMING TITLE BY, THROUGH OR UNDER ASSIGNOR. EXCEPT AS EXPRESSLY SET FORTH IN THE AGREEMENT, ALL PERSONAL PROPERTY, EQUIPMENT, FIXTURES AND APPURTENANCES CONSTITUTING A PORTION OF THE PURCHASED ASSETS ARE ASSIGNED TO ASSIGNEE "AS IS", "WHERE IS," WITHOUT LIMITATION OF THE GENERALITY OF THE IMMEDIATELY PRECEDING SENTENCE, ASSIGNOR EXPRESSLY DISCLAIMS AND NEGATES AS TO PERSONAL PROPERTY, IMPROVEMENTS AND FIXTURES, ANY REPRESENTATION OR WARRANTY, WHETHER EXPRESS OR IMPLIED, AND WHETHER BY COMMON LAW, STATUTE OR OTHERWISE, AS TO (A) MERCHANTABILITY, (B) FITNESS FOR ANY PARTICULAR PURPOSE, (C) CONFORMITY TO MODELS OR SAMPLES OF MATERIALS AND/OR (D) CONDITION, THEREOF. (b) ASSIGNOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF ANY INFORMATION, RECORDS OR DATA NOW, HERETOFORE, OR HEREAFTER MADE AVAILABLE TO ASSIGNEE IN CONNECTION WITH THE AGREEMENT, INCLUDING WITHOUT LIMITATION ANY DESCRIPTION OF THE PURCHASED ASSETS, PRICING ASSUMPTIONS, POTENTIAL FOR PRODUCTION OF HYDROCARBONS FROM THE PURCHASED ASSETS, OR ANY OTHER MATTERS CONTAINED IN ANY MATERIAL FURNISHED BY ASSIGNOR TO ASSIGNEE OR ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ADVISORS OR REPRESENTATIVES. SECTION 2.02. PERMITTED ENCUMBRANCES. Without in any way limiting the provisions of Section 2.01 above, the Purchased Assets are assigned and conveyed by Assignor and accepted by Assignee expressly subject to the following (the "Permitted Encumbrances"): (a) liens for taxes not yet due or, if due, being challenged in good faith by appropriate proceedings; 3 50 (b) materialmen's, mechanic's and other similar liens or charges arising in the ordinary course of business for obligations that are not delinquent and that will be paid or discharged in the ordinary course of business or, if delinquent, that are being contested in good faith in the ordinary course of business; (c) easements, rights-of-way, servitudes, permits, surface leases and other rights granted to or reserved for third parties in respect of surface operations that do not materially interfere with operations of the portion of the Purchased Assets burdened thereby; (d) rights reserved to or vested in any governmental authority to control or regulate any of the Leases, Wells or Units and all applicable laws, rules, regulations and orders of such authorities; (e) any Title Defects that Assignor may have expressly waived in writing or which are deemed to have been waived under the Agreement; (f) liens arising under operating agreements, unitization and pooling agreements, order and statutes and production sales contracts securing amounts not yet due or, if due, being contested in good faith in the ordinary course of business; (g) the terms and conditions of the Leases and the Contracts; (h) royalties, overriding royalties, net profits interests, production payments, reversionary interests and similar interests; (i) conventional rights of reassignment requiring notice to the holders of the rights prior to surrendering or releasing a leasehold interest; (j) calls on production exercisable only at prices substantially equivalent to then current fair market value; and (k) all rights to consent by, required notices to, filings with or other actions by governmental entities in connection with the conveyance of oil and gas leases or interests therein, if they are customarily obtained subsequent to the conveyance. By Assignee's acceptance of this Assignment, Assignee assumes and agrees to keep and perform the obligations of Assignor under the Permitted Encumbrances which accrue from and after the Effective Date. ARTICLE III MISCELLANEOUS SECTION 3.01. FURTHER ASSURANCES. Without limiting the provisions of Article II above, Assignor covenants and agrees to execute and deliver to Assignee all such other and additional instruments and other documents, and take such other actions, as may be reasonably requested in order to more effectively assure to Assignee and Assignee's successors and assigns all of the 4 51 respective properties, rights, interests, estates and privileges herein and hereby granted or intended so to be granted. SECTION 3.02. SUCCESSORS AND ASSIGNS. All of the provisions hereof shall inure to the benefit of and be binding upon the respective successors and assigns of Assignor and Assignee. All references herein to either Assignor or Assignee shall include their respective successors and assigns. SECTION 3.03. COUNTERPARTS. This Assignment is being executed in several originals to be effective as of the Effective Date. ASSIGNOR: NEBRASKA PUBLIC GAS AGENCY By --------------------------------------- Name ------------------------------------- Title ------------------------------------ ASSIGNEE: HUMPHREY-HILL, L.P. By Humphrey Oil Corp., General Partner ----------------------------------------- Charles B. Humphrey, President 5 52 THE STATE OF______ ) ) ss. COUNTY OF_________ ) This instrument was acknowledged before me on __________, 2000 by _______________, as _______________ for NEBRASKA PUBLIC GAS AGENCY, a body corporate and politic under the laws of the State of Nebraska, on behalf of said corporation. ----------------------------- Notary Public My Commission Expires: - ------------------------------------ THE STATE OF________ ) ) ss. COUNTY OF___________ ) This instrument was acknowledged before me on __________, 2000 by Charles B. Humphrey, as President of HUMPHREY OIL CORP., General Partner of HUMPHREY-HILL, L.P. a Texas limited partnership, on behalf of said partnership. ----------------------------- Notary Public My Commission Expires: - ------------------------------------ After recording, please return instrument to: - ------------------------------------ - ------------------------------------ - ------------------------------------ - ------------------------------------ 6 53 EXHIBIT G SELLER'S DELIVERIES AT CLOSING 1. A certificate dated the Closing Date signed by the Secretary or an Assistant Secretary of Seller that Seller's Board of Directors has authorized the transaction contemplated by the Agreement and has authorized the executing officer or attorney in fact to execute all instruments contemplated by the transaction on behalf of Seller. 2. A certificate dated the Closing Date signed by the President or a Vice-President certifying in such detail as Buyer may reasonably request as to the fulfillment of the conditions specified in Section 10.02, Subsections (a) through (c). 3. The opinion of Seller's counsel, Kutak Rock LLP or such other counsel designated by Seller as Purchaser may approve, dated the Closing Date in a form approved by Purchaser at least three days prior to the Closing Date, which approval shall not be unreasonably withheld. 4. Letters-in-Lieu in a form approved by Seller at least three days prior to the Closing Date, executed by Seller. 54 EXHIBIT H PURCHASER'S DELIVERIES AT CLOSING 1. A certificate dated the Closing Date signed by the Secretary or an Assistant Secretary of Purchaser's General Partner that its Board of Directors has authorized the transaction contemplated by the Agreement and has authorized the executing officer or attorney in fact to execute all instruments contemplated by the transaction on behalf of the General Partner on behalf of Purchaser. 2. A certificate dated the Closing Date signed by the President or a Vice-President of Purchaser's General Partner certifying in such detail as Seller may reasonably request as to the fulfillment of the conditions specified in Section 10.01, Subsections (a) through (c). 3. The opinion of Purchaser's counsel, Mike Harrell or such other counsel designated by Purchaser as Seller may approve, dated the Closing Date in a form approved by Seller at least three days prior to the Closing Date, which approval shall not be unreasonably withheld. 55 SCHEDULE 4.02(E) LITIGATION AND CLAIMS o CASE #93-11958, 261ST COURT, TRAVIS COUNTY, TEXAS STYLED LADD PETROLEUM CORPORATION V. STATE OF TEXAS GENERAL LAND OFFICE AFFECTING STATE LEASES INCLUDED WITHIN THE GOMEZ SOUTH UNIT #1 (GOMEZ #1-D AND #1-A WELLS), THE FSOC - DIXEL GAS UNIT #2 (DIXEL #2 WELL), AND FSOC-LEON GAS UNIT (LEON #1 WELL), PECOS COUNTY, TEXAS. OTHER THAN THE ABOVE, NONE. 56 SCHEDULE 4.02(F) ENCUMBRANCES NONE 57 SCHEDULE 4.02(G) TAXES NONE 58 SCHEDULE 4.02(H) VIOLATIONS NONE 59 SCHEDULE 4.02(J) ROYALTIES 1. UNDER COVER OF LETTER DATED OCTOBER 25, 1999, KUTAK ROCK, AS COUNSEL FOR NPGA, FORWARDED TO THE TEXAS GENERAL LAND OFFICE CHECK IN THE AMOUNT OF $8,766.84. THIS PAYMENT REPRESENTED ROYALTIES UNDERPAID TO THE STATE FOR REPORTING PERIODS SEPTEMBER, 1989 THROUGH AUGUST, 1993, UNDER LEASES #M-41697, M-51858 AND M-67014, AS DETERMINED BY LIMITED REVIEW CONDUCTED BY THE ROYALTY MANAGEMENT DIVISION OF THE TEXAS GENERAL LAND OFFICE. THIS PAYMENT LEFT PENDING PENALTIES IN THE AMOUNT OF $1,612.66 AND INTEREST IN THE AMOUNT OF $6,766.84, WHICH HE GLO WAS ASKED TO WAIVE. THERE HAS NOT BEEN FINAL DISPOSITION OF THIS REQUEST. 2. UNDER COVER OF LETTER DATED FEBRUARY 25, 1999(SIC) (RECEIVED MARCH 3, 2000), STYLED NOTICE OF UNDERPAYMENT ON STATE LEASE (M-41697, 51858, 67014) NPGA WAS NOTIFIED OF AN UNDERPAYMENT OF ROYALTIES FOR THE REPORTING PERIODS SEPTEMBER, 1996 THROUGH AUGUST, 1998, UNDER LEASES #M-41697, M-51858 AND M-67014. THE TOTAL AMOUNT DUE FOR THIS REPORTED UNDERPAYMENT IS $37,817.24, BEING $28,891.64 IN ADDITIONAL ROYALTY, $3,300.83 IN PENALTY AND $5,624.77 IN INTEREST COMPUTED THROUGH MARCH 25, 2000. 3. STATE OF TEXAS GENERAL LAND OFFICE LEASES M-41697, M-51858, M-67014 AND M-39999 ARE INCLUDED IN LITIGATION BEING CASE #93-11958 IN THE 261ST COURT, TRAVIS COUNTY, TX, STYLED LADD PETROLEUM CORPORATION V. STATE OF TEXAS GENERAL LAND OFFICE. THE GENERAL LAND OFFICE HAS ADVISED THAT THE MAXIMUM EXPOSURE TO NPGA AND ASSIGNS IN REGARD TO THIS MATTER WOULD BE $281,000, INCLUDING PENALTIES AND INTEREST THROUGH JANUARY 31, 2000. OTHER THAN THE ABOVE, NONE. 60 SCHEDULE 4.02(K) PERMITS AND LICENSES NONE 61 SCHEDULE 4.02(L) GOVERNMENTAL AUDITS o THERE ARE NO ONGOING OR PLANNED AUDITS. SEE SCHEDULE 4.02(J) REGARDING AUDITS PREVIOUSLY CONDUCTED BY THE STATE OF TEXAS GENERAL LAND OFFICE, ON WHICH ROYALTIES, AND OR PENALTIES AND INTEREST AMOUNTS ARE STILL OUTSTANDING. 62 SCHEDULE 4.02(M) GAS BALANCES FOLLOWING ARE GAS IMBALANCES AS OF DECEMBER 31, 1999
WELL IMBALANCE IN MCF ---- ---------------- DIXEL RESOURCES NO. 2 (2,004) GOMEZ SOUTH UNIT #1-A (69,928) GOMEZ SOUTH UNIT #1-A 24,616 GOMEZ SOUTH UNIT #2 (23,756) GOMEZ SOUTH UNIT 3A #1 (309) DIXEL RESOURCES UNIT #1 (5,056) FSOC-LEON #1 1,097 SABINE #1 0 ------------ TOTAL IMBALANCE AT 12/31/99 (75,340)
63 SCHEDULE 4.02(N) ENVIRONMENTAL MATTERS NONE EX-10.27 3 CREDIT AGREEMENT 1 EXHIBIT 10.27 CREDIT AGREEMENT among HUMPHREY-HILL, L.P. as Borrower, BANK OF AMERICA, N.A., as Administrative Agent and The Financial Institutions Listed on Schedule 1 Hereto, as Banks $25,000,000 dated March 24, 2000 Banc of America Securities LLC as Sole Lead Arranger and Book Manager 2 TABLE OF CONTENTS ARTICLE 1 TERMS DEFINED SECTION 1.1 Definitions................................................................................1 SECTION 1.2 Accounting Terms and Determinations.......................................................19 SECTION 1.3 Petroleum Terms...........................................................................19 SECTION 1.4 Money.....................................................................................19 ARTICLE 2 THE CREDIT SECTION 2.1 Commitments...............................................................................20 SECTION 2.2 Notes.....................................................................................24 SECTION 2.3 Interest Rates; Payments..................................................................24 SECTION 2.4 Mandatory Prepayments During Borrowing Base Deficiency....................................26 SECTION 2.5 Mandatory Prepayments from Cash Flow......................................................27 SECTION 2.6 Voluntary Reduction of Commitments........................................................27 SECTION 2.7 Termination of Commitments; Final Maturity of Revolving Loan..............................27 SECTION 2.8 Unused Commitment Fee.....................................................................27 SECTION 2.9 Borrowing Base Increase Fee...............................................................28 SECTION 2.10 Letter of Credit Fee......................................................................28 SECTION 2.11 Agency and other Fees.....................................................................28 SECTION 2.12 Closing Fee...............................................................................28 ARTICLE 3 GENERAL PROVISIONS SECTION 3.1 Delivery and Endorsement of Notes.........................................................28 SECTION 3.2 General Provisions as to Payments.........................................................29 ARTICLE 4 CHANGE IN CIRCUMSTANCES SECTION 4.1 Increased Cost and Reduced Return.........................................................30 SECTION 4.2 Limitation on Types of Revolving Loans....................................................31 SECTION 4.3 Illegality................................................................................31 SECTION 4.4 Treatment of Affected Loans...............................................................32 SECTION 4.5 Compensation..............................................................................32 SECTION 4.6 Taxes.....................................................................................33 SECTION 4.7 Discretion of Banks as to Manner of Funding...............................................34 ARTICLE 5 BORROWING BASE SECTION 5.1 Reserve Report; Proposed Borrowing Base...................................................35
i 3 SECTION 5.2 Scheduled Redeterminations of the Borrowing Base; Procedures and Standards.............................................................................35 SECTION 5.3 Special Redetermination...................................................................36 SECTION 5.4 Quarterly Reduction.......................................................................36 SECTION 5.5 Borrowing Base Deficiency.................................................................36 SECTION 5.6 Initial Borrowing Base....................................................................36 ARTICLE 6 COLLATERAL AND GUARANTEES SECTION 6.1 Security..................................................................................36 SECTION 6.2 Guarantees................................................................................37 SECTION 6.3 Supporting Documents......................................................................37 ARTICLE 7 CONDITIONS PRECEDENT SECTION 7.1 Conditions to Initial Borrowing and Participation in Letter of Credit Exposure............38 SECTION 7.2 Conditions to Each Borrowing and each Letter of Credit....................................42 SECTION 7.3 Materiality of Conditions.................................................................42 ARTICLE 8 REPRESENTATIONS AND WARRANTIES SECTION 8.1 Existence and Power.......................................................................43 SECTION 8.2 Necessary Authorization; Contravention....................................................43 SECTION 8.3 Binding Effect............................................................................43 SECTION 8.4 Financial Information.....................................................................43 SECTION 8.5 Litigation................................................................................44 SECTION 8.6 ERISA.....................................................................................45 SECTION 8.7 Taxes and Filing of Tax Returns...........................................................45 SECTION 8.8 Ownership of Properties Generally.........................................................46 SECTION 8.9 Mineral Interests.........................................................................46 SECTION 8.10 Licenses, Permits, Etc....................................................................46 SECTION 8.11 Compliance with Law.......................................................................46 SECTION 8.12 Full Disclosure...........................................................................46 SECTION 8.13 Organizational Structure; Nature of Business..............................................47 SECTION 8.14 Environmental Matters.....................................................................47 SECTION 8.15 Burdensome Obligations....................................................................48 SECTION 8.16 Fiscal Year...............................................................................48 SECTION 8.17 No Default................................................................................48 SECTION 8.18 Government Regulation.....................................................................48 SECTION 8.19 Insider...................................................................................48 SECTION 8.20 Gas Balancing Agreements and Advance Payment Contracts....................................48 SECTION 8.21 Nebraska Acquisition Documents............................................................48
ii 4 ARTICLE 9 AFFIRMATIVE COVENANTS SECTION 9.1 Information...............................................................................49 SECTION 9.2. Business of Borrower......................................................................51 SECTION 9.3 Maintenance of Existence..................................................................51 SECTION 9.4 Title Data................................................................................51 SECTION 9.5 Right of Inspection.......................................................................52 SECTION 9.6 Maintenance of Insurance..................................................................52 SECTION 9.7 Payment of Taxes and Claims...............................................................52 SECTION 9.8 Compliance with Laws and Documents........................................................53 SECTION 9.9 Operation of Properties and Equipment.....................................................53 SECTION 9.10 Environmental Law Compliance..............................................................53 SECTION 9.11 ERISA Reporting Requirements..............................................................53 SECTION 9.12 Additional Documents......................................................................55 SECTION 9.13 Environmental Review......................................................................55 ARTICLE 10 NEGATIVE COVENANTS SECTION 10.1 Incurrence of Debt........................................................................55 SECTION 10.2 Distributions.............................................................................55 SECTION 10.3 Negative Pledge...........................................................................55 SECTION 10.4 Consolidations and Mergers................................................................56 SECTION 10.5 Asset Dispositions........................................................................56 SECTION 10.6 Amendments to Organizational Documents; Other Material Agreements.........................56 SECTION 10.7 Use of Proceeds...........................................................................56 SECTION 10.8 Investments...............................................................................56 SECTION 10.9 Transactions with Affiliates..............................................................56 SECTION 10.10 ERISA.....................................................................................57 SECTION 10.11 Hedge Transactions........................................................................57 SECTION 10.12 Fiscal Year...............................................................................57 SECTION 10.13 Change in Business........................................................................57 SECTION 10.14 Restricted Payments.......................................................................57 ARTICLE 11 FINANCIAL COVENANTS SECTION 11.1 Current Ratio of Borrower.................................................................57 SECTION 11.2 Maximum General and Administrative Expenses...............................................57
iii 5 ARTICLE 12 DEFAULTS SECTION 12.1 Events of Default.........................................................................58 ARTICLE 13 AGENTS SECTION 13.1 Appointment, Powers, and Immunities.......................................................60 SECTION 13.2 Reliance by Agents........................................................................60 SECTION 13.3 Defaults..................................................................................61 SECTION 13.4 Rights as Bank............................................................................61 SECTION 13.5 Indemnification...........................................................................61 SECTION 13.6 Non-Reliance on Agents and Other Banks....................................................62 SECTION 13.7 Resignation of Agents.....................................................................62 ARTICLE 14 MISCELLANEOUS SECTION 14.1 Notices...................................................................................62 SECTION 14.2 No Waivers................................................................................63 SECTION 14.3 Expenses; Indemnification.................................................................63 SECTION 14.4 Right of Set-off; Adjustments.............................................................64 SECTION 14.5 Amendments and Waivers....................................................................64 SECTION 14.6 Survival..................................................................................65 SECTION 14.7 Limitation on Interest....................................................................65 SECTION 14.8 Invalid Provisions........................................................................65 SECTION 14.9 Waiver of Consumer Credit Laws............................................................66 SECTION 14.10 Assignments and Participations............................................................66 SECTION 14.11 TEXAS LAW.................................................................................68 SECTION 14.12 Consent to Jurisdiction; Waiver of Immunities.............................................68 SECTION 14.13 Counterparts; Effectiveness...............................................................68 SECTION 14.14 No Third Party Beneficiaries..............................................................69 SECTION 14.15 COMPLETE AGREEMENT........................................................................69 SECTION 14.16 WAIVER OF JURY TRIAL......................................................................69
iv 6 EXHIBITS EXHIBIT A FORM OF FACILITY GUARANTEES EXHIBIT B FORM OF NOTE EXHIBIT C FORM OF OPERATING AGREEMENT EXHIBIT D FORM OF SECURITY AGREEMENT EXHIBIT E FORM OF REQUEST FOR BORROWING EXHIBIT F FORM OF REQUEST FOR LETTER OF CREDIT EXHIBIT G FORM OF CONTINUATION AND CONVERSION NOTICE EXHIBIT H FORM OF CERTIFICATE OF OWNERSHIP INTERESTS EXHIBIT I-1 FORM OF CERTIFICATE OF FINANCIAL OFFICER OF EXCO EXHIBIT I-2 FORM OF CERTIFICATE OF FINANCIAL OFFICER OF BORROWER EXHIBIT J FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT EXHIBIT K FORM OF PLEDGE AGREEMENT SCHEDULES SCHEDULE 1 FINANCIAL INSTITUTIONS SCHEDULE 2 LITIGATION SCHEDULE 3 ORGANIZATION STRUCTURE; NATURE OF BUSINESS v 7 CREDIT AGREEMENT THIS CREDIT AGREEMENT (this "Agreement") is entered into as of the 24th day of March, 2000, among HUMPHREY-HILL, L.P., a Texas limited partnership ("Borrower"), Bank of America, N.A., as Administrative Agent ("Administrative Agent"), and the financial institutions listed on Schedule 1 hereto as Banks (individually a "Bank" and collectively "Banks"). W I T N E S S E T H: WHEREAS, Borrower has requested that Banks provide Borrower with a revolving credit facility, and Banks are willing to provide such facility on the terms and subject to the conditions hereinafter set forth; and WHEREAS, pursuant to Article 13 of this Agreement, Bank of America, N.A. has been appointed Administrative Agent for Banks hereunder; and WHEREAS, Banc of America Securities LLC ("BAS") has been appointed Sole Lead Arranger and Book Manager for the credit facility provided hereunder. NOW, THEREFORE, in consideration of the premises, the representations, warranties, covenants and agreements contained herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Borrower, Administrative Agent and Banks agree as follows: ARTICLE 1 TERMS DEFINED SECTION 1.1 Definitions. The following terms, as used herein, have the following meanings: "Adjusted Eurodollar Rate" means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by Administrative Agent to be equal to the quotient obtained by dividing (a) the Eurodollar Rate for such Eurodollar Loan for such Interest Period by (b) 1.00 minus the Reserve Requirement for such Eurodollar Loan for such Interest Period. "Administrative Agent" means Bank of America, N.A. in its capacity as Administrative Agent for Banks hereunder or any successor thereto. "Advance Payment Contract" means any contract whereby Borrower or any Subsidiary of Borrower either (a) receives or becomes entitled to receive (either directly or indirectly) any payment (an "Advance Payment") to be applied toward payment of the purchase price of Hydrocarbons 1 8 produced or to be produced from Mineral Interests owned by Borrower or any Subsidiary of Borrower and which Advance Payment is paid or to be paid in advance of actual delivery of such production to or for the account of the purchaser regardless of such production, or (b) grants an option or right of refusal to the purchaser to take delivery of such production in lieu of payment, and, in either of the foregoing instances, the Advance Payment is, or is to be, applied as payment in full for such production when sold and delivered or is, or is to be, applied as payment for a portion only of the purchase price thereof or of a percentage or share of such production; provided that inclusion of the standard "take or pay" provision in any gas sales or purchase contract or any other similar contract shall not, in and of itself, constitute such contract as an Advance Payment Contract for the purposes hereof. "Affiliate" means, as to any Person, any Subsidiary of such Person, or any other Person which, directly or indirectly, controls, is controlled by, or is under common control with, such Person and, with respect to Borrower or any of its Subsidiaries, means any director or executive officer of Borrower or any of its Subsidiaries and any Person who holds five percent (5%) or more of the voting stock of Borrower or any of its Subsidiaries. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or partnership interests, or by contract or otherwise. "Agent" means Administrative Agent, Sole Lead Arranger and Book Manager, individually, and "Agents" means Administrative Agent, Sole Lead Arranger and Book Manager, collectively. "Agreement" means this Agreement as the same may hereafter be modified, amended or supplemented from time to time. "Applicable Environmental Law" means any Law, statute, ordinance, rule, regulation, order or determination of any Tribunal or any board of fire underwriters (or other body exercising similar functions), affecting any real or personal property owned, operated or leased by Borrower or any of its Subsidiaries or any other operation of Borrower or any of its Subsidiaries in any way pertaining to health, safety or the environment, including, without limitation, all applicable zoning ordinances and building codes, flood disaster Laws and health, safety and environmental Laws and regulations, and further including, without limitation, (a) the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (as amended from time to time, herein referred to as "CERCLA"), (b) the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Recovery Act of 1976, as amended by the Solid Waste Disposal Act of 1980, and the Hazardous and Solid Waste Amendments of 1984 (as amended from time to time, herein referred to as "RCRA"), (c) the Safe Drinking Water Act, as amended, (d) the Toxic Substances Control Act, as amended, (e) the Clean Air Act, as amended, (f) the Occupational Safety and Health Act of 1970, as amended, (g) the Laws, rules and regulations of any state having jurisdiction over any real or personal property owned, operated or leased by Borrower or any of its 2 9 Subsidiaries or any other operation of Borrower or any of its Subsidiaries which relates to health, safety or the environment, as each may be amended from time to time, and (h) any federal, state or municipal Laws, ordinances or regulations which may now or hereafter require removal of asbestos or other hazardous wastes or impose any liability related to asbestos or other hazardous wastes. The terms "hazardous substance", "petroleum", "release" and "threatened release" have the meanings specified in CERCLA, and the terms "solid waste" and "disposal" (or "disposed") have the meanings specified in RCRA; provided, however, in the event either CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment with respect to all provisions of this Agreement; and provided further that, to the extent the Laws of the state in which any real or personal property owned, operated or leased by Borrower or any of its Subsidiaries is located establish a meaning for "hazardous substance", "petroleum", "release", "solid waste" or "disposal" which is broader than that specified in either CERCLA or RCRA, such broader meaning shall apply in so far as such broader meaning is applicable to the real or personal property owned, operated or leased by Borrower or any of its Subsidiaries and located in such state. "Applicable Lending Office" means, for each Bank and for each Type of Revolving Loan, the Domestic Lending Office or Eurodollar Lending Office of such Bank (or of an Affiliate of such Bank) designated for such Type of Revolving Loan set forth on Schedule 1 hereto or such other office of such Bank (or an Affiliate of such Bank) as such Bank may from time to time specify to Administrative Agent and Borrower by written notice in accordance with the terms hereof as the office by which its Revolving Loans of such Type are to be made and maintained. "Applicable Margin" means, on any date, with respect to each Eurodollar Loan, an amount determined by reference to the ratio of Outstanding Credit to the Borrowing Base on such date in accordance with the table below:
- ------------------------------------------------------------------------------------------------ Ratio of Outstanding Applicable Margin for Credit to Borrowing Base Eurodollar Loans - ------------------------------------------------------------------------------------------------ <.75 to 1 1.50% - ------------------------------------------------------------------------------------------------ >=.75 to 1 1.75% - ------------------------------------------------------------------------------------------------
"Approved Petroleum Engineer" means Lee Keeling and Associates, Inc. or any other reputable firm of independent petroleum engineers as shall be selected by Borrower and approved by Required Banks, such approval not to be unreasonably withheld. "Assignment and Acceptance Agreement" has the meaning given such term in Section 14.10(a). "Authorized Officer" means, as to any Person, its Chief Executive Officer, its President, its Chief Financial Officer, any of its Vice Presidents, its Treasurer or its corporate Secretary. 3 10 "Availability" means, as of any date, the remainder of (a) the Borrowing Base in effect on such date, minus (b) the Outstanding Credit on such date. "Bank" means any financial institution reflected on Schedule 1 hereto as having a Commitment and its successors and permitted Eligible Assignees, and "Banks" shall mean all Banks. "Bank of America" means Bank of America, N.A., a national banking association. "Base Rate" means, the floating rate of interest established from time to time by Administrative Agent as its "prime rate" of interest, which rate may not be the lowest rate of interest charged by Administrative Agent, each change in the Base Rate to become effective without notice to Borrower on the effective date of each such change. "Base Rate Loan" means the portion of the principal of the Revolving Loan bearing interest with reference to the Base Rate. "Book Manager" means Banc of America Securities LLC in its capacity as Book Manager for the credit facility provided hereunder or any successor thereto. "Borrower" means Humphrey-Hill, L.P., a Texas limited partnership. "Borrowing" means any disbursement to Borrower under, or to satisfy the obligations of Borrower or any of its Subsidiaries under, any of the Loan Papers. Any Borrowing of Base Rate Loans is referred to herein as a "Base Rate Borrowing," and any Borrowing of Eurodollar Loans is referred to herein as a "Eurodollar Borrowing." "Borrowing Base" means the loan value attributable to certain of Borrower's Mineral Interests as determined in accordance with Article 5 hereof. "Borrowing Base Deficiency" means, as of any date, the amount, if any, by which the Outstanding Credit on such date exceeds the Borrowing Base in effect on such date; provided, that, for purposes of determining the existence and amount of any Borrowing Base Deficiency, Letter of Credit Exposure will not be deemed to be outstanding to the extent it is secured by cash in the manner contemplated by Section 2.1(b). "Borrowing Base Properties" means all Mineral Interests evaluated by Banks for purposes of establishing the Borrowing Base. The Borrowing Base Properties on the date hereof constitute all of the Mineral Interests described in the Initial Reserve Report. "Borrowing Date" means the Eurodollar Business Day or the Domestic Business Day, as the case may be, upon which the proceeds of any Borrowing are made available to Borrower or to satisfy any obligation of Borrower or any of its Subsidiaries. 4 11 "Change of Control" means the occurrence of (a) any event or circumstance which, for any reason (including by operation of law), results in any of (i) Taurus ceasing to own on a fully diluted basis fifty percent (50%) of the limited partnership interests in Borrower free and clear of all Liens (ii) EXCO ceasing to own on a fully diluted basis one hundred percent (100%) of the general partnership interests in Borrower free and clear of all Liens, (b) an EXCO Change of Control, or (c) a Taurus Change of Control. "Closing Date" means March 24, 2000. "Code" means the Internal Revenue Code of 1986, as amended. "Commitment" means, with respect to any Bank, the commitment of such Bank to lend its Commitment Percentage of the Total Commitment to Borrower pursuant to Section 2.1 hereof. The amount of each Bank's Commitment is initially the amount set forth opposite such Bank's name on Schedule 1 hereto, as such Commitment may be terminated or reduced from time to time in accordance with the provisions hereof; provided, that, after giving effect to any Assignment and Acceptance Agreement, the Commitment of each Bank shall be the amount set forth in the Register maintained by Administrative Agent pursuant to Section 14.10(b). "Commitment Percentage" means, with respect to each Bank, initially, the Commitment Percentage for such Bank set forth on Schedule 1 hereto; provided, that, after giving effect to any Assignment and Acceptance Agreement, the Commitment Percentage of each Bank shall be the amount set forth in the Register maintained by Administrative Agent pursuant to Section 14.10(b). "Consolidated Current Assets" means, for any Person at any time, the current assets of such Person and its Consolidated Subsidiaries at such time. "Consolidated Current Liabilities" means, for any Person at any time, the current liabilities of such Person and its Consolidated Subsidiaries at such time. "Consolidated Subsidiary" or "Consolidated Subsidiaries" means, for any Person, any Subsidiary or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements. "Continue", "Continuation", and "Continued" shall refer to the continuation pursuant to Section 2.3(c) hereof of a Eurodollar Loan from one Interest Period to the next Interest Period. "Convert", "Conversion", and "Converted" shall refer to a conversion pursuant to Section 2.3(c) hereof of one Type of Revolving Loan into another Type of Revolving Loan. "Credit Parties" means Borrower, each Subsidiary of Borrower and EXCO, collectively, and "Credit Party" means any such party. 5 12 "Debt" means, for any Person at any time, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all other indebtedness (including capitalized lease obligations, other than usual and customary oil and gas leases) of such Person on which interest charges are customarily paid or accrued, (d) all Guarantees by such Person, (e) the unfunded or unreimbursed portion of all letters of credit issued for the account of such Person, (f) any amount owed by such Person representing the deferred purchase price of property or services other than accounts payable incurred in the ordinary course of business and in accordance with customary trade terms and which have not been outstanding for more than ninety (90) days past the invoice date, (g) all obligations of such Person secured by a Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non-recourse to the credit of that Person, and (h) all liability of such Person as a general partner of a partnership for obligations of such partnership of the nature described in (a) through (g) preceding. "Dedication Percentage" means (a) 75% during any Fiscal Quarter if the daily average NYMEX near month price for natural gas (the "Average Index Price") for the immediately preceding Fiscal Quarter was $3.00 per mmbtu or less, and (b) 60% during any Fiscal Quarter if the Average Index Price for the immediately preceding Fiscal Quarter was $3.00 or greater. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Distribution" by any Person, means (a) with respect to any stock issued by such Person or any partnership, joint venture, limited liability company, membership or other interest of such Person, the retirement, redemption, purchase, or other acquisition for value of any such stock or partnership, joint venture, limited liability company, membership or other interest, (b) the declaration or payment of any dividend or other distribution on or with respect to any stock, partnership, joint venture, limited liability company, membership or other interest of any Person, (c) any other payment by such Person with respect to such stock, partnership, joint venture, limited liability company, membership or other interest of such Person, and (d) the payment of any management fee, consulting fee, overhead reimbursement or other fee or payment of any kind to any holder of any stock, partnership, joint venture, limited liability company, membership or other interest of such Person or to any Affiliate of such holder; provided, that "Distribution" will not include payments made by Borrower to EXCO under the Operating Agreement "Dollars" means the lawful currency of the United States of America. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which national banks in Dallas, Texas, are authorized by Law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address identified on Schedule 1 hereto as its Domestic Lending Office or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to Borrower and Administrative Agent. 6 13 "Eligible Assignee" means (i) a Bank, (ii) an Affiliate of a Bank, and (iii) any other Person approved by Administrative Agent and, unless an Event of Default has occurred and is continuing at the time any assignment is effected in accordance with Section 14.10, such approval not to be unreasonably withheld or delayed by Borrower and such approval to be deemed given by Borrower if no objection is received by the assigning Bank and Administrative Agent from Borrower within two (2) Domestic Business Days after notice of such proposed assignment has been provided by the assigning Bank to Borrower; provided, however, that neither Borrower nor an Affiliate of Borrower shall qualify as an Eligible Assignee. "Environmental Complaint" means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, proceeding, judgment, letter or other communication from any federal, state or municipal authority or any other party against Borrower or any of its Subsidiaries involving (a) a Hazardous Discharge from, onto or about any real property owned, leased or operated at any time by Borrower or any of its Subsidiaries, (b) a Hazardous Discharge caused, in whole or in part, by Borrower or any of its Subsidiaries or by any Person acting on behalf of or at the instruction of Borrower or any of its Subsidiaries, or (c) any violation of any Applicable Environmental Law by Borrower or any of its Subsidiaries. "Environmental Liability" means any liability, loss, fine, penalty, charge, Lien, damage, cost, or expense of any kind that results directly or indirectly, in whole or in part (a) from the violation of any Applicable Environmental Law, (b) from the release or threatened release of any Hazardous Substance, (c) from removal, remediation, or other actions in response to the release or threatened release of any Hazardous Substance, (d) from actual or threatened damages to natural resources, (e) from the imposition of injunctive relief or other orders, (f) from personal injury, death, or property damage which occurs as a result of Borrower's or any of its Subsidiaries' use, storage, handling, or the release or threatened release of a Hazardous Substance, or (g) from any environmental investigation performed at, on, or for any real property owned by Borrower or any of its Subsidiaries. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rulings and regulations issued thereunder as from time to time in effect. "ERISA Affiliate" means any Person that for purposes of Title IV of ERISA is under common control with Borrower as determined under Section 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and rulings issued thereunder. "ERISA Event" means, with respect to Borrower and any ERISA Affiliate, (a) a "reportable event" as defined in section 4043 of ERISA (other than a reportable event not subject to the provision for thirty (30) days notice to the PBGC under regulations issued under section 4043 of ERISA), (b) the withdrawal of Borrower or any ERISA Affiliate from a Plan during a plan year in which it was a "substantial employer" as defined in section 4001(a)(2) of ERISA, (c) the filing of a notice of intent to terminate a Plan under section 4041(c) of ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC, (e) the failure to make required contributions which could result in the imposition of a Lien under section 412 of the Internal Revenue Code of 1986, as amended or section 7 14 302 of ERISA, or (f) any other event or condition which might reasonably be expected to constitute grounds under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or the imposition of any liability under Title IV of ERISA other than PBGC premiums due but not delinquent under Section 4007 of ERISA. "Eurodollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in the applicable eurodollar interbank market. "Eurodollar Lending Office" means, as to each Bank, its office, branch or Affiliate located at its address identified on Schedule 1 hereto as its Eurodollar Lending Office or such other office, branch or Affiliate of such Bank as it may hereafter designate as its Eurodollar Lending Office by notice to Borrower and Administrative Agent. "Eurodollar Loans" means Revolving Loans that bear interest at rates based upon the Adjusted Eurodollar Rate. "Eurodollar Rate" means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two (2) Eurodollar Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "Eurodollar Rate" shall mean, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two (2) Eurodollar Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates (rounded upwards, if necessary, to the nearest 1/100 of 1%). "Events of Default" has the meaning set forth in Section 12.1. "EXCO" means EXCO Resources, Inc., a Texas corporation. "EXCO Change of Control" will be deemed to have occurred if (a) as of any date, more than fifty percent (50%) of the Persons comprising the Board of Directors of EXCO were not members of the Board of Directors of EXCO one year prior to such date, or (b) Douglas H. Miller shall cease, for any reason, to be actively employed on a full time basis as the Chief Executive Officer of EXCO. "Exhibit" refers to an exhibit attached to this Agreement and incorporated herein by reference, unless specifically provided otherwise. 8 15 "Facility Guarantees" means Guarantees substantially in the form of Exhibit A to be executed by EXCO and each Subsidiary of Borrower in favor of Administrative Agent for the ratable benefit of the Banks pursuant to which each EXCO and each Subsidiary of Borrower jointly and severally guarantees payment and performance in full of the Obligations. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day; provided, that, (a) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (b) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate charged to Administrative Agent (in its individual capacity) on such day on such transactions as determined by Administrative Agent. "Financial Officer" of any Person means its Chief Financial Officer; provided, that if no Person serves in such capacity, "Financial Officer" shall mean the highest ranking executive officer of such Person with responsibility for accounting, financial reporting, cash management and similar functions. "Fiscal Quarter" means the three (3) month periods ending on March 31, June 30, September 30 and December 31 of each Fiscal Year. "Fiscal Year" means a twelve (12) month period ending December 31. "GAAP" means those generally accepted accounting principles and practices which are recognized as such by the American Institute of Certified Public Accountants acting through its Accounting Principles Board or by the Financial Accounting Standards Board or through other appropriate boards or committees thereof and which are consistently applied for all periods after the date hereof so as to properly reflect the financial condition, and the results of operations and changes in financial position, of a Person and its Consolidated Subsidiaries, except that any accounting principle or practice required to be changed by the said Accounting Principles Board or Financial Accounting Standards Board (or other appropriate board or committee of the said Boards) in order to continue as a generally accepted accounting principle or practice may be so changed. "Gas Balancing Agreement" means any agreement or arrangement whereby Borrower or any of its Subsidiaries, or any other party having an interest in any Hydrocarbons to be produced from Mineral Interests in which Borrower or any of its Subsidiaries owns an interest, has a right to take more than its proportionate share of production therefrom. "Governmental Authority" means any court or governmental department, commission, board, bureau, agency, or instrumentality of any nation or of any province, state, commonwealth, nation, territory, possession, county, parish, or municipality, whether now or hereafter constituted or existing. 9 16 "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions, by "comfort letter" or other similar undertaking of support or otherwise), or (b) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. "Hazardous Discharge" means any releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping of any Hazardous Substance from or onto any real property owned, leased or operated at any time by Borrower or any of its Subsidiaries or any real property owned, leased or operated by any other party. "Hazardous Substance" means any pollutant, toxic substance, hazardous waste, compound, element or chemical that is defined as hazardous, toxic, noxious, dangerous or infectious pursuant to any Applicable Environmental Law or which is otherwise regulated by any Applicable Environmental Law or is required to be investigated and/or remediated by or pursuant to any Applicable Environmental Law. "Hedge Transaction" means any commodity, interest rate, currency or other swap, option, collar, futures contract or other contract pursuant to which a Person hedges risks related to commodity prices, interest rates, currency exchange rates, securities prices or financial market conditions. Hedge Transactions expressly includes Oil and Gas Hedge Transactions. "Hill" means J.M. Hill. "Humphrey" means Charles Humphrey. "Humphrey Oil" means Humphrey Oil Corporation, a Texas corporation. "Hydrocarbons" means oil, gas, casinghead gas, drip gasolines, natural gasoline, condensate, distillate, and all other liquid and gaseous hydrocarbons produced or to be produced in conjunction therewith, and all products, by-products and all other substances derived therefrom or the processing thereof, and all other minerals and substances, including, but not limited to, sulphur, lignite, coal, uranium, thorium, iron, geothermal steam, water, carbon dioxide, helium, and any and all other 10 17 minerals, ores, or substances of value, and the products and proceeds therefrom, including, without limitation, all gas resulting from the in-situ combustion of coal or lignite. "Incremental Availability" means the incremental increase in Availability resulting from any increase in the Borrowing Base hereunder. "Initial Borrowing Base" means a Borrowing Base in the amount of $7,000,000, which shall be in effect during the period commencing on the Closing Date and continuing until the first Redetermination after the Closing Date. "Initial Reserve Report" means an engineering analysis of the Nebraska Properties, prepared by EXCO Resources, Inc. dated as of January 1, 2000, a copy of which has been provided to Administrative Agent and each Bank. "Interest Period" means, with respect to each Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending one (1), two (2), three (3), and, if available to all Banks, six (6) months thereafter, as Borrower may elect in the applicable Request for Borrowing; provided that: (i) any Interest Period which would otherwise end on a day which is not a Eurodollar Business Day shall be extended to the next succeeding Eurodollar Business Day unless such Eurodollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Eurodollar Business Day; (ii) any Interest Period which begins on the last Eurodollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (iii) below, end on the last Eurodollar Business Day of a calendar month; (iii) if any Interest Period includes a date on which any payment of principal of any Eurodollar Loan is required to be made hereunder, but does not end on such date, then (A) the principal amount of each Eurodollar Loan required to be repaid on such date shall have an Interest Period ending on such date, and (B) the remainder of each such Eurodollar Loan shall have an Interest Period determined as set forth above; and (iv) no Interest Period applicable to a Eurodollar Loan shall extend past the Termination Date. "Investment" means, with respect to any Person, any loan, advance, extension of credit, capital contribution to, investment in or purchase of the stock or other securities of, or interests in, any other Person; provided, that "Investment" shall not include current customer and trade accounts which are payable in accordance with customary trade terms. 11 18 "Laws" means all applicable statutes, laws, ordinances, regulations, orders, writs, injunctions, or decrees of any state, commonwealth, nation, territory, possession, county, township, parish, municipality or Governmental Authority. "Letters of Credit" means letters of credit issued for the account of Borrower pursuant to Section 2.1(b). "Letter of Credit Exposure" of any Bank means such Bank's aggregate participation in the unfunded portion and the funded but unreimbursed portion of Letters of Credit outstanding at any time. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, financing statement, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, Borrower and its Subsidiaries shall be deemed to own subject to a Lien any asset which is acquired or held subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan Papers" means this Agreement, the Notes, the Facility Guarantees, each Security Agreement, all Mortgages now or at any time hereafter delivered pursuant to Section 6.1, and all other certificates, documents or instruments delivered in connection with this Agreement, as the foregoing may be amended from time to time. "Margin Regulations" means Regulations G, T, U and X of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Margin Stock" means "margin stock" as defined in Regulation U. "Material Adverse Change" means any circumstance or event that has had or would reasonably be expected to have (a) a material and adverse effect on the financial condition, business operations, prospects, properties or assets of any Credit Party, including, without limitation, any circumstances or event that has had, or would reasonably be expected to have a material adverse effect on the Nebraska Properties, (b) an adverse effect on (i) the validity and enforceability of any Loan Paper, or (ii) the perfection or priority of any Lien purported to be created thereby, or (c) a material adverse effect on the right or ability of any Credit Party to fully, completely and timely pay and perform its obligations under the Loan Papers. "Material Agreement" means any material written or oral agreement, contract, commitment, or understanding to which a Person is a party, by which such Person is directly or indirectly bound, or to which any assets of such Person may be subject, which involves the payment of $50,000 or more in any Fiscal Year or goods or services with a value in any Fiscal Year of $50,000 or more and is not cancelable by such Person upon notice of thirty (30) days or less without liability for further payment other than nominal penalty. 12 19 "Material Gas Imbalance" means, with respect to all Gas Balancing Agreements to which Borrower or any of its Subsidiaries is a party or by which any Mineral Interest owned by Borrower or any of its Subsidiaries is bound, a net gas imbalance to Borrower or any of its Subsidiaries in excess of $250,000. "Maximum Lawful Rate" means, for each Bank, the maximum rate (or, if the context so permits or requires, an amount calculated at such rate) of interest which, at the time in question would not cause the interest charged on the portion of the Revolving Loans owed to such Bank at such time to exceed the maximum amount which such Bank would be allowed to contract for, charge, take, reserve, or receive under applicable Laws after taking into account, to the extent required by applicable Laws, any and all relevant payments or charges under the Loan Papers. To the extent the Laws of the State of Texas are applicable for purposes of determining the "Maximum Lawful Rate," such term shall mean the "interest rate ceiling" from time to time in effect under Chapter 1D of the Texas Credit Title, Revised Civil Statutes of Texas, 1925, as amended, substituted for or restated, or, if permitted by applicable Law and effective upon the giving of the notices required by such Chapter 1D (or effective upon any other date otherwise specified by applicable Law), the "quarterly ceiling" or "annualized ceiling" from time to time in effect under such Chapter 1D, whichever Administrative Agent (with the approval of Required Banks) shall elect to substitute for the "interest rate ceiling," and vice versa, each such substitution to have the effect provided in such Chapter 1D, and Administrative Agent (with the approval of Required Banks) shall be entitled to make such election from time to time and one or more times and, without notice to Borrower, to leave any such substitute rate in effect for subsequent periods in accordance with such Chapter 1D. "Mineral Interests" means rights, estates, titles, and interests in and to oil and gas leases and any oil and gas interests, royalty and overriding royalty interest, production payment, net profits interests, oil and gas fee interests, and other rights therein, including, without limitation, any reversionary or carried interests relating to the foregoing, together with rights, titles, and interests created by or arising under the terms of any unitization, communization, and pooling agreements or arrangements, and all properties, rights and interests covered thereby, whether arising by contract, by order, or by operation of Laws, which now or hereafter include all or any part of the foregoing. "Monthly Date" means the last day of each calendar month. "Mortgages" means all mortgages, deeds of trusts, security agreements, pledge agreements, collateral mortgages, collateral chattel mortgages, financing statements and other documents, instruments and agreements evidencing, creating, perfecting or otherwise establishing the Liens on Mineral Interests required by Section 6.1 hereof. All Mortgages shall be in form and substance reasonably satisfactory to Administrative Agent. "Nebraska Acquisition" means the proposed purchase by Borrower of the Nebraska Properties pursuant to the Nebraska Acquisition Agreement. 13 20 "Nebraska Acquisition Agreement" means that certain Purchase and Sale Agreement dated February 22, 2000, by and between Borrower and Nebraska Public Gas Agency, a body politic and corporation under the laws of the State of Nebraska. "Nebraska Acquisition Documents" means the Nebraska Acquisition Agreement and all agreements, assignments, deeds, conveyances, certificates and other documents and instruments now or hereafter executed and delivered by or between Borrower and Nebraska Public Gas Agency, a body politic and corporation under the laws of the State of Nebraska, pursuant to the Nebraska Acquisition Agreement or in connection with the Nebraska Acquisition. "Nebraska Properties" means the Mineral Interests to be acquired by Borrower on the Closing Date from Nebraska Public Gas Agency, a body politic and corporation under the laws of the State of Nebraska, pursuant to the Nebraska Acquisition Agreement. "Net Revenues" means, for Borrower and its Consolidated Subsidiaries for a month (a) the gross cash receipts of Borrower and its Consolidated Subsidiaries for such month from whatever source derived, minus (b) the sum of each of the following for such month (i) severance taxes payable in cash with respect to Hydrocarbons produced from Borrower's and its Subsidiaries' Mineral Interests during such month, (ii) lease operating expenses (including payments under the Operating Agreement) paid by Borrower and its Subsidiaries in cash during such month, and (iii) ad valorem tax expense accrual attributable to Borrower and its Subsidiaries' Mineral Interests for such month. "Note" means a promissory note of Borrower payable to the order of a Bank, in substantially the form of Exhibit B hereto, in the amount of such Bank's Commitment, evidencing the obligation of Borrower to repay to such Bank the Revolving Loans made by such Bank, together with all modifications, extensions, renewals and rearrangement thereof, and "Notes" means all of such Notes collectively. "Obligations" means all present and future indebtedness, obligations and liabilities, and all renewals and extensions thereof, or any part thereof, of any Credit Party to Administrative Agent or to any Bank or any Affiliate of any Bank arising pursuant to the Loan Papers or pursuant to any Hedge Transaction entered into with any Bank or any Affiliate of any Bank, and all interest accrued thereon and costs, expenses, and attorneys' fees incurred in the enforcement or collection thereof, regardless of whether such indebtedness, obligations and liabilities are direct, indirect, fixed, contingent, liquidated, unliquidated, joint, several or joint and several. "Oil & Gas Hedge Transaction" means a Hedge Transaction pursuant to which any Person hedges the price to be received by it for future production of Hydrocarbons. "Operating Agreement" means the existing Operating Agreements encumbering the Nebraska Properties, a copy of each of which is attached hereto as Exhibit C. 14 21 "Outstanding Credit" means, on any date, the sum of (a) aggregate outstanding principal balance of the Revolving Loan on such date, including the amount of any Borrowing to be made on such date, and (b) the aggregate outstanding Letter of Credit Exposure on such date, including Letter of Credit Exposure attributable to Letters of Credit to be issued on such date. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Encumbrances" means with respect to any asset: (a) Liens (if any) securing the Obligations in favor of Banks; (b) Minor defects in title which do not secure the payment of money and otherwise have no material adverse effect on the value or the operation of the subject property, and for the purposes of this Agreement, a minor defect in title shall include, but not be limited to, easements, rights-of-way, servitudes, permits, surface leases and other similar rights in respect of surface operations, and easements for pipelines, streets, alleys, highways, telephone lines, power lines, railways and other easements and rights-of-way, on, over or in respect of any of the properties of Borrower or any of its Subsidiaries that are customarily granted in the oil and gas industry; (c) Inchoate statutory or operators' liens securing obligations for labor, services, materials and supplies furnished to Mineral Interests in the ordinary course of business which are not delinquent (except to the extent permitted by Section 9.7); (d) Mechanic's, materialmen's, warehouseman's, journeyman's and carrier's liens and other similar liens arising by operation of Law in the ordinary course of business which are not delinquent (except to the extent permitted by Section 9.7); (e) Liens for Taxes or assessments not yet due or not yet delinquent, or, if delinquent, that are being contested in good faith in the normal course of business by appropriate action, as permitted by Section 9.7; and (f) Lease burdens payable to third parties encumbering Mineral Interests at the time such Mineral Interests are acquired by Borrower or its Subsidiaries and which are deducted in the calculation of discounted present value in the Reserve Report including, without limitation, any royalty, overriding royalty, net profits interest, production payment, carried interest or reversionary working interest. "Permitted Investments" means (a) readily marketable direct obligations of the United States of America (or investments in mutual funds or similar funds which invest solely in such obligations), (b) fully insured time deposits and certificates of deposit with maturities of one year or less of any commercial bank operating in the United States having capital and surplus in excess of $500,000,000, 15 22 and (c) commercial paper of a domestic issuer if at the time of purchase such paper is rated in one of the two highest ratings categories of Standard and Poor's Corporation or Moody's Investors Service. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a Government Authority. "Plan" means an employee benefit plan within the meaning of section 3(3) of ERISA, and any other similar plan, policy or arrangement, including an employment contract, whether formal or informal and whether legally binding or not, under which Borrower or an ERISA Affiliate of Borrower has any current or future obligation or liability or under which any present or former employee of Borrower or an ERISA Affiliate of Borrower, or such present or former employee's dependents or beneficiaries, has any current or future right to benefits resulting from the present or former employee's employment relationship with Borrower or an ERISA Affiliate of Borrower. "Pledge Agreement" means a Pledge Agreement substantially in the form of Exhibit K to be executed by Taurus pursuant to which Taurus pledges its limited partnership interest in Borrower to Administrative Agent to secure the Obligations. "Proved Mineral Interests" means, collectively, Proved Producing Mineral Interests, Proved Nonproducing Mineral Interests, and Proved Undeveloped Mineral Interests. "Proved Nonproducing Mineral Interests" means all Mineral Interests which constitute proved developed nonproducing reserves. "Proved Producing Mineral Interests" means all Mineral Interests which constitute proved developed producing reserves. "Proved Undeveloped Mineral Interests" means all Mineral Interests which constitute proved undeveloped reserves. "Quarterly Date" means the last day of each March, June, September and December. "Quarterly Reduction" means the scheduled reduction in the Borrowing Base by the Quarterly Reduction Amount on each Quarterly Date pursuant to Section 5.4 hereof. "Quarterly Reduction Amount" means an amount determined by Administrative Agent in its sole discretion at the time of, and in connection with, each Redetermination of the Borrowing Base; provided, that such reduction shall not be less than $200,000. The initial Quarterly Reduction Amount shall be $200,000. "Recognized Value" means, with respect to oil and gas properties, the discounted present value of the estimated net cash flow to be realized from the production of Hydrocarbons from such 16 23 oil and gas properties as determined by Bank of America for purposes of determining the portion of the Borrowing Base which it attributed to such oil and gas properties in connection with the most recent Redetermination of the Borrowing Base as of the date "Recognized Value" is being determined. "Redetermination" means (i) any Scheduled Redetermination, or (ii) any Special Redetermination. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 221, as in effect from time to time. "Request for Borrowing" has the meaning set forth in Section 2.1(d). "Required Banks" means Banks holding at least sixty-six and sixty-seven one hundredths of one percent (66.67%) of the Total Commitment. "Reserve Report" means an unsuperseded engineering analysis of the Mineral Interests owned by Borrower, in form and substance reasonably acceptable to Required Banks, prepared in accordance with customary and prudent practices in the petroleum engineering industry and Financial Accounting Standards Board Statement 69. Each Reserve Report required to be delivered by March 1 of each year pursuant to Section 5.1 shall be prepared by the Approved Petroleum Engineer. Each other Reserve Report shall be prepared by EXCO's in-house engineering staff. Notwithstanding the foregoing, in connection with any Special Redetermination requested by Borrower, the Reserve Report shall be in form and scope mutually acceptable to Borrower and Required Banks. Until superseded the Initial Reserve Report shall be considered a Reserve Report. "Reserve Requirement" means, at any time, the maximum rate at which reserves (including, without limitation, any marginal, special, supplemental, or emergency reserves) are required to be maintained under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) by member banks of the Federal Reserve System against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks with respect to (i) any category of liabilities which includes deposits by reference to which the Adjusted Eurodollar Rate is to be determined, or (ii) any category of extensions of credit or other assets which include Eurodollar Loans. The Adjusted Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Reserve Requirement. "Restricted Payment" means any payment (whether in cash or other property) by Borrower or any of its subsidiaries of any type, and whether or not paid to an Affiliate, and including any payment of expenses, costs, liabilities, obligations, Distributions or Debt, other than (a) payments of the Obligations, (b) payments of lease operating expenses, severance and ad valorem taxes, (c) payments of Distributions expressly permitted by Section 10.2, (d) payments of general and 17 24 administrative expenses expressly permitted by Section 11.2, and (e) other payments in an amount not exceeding $25,000 in any Fiscal Year. "Revolving Loan" means the revolving credit loan in an aggregate amount outstanding at any time not to exceed the amount of the Total Commitment then in effect less the amount of the Letter of Credit Exposure then outstanding to be made by Banks to Borrower in accordance with Section 2.1 hereof. The Revolving Loan may be comprised of the Base Rate Loan and one or more Eurodollar Loans as Borrower may select in a Request for Borrowing or a Notice of Continuation or Conversion. "Schedule" means a "schedule" attached to this Agreement and incorporated herein by reference, unless specifically indicated otherwise. "Scheduled Redetermination" means any Redetermination of the Borrowing Base pursuant to Section 5.2. "Section" refers to a "section" or "subsection" of this Agreement unless specifically indicated otherwise. "Security Agreement" means a Security Agreement substantially in the form of Exhibit D to be executed by Borrower and Subsidiaries of Borrower to Administrative Agent pursuant to which Borrower and such Subsidiaries grant first and prior Liens in substantially all of their personal property assets to Administrative Agent for the ratable benefit of the Banks to secure the Obligations. "Sole Lead Arranger" means Banc of America Securities LLC in its capacity as the Sole Lead Arranger for the credit facility provided hereunder and any successor thereto. "Special Redetermination" means any Redetermination of the Borrowing Base pursuant to Section 5.3. "Subsidiary" means, for any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions (including that of a general partner) are at the time directly or indirectly owned, collectively, by such Person and any Subsidiaries of such Person. The term Subsidiary shall include Subsidiaries of Subsidiaries (and so on). "Taurus" means Taurus Acquisition, Inc., a Texas corporation. "Taurus Change of Control" means the occurrence of any event or circumstance which, for any reason (including by operation of law), results in EXCO ceasing to own on a fully-diluted basis, one hundred percent (100%) of the outstanding capital stock of Taurus of every class, free and clear of all Liens. 18 25 "Taxes" means all taxes, assessments, filing or other fees, levies, imposts, duties, deductions, withholdings, stamp taxes, capital transaction taxes, foreign exchange taxes or other charges, or other charges of any nature whatsoever, from time to time or at any time imposed by Law or any Governmental Authority. "Tax" means any one of the foregoing. "Termination Date" means March 24, 2003. "Title Review Limit" has the meaning assigned to such term in Section 6.3. "Total Commitment" means the Commitments of all Banks in an initial aggregate amount of $25,000,000 as such amount shall be reduced from time to time pursuant to Section 2.6. "Tribunal" means any state, commonwealth, federal, foreign, territorial or other court or governmental body, subdivision, agency, department, commission, board, bureau or instrumentality of a governmental body. "Type" shall mean any type of Revolving Loan (i.e., the Base Rate Loan or Eurodollar Loan). SECTION 1.2 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP, applied on a basis consistent with the most recent audited consolidated financial statements of Borrower delivered to Banks prior to the date hereof except for changes concurred in by Borrower's independent certified public accountants and which are disclosed to Administrative Agent on the next date on which financial statements are required to be delivered to Banks pursuant to Section 9.1. SECTION 1.3 Petroleum Terms. As used herein, the terms "proved reserves," "proved developed reserves," "proved developed producing reserves," "proved developed nonproducing reserves," and "proved undeveloped reserves" have the meaning given such terms from time to time and at the time in question by the Society of Petroleum Engineers of the American Institute of Mining Engineers. SECTION 1.4 Money. Unless expressly stipulated otherwise, all references herein to "dollars," "money," "funds," "payments," "prepayments" or other similar financial or monetary terms, are references to currency of the United States of America. 19 26 ARTICLE 2 THE CREDIT SECTION 2.1 Commitments. (a) Each Bank severally agrees, subject to Sections 2.1(c), 2.1(d), 7.1 and 7.2 and the other terms and conditions set forth in this Agreement, to lend to Borrower from time to time prior to the Termination Date amounts not to exceed in the aggregate at any one time outstanding, the amount of such Bank's Commitment reduced by an amount equal to such Bank's Letter of Credit Exposure. Each Borrowing shall be in an aggregate principal amount of $500,000 or any larger integral multiple of $100,000 (except that any Base Rate Borrowing may be in an amount equal to the Availability at such time), and (ii) shall be made from Banks ratably in accordance with their respective Commitment Percentages. Subject to the foregoing limitations and the other provisions of this Agreement, prior to the Termination Date Borrower may borrow under this Section 2.1(a), repay amounts borrowed and request new Borrowings to be made under this Section 2.1. (b) Administrative Agent will, from time to time prior to the Termination Date, upon request by Borrower, issue Letters of Credit for the account of Borrower, so long as (i) the sum of (A) the total Letter of Credit Exposure then existing, and (B) the amount of the requested Letter of Credit does not exceed $50,000, and (ii) Borrower would be entitled to a Borrowing under Sections 2.1(a), 2.1(c) and 2.1(d) in the amount of the requested Letter of Credit. Not less than three (3) Domestic Business Days prior to the requested date of issuance of any such Letter of Credit, Borrower shall execute and deliver to Administrative Agent, Administrative Agent's customary letter of credit application. Each Letter of Credit shall be in the minimum amount of $10,000 and shall be in form and substance acceptable to Administrative Agent. No Letter of Credit shall have an expiration date later than the earlier of (i) the Termination Date, or (ii) one (1) year from the date of issuance. Upon the date of issuance of a Letter of Credit, Administrative Agent shall be deemed to have sold to each other Bank, and each other Bank shall be deemed to have unconditionally and irrevocably purchased from Administrative Agent, a non-recourse participation in the related Letter of Credit and Letter of Credit Exposure equal to such Bank's Commitment Percentage of such Letter of Credit and Letter of Credit Exposure. Upon request of any Bank, but not less often than quarterly, Administrative Agent shall provide notice to each Bank by telephone, teletransmission or telex setting forth each Letter of Credit issued and outstanding pursuant to the terms hereof and specifying the beneficiary and expiration date of each such Letter of Credit, each Bank's percentage of each such Letter of Credit and the actual dollar amount of each Bank's participation held by Administrative Agent thereof for such Bank's account and risk. Immediately upon the occurrence of an Event of Default Borrower shall deposit with Administrative Agent cash in such amounts as Administrative Agent may request, up to a maximum amount equal to the aggregate existing Letter of Credit Exposure of all Banks. Any amounts so deposited shall be held by Administrative Agent for the ratable benefit of all Banks as security for the outstanding Letter of Credit Exposure and the other Obligations, and Borrower will, in connection therewith, execute and deliver such security agreements in form and substance satisfactory to 20 27 Administrative Agent which it may, in its discretion, require. As drafts or demands for payment are presented under any Letter of Credit, Administrative Agent shall apply such cash to satisfy such drafts or demands. When all Letters of Credit have expired and the Obligations have been repaid in full (and no Bank has any obligation to lend or issue Letters of Credit hereunder) or such Event of Default has been cured to the satisfaction of Required Banks, Administrative Agent shall release to Borrower any remaining cash deposited under this Section 2.1(b). Whenever Borrower is required to make deposits under this Section 2.1(b) and fails to do so on the day such deposit is due, Administrative Agent or any Bank may, without notice to Borrower, make such deposit (whether by application of proceeds of any collateral for the Obligations, by transfers from other accounts maintained with any Bank or otherwise) using any funds then available to any Bank of any Credit Party, any guarantor, or any other party liable for repayment of the Obligations. Notwithstanding anything to the contrary contained herein, Borrower hereby agrees to reimburse Administrative Agent immediately upon demand by Administrative Agent, and in immediately available funds, for any payment or disbursement made by Administrative Agent under any Letter of Credit issued by it. Payment shall be made by Borrower with interest on the amount so paid or disbursed by Administrative Agent from and including the date payment is made under any Letter of Credit to and including the date of payment, at the lesser of (i) the Maximum Lawful Rate, or (ii) the sum of (a) two percent (2%), plus (b) the Base Rate in effect from day to day. The obligations of Borrower under this paragraph will continue until all Letters of Credit have expired and all reimbursement obligations with respect thereto have been paid in full by Borrower and until all other Obligations shall have been paid in full. Borrower shall be obligated to reimburse Administrative Agent upon demand for all amounts paid under Letters of Credit as set forth in the immediately preceding paragraph hereof; provided, however, if Borrower for any reason fails to reimburse Administrative Agent in full upon demand, Banks shall reimburse Administrative Agent in accordance with each Banks' Commitment Percentage for amounts due and unpaid from Borrower as set forth hereinbelow; provided, however, that no such reimbursement made by Banks shall discharge Borrower's obligations to reimburse Administrative Agent. All reimbursement amounts payable by any Bank under this Section 2.1(b) shall include interest thereon at the Federal Funds Rate, from the date of the payment of such amounts by Administrative Agent to the date of reimbursement by such Bank. No Bank shall be liable for the performance or nonperformance of the obligations of any other Bank under this paragraph. The reimbursement obligations of Banks under this paragraph shall continue after the Termination Date and shall survive termination of this Agreement and the other Loan Papers. Borrower shall indemnify and hold Administrative Agent and each Bank, and their respective officers, directors, representatives and employees harmless from loss for any claim, demand or liability which may be asserted against any or such indemnified party in connection with actions taken under Letters of Credit or in connection therewith (including losses resulting from the negligence of any or such indemnified party), and shall pay each indemnified party for reasonable fees of attorneys and legal costs paid or incurred by each indemnified party in connection with any matter related to Letters of Credit, except for losses and liabilities incurred as a direct result of the gross negligence or wilful 21 28 misconduct of such indemnified party, IT BEING THE EXPRESS INTENTION OF THE PARTIES THAT EACH INDEMNIFIED PARTY SHALL BE INDEMNIFIED FOR THE CONSEQUENCES OF ITS OWN ORDINARY NEGLIGENCE. If Borrower for any reason fails to indemnify or pay such indemnified party as set forth herein in full, Banks shall indemnify and pay such indemnified party upon demand, in accordance with each Bank's Commitment Percentage of such amounts due and unpaid from Borrower. The provisions of this paragraph shall survive the termination of this Agreement. Administrative Agent does not make any representation or warranty, and does not assume any responsibility with respect to the validity, legality, sufficiency or enforceability of any letter of credit application executed and delivered in connection with any Letter of Credit issued hereunder or any document relative thereto or to the collectability thereunder. Administrative Agent does not assume any responsibility for the financial condition of Borrower or for the performance of any obligation of Borrower. Administrative Agent may use its discretion with respect to exercising or refraining from exercising any rights, or taking or refraining from taking any action which may be vested in it or which it may be entitled to take or assert with respect to any Letter of Credit or any Letter of Credit application. FURTHERMORE, EXCEPT AS SET FORTH HEREIN, ADMINISTRATIVE AGENT SHALL BE UNDER NO LIABILITY TO ANY BANK, WITH RESPECT TO ANYTHING ADMINISTRATIVE AGENT MAY DO OR REFRAIN FROM DOING IN THE EXERCISE OF ITS JUDGMENT, THE SOLE LIABILITY AND RESPONSIBILITY OF ADMINISTRATIVE AGENT BEING TO HANDLE EACH BANK'S SHARE ON AS FAVORABLE A BASIS AS ADMINISTRATIVE AGENT HANDLES ITS OWN SHARE. ADMINISTRATIVE AGENT SHALL NOT HAVE ANY DUTIES OR RESPONSIBILITIES EXCEPT THOSE EXPRESSLY SET FORTH HEREIN AND THOSE DUTIES AND LIABILITIES SHALL BE SUBJECT TO THE LIMITATIONS AND QUALIFICATIONS SET FORTH HEREIN. FURTHERMORE, NEITHER ADMINISTRATIVE AGENT, NOR ANY OF ITS DIRECTORS, OFFICERS, OR EMPLOYEES SHALL BE LIABLE FOR ANY ACTION TAKEN OR OMITTED (WHETHER OR NOT SUCH ACTION TAKEN OR OMITTED IS EXPRESSLY SET FORTH HEREIN) UNDER OR IN CONNECTION HEREWITH OR UNDER ANY OTHER INSTRUMENT OR DOCUMENT IN CONNECTION HEREWITH, EXCEPT FOR GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. Administrative Agent shall not incur any liability to any Bank, Borrower, or any Affiliate of any Bank, or Borrower, in acting upon any notice, document, order, consent, certificate, warrant or other instrument reasonably believed by Administrative Agent to be genuine or authentic and to be signed by the proper party. (c) No Bank will be obligated to lend to Borrower hereunder or incur Letter of Credit Exposure, and Borrower shall not be entitled to borrow hereunder or obtain Letters of Credit hereunder at any time that a Borrowing Base Deficiency exists or in an amount which would cause the Outstanding Credit to exceed the Borrowing Base then in effect. Nothing in this Section 2.1(c) shall be deemed to limit any Bank's obligation to reimburse Administrative Agent with respect to its participation in Letters of Credit as a result of the drawing under any Letter of Credit pursuant to Section 2.1(c). 22 29 (d) proceeds of Borrowings hereunder and Letters of Credit issued hereunder shall be used only (a) to pay up to $6,800,000 of the purchase price for the Nebraska Acquisition (including related transaction costs), and (b) for other general corporate purposes. Letters of Credit may be used for general corporate purposes. Notwithstanding the foregoing, no Borrowing shall be made or Letter of Credit issued for any purpose prohibited by Section 10.7 hereof. (e) In order to request any Borrowing under this Section 2.1, Borrower shall hand deliver, telex or telecopy to Administrative Agent a duly completed Request for Borrowing (herein so called) prior to 12:00 noon (Dallas, Texas time), (i) at least one (1) Domestic Business Day before the Borrowing Date specified for a proposed Base Rate Borrowing, and (ii) at least three (3) Eurodollar Business Days before the Borrowing Date of a proposed Eurodollar Borrowing. Each such Request for Borrowing shall be substantially in the form of Exhibit E hereto, and shall specify: (i) the Borrowing Date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a Eurodollar Business Day in the case of a Eurodollar Borrowing; (ii) the aggregate amount of such Borrowing; (iii) whether such Borrowing is to be a Base Rate Borrowing or a Eurodollar Borrowing; (iv) in the case of a Eurodollar Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period; and (v) The use of proceeds of such Borrowing. Upon receipt of a Request for Borrowing, Administrative Agent shall promptly notify each Bank of the contents thereof and the amount of the Borrowing to be loaned by such Bank pursuant thereto, and such Request for Borrowing shall not thereafter be revocable by Borrower. Not later than 12:00 noon (Dallas, Texas time) on the date of each Borrowing, each Bank shall make available its Commitment Percentage of such Borrowing, in Federal or other funds immediately available in Dallas, Texas to Administrative Agent at its address set forth on Schedule 1 hereto. Notwithstanding the foregoing, if Borrower delivers to Administrative Agent a Request for Borrowing prior to 10:00 a.m. (Dallas, Texas time) on a Domestic Business Day requesting a Base Rate Borrowing on such day, each Bank shall use its best efforts to make available to Administrative Agent its Commitment Percentage of such Borrowing by 1:00 p.m. (Dallas, Texas time) on the same day. Unless Administrative Agent determines that any applicable condition specified in Section 7.2 has not been satisfied, Administrative Agent will make the funds so received from Banks available to Borrower at Administrative Agent's aforesaid address. 23 30 (f) In order to request any Letter of Credit hereunder, Borrower shall hand deliver, telex or telecopy to Administrative Agent a duly completed Request for Letter of Credit (herein so called) prior to 12:00 noon (Dallas, Texas time) at least three (3) Domestic Business Days before the date specified for issuance of such Letter of Credit. Each Request for Letter of Credit shall be substantially in the form of Exhibit F hereto, shall be accompanied by Administrative Agent's duly completed and executed letter of credit application and agreement and shall specify: (i) the requested date for issuance of such Letter of Credit; (ii) the terms of such requested Letter of Credit, including the name and address of the beneficiary, the stated amount, the expiration date and the conditions under which drafts under such Letter of Credit are to be available; and (iii) the purpose of such Letter of Credit. Upon receipt of a Request for Letter of Credit, Administrative Agent shall promptly notify each Bank of the contents thereof, including the amount of the requested Letter of Credit, and such Request for Letter of Credit shall not thereafter be revocable by Borrower. No later than 12:00 noon (Dallas, Texas time) on the date each Letter of Credit is requested, unless Administrative Agent determines that any applicable condition precedent set forth in Section 7.2 hereof has not been satisfied, Administrative Agent will issue and deliver such Letter of Credit pursuant to the instructions of Borrower. SECTION 2.2 Notes. Each Bank's Commitment Percentage of the Revolving Loan shall be evidenced by a single Note payable to the order of such Bank in an amount equal to such Bank's Commitment. SECTION 2.3 Interest Rates; Payments. (a) The principal amount of the Base Rate Loan outstanding from day to day shall bear interest at a rate per annum equal to the Base Rate in effect from day to day; provided that in no event shall the rate charged hereunder or under the Notes exceed the Maximum Lawful Rate. Interest on the principal of the Base Rate Loan shall be payable as it accrues pursuant to Section 2.5 and on each Quarterly Date, and on the Termination Date. (b) The principal amount of each Eurodollar Loan shall bear interest for the Interest Period applicable thereto at a rate per annum equal to the sum of (i) the Applicable Margin, plus (ii) the applicable Adjusted Eurodollar Rate; provided that in no event shall the rate charged hereunder or under the Notes exceed the Maximum Lawful Rate. Interest on any portion of the principal of each Eurodollar Loan shall be payable as it accrues pursuant to Section 2.5 and, in the case of accrued interest which is not fully paid pursuant to Section 2.5 and which (i) accrues on the outstanding principal balance of a Eurodollar Loan subject to an Interest Period of one (1), two (2) or three (3) months shall be payable on the last day of the Interest Period applicable thereto, and (ii) 24 31 on the outstanding principal balance of any Eurodollar Loan having an Interest Period of more than three (3) months shall be payable on the last day of the Interest Period applicable thereto and on each Quarterly Date. (c) So long as no Default or Event of Default shall be continuing, subject to the provisions of this Section 2.3, Borrower shall have the option of having all or any portion of the principal outstanding under the Revolving Loan be a Base Rate Loan or one (1) or more Eurodollar Loans, which shall bear interest at rates determined by reference to the Base Rate and the Adjusted Eurodollar Rate, respectively; provided, that each Eurodollar Loan shall be in a minimum amount of $500,000 and shall be in an amount which is an integral multiple of $100,000. Prior to the termination of each Interest Period with respect to each Eurodollar Loan, Borrower shall give written notice (a "Notice of Continuation or Conversion") in the form of Exhibit G attached hereto to Administrative Agent of the Type of Revolving Loan which shall be applicable to the principal of such Eurodollar Loan upon the expiration of such Interest Period. Such Notice of Continuation or Conversion shall be given to Administrative Agent at least one (1) Domestic Business Day, in the case of a Base Rate Loan selection and three (3) Eurodollar Business Days, in the case of a Eurodollar Loan selection, prior to the termination of the Interest Period then expiring. If Borrower shall specify a Eurodollar Loan, such Notice of Continuation or Conversion shall also specify the length of the succeeding Interest Period (subject to the definition of such term) selected by Borrower. Each Notice of Continuation or Conversion shall be irrevocable and effective upon notification thereof to Administrative Agent. If the required Notice of Continuation or Conversion shall not have been timely received by Administrative Agent, Borrower shall be deemed to have elected that the principal of the Eurodollar Loan subject to the Interest Period then expiring be a part of the Base Rate Loan upon the expiration of such Interest Period and Borrower will be deemed to have given Administrative Agent notice of such election. Subject to the limitations set forth in this Section 2.3(c) on the amount and number of Eurodollar Loans, Borrower shall have the right to convert (a "Conversion") all or any part of the Base Rate Loan to a Eurodollar Loan by giving Administrative Agent a Notice of Continuation or Conversion of such election at least three (3) Eurodollar Business Days prior to the date on which Borrower elects to make such conversion (a "Conversion Date"). The Conversion Date selected by Borrower shall be a Eurodollar Business Day. Notwithstanding anything in this Section 2.3 to the contrary, no portion of the principal of the Base Rate Loan may be Converted to a Eurodollar Loan and no Eurodollar Loan may be Continued as such when any Default or Event of Default has occurred and is continuing, but each such Eurodollar Loan shall be automatically Converted to the Base Rate Loan on the last day of each applicable Interest Period. Borrower shall not be permitted to have more than four (4) Eurodollar Loans in effect at any time. (d) Notwithstanding anything to the contrary set forth in Section 2.3(a) or 2.3(b) above, all overdue principal of the Obligations and, to the extent permitted by law, overdue interest, shall bear interest from the date due, payable on demand, for each day until paid at a rate per annum equal to the lesser of (a) the sum of (i) two percent (2%), plus (ii) the Base Rate in effect from day to day, and (b) the Maximum Lawful Rate. 25 32 (e) Administrative Agent shall determine each interest rate applicable to the Revolving Loan in accordance with the terms hereof. Administrative Agent shall promptly notify Borrower and Banks by telex, telecopy or cable of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (f) Notwithstanding the foregoing, if at any time the rate of interest calculated with reference to the Base Rate or the Eurodollar Rate hereunder (the "contract rate") is limited to the Maximum Lawful Rate, any subsequent reductions in the contract rate shall not, to the extent permitted by law, reduce the rate of interest on the affected Revolving Loan below the Maximum Lawful Rate until the total amount of interest accrued equals the amount of interest which would have accrued if the contract rate had at all times been in effect. In the event that at maturity (stated or by acceleration), or at final payment of any Note, the total amount of interest paid or accrued on such Note is less than the amount of interest which would have accrued if the contract rate had at all times been in effect with respect thereto, then at such time, to the extent permitted by law, Borrower shall pay to the holder of such Note an amount equal to the difference between (i) the lesser of the amount of interest which would have accrued if the contract rate had at all times been in effect and the amount of interest which would have accrued if the Maximum Lawful Rate had at all times been in effect, and (ii) the amount of interest actually paid on such Note. (g) Interest payable hereunder computed by reference to the Eurodollar Rate shall be computed based on the number of actual days elapsed assuming that each calendar year consisted of 360 days. Interest payable hereunder computed by reference to the Base Rate shall be computed based on the actual number of days elapsed assuming that each calendar year consisted of 365 days. SECTION 2.4 Mandatory Prepayments During Borrowing Base Deficiency. (a) In the event a Borrowing Base Deficiency exists after giving effect to, and as a result of, any Redetermination, Borrower shall, at its option, either (i) eliminate such Borrowing Base Deficiency by making a single mandatory prepayment of principal on the Revolving Loan in an amount equal to the entire amount of such Borrowing Base Deficiency on the first Monthly Date following the date on which such Borrowing Base Deficiency is determined to exist, or (ii) eliminate such Borrowing Base Deficiency by making six (6) consecutive mandatory prepayments of principal on the Revolving Loan each of which shall be in the amount of one sixth (1/6th) of the amount of such Borrowing Base Deficiency commencing on the first Monthly Date following the date on which such Borrowing Base Deficiency is determined to exist and continuing on each Monthly Date thereafter. If a Borrowing Base Deficiency cannot be eliminated pursuant to this clause (a) by prepayment of the Revolving Loan in full (as a result of outstanding Letter of Credit Exposure), on each Monthly Date, Borrower shall also deposit cash with Administrative Agent, to be held by Administrative Agent to secure outstanding Letter of Credit Exposure in the manner contemplated by Section 2.1(b), in an amount at least equal to one sixth (1/6th) of the balance of such Borrowing Base Deficiency (i.e., one-sixth of the difference between the Borrowing Base Deficiency and the remaining outstanding principal of the Revolving Loan on the date such Borrowing Base Deficiency is first determined to occur). 26 33 (b) In the event a Borrowing Base Deficiency occurs or an existing Borrowing Base Deficiency increases as a result of any Quarterly Reduction, then, on the date of such Quarterly Reduction, Borrower shall make a prepayment of principal on the Revolving Loan in the amount of such Borrowing Base Deficiency (or increase in any existing Borrowing Base Deficiency). (c) For purposes of clause (a) and (b) preceding, if (i) the date of any Redetermination is also the date of any Quarterly Reduction, and (ii) the Borrowing Base in effect immediately prior to the date of such Redetermination is higher than the amount of the Borrowing Base as reduced on the date of such Redetermination, then the reduction in the Borrowing Base which becomes effective on the date of such Redetermination will be deemed to have resulted from the Quarterly Reduction to the extent of the Quarterly Reduction Amount then in effect. SECTION 2.5 Mandatory Prepayments from Cash Flow. Commencing on August 15, 2000 and continuing on the 15th day of each November, February, May and August thereafter until the Commitments are terminated and the Obligations are paid in full, Borrower shall make a mandatory prepayment on the Revolving Loan in an amount equal to the Dedication Percentage then in effect of Borrower's Net Revenues for the immediately preceding Fiscal Quarter. Each such payment shall be applied first to accrued but unpaid interest and then to principal. In the event mandatory prepayments are required under this Section 2.5 at any time when mandatory prepayments are required under Section 2.4(a), the mandatory prepayments required by this Section 2.5 shall be applied to reduce the prepayments Borrower is required to make pursuant to Section 2.4(a) in direct order of maturity. SECTION 2.6 Voluntary Reduction of Commitments. Borrower may, by notice to Administrative Agent five (5) Domestic Business Days prior to the effective date of any such reduction, reduce the Total Commitment (and thereby reduce the Commitment of each Bank ratably) in amounts not less than $5,000,000 and in an amount which is an integral multiple of $1,000,000. On the effective date of any such reduction, Borrower shall, to the extent required as a result of such reduction, make a principal payment on the Revolving Loan in an amount sufficient to cause the principal balance of the Revolving Loan to be equal to or less than the Total Commitment as thereby reduced. Notwithstanding the foregoing, Borrower shall not be permitted to voluntarily reduce the Total Commitment to an amount less than the aggregate Letter of Credit Exposure of all Banks. SECTION 2.7 Termination of Commitments; Final Maturity of Revolving Loan. The Total Commitment (and the Commitment of each Bank) shall terminate, and the entire outstanding principal balance of the Revolving Loan, all interest accrued thereon, all accrued but unpaid fees hereunder and all other outstanding Obligations shall be due and payable in full on the Termination Date. SECTION 2.8 Unused Commitment Fee. On the Termination Date, on each Quarterly Date prior to the Termination Date, and, in the event the Commitments are terminated in their entirety prior to the Termination Date, on the date of such termination, Borrower shall pay to Administrative Agent, for the ratable benefit of each Bank, a commitment fee equal to .375% (computed on a per annum basis on the basis of actual days elapsed and as if each calendar year consisted of 365 days) 27 34 of the average daily Availability for the Fiscal Quarter (or portion thereof) ending on the date such payment is due. SECTION 2.9 Borrowing Base Increase Fee. Simultaneously with each increase in the Borrowing Base, Borrower shall pay to Administrative Agent for the ratable benefit of each Bank, a borrowing base increase fee in an amount to be mutually agreed upon by Borrower and Administrative Agent in connection with such increase. SECTION 2.10 Letter of Credit Fee. (a) Borrower shall pay to Administrative Agent for its own account a fee on the daily average amount of all Letter of Credit Exposure computed at a per annum rate for each day of .125% of such daily average Letter of Credit Exposure. Such fee shall be payable in arrears on each Quarterly Date. Notwithstanding the foregoing, no fee shall accrue or be payable pursuant to this Section 2.10(a) at any time that there is only one Bank which is a party to this Credit Agreement. (b) Borrower shall pay to Administrative Agent for the ratable benefit of each Bank a fee on the daily average amount of all Letter of Credit Exposure computed at a per annum rate for each day equal to the Applicable Margin in effect for Eurodollar Loans on such day. Such fee shall be payable quarterly in arrears on each Quarterly Date. SECTION 2.11 Agency and other Fees. Borrower shall pay to Administrative Agent and its Affiliates such other reasonable fees and amounts as Borrower shall be required to pay to Administrative Agent and its Affiliates from time to time pursuant to any separate agreement between Borrower and Administrative Agent or such Affiliates. Such fees and other amounts shall be retained by Administrative Agent and its Affiliates, and no Bank (other than Administrative Agent) shall have any interest therein. SECTION 2.12 Closing Fee. Borrower shall pay to Administrative Agent, for the ratable benefit of each Bank, a non-refundable closing fee on the Closing Date in the amount of $50,000. ARTICLE 3 GENERAL PROVISIONS SECTION 3.1 Delivery and Endorsement of Notes. Simultaneously with the execution of this Agreement, Administrative Agent shall deliver to each Bank the Note payable to such Bank. Each Bank may endorse (and prior to any transfer of its Note shall endorse) on the schedules attached and forming a part thereof appropriate notations to evidence the date and amount of its Commitment Percentage of each Borrowing and Type of each Revolving Loan made by it, the Interest Period applicable thereto, and the date and amount of each payment of principal made by Borrower with respect thereto; provided that the failure by any Bank to so endorse its Note shall not affect the liability of Borrower for the repayment of all amounts outstanding under such Note together with 28 35 interest thereon. Each Bank is hereby irrevocably authorized by Borrower to endorse its Note and to attach to and make a part of any Note a continuation of any such schedule as required. SECTION 3.2 General Provisions as to Payments. (a) Borrower shall make each payment of principal of, and interest on, the Revolving Loan and all fees payable hereunder shall be paid not later than 12:00 noon (Dallas, Texas time) on the date when due, in Federal or other funds immediately available in Dallas, Texas, to Administrative Agent at its address set forth on Schedule 1 hereto. Administrative Agent will promptly (and if such payment is received by Administrative Agent by 10:00 a.m. (Dallas, Texas time) and otherwise if reasonably possible, on the same Domestic Business Day) distribute to each Bank its Commitment Percentage of each such payment received by Administrative Agent for the account of Banks. Whenever any payment of (a) principal of, or interest on, any portion of the Base Rate Loan, or (b) fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, any Eurodollar Loan shall be due on a day which is not a Eurodollar Business Day, the date for payment thereof shall be extended to the next succeeding Eurodollar Business Day (subject to the definition of Interest Period). If the date for any payment of principal is extended by operation of Law or otherwise, interest thereon shall be payable for such extended time. Borrower hereby authorizes Administrative Agent to charge from time to time against Borrower's accounts with Administrative Agent any amount then due. (b) Prior to the occurrence of an Event of Default, all principal payments received by Banks shall be applied first to Eurodollar Loans outstanding with Interest Periods ending on the date of such payment, then to the Base Rate Loan, and then to Eurodollar Loans, next maturing until such principal payment is fully applied. (c) After the occurrence of an Event of Default, all amounts collected or received by Administrative Agent or any Bank shall be applied first to the payment of all proper costs incurred by Administrative Agent in connection with the collection thereof (including reasonable expenses and disbursements of Administrative Agent), second to the payment of all proper costs incurred by Banks in connection with the collection thereof (including reasonable expenses and disbursements of Banks), third to the reimbursement of any advances made by Banks to effect performance of any unperformed covenants of Borrower or any of its Subsidiaries under any of the Loan Papers, fourth to the payment of any unpaid fees required pursuant to Section 2.11, fifth to the payment of any unpaid fees required pursuant to Sections 2.8, 2.9, and 2.10, sixth, to payment to each Bank of its Commitment Percentage of the outstanding principal of the Revolving Loan and accrued but unpaid interest thereon, and seventh to establish the deposits required in Section 2.1(b). All payments received by a Bank after the occurrence of an Event of Default for application to the principal of the Revolving Loan shall be applied by such Bank in the manner provided in Section 3.2(b). 29 36 ARTICLE 4 CHANGE IN CIRCUMSTANCES SECTION 4.1 Increased Cost and Reduced Return. (a) If, after the date hereof, the adoption of any applicable Law, rule, or regulation, or any change in any applicable Law, rule, or regulation, or any change 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 Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of Law) of any such Governmental Authority, central bank, or comparable agency: (i) shall subject such Bank (or its Applicable Lending Office) to any Tax, duty, or other charge with respect to any Eurodollar Loans, its Note, or its obligation to make Eurodollar Loans, or change the basis of taxation of any amounts payable to such Bank (or its Applicable Lending Office) under this Agreement or its Note in respect of any Eurodollar Loans (other than Taxes imposed on the overall net income of such Bank by the jurisdiction in which such Bank has its principal office or such Applicable Lending Office); (ii) shall impose, modify, or deem applicable any reserve, special deposit, assessment, or similar requirement (other than the Reserve Requirement utilized in the determination of the Adjusted Eurodollar Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Bank (or its Applicable Lending Office), including the Commitment of such Bank hereunder; or (iii) shall impose on such Bank (or its Applicable Lending Office) or on the London interbank market any other condition affecting this Agreement or its Note or any of such extensions of credit or liabilities or commitments; and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making, Converting into, Continuing, or maintaining any Eurodollar Loans or to reduce any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or its Note with respect to any Eurodollar Loans, then Borrower shall pay to such Bank on demand such amount or amounts as will compensate such Bank for such increased cost or reduction. If any Bank requests compensation by Borrower under this Section 4.1(a), Borrower may, by notice to such Bank (with a copy to Administrative Agent), suspend the obligation of such Bank to make or Continue Eurodollar Loans, or to Convert all or part of the Base Rate Loan owing to such Bank to Eurodollar Loans, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 4.4 shall be applicable); provided that such suspension shall not affect the right of such Bank to receive the compensation so requested. 30 37 (b) If, after the date hereof, any Bank shall have determined that the adoption of any applicable Law, rule, or regulation 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 any 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 Bank or any corporation controlling such Bank as a consequence of such Bank's obligations hereunder to a level below that which such Bank or such corporation could have achieved but for such adoption, change, request, or directive (taking into consideration its policies with respect to capital adequacy), then from time to time upon demand Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such reduction. (c) Each Bank shall promptly notify Borrower and Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section 4.1 and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to it. Any Bank claiming compensation under this Section 4.1 shall furnish to Borrower and Administrative Agent a statement setting forth the additional amount or amounts to be paid to it hereunder which shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. SECTION 4.2 Limitation on Types of Revolving Loans. If on or prior to the first day of any Interest Period for any Eurodollar Loan: (a) Administrative Agent determines (which determination shall be conclusive) that by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period; or (b) Required Banks determine (which determination shall be conclusive) and notify Administrative Agent that the Adjusted Eurodollar Rate will not adequately and fairly reflect the cost to Banks of funding Eurodollar Loans for such Interest Period; then Administrative Agent shall give Borrower prompt notice thereof specifying the relevant amounts or periods, and so long as such condition remains in effect, Banks shall be under no obligation to make additional Eurodollar Loans, Continue Eurodollar Loans, or to Convert all or any part of the Base Rate Loan into Eurodollar Loans and Borrower shall, on the last day(s) of the then current Interest Period(s) for the outstanding Eurodollar Loans, either prepay such Eurodollar Loans or Convert such Eurodollar Loans into the Base Rate Loan in accordance with the terms of this Agreement. SECTION 4.3 Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Bank or its Applicable Lending Office to make, maintain, or 31 38 fund Eurodollar Loans hereunder, then such Bank shall promptly notify Borrower thereof and such Bank's obligation to make or Continue Eurodollar Loans and to Convert all or any part of the Base Rate Loan into Eurodollar Loans shall be suspended until such time as such Bank may again make, maintain, and fund Eurodollar Loans (in which case the provisions of Section 2.7 shall be applicable). SECTION 4.4 Treatment of Affected Loans. If the obligation of any Bank to make a Eurodollar Loan or to Continue Eurodollar Loans, or to Convert all or any part of the Base Rate Loan into Eurodollar Loans shall be suspended pursuant to Section 4.1 or hereof, such Bank's Eurodollar Loans shall be automatically Converted into the Base Rate Loan on the last day(s) of the then current Interest Period(s) for such Eurodollar Loans (or, in the case of a Conversion required by Section 4.3 hereof, on such earlier date as such Bank may specify to Borrower with a copy to Administrative Agent) and, unless and until such Bank gives notice as provided below that the circumstances specified in Section 4.1 or 4.3 hereof that gave rise to such Conversion no longer exist: (a) to the extent that such Bank's Eurodollar Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Bank's Eurodollar Loans shall be applied instead to its Commitment Percentage of the Base Rate Loan; and (b) all Revolving Loans that would otherwise be made or Continued by such Bank as Eurodollar Loans shall be made or Continued instead as a part of the Base Rate Loan, and all or any part of the Base Rate Loan held by such Bank that would otherwise be Converted into Eurodollar Loans shall remain as part of the Base Rate Loan. If such Bank gives notice to Borrower (with a copy to Administrative Agent) that the circumstances specified in Section 4.1 or 4.3 hereof that gave rise to the Conversion of such Bank's Eurodollar Loans pursuant to this Section 4.4 no longer exist (which such Bank agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Loans made by other Banks are outstanding, such Bank's portion of the Base Rate Loan shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Loans, to the extent necessary so that, after giving effect thereto, all Eurodollar Loans held by Banks holding Eurodollar Loans are held pro rata (as to principal amounts and Interest Periods) in accordance with their respective Commitments. SECTION 4.5 Compensation. Upon the request of any Bank, Borrower shall pay to such Bank such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost, or expense incurred by it as a result of: (a) any payment, prepayment, or Conversion of a Eurodollar Loan for any reason (including, without limitation, the acceleration of the Revolving Loans pursuant to Section 12.1) on a date other than the last day of the Interest Period for such Revolving Loan; or (b) any failure by Borrower for any reason (including, without limitation, the failure of any condition precedent specified in Article 7 to be satisfied) to borrow, Convert, Continue, 32 39 or prepay a Eurodollar Loan on the date for such Borrowing, Conversion, Continuation, or prepayment specified in the relevant Request for Borrowing, or notice of prepayment, Continuation, or Conversion under this Agreement. SECTION 4.6 Taxes. (a) Any and all payments by Borrower to or for the account of any Bank or Administrative Agent hereunder or under any other Loan Paper shall be made free and clear of and without deduction for any and all present or future Taxes, and all liabilities with respect thereto, excluding, in the case of each Bank and Administrative Agent, Taxes imposed on its income, and franchise Taxes imposed on it, by the jurisdiction under the Laws of which such Bank (or its Applicable Lending Office) or Administrative Agent (as the case may be) is organized or any political subdivision thereof. If Borrower shall be required by Law to deduct any Taxes from or in respect of any sum payable under this Agreement or any other Loan Paper to any Bank or Administrative Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 4.6) such Bank or Administrative Agent receives an amount equal to the sum it would have received had no such deductions been made, (ii) Borrower shall make such deductions, (iii) Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable Law, and (iv) Borrower shall furnish to Administrative Agent, at its address set forth on Schedule 1 hereto, the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, Borrower agrees to pay any and all present or future stamp or documentary Taxes and any other excise or property Taxes or charges or similar levies which arise from any payment made under this Agreement or any other Loan Paper or from the execution or delivery of, or otherwise with respect to, this Agreement or any other Loan Paper (hereinafter referred to as "Other Taxes"). (c) Borrower agrees to indemnify each Bank and Administrative Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 4.6) paid by such Bank or Administrative Agent (as the case may be) and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto. (d) Each Bank organized under the Laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on Schedule 1 hereto and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by Borrower or Administrative Agent (but only so long as such Bank remains lawfully able to do so), shall provide Borrower and Administrative Agent with (i) Internal Revenue Service Form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income Tax treaty to which the United States is a party which reduces the rate of withholding Tax on payments of interest or certifying that the income receivable pursuant to this 33 40 Agreement is effectively connected with the conduct of a trade or business in the United States, (ii) Internal Revenue Service Form W-8 or W-9, as appropriate, or any successor form prescribed by the Internal Revenue Service, and (iii) any other form or certificate required by any taxing authority (including any certificate required by Sections 871(h) and 881(c) of the Code), certifying that such Bank is entitled to an exemption from or a reduced rate of Tax on payments pursuant to this Agreement or any of the other Loan Papers. (e) For any period with respect to which a Bank has failed to provide Borrower and Administrative Agent with the appropriate form pursuant to Section 4.6(d) (unless such failure is due to a change in treaty, Law, or regulation occurring subsequent to the date on which a form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 4.6(a) or 4.6(b) with respect to Taxes imposed by the United States; provided, however, that should a Bank, which is otherwise exempt from or subject to a reduced rate of withholding Tax, become subject to Taxes because of its failure to deliver a form required hereunder, Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (f) If Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 4.6, then such Bank will agree to use reasonable efforts to change the jurisdiction of its Applicable Lending Office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Bank, is not otherwise disadvantageous to such Bank. (g) Within thirty (30) days after the date of any payment of Taxes Borrower is required to pay pursuant to this Section 4.6, Borrower shall furnish to Administrative Agent the original or a certified copy of a receipt evidencing such payment. (h) Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of Borrower contained in this Section 4.6 shall survive the termination of the Commitments and the payment in full of the Notes. SECTION 4.7 Discretion of Banks as to Manner of Funding. Notwithstanding any provisions of this Agreement to the contrary, each Bank shall be entitled to fund and maintain its funding of all or any part of its Commitment in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if such Bank had actually funded and maintained each Eurodollar Loan through the purchase of deposits having a maturity corresponding to the last day of the Interest Period applicable to such Eurodollar Loan and bearing an interest rate equal to the Adjusted Eurodollar Rate for such Interest Period. 34 41 ARTICLE 5 BORROWING BASE SECTION 5.1 Reserve Report; Proposed Borrowing Base. As soon as available and in any event by March 1 and September 1 of each year commencing September 1, 2000, Borrower shall deliver to each Bank a Reserve Report prepared as of the immediately preceding December 31 and June 30 respectively. Simultaneously with the delivery to Administrative Agent and each Bank of each Reserve Report, Borrower shall notify each Bank of the amount of the Borrowing Base which Borrower requests become effective on the next Redetermination Date (or such date promptly following such Redetermination Date as Required Banks shall elect). SECTION 5.2 Scheduled Redeterminations of the Borrowing Base; Procedures and Standards. Based in part on the Reserve Reports made available to Banks pursuant to Section 5.1, Banks shall redetermine the Borrowing Base (i) on a date selected by Required Banks by written notice to Borrower which date shall be on or around each April 1 and October 1 commencing October 1, 2000 (or, in each such case, on a date promptly thereafter as reasonably possible based on the engineering and other information available to Banks). Any Borrowing Base which becomes effective as a result of any Redetermination of the Borrowing Base shall be subject to the following restrictions: (a) such Borrowing Base shall not exceed the Borrowing Base requested by Borrower pursuant to Sections 5.1 or 5.3 (as applicable), (b) such Borrowing Base shall not exceed the Total Commitment then in effect, (c) to the extent such Borrowing Base represents an increase from the Borrowing Base in effect prior to such Redetermination, such Borrowing Base shall be approved by all Banks, and (d) any Borrowing Base which represents a decrease in the Borrowing Base in effect prior to such Redetermination, or a reaffirmation of such prior Borrowing Base, shall be approved by Required Banks. Each Redetermination shall be made by Banks in their sole discretion. Without limiting such discretion, Borrower acknowledges and agrees that Banks (i) may make such assumptions regarding appropriate existing and projected pricing for Hydrocarbons as they deem appropriate in their sole discretion, (ii) may make such assumptions regarding projected rates and quantities of future production of Hydrocarbons from the Mineral Interests owned by Borrower as they deem appropriate in their sole discretion, (iii) may consider the projected cash requirements of Borrower and its Subsidiaries, (iv) are not required to consider any asset other than Proved Mineral Interests owned by Borrower which are subject to first and prior Liens in favor of Administrative Agent for the ratable benefit of Banks to the extent required by Section 6.1 hereof, and (v) may make such other assumptions, considerations and exclusions as each Bank deems appropriate in the exercise of its sole discretion. It is further acknowledged and agreed that each Bank may consider such other credit factors as it deems appropriate in the exercise of its sole discretion and shall have no obligation in connection with any Redetermination to approve any increase from the Borrowing Base in effect prior to such Redetermination. Promptly following any Redetermination of the Borrowing Base, Administrative Agent shall deliver written notice to Borrower specifying (a) the amount of the Borrowing Base as redetermined (which Borrowing Base shall be effective as of the date specified in such notice, and subject to Section 5.4 shall remain in effect for all purposes of this Agreement 35 42 until the next Redetermination), and (b) the Quarterly Reduction Amount to be in effect until the next Redetermination. SECTION 5.3 Special Redetermination. (a) In addition to Scheduled Redeterminations, Required Banks shall be permitted to make a Special Redetermination of the Borrowing Base once in each period between Scheduled Redeterminations. Any request by Required Banks pursuant to this Section 5.3(a) shall be submitted to Administrative Agent and Borrower. (b) In addition to Scheduled Redeterminations, Borrower shall be permitted to request a Special Redetermination of the Borrowing Base once in each Fiscal Year. Such request shall be submitted to Administrative Agent and Required Banks and at the time of such request Borrower shall deliver to each Bank a Reserve Report. Together with such request, Borrower shall also notify each Bank of the Borrowing Base requested by Borrower in connection with such Special Redetermination. (c) Any Special Redetermination shall be made by Banks in accordance with the procedures and standards set forth in Section 5.2; provided, that, no Reserve Report will be required to be delivered to Banks in connection with any Special Determination requested by Required Banks pursuant to clause (a) above. SECTION 5.4 Quarterly Reduction. Commencing on June 30, 2000 and continuing on each Quarterly Date thereafter, the Borrowing Base in effect hereunder shall reduce automatically and without notice to Borrower by the Quarterly Reduction Amount then in effect. SECTION 5.5 Borrowing Base Deficiency. If a Borrowing Base Deficiency exists after (a) giving effect to any Redetermination, or (b) as a result of any Quarterly Reduction, Borrower shall be obligated to eliminate such Borrowing Base Deficiency by making the mandatory prepayments of the Revolving Loans or taking the actions required by Section 2.4. SECTION 5.6 Initial Borrowing Base. The Borrowing Base shall be $7,000,000 for the period commencing on the Closing Date and ending on the effective date of the first Redetermination after the Closing Date. ARTICLE 6 COLLATERAL AND GUARANTEES SECTION 6.1 Security. (a) The Obligations shall be secured by first and prior Liens (subject only to Permitted Encumbrances) covering and encumbering (i) substantially all assets owned by Borrower 36 43 and each of its Subsidiaries, including, without limitation, all Mineral Interests owned by Borrower and its Subsidiaries, and (ii) the outstanding limited partnership interest in Borrower held by Taurus. On the Closing Date, Borrower and Taurus shall deliver to Administrative Agent for the ratable benefit of each Bank, a Pledge Agreement (to be executed by Taurus), a Security Agreement and Mortgages (each to be executed by Borrower) in form and substance acceptable to Administrative Agent and duly executed by Borrower and Taurus (as applicable) together with such other assignments, conveyances, amendments, agreements and other writings, including, without limitation, UCC-1 financing statements (each duly authorized and executed) as Administrative Agent shall deem necessary or appropriate to grant, evidence and perfect first and prior Liens in substantially all assets owned by Borrower (including, without limitation, all Mineral Interests owned by Borrower) and the limited partnership interests in Borrower owned by Taurus. (b) On or before each Redetermination Date and at such other times as Administrative Agent or Required Banks shall request, Borrower shall execute and deliver to Administrative Agent, and cause each of its Subsidiaries to execute and deliver to Administrative Agent, for the ratable benefit of each Bank, Mortgages granting, evidencing and perfecting the Liens required by Section 6.1(a) preceding with respect to all Mineral Interests acquired by Borrower or any Subsidiaries of Borrower on or subsequent to the last date on which Borrower or any of its Subsidiaries were required to execute and deliver Mortgages pursuant to this Section 6.1, or which, for any other reason are not the subject of valid, enforceable, perfected first priority Liens (subject only to Permitted Encumbrances) in favor of Administrative Agent for the ratable benefit of Banks. (c) On the date of the creation or acquisition by Borrower or any Subsidiary of Borrower of any Subsidiary of Borrower (a "New Subsidiary"), Borrower shall cause such New Subsidiary to execute and deliver to Administrative Agent for the ratable benefit of the Banks, a Security Agreement and one or more Mortgages, together with such other assignments, conveyances, amendments, agreements and other writings, including, without limitations UCC-1 financing statements (each duly authorized and executed) as Administrative Agent shall deem necessary or appropriate to grant, evidence and perfect first and prior Liens on substantially all assets, including, without limitation, all Mineral Interests, owed by such New Subsidiary. SECTION 6.2 Guarantees. The Obligations shall be jointly and severally guaranteed by EXCO and each Subsidiary of Borrower pursuant to Facility Guarantees duly executed and delivered by each such Person. On the date of the creation or acquisition by Borrower or any Subsidiary of Borrower of any New Subsidiary, Borrower shall cause such New Subsidiary to execute and deliver a Facility Guaranty to Administrative Agent. SECTION 6.3 Supporting Documents. At any time Borrower or any of its Subsidiaries are required to execute and deliver Mortgages, Security Agreements, Pledge Agreements or Facility Guarantees to Administrative Agent pursuant to this Article 6, Borrower shall also deliver or cause to be delivered to Administrative Agent such other documents, instruments and agreements, including, without limitation, certificates of officers of Borrower, Taurus, EXCO, and Subsidiaries of Borrower, certificates of Governmental Authorities, opinions of counsel (addressed to 37 44 Administrative Agent) and other documents, instruments and agreements Administrative Agent shall deem necessary or appropriate to verify (i) the valid organization and existence of the Credit Party executing and delivering such Loan Papers, (ii) the due authorization, execution and delivery of such Loan Papers, (iii) Taurus', EXCO's, Borrower's or such Subsidiaries' title to the property (including Mineral Interests) purported to be subject to the Liens created by such Loan Papers; provided, that, in the absence of any Default or Borrowing Base Deficiency, Borrower shall not be required to provide opinions or other evidence of title with respect to Mineral Interests with an aggregate Recognized Value in excess of ninety percent (90%) of the aggregate Recognized Value of all Mineral Interests owned by Borrower (such limitation is referred to herein as the "Title Review Limit"); and (iv) the validity, perfection and priority of the Liens created by such Loan Papers and such other matters related thereto as Administrative Agent shall reasonably request. ARTICLE 7 CONDITIONS PRECEDENT SECTION 7.1 Conditions to Initial Borrowing and Participation in Letter of Credit Exposure. The obligation of each Bank to loan its Commitment Percentage of the initial Borrowing made hereunder, and the obligation of Administrative Agent to issue (or cause another Bank to issue) the initial Letter of Credit issued hereunder is subject to the satisfaction of each of the following conditions prior to or simultaneously with the initial Borrowing made hereunder: (a) Closing Deliveries. Administrative Agent shall have received each of the following documents, instruments and agreements, each of which shall be in form and substance and executed in such counterparts as shall be acceptable to Administrative Agent and each Bank and each of which shall, unless otherwise indicated, be dated the Closing Date: (i) a Note payable to the order of each Bank, each in the amount of such Bank's Commitment, duly executed by Borrower; (ii) Mortgages duly executed and delivered by Borrower creating first and prior Liens on all Mineral Interests owned by Borrower, including, without limitation, the Nebraska Properties; (iii) a Security Agreement duly executed and delivered by Borrower; (iv) a Pledge Agreement duly executed by Taurus; (v) such financing statements on form UCC-1 (or any other form required by Lender in its reasonable discretion) as Administrative Agent shall require to evidence and perfect the Liens created by the Mortgages, Pledge Agreement and the Security Agreement referenced in clauses (ii),(iii) and (iv) above, each of which shall be 38 45 executed and delivered by Borrower or Taurus (as applicable) and filed of record in such jurisdictions as Administrative Agent shall require in its sole discretion; (vi) Facility Guaranty duly executed and delivered by EXCO; (vii) a copy of the Articles of Incorporation and all amendments thereto of EXCO and Taurus accompanied by a certificate that such copy is true, correct and complete, and dated within ten (10) days of the Closing Date, issued by the appropriate Governmental Authority of the jurisdiction of incorporation or organization of each of EXCO and Taurus and accompanied by a certificate of the Secretary or comparable Authorized Officer of EXCO that such copy is true, correct and complete on the Closing Date; (viii) a copy of the Bylaws and all amendments thereto of each of EXCO and Taurus accompanied by a certificate of the Secretary or comparable Authorized Officer of EXCO and Taurus that such copy is true, correct and complete as of the date hereof; (ix) a copy of the Certificate of Formation and all amendments thereto of Borrower accompanied by a certificate that such copy is true, correct and complete and dated within ten (10) days of the Closing Date, issued by the appropriate Governmental Authority of the jurisdiction of incorporation or organization of Borrower, and accompanied by a certificate of the Secretary or comparable Authorized Officer of Borrower that such copy is true, correct and complete on the Closing Date; (x) a copy of the Limited Partnership Agreement for Borrower together with a certificate from an Authorized Officer of Borrower stating that such copy is a true and correct copy of the Limited Partnership Agreement for Borrower and that such Limited Partnership Agreement has not been amended or modified in any respect and is in full force and effect on the Closing Date; (xi) certain certificates and other documents issued by the appropriate Governmental Authorities of such jurisdictions as Administrative Agent has requested relating to the existence of each of EXCO, Taurus and Borrower and to the effect that of each of EXCO, Taurus and Borrower is in good standing with respect to the payment of franchise and similar Taxes and is duly qualified to transact business in such jurisdictions; (xii) a certificate of incumbency of all officers of each of EXCO, Taurus and Borrower who will be authorized to execute or attest to any Loan Paper on behalf of EXCO, Taurus or Borrower dated the date hereof, executed by the Secretary or comparable Authorized Officer of such Person; 39 46 (xiii) copies of resolutions or comparable authorizations approving the Loan Papers and authorizing the transactions contemplated by this Agreement and the other Loan Papers, duly adopted by the Board of Directors of each of EXCO and Taurus and the Partners of Borrower; accompanied by certificates of the Secretary or comparable Authorized Officer of each of EXCO, Taurus and Borrower that such copies are true and correct copies of resolutions duly adopted at a meeting of or (if permitted by applicable Law and, if required by such Law, by the Bylaws of EXCO or Taurus and the Limited Partnership Company Agreement of Borrower) by the unanimous written consent of the Board of Directors of each of EXCO and Taurus and the Partners of Borrower; and that such resolutions constitute all the resolutions adopted with respect to such transactions, have not been amended, modified, or revoked in any respect, and are in full force and effect as of the date hereof; (xiv) an opinion of Haynes & Boone, L.L.P., counsel for Borrower, EXCO and Taurus, dated the date hereof, favorably opining as to the enforceability of each of the Loan Papers and otherwise in form and substance satisfactory to Administrative Agent and Banks; (xv) such UCC-11 search reports as Administrative Agent shall require, prepared as of a date not more than twenty (20) days prior to the Closing Date, conducted in such jurisdictions and reflecting such names as Administrative Agent shall request; (xvi) a certificate signed by an Authorized Officer of Borrower stating that (A) the representations and warranties contained in this Agreement and the other Loan Papers are true and correct in all material respects, (B) no Default or Event of Default has occurred and is continuing, and (C) all conditions set forth in this Section 7.1 and Section 7.2 have been satisfied; (xvii) a Certificate of Ownership Interests signed by an Authorized Officer of Borrower in the form of Exhibit H attached hereto; (xviii) a report or reports in form, scope and detail acceptable to Administrative Agent from environmental engineering firms acceptable to Administrative Agent setting forth the results of a current phase I environmental review of the Mineral Interests, which report(s) shall not reflect the existence of facts or circumstances which would constitute a material violation of any Applicable Environmental Law or which are likely to result in a material liability to Borrower or any of its Subsidiaries; and (xix) certificates from Borrower's insurance broker setting forth the insurance maintained by Borrower, stating that such insurance is in full force and effect, that all premiums due have been paid and stating that such insurance is adequate and complies with the requirements of Section 9.6. 40 47 (b) Title Review. Administrative Agent or its counsel shall have completed a review of title (including opinions of title) to the Nebraska Properties (subject to the Title Review Limit), and such review shall not have revealed any condition or circumstance which would reflect that the representations and warranties contained in Section 8.9 hereof are inaccurate in any respect. (c) Amendment of Limited Partnership Agreement. Borrower's Limited Partnership Agreement shall have been amended and restated on terms and conditions acceptable to Administrative Agent such that after giving effect thereto (i) Taurus will own on a fully diluted basis at least fifty percent (50%) of the limited partnership interests in Borrower free and clear of all Liens, and (ii) EXCO will own on a fully diluted basis one hundred percent (100%) of the general partnership interests in Borrower free and clear of all Liens. (d) Partner Contributions. EXCO directly or indirectly through Taurus shall have contributed at least $3,500,000 in cash to the partnership capital of Borrower. (e) Completion of Nebraska Acquisition. Borrower shall have completed (or simultaneously with the funding of the initial Borrowing hereunder, Borrower shall complete) the Nebraska Acquisition for a total purchase price of not more than $10,200,000 and otherwise on the terms and conditions substantially in accordance with the Nebraska Acquisition Agreement as in effect on the date hereof, and as a result thereof Borrower shall have acquired, or simultaneously with the funding of such Borrowing Borrower shall acquire, good and defensible title to all such Nebraska Properties, free and clear of all Liens except Permitted Encumbrances. (f) No Material Adverse Change. In the sole discretion of each Bank, since January 1, 2000, no Material Adverse Change shall have occurred. (g) No Legal Prohibition. The transactions contemplated by this Agreement shall be permitted by applicable Law and regulation and shall not subject Administrative Agent, any Bank, or any Credit Party to any Material Adverse Change. (h) No Litigation. No litigation, arbitration or similar proceeding shall be pending or threatened which calls into question the validity or enforceability of this Agreement, the other Loan Papers or the transactions contemplated hereby or thereby. (i) Closing Fees. Borrower shall have paid to Administrative Agent for the ratable benefit of each Bank, and shall have paid to Administrative Agent, the fees to be paid on the Closing Date pursuant to Section 2.12. (j) Other Matters. All matters related to this Agreement, the other Loan Papers and the Credit Parties shall be acceptable to each Bank in its sole discretion, and Borrower shall have delivered to Administrative Agent and each Bank such evidence as they shall request to substantiate any matters related to this Agreement and the other Loan Papers, as Administrative Agent or any Bank shall request. 41 48 SECTION 7.2 Conditions to Each Borrowing and each Letter of Credit. The obligation of each Bank to loan its Commitment Percentage of each Borrowing and the obligation of Administrative Agent to issue a Letter of Credit on the date such Letter of Credit is to be issued is subject to the further satisfaction of the following conditions: (a) timely receipt by Administrative Agent of a Request for Borrowing or a Request for Letter of Credit (as applicable); (b) immediately before and after giving effect to such Borrowing or issuance of such Letter of Credit, no Default or Event of Default shall have occurred and be continuing and the funding of such Borrowing or the issuance of the requested Letter of Credit (as applicable) shall not cause a Default or Event of Default; (c) the representations and warranties of Borrower contained in this Agreement and the other Loan Papers shall be true and correct in all material respects on and as of the date of such Borrowing or issuance of such Letter of Credit (as applicable), with the same effect as though such representations and warranties had been made on and as of the date of such Borrowing or issuance of such Letter of Credit (as applicable) or, if such representations and warranties are expressly limited to particular dates, as of such particular dates; (d) after giving effect to such Borrowing or issuance of such Letter of Credit, the Outstanding Credit shall not exceed the Borrowing Base; (e) no Material Adverse Change shall have occurred; (f) the funding of such Borrowing or the issuance of such Letter of Credit (as applicable) shall be permitted by applicable Law; and (g) such Borrowing in such Letter of Credit shall be used only for a purpose permitted under the Agreement. The funding of each Borrowing and the issuance of each Letter of Credit hereunder shall be deemed to be a representation and warranty by Borrower on the date of such Borrowing and the date of issuance of each Letter of Credit as to the facts specified in Sections 7.2(b) through 7.2(e). SECTION 7.3 Materiality of Conditions. Each condition precedent herein is material to the transactions contemplated herein, and time is of the essence in respect of each thereof. 42 49 ARTICLE 8 REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to Administrative Agent and each Bank that each of the following statements is true and correct on the date hereof, and will be true and correct on the occasion of each Borrowing and the issuance of each Letter of Credit: SECTION 8.1 Existence and Power. Each Credit Party (a) is a corporation, limited liability company or partnership duly incorporated or organized (as applicable), validly existing and in good standing under the laws of its jurisdiction of incorporation or organization (as applicable), (b) has all corporate, limited liability company or partnership power (as applicable) and all material governmental licenses, authorizations, consents and approvals required to carry on its businesses as now conducted and as proposed to be conducted, and (c) is duly qualified to transact business as a foreign corporation, foreign limited liability company or foreign partnership (as applicable) in each jurisdiction where a failure to be so qualified could result in a Material Adverse Change. SECTION 8.2 Necessary Authorization; Contravention. The execution, delivery and performance of this Agreement and the other Loan Papers by each Credit Party (to the extent each Credit Party is a party thereto), are within such Credit Party's corporate, limited liability company or partnership power, have been duly authorized by all necessary corporate, limited liability company or partnership action, require no action by or in respect of, or filing with, any Governmental Authority and do not contravene, or constitute a default under, any provision of applicable Law (including, without limitation, the Margin Regulations) or of the articles or certificate of incorporation, bylaws, partnership agreement, limited liability company agreement or other organizational documents of any Credit Party, or of any agreement, judgment, injunction, order, decree or other instrument binding upon any Credit Party or result in the creation or imposition of any Lien on any asset of any Credit Party other than the Liens securing the Obligations. SECTION 8.3 Binding Effect. This Agreement constitutes a valid and binding agreement of Borrower; the other Loan Papers when executed and delivered in accordance with this Agreement, will constitute the valid and binding obligations of each Credit Party (to the extent each Credit Party is a party thereto), and each Loan Paper is, or when executed and delivered, will be, enforceable against each Credit Party (to the extent each Credit Party is a party thereto), in accordance with its terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors rights generally, and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability. SECTION 8.4 Financial Information. (a) The most recent annual audited consolidated balance sheets of each of Borrower, EXCO and Taurus and the related consolidated statements of operations and cash flows for the Fiscal Year then ended, copies of which have been delivered to each Bank, fairly present, in conformity with GAAP, the consolidated financial position of each of Borrower, EXCO and Taurus 43 50 as of the end of such Fiscal Year and its consolidated results of operations and cash flows for such Fiscal Year. (Notwithstanding the foregoing, the representation and warranty contained in this Section 8.4(a) will not be deemed to be made with respect to Borrower and Taurus until such time as annual audited consolidated balance sheets, statements of operations and cash flows for Borrower for the Fiscal Year ended December 31, 2000 are delivered to each Bank in accordance with Section 9.1(a)). (b) The most recent quarterly unaudited consolidated balance sheet of Borrower, EXCO and Taurus delivered to Banks, and the related unaudited consolidated statements of operations and cash flows for the portion of Borrower's, EXCO's and Taurus's Fiscal Year then ended, fairly present, in conformity with GAAP applied on a basis consistent with the financial statements referred to in Section 8.4(a), the consolidated financial position of Borrower, EXCO and Taurus as of such date and its consolidated results of operations and cash flows for such portion of Borrower's, EXCO's and Taurus's Fiscal Year. (Notwithstanding the foregoing, the representation and warranty contained in this Section 8.4(b) will not be deemed to be made with respect to Borrower until such time as quarterly unaudited consolidated balance sheets, statements of operations and cash flows for Borrower for the Fiscal Quarter ending March 31, 2000 are delivered to each Bank in accordance with Section 9.1(b)). (c) No Material Adverse Change has occurred. (d) After giving effect to the transactions contemplated by this Agreement, (i) the fair value of the property of each Credit Party is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of each Credit Party , (ii) the present fair saleable value of the assets of each Credit Party is not less than the amount that will be required to pay the liability of such Credit Party on its debts as they become absolute and matured, (iii) each Credit Party is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (iv) no Credit Party intends to, and no Credit Party believes that it will, incur debts or liabilities beyond its ability to pay as such debts and liabilities mature, and (v) no Credit Party is engaged in a business or transaction, and no Credit Party is about to engage in business or a transaction for which such Credit Party's property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Credit Party is engaged. (e) Borrower was formed on February 17, 2000 for the purpose of acquiring and developing the Nebraska Properties and producing and marketing Hydrocarbons therefrom. Prior to giving effect to the acquisition of the Nebraska Properties, Borrower had no assets, operations, employees or liabilities of any nature (contingent or otherwise) other than rights and obligations arising under the Nebraska Acquisition Agreement, this Agreement and the other Loan Papers. SECTION 8.5 Litigation. Except for matters disclosed on Schedule 2 attached hereto, there is no action, suit or proceeding pending against, or to the knowledge of Borrower, threatened against or affecting Borrower or any of its Subsidiaries before any Governmental Authority in which there 44 51 is a reasonable possibility of an adverse decision which could result in a Material Adverse Change or which could in any manner draw into question the validity of the Loan Papers. SECTION 8.6 ERISA. Neither Borrower nor any ERISA Affiliate of Borrower maintains or has ever maintained or been obligated to contribute to any Plan covered by Title IV of ERISA or subject to the funding requirements of Section 412 of the Code or Section 302 of ERISA. Each Plan maintained by Borrower or any ERISA Affiliate of Borrower is in compliance in all material respects with all applicable Laws. Except in such instances where an omission or failure would not result in a Material Adverse Change on the business, financial condition or prospects of Borrower, (a) all returns, reports and notices required to be filed with any regulatory agency with respect to any Plan have been filed timely, and (b) neither Borrower nor any ERISA Affiliate of Borrower has failed to make any contribution or pay any amount due or owing as required by the terms of any Plan. There are no pending or, to the best of Borrower's knowledge, threatened claims, lawsuits, investigations or actions (other than routine claims for benefits in the ordinary course) asserted or instituted against, and neither Borrower nor any ERISA Affiliate of Borrower has knowledge of any threatened litigation or claims against, the assets of any Plan or its related trust or against any fiduciary of a Plan with respect to the operation of such Plan that are likely to result in liability of Borrower causing a Material Adverse Change. Except in such instances where an omission or failure would not result in a Material Adverse Change, each Plan that is intended to be "qualified" within the meaning of section 401(a) of the Code is, and has been during the period from its adoption to date, so qualified, both as to form and operation and all necessary governmental approvals, including a favorable determination as to the qualification under the Code of such Plan and each amendment thereto, have been or will be timely obtained. Neither Borrower nor any ERISA Affiliate of Borrower has engaged in any prohibited transactions, within the meaning of section 406 of ERISA or section 4975 of the Code, in connection with any Plan which would result in liability of Borrower causing a Material Adverse Change. Neither Borrower nor any ERISA Affiliate of Borrower maintains or contributes to any Plan that provides a post-employment health benefit, other than a benefit required under Section 601 of ERISA, or maintains or contributes to a Plan that provides health benefits that is not fully funded except where the failure to fully fund such Plan would not result in a Material Adverse Change. Neither Credit Party nor any ERISA Affiliate of Borrower maintains, has established or has ever participated in a multiple employer welfare benefit arrangement within the meaning of section 3(40)(A) of ERISA. SECTION 8.7 Taxes and Filing of Tax Returns. Borrower and each of its Subsidiaries has filed all tax returns required to have been filed and has paid all Taxes shown to be due and payable on such returns, including interest and penalties, and all other Taxes which are payable by such party, to the extent the same have become due and payable. Borrower does not know of any proposed material Tax assessment against it or any of its Subsidiaries and all Tax liabilities of Borrower and its Subsidiaries are adequately provided for. Except as disclosed in writing to Banks prior to the date hereof, no income tax liability of Borrower or any of its Subsidiaries has been asserted by the Internal Revenue Service or other Governmental Authority for Taxes in excess of those already paid. 45 52 SECTION 8.8 Ownership of Properties Generally. Borrower and each of its Subsidiaries has good and valid fee simple or leasehold title to all material properties and assets purported to be owned by it, including, without limitation, all assets reflected in the balance sheets referred to in Section 8.4(a) and 8.4(b) and all assets which are used by Borrower and its Subsidiaries in the operation of their respective businesses, and none of such properties or assets is subject to any Lien other than Permitted Encumbrances. SECTION 8.9 Mineral Interests. Borrower has good and defensible title to all Mineral Interests described in the Reserve Report, including, after giving effect to the Nebraska Acquisition, the Nebraska Properties, free and clear of all Liens except Permitted Encumbrances. All such Mineral Interests are valid, subsisting, and in full force and effect, and all rentals, royalties, and other amounts due and payable in respect thereof have been duly paid. Without regard to any consent or non-consent provisions of any joint operating agreement covering any of Borrower's Proved Mineral Interests, Borrower's share of (a) the costs for each Proved Mineral Interest described in the Reserve Report is not greater than the decimal fraction set forth in the Reserve Report, before and after payout, as the case may be, and described therein by the respective designations "working interests", "WI", "gross working interest", "G.I.", or similar terms, and (b) production from, allocated to, or attributed to each such Proved Mineral Interest is not less than the decimal fraction set forth in the Reserve Report, before and after payout, as the case may be, and described therein by the designations net revenue interest, NHI, or similar terms. Each well drilled in respect of each Proved Producing Mineral Interest described in the Reserve Report (y) is capable of, and is presently, producing Hydrocarbons in commercially profitable quantities, and Borrower is currently receiving payments for its share of production, with no funds in respect of any thereof being presently held in suspense, other than any such funds being held in suspense pending delivery of appropriate division orders, and (z) has been drilled, bottomed, completed, and operated in compliance with all applicable Laws and no such well which is currently producing Hydrocarbons is subject to any penalty in production by reason of such well having produced in excess of its allowable production. SECTION 8.10 Licenses, Permits, Etc. Borrower and each of its Subsidiaries possesses such valid franchises, certificates of convenience and necessity, operating rights, licenses, permits, consents, authorizations, exemptions and orders of Governmental Authorities, as are necessary to carry on its business as now conducted and as proposed to be conducted, except to the extent a failure to obtain any such item would not result in a Material Adverse Change. SECTION 8.11 Compliance with Law. The business and operations of Borrower and its Subsidiaries have been and are being conducted in accordance with all applicable Laws other than violations of Laws which do not (either individually or collectively) result in a Material Adverse Change. SECTION 8.12 Full Disclosure. All information heretofore furnished by any Credit Party to Administrative Agent or any Bank for purposes of or in connection with this Agreement, any Loan Paper or any transaction contemplated hereby or thereby is, and all such information hereafter furnished by or on behalf of Borrower to Administrative Agent or any Bank will be, true, complete 46 53 and accurate in every material respect. Borrower has disclosed or has caused to be disclosed to Banks in writing any and all facts (other than facts of general public knowledge) which might reasonably be expected to result in a Material Adverse Change. SECTION 8.13 Organizational Structure; Nature of Business. Borrower is engaged only in the business of acquiring, owning, exploring, developing and operating the Nebraska Properties and other Mineral Interests contained in the AMI (as defined in the Amended and Restated Agreement of Limited Partnership of Humphrey-Hill, L.P. dated March 24, 2000), and the production, marketing, processing and transporting of Hydrocarbons therefrom. Schedule 3 hereto accurately reflects (i) the jurisdiction of organization of Borrower, (ii) each jurisdiction in which Borrower is qualified to transact business as a foreign limited partnership, (iii) the authorized, issued and outstanding limited partnership interests of Borrower (and the legal and beneficial owners of such interests), and (iv) all outstanding warrants, options, subscription rights, convertible securities or other rights to purchase limited partnership interests of Borrower. Borrower has no Subsidiaries on the Closing Date. SECTION 8.14 Environmental Matters. No operation conducted by Borrower or any Subsidiary of Borrower and no real or personal property now or previously owned or leased by Borrower or any Subsidiary of Borrower (including, without limitation, the Nebraska Properties) and no operations conducted thereon, and to Borrower's knowledge, no operations of any prior owner, lessee or operator of any such properties, is or has been in violation of any Applicable Environmental Law other than violations which neither individually nor in the aggregate could result in a Material Adverse Change. Neither Borrower, any Subsidiary of Borrower, nor any such property or operation is the subject of any existing, pending or, to Borrower's knowledge, threatened Environmental Complaint which could, individually or in the aggregate, result in Material Adverse Change. All notices, permits, licenses, and similar authorizations, required to be obtained or filed in connection with the ownership of each tract of real property or operations of Borrower or any Subsidiary of Borrower thereon and each item of personal property owned, leased or operated by Borrower or any Subsidiary of Borrower, including, without limitation, notices, licenses, permits and authorizations required in connection with any past or present treatment, storage, disposal, or release of Hazardous Substances into the environment, have been duly obtained or filed except to the extent the failure to obtain or file such notices, licenses, permits and authorizations would not result in a Material Adverse Change. All Hazardous Substances, generated at each tract of real property and by each item of personal property owned, leased or operated by Borrower or any Subsidiary of Borrower have been transported, treated, and disposed of only by carriers or facilities maintaining valid permits under RCRA and all other Applicable Environmental Laws for the conduct of such activities except in such cases where the failure to obtain such permits could not, individually or in the aggregate, result in a Material Adverse Change. There have been no Hazardous Discharges which were not in compliance with Applicable Environmental Laws other than Hazardous Discharges which would not, individually or in the aggregate, result in a Material Adverse Change. Neither Borrower nor any Subsidiary of Borrower has any contingent liability in connection with any Hazardous Discharge which could reasonably be expected to result in a Material Adverse Change. 47 54 SECTION 8.15 Burdensome Obligations. Neither Borrower, nor any Subsidiary of Borrower, nor any of their respective properties is subject to any Law or any pending or threatened change of Law or subject to any restriction under its articles (or certificate) of incorporation, bylaws, regulations, partnership agreement or comparable charter or other organizational documents or under any agreement or instrument to which Borrower or any Subsidiary of Borrower or by which Borrower or any Subsidiary of Borrower or any of their respective properties may be subject or bound, which is so unusual or burdensome as to be likely in the foreseeable future to result in a Material Adverse Change. Without limiting the foregoing, neither Borrower nor any Subsidiary of Borrower is a party to or bound by any agreement or subject to any order of any Governmental Authority which prohibits or restricts in any way the right of Borrower or any Subsidiary of Borrower to make Distributions. SECTION 8.16 Fiscal Year. Borrower's Fiscal Year is January 1 through December 31. SECTION 8.17 No Default. Neither a Default nor an Event of Default has occurred or will exist after giving effect to the transactions contemplated by this Agreement or the other Loan Papers. SECTION 8.18 Government Regulation. Neither Borrower nor any Subsidiary of Borrower is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act (as any of the preceding acts have been amended), the Investment Company Act of 1940 or any other law which regulates the incurring by Borrower or any Subsidiary of Borrower of Debt, including, but not limited to laws relating to common contract carriers or the sale of electricity, gas, steam, water or other public utility services. SECTION 8.19 Insider. Neither Borrower nor any Subsidiary of Borrower is, and no Person having "control" (as that term is defined in 12 U.S.C. Section 375(b) or regulations promulgated thereunder) of Borrower or any Subsidiary of Borrower is an "executive officer", "director" or "shareholder" of any Bank or any bank holding company of which any Bank is a Subsidiary or of any Subsidiary of such bank holding company. SECTION 8.20 Gas Balancing Agreements and Advance Payment Contracts. On the date of this Agreement, (a) there is no Material Gas Imbalance, and (b) the aggregate amount of all Advance Payments received by Borrower under Advance Payment Contracts which have not been satisfied by delivery of production does not exceed $50,000. SECTION 8.21 Nebraska Acquisition Documents. Borrower has provided each Bank with a true and correct copy of each of the Nebraska Acquisition Documents including all amendments and modifications thereto. No material rights or obligations of any party to any of such Nebraska Acquisition Documents have been waived and neither Borrower nor any of its Subsidiaries, nor to the best knowledge of Borrower or any other party to any of such Nebraska Acquisition Documents, is in default of its obligations thereunder. Each of the Nebraska Acquisition Documents is a valid, binding and enforceable obligation of the parties thereto in accordance with its terms and is in full force and effect. Each representation and warranty made by Borrower, and to the best knowledge 48 55 of Borrower, by Sellers in the Nebraska Acquisition Agreement and the other Nebraska Acquisition Documents (a) was true and correct when made, and (b) will be true and correct on the Closing Date. ARTICLE 9 AFFIRMATIVE COVENANTS Borrower covenants and agrees that, so long as any Bank has any commitment to lend or participate in Letter of Credit Exposure hereunder or any amount payable under any Note remains unpaid or any Letter of Credit remains outstanding: SECTION 9.1 Information. Borrower will deliver, or cause to be delivered, to each Bank: (a) as soon as available and in any event within one hundred twenty (120) days after the end of each Fiscal Year, a consolidated balance sheet of each of Borrower, EXCO and Taurus as of the end of such Fiscal Year and the related consolidated statements of income and statements of cash flow for such Fiscal Year, setting forth in each case in comparative form the figures for the previous Fiscal Year, all reported by Borrower, EXCO and Taurus in accordance with GAAP and audited by a firm of independent public accountants of nationally recognized standing and acceptable to Administrative Agent; (b) (i) as soon as available and in any event within forty-five (45) days after the end of each of the first three (3) Fiscal Quarters of each Fiscal Year, consolidated balance sheets of Borrower, EXCO and Taurus as of the end of such Fiscal Quarter and the related consolidated statements of income and statements of cash flow for such quarter and for the portion of Borrower's, EXCO's and Taurus's Fiscal Year ended at the end of such Fiscal Quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of Borrower's, EXCO's and Taurus's previous Fiscal Year; (c) simultaneously with the delivery of each set of financial statements referred to in Sections 9.1(a) and 9.1(b), a certificate of a Financial Officer of each of EXCO and Borrower in the form of Exhibit I-1 or I-2 (as applicable) attached hereto, (i) setting forth, in the case of the certificate delivered by the Financial Officer of Borrower, in reasonable detail the calculations required to establish whether Borrower was in compliance with the requirements of Article 11 on the date of such financial statements, (ii) stating whether there exists on the date of such certificate any Default and, if any Default then exists, setting forth the details thereof and the action which the Credit Parties are taking or propose to take with respect thereto, (iii) stating whether or not such financial statements fairly reflect in all material respects the results of operations and financial condition of Borrower, EXCO and Taurus as of the date of the delivery of such financial statements and for the period covered thereby, (iv) setting forth (A) whether as of such date there is a Material Gas Imbalance and, if so, setting forth the amount of net gas imbalances under Gas Balancing Agreements to which Borrower or any of its Subsidiaries is a party or by which any Mineral Interests owned by Borrower or any of its Subsidiaries are bound, and (B) the aggregate amount of all Advance 49 56 Payments received under Advance Payment Contracts to which Borrower or any of its Subsidiaries is a party or by which any Mineral Interests owned by Borrower or any of its Subsidiaries are bound which have not been satisfied by delivery of production, if any, and (v) a summary of the Hedge Transactions to which Borrower or any of its Subsidiaries is a party on such date; (d) as soon as available and in any event within forty-five (45) days after the end of each Fiscal Quarter, a report of Borrower's Financial Officer setting forth in reasonable detail Borrower's Net Revenues for the preceding Fiscal Quarter; (e) promptly upon the delivery thereof to Borrower's partners or their Affiliates generally, copies of all financial statements, material reports and proxy statements so mailed; (f) promptly upon the filing thereof, copies of all final registration statements, post effective amendments thereto and annual, quarterly or special reports which any Credit Party shall have filed with the Securities and Exchange Commission; provided that Borrower must deliver, or cause to be delivered, any annual reports which any Credit Party shall have filed with the Securities and Exchange Commission, within ninety (90) days after the end of each Fiscal Year of such Credit Party, and any quarterly reports which Borrower shall have filed with the Securities and Exchange Commission, within forty-five (45) days after the end of each of the first three (3) Fiscal Quarters of each Fiscal Year of such Credit Party; (g) promptly upon receipt of same, any notice or other information received by Borrower or any Subsidiary of Borrower indicating any potential, actual or alleged (i) non- compliance with or violation of the requirements of any Applicable Environmental Law which could result in liability to Borrower or any Subsidiary of Borrower for fines, clean up or any other remediation obligations or any other liability in excess of $100,000 in the aggregate; (ii) threatened Hazardous Discharge which Hazardous Discharge would impose on Borrower or any Subsidiary of Borrower a duty to report to a Governmental Authority or to pay cleanup costs or to take remedial action under any Applicable Environmental Law which could result in liability to Borrower or any Subsidiary of Borrower for fines, clean up and other remediation obligations or any other liability in excess of $100,000 in the aggregate; or (iii) the existence of any Lien arising under any Applicable Environmental Law securing any obligation to pay fines, clean up or other remediation costs or any other liability in excess of $100,000 in the aggregate. Without limiting the foregoing, Borrower or any Subsidiary of Borrower shall provide to Banks promptly upon receipt of same by Borrower or any Subsidiary of Borrower copies of all environmental consultants or engineers reports received by Borrower or any Subsidiary of Borrower which would render the representation and warranty contained in Section 8.14 untrue or inaccurate in any respect; (h) in the event any notification is provided to any Bank or Administrative Agent pursuant to Section 9.1(f) hereof or Administrative Agent or any Bank otherwise learns of any event or condition under which any such notice would be required, then, upon request of Required Banks, Borrower shall within thirty (30) days of such request, cause to be furnished to Administrative Agent and each Bank a report by an environmental consulting firm acceptable to Administrative Agent and 50 57 Required Banks, stating that a review of such event, condition or circumstance has been undertaken (the scope of which shall be acceptable to Administrative Agent and Required Banks) and detailing the findings, conclusions and recommendations of such consultant. Borrower shall bear all expenses and costs associated with such review and updates thereof; (i) immediately upon any Authorized Officer becoming aware of the occurrence of any Default, a certificate of an Authorized Officer setting forth the details thereof and the action which Borrower is taking or proposes to take with respect thereto; (j) no later than March 1, and September 1 of each year, reports of production volumes, revenue, expenses and product prices for all Mineral Interests owned by Borrower for the periods of six (6) months ending the preceding December 31, and June 30, respectively; such reports shall be prepared on an accrual basis and shall be reported on a field by field basis; (k) promptly notify Banks of any Material Adverse Change; (l) on or before May 24, 2000 an engineering analysis of the Nebraska Properties in form and substance satisfactory to Administrative Agent and prepared by Lee Keeling and Associates, Inc.; and (m) from time to time such additional information regarding the financial position or business of Borrower and its Subsidiaries as Administrative Agent, at the request of any Bank, may reasonably request. SECTION 9.2. Business of Borrower. The sole business of Borrower is and shall continue to be solely the acquisition, ownership, exploration, development and operation of the Nebraska Properties and other Mineral Interests contained in the AMI (as defined in the Amended and Restated Agreement of Limited Partnership of Humphrey-Hill, L.P. dated March 24, 2000), and the production, marketing, processing and transportation of Hydrocarbons therefrom. SECTION 9.3 Maintenance of Existence. Borrower shall, and shall cause each Credit Party to, at all times (a) maintain its corporate, partnership or limited liability company existence in its state of incorporation or organization, and (b) maintain its good standing and qualification to transact business in all jurisdictions where the failure to maintain good standing or qualification to transact business could result in a Material Adverse Change. SECTION 9.4 Title Data. In addition to the title information required by Article 7, but subject to the Title Review Limit, Borrower shall, upon the request of Required Banks, cause to be delivered to Administrative Agent such title opinions and other information regarding title to Mineral Interests owned by Borrower and the perfection and priority of Administrative Agent's Liens therein as are appropriate to determine the status thereof. 51 58 SECTION 9.5 Right of Inspection. Borrower will permit, and will cause each of its Subsidiaries to permit, any officer, employee or Administrative Agent of Administrative Agent or of any Bank to visit and inspect any of the assets of Borrower and its Subsidiaries, examine Borrower's and its Subsidiaries' books of record and accounts, take copies and extracts therefrom, and discuss the affairs, finances and accounts of Borrower and its Subsidiaries with Borrower's and its Subsidiaries' officers, accountants and auditors, all at such reasonable times and as often as Administrative Agent or any Bank may reasonably request, all at the expense of Borrower; provided, that, in the absence of a Default or Event of Default, neither Administrative Agent nor any Bank will require Borrower to incur any unreasonable cost or expense under this Section 9.5. SECTION 9.6 Maintenance of Insurance. Borrower will, and will cause each of its Subsidiaries to, at all times maintain or cause to be maintained insurance covering such risks as are customarily carried by businesses similarly situated, including, without limitation, the following: (a) workmen's compensation insurance; (b) employer's liability insurance; (c) comprehensive general public liability and property damage insurance; (d) comprehensive automobile liability insurance, and (e) such other perils as are customarily insured against in the oil and gas industry. All loss payable clauses or provisions in all policies of insurance maintained by Borrower and its Subsidiaries pursuant to this Section 9.6 shall be endorsed in favor of and made payable to Administrative Agent for the ratable benefit of Banks, as their interests may appear. Administrative Agent shall have the right, for the ratable benefit of the Banks, to collect, and Borrower hereby assigns to Administrative Agent for the ratable benefit of Banks (and hereby agrees to cause each Subsidiary of Borrower to assign), any and all monies that may become payable under any such policies of insurance by reason of damage, loss or destruction of any of property which stands as security for the Obligations or any part thereof, and Administrative Agent may, at its election, either apply for the ratable benefit of Banks all or any part of the sums so collected toward payment of the Obligations, whether or not such Obligations are then due and payable, in such manner as Administrative Agent may elect or release same to Borrower or the applicable Subsidiary of Borrower. SECTION 9.7 Payment of Taxes and Claims. Borrower will, and will cause each of its Subsidiaries to, pay (a) all Taxes imposed upon it or any of its assets or with respect to any of its franchises, business, income or profits before any material penalty or interest accrues thereon, and (b) all material claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by Law have or might become a Lien (other than a Permitted Encumbrance) on any of its assets; provided, however, no payment of Taxes or claims shall be required if (i) the amount, applicability or validity thereof is currently being contested in good faith by appropriate action promptly initiated and diligently conducted in accordance with good business practices and no material part of the property or assets of Borrower or any of its Subsidiaries is subject to any pending levy or execution, (ii) Borrower and its Subsidiaries, as and to the extent required in accordance with GAAP, shall have set aside on their books reserves (segregated to the extent required by GAAP) deemed by them to be adequate with respect thereto, and (iii) the Borrower has notified Administrative Agent of such circumstances in detail satisfactory to Administrative Agent. 52 59 SECTION 9.8 Compliance with Laws and Documents. Borrower will, and will cause each of its Subsidiaries to, comply with all Laws, their respective partnership agreements, certificates (or articles) of incorporation, bylaws, regulations and similar organizational documents and all Material Agreements to which Borrower or any of its Subsidiaries is a party, if a violation, alone or when combined with all other such violations, could result in a Material Adverse Change. SECTION 9.9 Operation of Properties and Equipment. (a) Borrower will, and will cause each of the other Credit Parties to, maintain, develop and operate (or cause the operator to maintain and operate to the extent Borrower or any other Credit Party is not the operator) its Mineral Interests in a good and workmanlike manner, and observe and comply with all of the terms and provisions, express or implied, of all oil and gas leases relating to such Mineral Interests so long as such Mineral Interests are capable of producing Hydrocarbons and accompanying elements in paying quantities. (b) Borrower will, and will cause each of the other Credit Parties to, comply in all respects with all contracts and agreements applicable to or relating to its Mineral Interest or the production and sale of Hydrocarbons and accompanying elements therefrom. (c) Borrower will, and will cause each of the other Credit Parties to, at all times maintain, preserve and keep all operating equipment used with respect to its Mineral Interests in proper repair, working order and condition, and make all necessary or appropriate repairs, renewals, replacements, additions and improvements thereto so that the efficiency of such operating equipment shall at all times be properly preserved and maintained; provided that, no item of operating equipment need be so repaired, renewed, replaced, added to or improved if Borrower shall in good faith determine that such action is not necessary or desirable for the continued efficient and profitable operation of the business of Borrower and the other Credit Parties. SECTION 9.10 Environmental Law Compliance. Borrower will, and will cause each of the other Credit Parties to, comply with all Applicable Environmental Laws, including, without limitation, (a) all licensing, permitting, notification and similar requirements of Applicable Environmental Laws, and (b) all provisions of all Applicable Environmental Laws regarding storage, discharge, release, transportation, treatment and disposal of Hazardous Substances. Borrower will, and will cause each of the other Credit Parties to, promptly pay and discharge when due all legal debts, claims, liabilities and obligations with respect to any clean-up or remediation measures necessary to comply with Applicable Environmental Laws. SECTION 9.11 ERISA Reporting Requirements. Borrower shall furnish, or cause to be furnished, to Administrative Agent: (a) Promptly and in any event (i) within thirty (30) days after Borrower or any ERISA Affiliate knows or has reason to know that any ERISA Event described in clause (a) of the definition of ERISA Event or any event described in section 4063(a) of ERISA with respect to any 53 60 Plan of Borrower or any ERISA Affiliate has occurred, and (ii) within fifteen (15) days after Borrower or any ERISA Affiliate knows or has reason to know that any other ERISA Event with respect to any Plan of Borrower or any ERISA Affiliate has occurred or a request for minimum funding waiver under section 412 of the Code with respect to any Plan of Borrower or any ERISA Affiliate has been made, a written notice describing such event and describing what action is being taken or is proposed to be taken with respect thereto, together with a copy of any notice of event that is given to the PBGC; (b) Promptly and in any event within five (5) Domestic Business Days after receipt thereof by Borrower or any ERISA Affiliate from the PBGC, copies of each notice received by Borrower or any ERISA Affiliate of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan; (c) Promptly and in any event within thirty (30) days after the receipt by Borrower of a request therefor by a Bank, copies of any annual and other report (including Schedule B thereto) with respect to a Plan filed by Borrower or any ERISA Affiliate with the United States Department of Labor, the Internal Revenue Service or the PBGC; (d) Promptly, and in any event within ten (10) Domestic Business Days after receipt thereof, a copy of any correspondence Borrower or any ERISA Affiliate receives from the Plan Sponsor (as defined by section 4001(a)(10) of ERISA) of any Plan asserting withdrawal liability pursuant to section 4219 or 4202 of ERISA upon Borrower or any ERISA Affiliate, and a statement from the chief financial officer of Borrower or such ERISA Affiliate setting forth details as to the events giving rise to such withdrawal liability and the action which Borrower or such ERISA Affiliate is taking or proposes to take with respect thereto; (e) Notification within thirty (30) days of the effective date thereof of any material increases in the benefits of any existing Plan which is not a multiemployer plan (as defined in section 4001(a)(3) of ERISA), or the establishment of any new Plans, or the commencement of contributions to any Plan to which Borrower or any ERISA Affiliate was not previously contributing; (f) Notification within five (5) Domestic Business Days after Borrower or any ERISA Affiliate knows or has reason to know that Borrower or any such ERISA Affiliate has or intends to file a notice of intent to terminate any Plan under a distress termination within the meaning of section 4041(c) of ERISA and a copy of such notice; and (g) Promptly after receipt of written notice of commencement thereof, notice of all (i) claims made by participants or beneficiaries with respect to any Plan and (ii) actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting Borrower or any ERISA Affiliate with respect to any Plan, except those which, in the aggregate, if adversely determined would not result in a Material Adverse Change. 54 61 SECTION 9.12 Additional Documents. Borrower will, and will cause each other Credit Party (to the extent each is party thereto) to, cure promptly any defects in the creation and issuance of each Note, and the execution and delivery of this Agreement and the other Loan Papers and, at Borrower's expense, Borrower shall promptly and duly execute and deliver to each Bank, and cause each other Credit Party to promptly and duly execute and deliver to each Bank, upon reasonable request, all such other and further documents, agreements and instruments in compliance with or accomplishment of the covenants and agreements of Borrower and each other Credit Party in this Agreement and the other Loan Papers as may be reasonably necessary or appropriate in connection therewith. SECTION 9.13 Environmental Review. Not later than thirty (30) days prior to the date of any acquisition by Borrower of Mineral Interests or related assets, other than an acquisition of additional interests in Mineral Interests in which Borrower previously held an interest, Borrower shall deliver to Administrative Agent a report in form, scope and detail acceptable to Administrative Agent from environmental engineering firms acceptable to Administrative Agent, which report or reports shall set forth the results of a Phase I environmental review of such Mineral Interests and related assets. ARTICLE 10 NEGATIVE COVENANTS Borrower agrees that, so long as any Bank has any commitment to lend or participate in Letter of Credit Exposure hereunder or any amount payable under any Note remains unpaid or any Letter of Credit remains outstanding: SECTION 10.1 Incurrence of Debt. Borrower will not, nor will Borrower permit any of its Subsidiaries to, incur, become or remain liable for any Debt other than (a) the Obligations, and (b) other Debt in an aggregate amount outstanding at any time not to exceed $25,000. SECTION 10.2 Distributions. Borrower will not, nor will Borrower permit any of its Subsidiaries to, directly or indirectly, declare or pay, or incur any liability to declare or pay, any Distribution; provided, that, so long as no Default or Borrowing Base Deficiency has then occurred which is continuing Borrower shall be permitted to make Distributions to EXCO, Hill, Humphrey, Humphrey Oil and Taurus. SECTION 10.3 Negative Pledge. Borrower will not, nor will Borrower permit any of its Subsidiaries to, create, assume or suffer to exist any Lien on any asset of Borrower or any of its Subsidiaries other than Permitted Encumbrances. Borrower will not, nor will Borrower permit any of its Subsidiaries to, enter into or become bound by any agreement (other than this Agreement) that prohibits or otherwise restricts the right of Borrower or any of its Subsidiaries to create, assume or suffer to exist any Lien on any of Borrower's or any of its Subsidiaries' assets in favor of Administrative Agent for the ratable benefit of Banks. 55 62 SECTION 10.4 Consolidations and Mergers. Borrower will not, nor will Borrower permit any Subsidiary to, consolidate or merge with or into any other Person. SECTION 10.5 Asset Dispositions. Borrower will not, nor will Borrower permit any of its Subsidiaries to, sell, lease, transfer, abandon or otherwise dispose of assets with an aggregate value of $25,000 or greater in any Fiscal Year other than sales of Hydrocarbons produced from Borrower's Mineral Interests in the ordinary course of business. In no event will Borrower sell, transfer or dispose of any capital stock or other equity interest, in any Subsidiary of Borrower nor will any Subsidiary of Borrower issue or sell, any capital stock or other equity interest or any option, warrant or other right to acquire such capital stock or equity interest or security convertible into such capital stock or equity interest to any Person other than the direct parent of such issuer on the Closing Date. SECTION 10.6 Amendments to Organizational Documents; Other Material Agreements. Borrower will not, nor will Borrower permit any of its Subsidiaries to, enter into or permit any modification or amendment of, or waive any right or obligation of any Person under, (a) the Operating Agreement, or (b) its certificate or articles of incorporation, bylaws, partnership agreement, limited liability company agreement, regulations or other organizational documents. SECTION 10.7 Use of Proceeds. The proceeds of Borrowings will not be used for any purpose other than the purposes expressly permitted by Section 2.1(d) hereof. Without limiting the foregoing, none of such proceeds (including, without limitation, proceeds of Letters of Credit issued hereunder) will be used, directly or indirectly, for any other purpose, including, without limitation, the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock, and none of such proceeds will be used in violation of applicable Law (including, without limitation, the Margin Regulations). Letters of Credit will be issued hereunder only for the purpose of securing bids, tenders, bonds, contracts and other obligations entered into in the ordinary course of Borrower's business. Without limiting the foregoing no Letters of Credit will be issued hereunder for the purpose of providing credit enhancement with respect to any Debt or equity security of Borrower or any Subsidiary of Borrower or to secure Borrower's or any of its Subsidiaries' obligations with respect to Hedge Transactions other than Hedge Transactions with a Bank. SECTION 10.8 Investments. Borrower will not, nor will Borrower permit any of its Subsidiaries to, directly or indirectly, make or have outstanding any Investment other than (a) Permitted Investments, and (b) other Investments to the extent permitted pursuant to clause (e) of the definition of Restricted Payments. Borrower will not create or acquire any Subsidiary. SECTION 10.9 Transactions with Affiliates. Borrower will not, nor will Borrower permit any of its Subsidiaries to, engage in any transaction with an Affiliate unless such transaction is as favorable to such party as could be obtained in an arm's length transaction with an unaffiliated Person in accordance with prevailing industry customs and practices. Without limiting the foregoing, Borrower will not, and Borrower will not permit any of its Subsidiaries to, pay or become obligated to pay any Distribution to either EXCO, Hill, Humphrey, or Taurus or any Affiliate of EXCO, Hill, Humphrey and Taurus other than Distributions expressly permitted by Section 10.2 hereof. 56 63 Notwithstanding the foregoing, Borrower shall be permitted to enter into the Operating Agreement and make the payments to EXCO expressly contemplated thereof. SECTION 10.10 ERISA. Except in such instances where an omission or failure would not result in a Material Adverse Change, Borrower will not, nor will Borrower permit any of its Subsidiaries to (a) take any action or fail to take any action which would result in a violation of ERISA, the Code or other laws applicable to the Plans maintained or contributed to by it or any ERISA Affiliate, or (b) modify the term of, or the funding obligations or contribution requirements under any existing Plan, establish a new Plan, or become obligated or incur any liability under a Plan that is not maintained or contributed to by a Borrower or any ERISA Affiliate as of the Closing Date. SECTION 10.11 Hedge Transactions. Borrower will not, nor will Borrower permit any of its Subsidiaries to, enter into Oil and Gas Hedge Transactions which would cause the volume of Hydrocarbons with respect to which a settlement payment is calculated under such Oil and Gas Hedge Transactions to exceed seventy-five percent (75%) of Borrower's anticipated production from Proved Producing Mineral Interests during the period from the immediately preceding settlement date (or the commencement of such Hedge Transaction if there is no prior settlement date) to such settlement date. SECTION 10.12 Fiscal Year. Borrower will not change its fiscal year. SECTION 10.13 Change in Business. Borrower will not engage in any business other than the business engaged in by Borrower on the date hereof as described in Section 8.13 hereof. SECTION 10.14 Restricted Payments. Borrower will not make, and Borrower will not permit any of its Subsidiaries to, make any Restricted Payment. ARTICLE 11 FINANCIAL COVENANTS Borrower agrees that so long as any Bank has any commitment to lend or participate in Letter of Credit Exposure hereunder or any amount payable under any Note remains unpaid or any Letter of Credit remains outstanding: SECTION 11.1 Current Ratio of Borrower. Borrower will not permit its ratio of Consolidated Current Assets to its Consolidated Current Liabilities to be less than 1.0 to 1.0 at any time. SECTION 11.2 Maximum General and Administrative Expenses. Borrower will not incur or pay, nor will Borrower permit any of its Subsidiaries to incur or pay, general and administrative expenses in an aggregate amount exceeding (a) $75,000 during the period commencing on the 57 64 Closing Date and ending December 31, 2000, or (b) $100,000 during any Fiscal Year ending on or after December 31, 2001. ARTICLE 12 DEFAULTS SECTION 12.1 Events of Default. If one or more of the following events (collectively "Events of Default" and individually an "Event of Default") shall have occurred and be continuing: (a) Borrower shall fail to pay when due any principal on any Note; (b) Borrower shall fail to pay when due accrued interest on any Note or any fees or any other amount payable hereunder and such failure shall continue for a period of three (3) days following the due date; (c) Borrower shall fail to observe or perform any covenant or agreement contained in Article 10 or Article 11 of this Agreement; (d) Borrower or any other Credit Party shall fail to observe or perform any covenant or agreement contained in this Agreement or any other Loan Papers (other than those referenced in Sections 12.1(a), 12.1(b) and 12.1(c)) and such failure continues for a period of twenty (20) days after the earlier of (i) the date any Authorized Officer of Borrower acquires knowledge of such failure, or (ii) written notice of such failure has been given to Borrower by Administrative Agent or any Bank; (e) any representation, warranty, certification or statement made or deemed to have been made by Borrower or any other Credit Party in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made; (f) Borrower or any other Credit Party shall fail to make any payment when due on any Debt of such Person in a principal amount equal to or greater than $10,000 or any other event or condition shall occur which (i) results in the acceleration of the maturity of any such Debt, or (ii) entitles the holder of such Debt to accelerate the maturity thereof; (g) Borrower or any other Credit Party shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general 58 65 assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against Borrower or any other Credit Party seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of sixty (60) days; or an order for relief shall be entered against Borrower or any other Credit Party under the federal bankruptcy Laws as now or hereafter in effect; (i) one (1) or more final judgments or orders for the payment of money aggregating in excess of $100,000 shall be rendered against Borrower or any other Credit Party and such judgment or order shall continue unsatisfied and unstayed for thirty (30) days; (j) any event occurs with respect to any Plan or Plans pursuant to which Borrower and/or any ERISA Affiliate incur a liability due and owing at the time of such event, without existing funding therefor, for benefit payments under such Plan or Plans in excess of $250,000; or (ii) Borrower, any ERISA Affiliate, or any other "party-in-interest" or "disqualified person", as such terms are defined in section 3(14) of ERISA and section 4975(e)(2) of the Code, shall engage in transactions which in the aggregate would reasonably result in a direct or indirect liability to Borrower or any ERISA Affiliate in excess of $250,000 under section 409 or 502 of ERISA or section 4975 of the Code; (k) Borrower or any Subsidiary of Borrower shall incur Environmental Liabilities which, individually or when considered in the aggregate, exceed $250,000; (l) this Agreement or any other Loan Paper shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by Borrower or any other Credit Party , or Borrower or any other Credit Party shall deny that it has any further liability or obligation under any of the Loan Papers to which it is a party, or any Lien created by the Loan Papers shall for any reason (other than the release thereof in accordance with the Loan Papers) cease to be a valid, first priority, perfected Lien upon any of the Proved Mineral Interests purported to be covered thereby; (m) a Material Adverse Change shall occur; or (n) a Change of Control shall occur; then, and in every such event, Administrative Agent shall without presentment, notice or demand (unless expressly provided for herein) of any kind (including, without limitation, notice of intention to accelerate and acceleration), all of which are hereby waived, (a) if requested by Required Banks, terminate the Commitments and they shall thereupon terminate, and (b) if requested by Required 59 66 Banks, take such other actions as may be permitted by the Loan Papers including, declaring the Notes (together with accrued interest thereon) to be, and the Notes shall thereupon become, immediately due and payable; provided that in the case of any of the Events of Default specified in Sections 12.1(g) or 12.1(h), without any notice to Borrower or any other act by Administrative Agent or Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable. ARTICLE 13 AGENTS SECTION 13.1 Appointment, Powers, and Immunities. Each Bank hereby irrevocably appoints and authorizes each Agent to act as its agent under this Agreement and the other Loan Papers with such powers and discretion as are specifically delegated to each such Agent by the terms of this Agreement and the other Loan Papers (and any separate agreements entered into among the parties regarding same), together with such other powers as are reasonably incidental thereto. No Agent (which term as used in this sentence and in Section 13.5 and the first sentence of Section 13.6 hereof shall include their Affiliates and their own and their Affiliates' officers, directors, employees, and agents): (a) shall have any duties or responsibilities except those expressly set forth in this Agreement and the other Loan Papers and no Agent shall be a trustee or fiduciary for any Bank; (b) shall be responsible to Banks for any recital, statement, representation, or warranty (whether written or oral) made in or in connection with any Loan Paper or any certificate or other document referred to or provided for in, or received by any of them under, any Loan Paper, or for the value, validity, effectiveness, genuineness, enforceability, or sufficiency of any Loan Paper, or any other document referred to or provided for therein or for any failure by any Credit Party or any other Person to perform any of its obligations thereunder; (c) shall be responsible for or have any duty to ascertain, inquire into, or verify the performance or observance of any covenants or agreements by any Credit Party or the satisfaction of any condition or to inspect the property (including the books and records) of any Credit Party or any of its Subsidiaries or Affiliates; (d) shall be required to initiate or conduct any litigation or collection proceedings under any Loan Paper; and (e) shall be responsible for any action taken or omitted to be taken by it under or in connection with any Loan Paper, except for its own gross negligence or willful misconduct. Each Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by any such Agent with reasonable care. SECTION 13.2 Reliance by Agents. Each Agent shall be entitled to rely upon any certification, notice, instrument, writing, or other communication (including, without limitation, any thereof by telephone or telecopy) believed by it to be genuine and correct and to have been signed, sent or made by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel (including counsel for any Credit Party), independent accountants, and other experts selected by any such Agent. Each Agent may deem and treat the payee of any Note as the holder thereof for all purposes hereof unless and until Administrative Agent receives and accepts an Assignment and Acceptance Agreement executed in accordance with Section 14.10 hereof. As to any matters not expressly provided for by this Agreement, no Agent shall be required to exercise any 60 67 discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of Required Banks, and such instructions shall be binding on Banks; provided, however, that no Agent shall be required to take any action that exposes such Agent to personal liability or that is contrary to any Loan Paper or applicable Law unless it shall first be indemnified to its satisfaction by Banks against any and all liability and expense which may be incurred by it by reason of taking any such action. SECTION 13.3 Defaults. No Agent shall be deemed to have knowledge or notice of the occurrence of a Default or Event of Default unless Administrative Agent has received written notice from a Bank, Parent or Borrower specifying such Default or Event of Default and stating that such notice is a "Notice of Default". In the event that Administrative Agent receives such a notice of the occurrence of a Default or Event of Default, Administrative Agent shall give prompt notice thereof to Banks. Administrative Agent shall (subject to Section 13.2 hereof) take such action with respect to such Default or Event of Default as shall reasonably be directed by Required Banks; provided that, unless and until Administrative Agent shall have received such directions, Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interest of Banks. SECTION 13.4 Rights as Bank. With respect to its Commitment and the Revolving Loans made by it, Bank of America (and any successor acting as Administrative Agent) in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as Administrative Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include Administrative Agent in its individual capacity. Bank of America (and any successor acting as Administrative Agent), each other Agent and their Affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, make investments in, provide services to, and generally engage in any kind of lending, trust, or other business with any Credit Party or Affiliates as if it were not acting as Agent, and Bank of America (and any successor acting as Administrative Agent), each other Agent and their Affiliates may accept fees and other consideration from any Credit Party or Affiliates for services in connection with this Agreement or otherwise without having to account for the same to Banks. SECTION 13.5 Indemnification. Banks agree to indemnify each Agent (to the extent not reimbursed by Parent and/or Borrower hereof, but without limiting the obligations of Parent and Borrower to so reimburse) ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including attorneys' fees), or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against any such Agent (including by any Bank) in any way relating to or arising out of any Loan Paper or the transactions contemplated thereby or any action taken or omitted by any Agent under any Loan Paper (INCLUDING ANY OF THE FOREGOING ARISING FROM THE NEGLIGENCE OF ANY AGENT); provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Person to be indemnified. Without limitation of the foregoing, each Bank agrees to reimburse each Agent 61 68 promptly upon demand for its ratable share of any costs or expenses payable by Parent and/or Borrower hereunder, to the extent that any such Agent is not promptly reimbursed for such costs and expenses by Parent and/or Borrower. The agreements contained in this Section 13.5 shall survive payment and performance in full of the Obligations and all other amounts payable under this Agreement. SECTION 13.6 Non-Reliance on Agents and Other Banks. Each Bank agrees that it has, independently and without reliance on any Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of each Credit Party and decision to enter into this Agreement and that it will, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under the Loan Papers. Except for notices, reports, and other documents and information expressly required to be furnished to Banks by Administrative Agent hereunder, no Agent shall have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition, or business of any Credit Party or their Affiliates that may come into the possession of any such Agent or any of their Affiliates. SECTION 13.7 Resignation of Agents. Any Agent may resign at any time by giving notice thereof to Banks and Borrower. Upon any such resignation, Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by Required Banks and shall have accepted such appointment within thirty (30) days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of Banks, appoint a successor Agent which shall be a commercial bank organized under the Laws of the United States of America having combined capital and surplus of at least $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor, such successor shall thereupon succeed to and become vested with all the rights, powers, discretion, privileges, and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article 13 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. ARTICLE 14 MISCELLANEOUS SECTION 14.1 Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telecopy or similar writing) and shall be given, if to Administrative Agent or any Bank, at its address or telecopier number set forth on Schedule 1 hereto, and if given to Borrower, at its address or telecopy number set forth on the signature pages hereof (or in either case, at such other address or telecopy number as such party may hereafter specify for the purpose by notice to the other parties hereto). Each such notice, request or other communication shall be effective (a) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section 14.1 and the appropriate answerback is received or receipt 62 69 is otherwise confirmed, (b) if given by mail, three (3) Domestic Business Days after deposit in the mails with first class postage prepaid, addressed as aforesaid or (c) if given by any other means, when delivered at the address specified in this Section 14.1; provided that notices to Administrative Agent under Article 2 or 3 shall not be effective until received. SECTION 14.2 No Waivers. No failure or delay by Administrative Agent or any Bank in exercising any right, power or privilege hereunder or under any Note or other Loan Paper shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by Law or in any of the other Loan Papers. SECTION 14.3 Expenses; Indemnification. (a) Borrower agrees to pay on demand all reasonable costs and expenses of Administrative Agent in connection with the syndication, preparation, execution, delivery, modification, and amendment of this Agreement, the other Loan Papers, and the other documents to be delivered hereunder, including, without limitation, the reasonable fees and expenses of counsel for Administrative Agent (including the cost of internal counsel) with respect thereto and with respect to advising Administrative Agent as to its rights and responsibilities under the Loan Papers. Borrower further agrees to pay on demand all reasonable costs and expenses of Administrative Agent and Banks, if any (including, without limitation, reasonable attorneys' fees and expenses and the cost of internal counsel), in connection with the enforcement (whether through negotiations, legal proceedings, or otherwise) of the Loan Papers and the other documents to be delivered hereunder. (b) Borrower agrees to indemnify and hold harmless Administrative Agent and each Bank and each of their Affiliates and their respective officers, directors, employees, Administrative Agents, and advisors (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities, costs, and expenses (including, without limitation, reasonable attorneys' fees) that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation, or proceeding or preparation of defense in connection therewith) the Loan Papers, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Revolving Loan (INCLUDING ANY OF THE FOREGOING ARISING FROM THE NEGLIGENCE OF THE INDEMNIFIED PARTY), except to the extent such claim, damage, loss, liability, cost, or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 14.3 applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by Borrower, its directors, shareholders or creditors or an Indemnified Party or any other Person or any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated. Borrower agrees not to assert any claim against Administrative Agent, any Bank, any of their Affiliates, or any of their respective directors, officers, 63 70 employees, attorneys, Administrative Agents, and advisers, on any theory of liability, for special, indirect, consequential, or punitive damages arising out of or otherwise relating to the Loan Papers, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Revolving Loan. (c) Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of Borrower contained in this Section 14.3 shall survive the payment in full of the Revolving Loans and all other amounts payable under this Agreement. SECTION 14.4 Right of Set-off; Adjustments. (a) Upon the occurrence and during the continuance of any Event of Default, each Bank (and each of its Affiliates) is hereby authorized at any time and from time to time, to the fullest extent permitted by Law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank (or any of its Affiliates) to or for the credit or the account of Borrower against any and all of the Obligations, irrespective of whether such Bank shall have made any demand under this Agreement or Note held by such and although such obligations may be unmatured. Each Bank agrees promptly to notify Borrower after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Bank under this Section 14.4 are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Bank may have. (b) If any Bank (a "benefitted Bank") shall at any time receive any payment of all or part of the Revolving Loans owing to it, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, or otherwise), in a greater proportion than any such payment to or collateral received by any other Bank, if any, in respect of such other Bank's Revolving Loans owing to it, or interest thereon, such benefitted Bank shall purchase for cash from the other Banks a participating interest in such portion of each such other Bank's Revolving Loans owing to it, or shall provide such other Banks with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefitted Bank to share the excess payment or benefits of such collateral or proceeds ratably with each Banks; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such benefitted Bank, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. Borrower agrees that any Bank so purchasing a participation from a Bank pursuant to this Section 14.4 may, to the fullest extent permitted by Law, exercise all of its rights of payment (including the right of set-off) with respect to such participation as fully as if such Person were the direct creditor of Borrower in the amount of such participation. SECTION 14.5 Amendments and Waivers. Any provision of this Agreement or any other Loan Paper may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by Borrower and the Required Banks (and, if Article 13 or the rights or duties of any Agent are affected thereby, by such Agent); provided that no such amendment or waiver shall, unless signed 64 71 by each Bank directly affected thereby, (i) increase the Commitments of Banks, (ii) reduce the principal of or rate of interest on any Revolving Loan or any fees or other amounts payable hereunder, (iii) postpone any date fixed for the payment of any scheduled installment of principal of or interest on any Revolving Loan or any fees or other amounts payable hereunder or for termination of any Commitment, (iv) change the percentage of the Commitments or of the unpaid principal amount of the Notes, or the number of Banks, which shall be required for Banks or any of them to take any action under this Section 14.5 or any other provision of this Agreement, or (v) release any guarantor of the Obligations or all or substantially all of the collateral securing the Obligations. SECTION 14.6 Survival. All representations, warranties and covenants made by Borrower or any of its Subsidiaries herein or in any certificate or other instrument delivered by it or in its behalf under the Loan Papers shall be considered to have been relied upon by Banks and shall survive the delivery to Banks of such Loan Papers or the extension of the Revolving Loans (or any part thereof), regardless of any investigation made by or on behalf of Banks. The indemnity provided in Section 14.3 herein shall survive the repayment of all credit advances hereunder and/or the discharge or release of any Lien granted hereunder or in any other Loan Paper, contract or agreement between Borrower or any of its Subsidiaries and Administrative Agent or any Bank. SECTION 14.7 Limitation on Interest. Regardless of any provision contained in the Loan Papers, Banks shall never be entitled to receive, collect, or apply, as interest on the Revolving Loan, any amount in excess of the Maximum Lawful Rate, and in the event any Bank ever receives, collects or applies as interest any such excess, such amount which would be deemed excessive interest shall be deemed a partial prepayment of principal and treated hereunder as such; and if the Revolving Loan is paid in full, any remaining excess shall promptly be paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds the Maximum Lawful Rate, Borrower and Banks shall, to the extent permitted under applicable Law, (a) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof and (c) amortize, prorate, allocate and spread, in equal parts, the total amount of the interest throughout the entire contemplated term of the Notes, so that the interest rate is the Maximum Lawful Rate throughout the entire term of the Notes; provided, however, that if the unpaid principal balance thereof is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Lawful Rate, Banks shall refund to Borrower the amount of such excess and, in such event, Banks shall not be subject to any penalties provided by any laws for contracting for, charging, taking, reserving or receiving interest in excess of the Maximum Lawful Rate. SECTION 14.8 Invalid Provisions. If any provision of the Loan Papers is held to be illegal, invalid, or unenforceable under present or future Laws effective during the term thereof, such provision shall be fully severable, the Loan Papers shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part thereof, and the remaining provisions thereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of the Loan Papers a provision 65 72 as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid and enforceable. SECTION 14.9 Waiver of Consumer Credit Laws. Pursuant to Article 15.10(b) of Chapter 15, Subtitle 79, Revised Civil Statutes of Texas, 1925, as amended, Borrower agrees that such Chapter 15 shall not govern or in any manner apply to the Revolving Loan. SECTION 14.10 Assignments and Participations. (a) Each Bank may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its interest in the Revolving Loan, its Note, and its Commitment); provided, however, that (i) each such assignment shall be to an Eligible Assignee; (ii) except in the case of an assignment to another Bank or an assignment of all of a Bank's rights and obligations under this Agreement, any such partial assignment shall be in an amount at least equal to $5,000,000 or an integral multiple of $100,000 in excess thereof; (iii) each such assignment by a Bank shall be of a constant, and not varying, percentage of all of its rights and obligations under this Agreement and its Note; and (iv) the parties to such assignment shall execute and deliver to Administrative Agent for its acceptance an Assignment and Acceptance Agreement (herein so called) in the form of Exhibit J hereto, together with any Note subject to such assignment and a processing fee of $3,500. Upon execution, delivery, and acceptance of such Assignment and Acceptance Agreement, the assignee thereunder shall be a party hereto and, to the extent of such assignment, have the obligations, rights, and benefits of a Bank hereunder and the assigning Bank shall, to the extent of such assignment, relinquish its rights and be released from its obligations under this Agreement. Upon the consummation of any assignment pursuant to this Section 14.10(a), the assignor, Administrative Agent and Borrower shall make appropriate arrangements so that, if required, new Notes are issued to the assignor and the assignee. If the assignee is not incorporated under the Laws of the United States of America or a state thereof, it shall deliver to Borrower and Administrative Agent certification as to exemption from deduction or withholding of Taxes in accordance with Section 4.6(d). (b) Administrative Agent shall maintain at its address set forth on Schedule 1 hereto, a copy of each Assignment and Acceptance Agreement delivered to and accepted by it and a register for the recordation of the names and addresses of Banks and the Commitment of, and principal amount of the Revolving Loan owing to, each Bank and the Commitment Percentage of 66 73 each Bank from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and Borrower, Administrative Agent and Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by Borrower or any Bank at any reasonable time and from time to time upon reasonable prior notice. (c) Upon its receipt of an Assignment and Acceptance Agreement executed by the parties thereto, together with any Note subject to such assignment and payment of the processing fee, Administrative Agent shall, if such Assignment and Acceptance Agreement has been completed and is in substantially the form of Exhibit J hereto, (i) accept such Assignment and Acceptance Agreement, (ii) record the information contained therein in the Register, and (iii) give prompt notice thereof to the parties thereto. (d) Each Bank may sell participations to one or more Persons in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and its interest in the Revolving Loan); provided, however, that (i) such Bank's obligations under this Agreement shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participant shall be entitled to the benefit of the yield protection provisions contained in Article 4 and the right of set-off contained in Section 14.4, and (iv) Borrower shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement, and such Bank shall retain the sole right to enforce the obligations of Borrower relating to its interest in the Revolving Loan and its Note and to approve any amendment, modification, or waiver of any provision of this Agreement (other than amendments, modifications, or waivers decreasing the amount of principal of or the rate at which interest is payable on the Revolving Loan or Note, extending any scheduled principal payment date or date fixed for the payment of interest on the Revolving Loan or Note, or extending its Commitment). (e) Notwithstanding any other provision set forth in this Agreement, any Bank may at any time assign and pledge all or any portion of its interest in the Revolving Loan and its Note to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Bank from its obligations hereunder. (f) Any Bank may furnish any information concerning Borrower or any of its Subsidiaries in the possession of such Bank from time to time to assignees and participants (including prospective assignees and participants). (g) Borrower shall not assign or transfer any rights or obligations under any Loan Paper or permit any Credit Party to assign or transfer any rights or obligations under any Loan Paper without first obtaining all Banks' consent, and any purported assignment or transfer without all Bank's consent is void. 67 74 SECTION 14.11 TEXAS LAW. THIS AGREEMENT, EACH NOTE AND THE OTHER LOAN PAPERS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA, EXCEPT TO THE EXTENT THAT THE LAWS OF ANY STATE IN WHICH ANY PROPERTY INTENDED AS SECURITY FOR THE OBLIGATIONS IS LOCATED NECESSARILY GOVERN (A) THE PERFECTION AND PRIORITY OF THE LIENS IN FAVOR OF ADMINISTRATIVE AGENT AND BANKS WITH RESPECT TO SUCH PROPERTY, AND (B) THE EXERCISE OF ANY REMEDIES (INCLUDING FORECLOSURE) WITH RESPECT TO SUCH PROPERTY. SECTION 14.12 Consent to Jurisdiction; Waiver of Immunities. (a) Borrower hereby irrevocably submits to the jurisdiction of any Texas State or Federal court sitting in the Northern District of Texas over any action or proceeding arising out of or relating to this Agreement or any other Loan Papers, and Borrower hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Texas State or Federal court. As an alternative, Borrower irrevocably consents to the service of any and all process in any such action or proceeding by the mailing of copies of such process to such Person at its address specified in Section 14.1. Borrower agrees that a final unappealable judgment on any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (b) Nothing in this Section 14.12 shall affect any right of Banks to serve legal process in any other manner permitted by law or affect the right of any Bank to bring any action or proceeding against Borrower or its Subsidiaries or their respective properties in the courts of any other jurisdictions. (c) To the extent that Borrower has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, Borrower hereby irrevocably waives such immunity in respect of its obligations under this Agreement and the other Loan Papers. SECTION 14.13 Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when Administrative Agent shall have received counterparts hereof signed by all of the parties hereto or, in the case of any Bank as to which an executed counterpart shall not have been received, Administrative Agent shall have received telegraphic or other written confirmation from such Bank of execution of a counterpart hereof by such Bank. 68 75 SECTION 14.14 No Third Party Beneficiaries. It is expressly intended that there shall be no third party beneficiaries of the covenants, agreements, representations or warranties herein contained other than third party beneficiaries permitted pursuant to Section 14.10. SECTION 14.15 COMPLETE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN PAPERS COLLECTIVELY REPRESENT THE FINAL AGREEMENT BY AND AMONG BANKS, ADMINISTRATIVE AGENT AND BORROWER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF BANKS, ADMINISTRATIVE AGENT AND BORROWER. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG BANKS, ADMINISTRATIVE AGENT AND BORROWER. SECTION 14.16 WAIVER OF JURY TRIAL. BORROWER, ADMINISTRATIVE AGENT AND BANKS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN PAPERS AND FOR ANY COUNTERCLAIM THEREIN. (signature page to immediately follow) 69 76 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective Authorized Officers on the day and year first above written. BORROWER: HUMPHREY-HILL, L.P., a Texas limited partnership By: EXCO Resources, Inc. a Texas corporation, its general partner By: /s/ T.W. EUBANK ------------------------------------ Name: T.W. Eubank Title: President Address for Notice: 5735 Pineland, Suite 235 Dallas, TX 75231 Attn: Douglas H. Miller Fax No.: (214) 368-2087 77 BANKS: Bank of America, N.A., a national banking association By: /s/ DENISE A. SMITH ----------------------------------------- Name: Denise A. Smith Title: Managing Director Administrative Agent: Bank of America, N.A., a national banking association By: /s/ DENISE A. SMITH ----------------------------------------- Name: Denise A. Smith Title: Managing Director 78 EXHIBIT A FACILITY GUARANTY THIS FACILITY GUARANTY (this "Guaranty") is dated as of the ____ day of __________, ____, by [___________, A ____________] ("Guarantor"), in favor of BANK OF AMERICA, N.A. (Bank of America, N.A., acting as a Bank but not as Administrative Agent, and each of its successors and assigns are collectively referred to herein as "Noteholders"). W I T N E S S E T H: WHEREAS, Humphrey-Hill, L.P. ("Borrower"), Bank of America, N.A., as Administrative Agent ("Administrative Agent") and the financial institutions parties thereto as Banks, are parties to that certain Credit Agreement (as from time to time amended, the "Agreement") dated as of March 24, 2000, pursuant to which Noteholders have made a revolving credit loan to Borrower and agreed to issue and participate in letters of credit issued on behalf of Borrower (unless otherwise defined herein, all terms used herein with their initial letter capitalized shall have the meaning given such terms in the Agreement); and WHEREAS, Noteholders have required, as a condition to the extension and/or the continued extension of credit under the Agreement, that Guarantor execute and deliver this Guaranty; and WHEREAS, Guarantor has determined that valuable benefits will be derived by it as a result of the Agreement and the extension of credit made (and/or to be made) by Noteholders thereunder; and WHEREAS, Guarantor has further determined that the benefits accruing to it from the Agreement exceed Guarantor's anticipated liability under this Guaranty. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, Guarantor hereby covenants and agrees as follows: 1. Guarantor hereby absolutely and unconditionally guarantees the prompt, complete and full payment when due, no matter how such shall become due, of the Obligations, and further guarantees that Borrower will properly and timely perform the Obligations. Notwithstanding any contrary provision in this Guaranty, however, Guarantor's maximum liability under this Guaranty is limited, to the extent, if any, required so that its liability is not subject to avoidance under applicable Debtor Relief Laws (as such term is defined in Paragraph 8 hereof). [PRECEDING SENTENCE WILL NOT BE INCLUDED IN THE FACILITY GUARANTY EXECUTED BY EXCO.] A-1 79 2. If Guarantor is or becomes liable for any indebtedness owing by Borrower to any Noteholder by endorsement or otherwise than under this Guaranty, such liability shall not be in any manner impaired or affected hereby, and the rights of Noteholders hereunder shall be cumulative of any and all other rights that Noteholders may ever have against Guarantor. The exercise by any Noteholder of any right or remedy hereunder or under any other instrument, at law or in equity, shall not preclude the concurrent or subsequent exercise of any other right or remedy. 3. In the event of default by Borrower in payment of the Obligations, or any part thereof, when such Obligations become due, either by their terms or as the result of the exercise of any power to accelerate, Guarantor shall, on demand, and without further notice of dishonor and without any notice having been given to Guarantor previous to such demand of the acceptance by Noteholders of this Guaranty, and without any notice having been given to such Guarantor previous to such demand of the creating or incurring of such Obligations, pay the amount due thereon to Noteholders at Administrative Agent's office as set forth in the Agreement, and it shall not be necessary for any Noteholder, in order to enforce such payment by Guarantor, first, to institute suit or exhaust its remedies against Borrower or others liable on such Obligations, to have Borrower joined with Guarantor in any suit brought under this Guaranty or to enforce their rights against any security which shall ever have been given to secure such indebtedness; provided, however, that in the event any Noteholder elects to enforce and/or exercise any remedies they may possess with respect to any security for the Obligations prior to demanding payment from Guarantor, Guarantor shall nevertheless be obligated hereunder for any and all sums still owing to Noteholders on the Obligations and not repaid or recovered incident to the exercise of such remedies. 4. Notice to Guarantor of the acceptance of this Guaranty and of the making, renewing or assignment of the Obligations and each item thereof, are hereby expressly waived by Guarantor. 5. Each payment on the Obligations shall be deemed to have been made by Borrower unless express written notice is given to Noteholders at the time of such payment that such payment is made by Guarantor as specified in such notice. 6. If all or any part of the Obligations at any time are secured, Guarantor agrees that Administrative Agent and/or Noteholders may at any time and from time to time, at their discretion and with or without valuable consideration, allow substitution or withdrawal of collateral or other security and release collateral or other security or compromise or settle any amount due or owing under the Agreement or amend or modify in whole or in part the Agreement or any Loan Paper executed in connection with same without impairing or diminishing the obligations of Guarantor hereunder. Guarantor further agrees that if Borrower executes in favor of any Noteholder any collateral agreement, mortgage or other security instrument, the exercise by any Noteholder of any right or remedy thereby conferred on such Noteholder shall be wholly discretionary with such Noteholder, and that the exercise or failure to exercise any such right or remedy shall in no way impair or diminish the obligation of Guarantor hereunder. Guarantor further agrees that Noteholders and Administrative Agent shall not be liable for their failure to use diligence in the collection of the Obligations or in preserving the liability of any Person liable for the Obligations, and Guarantor A-2 80 hereby waives presentment for payment, notice of nonpayment, protest and notice thereof (including, notice of acceleration), and diligence in bringing suits against any Person liable on the Obligations, or any part thereof. 7. Guarantor agrees that Noteholders, in their discretion, may a) bring suit against all guarantors (including, without limitation, Guarantor hereunder) of the Obligations jointly and severally or against any one or more of them, b) compound or settle with any one or more of such guarantors for such consideration as Noteholders may deem proper, and c) release one or more of such guarantors from liability hereunder, and that no such action shall impair the rights of Noteholders to collect the Obligations (or the unpaid balance thereof) from other such guarantors of the Obligations, or any of them, not so sued, settled with or released. Guarantor agrees, however, that nothing contained in this paragraph, and no action by Noteholders permitted under this paragraph, shall in any way affect or impair the rights or obligations of such guarantors among themselves. 8. Guarantor represents and warrants to each Noteholder that a) Guarantor is a corporation, limited liability company or partnership duly organized and validly existing under the laws of the jurisdiction of its incorporation or formation; and b) Guarantor possesses all requisite authority and power to authorize, execute, deliver and comply with the terms of this Guaranty; this Guaranty has been duly authorized and approved by all necessary action on the part of Guarantor and constitutes a valid and binding obligation of Guarantor enforceable in accordance with its terms, except as the enforcement thereof may be limited by applicable Debtor Relief Laws; and no approval or consent of any court or governmental entity is required for the authorization, execution, delivery or compliance with this Guaranty which has not been obtained (and copies thereof delivered to Noteholders). As used in this Guaranty, the term "Debtor Relief Laws" means the Bankruptcy Code of the United States of America and all other applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization, suspension of payments or similar debtor relief Laws from time to time in effect affecting the rights of creditors generally. 9. Guarantor covenants and agrees that until the Obligations are paid and performed in full, except as otherwise provided in the Agreement or unless Noteholders give their prior written consent to any deviation therefrom, it will a) at all times maintain its existence and authority to transact business in any State or jurisdiction where Guarantor has assets and operations, b) promptly deliver to Noteholders and to Administrative Agent such information respecting its business affairs, assets and liabilities as Noteholders may reasonably request, and c) duly and punctually observe and perform all covenants applicable to Guarantor under the Agreement and the other Loan Papers. The failure of Guarantor to comply with the terms of this paragraph shall be an Event of Default under the Agreement. 10. This Guaranty is for the benefit of Noteholders, their successors and assigns, and in the event of an assignment by Noteholders (or their successors or assigns) of the Obligations, or any part thereof, the rights and benefits hereunder, to the extent applicable to the Obligations so assigned, A-3 81 may be transferred with such Obligations. This Guaranty is binding upon Guarantor and its successors and assigns. 11. No modification, consent, amendment or waiver of any provision of this Guaranty, nor consent to any departure by Guarantor therefrom, shall be effective unless the same shall be in writing and signed by each Noteholder, and then shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on Guarantor in any case shall, of itself, entitle Guarantor to any other or further notice or demand in similar or other circumstances. No delay or omission by Noteholders in exercising any power or right hereunder shall impair any such right or power or be construed as a waiver thereof or any acquiescence therein, nor shall any single or partial exercise of any such power preclude other or further exercise thereof, or the exercise of any other right or power hereunder. All rights and remedies of Noteholders hereunder are cumulative of each other and of every other right or remedy which Noteholders may otherwise have at law or in equity or under any other contract or document, and the exercise of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies. 12. No provision herein or in any promissory note, instrument or any other Loan Paper executed by Borrower or Guarantor evidencing the Obligations shall require the payment or permit the collection of interest in excess of the Maximum Lawful Rate. If any excess of interest in such respect is provided for herein or in any such promissory note, instrument, or any other Loan Paper, the provisions of this paragraph shall govern, and neither Borrower nor Guarantor shall be obligated to pay the amount of such interest to the extent that it is in excess of the amount permitted by law. The intention of the parties being to conform strictly to any applicable federal or state usury Laws now in force, all promissory notes, instruments and other Loan Papers executed by Borrower or Guarantor evidencing the Obligations shall be held subject to reduction to the amount allowed under said usury Laws as now or hereafter construed by the courts having jurisdiction. 13. If Guarantor should breach or fail to perform any provision of this Guaranty, Guarantor agrees to pay Noteholders all costs and expenses (including court costs and reasonable attorneys fees) incurred by Noteholders in the enforcement hereof. 14. (a) The liability of Guarantor under this Guaranty shall in no manner be impaired, affected or released by the insolvency, bankruptcy, making of an assignment for the benefit of creditors, arrangement, compensation, composition or readjustment of Borrower, or any proceedings affecting the status, existence or assets of Borrower or other similar proceedings instituted by or against Borrower and affecting the assets of Borrower. (b) Guarantor acknowledges and agrees that any interest on any portion of the Obligations which accrues after the commencement of any proceeding referred to in clause (a) above (or, if interest on any portion of the Obligations ceases to accrue by operation of law by reason of the commencement of said proceeding, such interest as would have accrued on such portion of the Obligations if said proceedings had not been commenced) shall be included in the Obligations because it is the intention of Guarantor, Administrative Agent and Noteholders that the Obligations which are A-4 82 guaranteed by Guarantor pursuant to this Guaranty should be determined without regard to any rule of law or order which may relieve Borrower of any portion of such Obligations. Guarantor will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar Person to pay Noteholders or Administrative Agent, or allow the claim of Noteholders or Administrative Agent in respect of, any such interest accruing after the date on which such proceeding is commenced. (c) In the event that all or any portion of the Obligations are paid by Borrower, the obligations of Guarantor hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from Administrative Agent or any Noteholder as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Obligations for all purposes under this Guaranty. 15. Guarantor understands and agrees that any amounts of Guarantor on account with any Noteholder may be offset to satisfy the obligations of Guarantor hereunder. 16. Guarantor hereby subordinates and makes inferior any and all indebtedness now or at any time hereafter owed by Borrower to Guarantor to the Obligations evidenced by the Agreement and agrees after the occurrence of a Default or Event of Default under the Agreement, not to permit Borrower to repay, or to accept payment from Borrower of, such indebtedness or any part thereof without the prior written consent of Noteholders. Without limiting the foregoing, Guarantor hereby acknowledges and agrees that it will not accept from Borrower or any of its Subsidiaries any, distribution, dividend, reimbursement, repayment, payment or transfer of cash or assets of any type which is prohibited under or pursuant to the terms of the Agreement (a "Prohibited Payment") and to the extent any such Prohibited Payment is received by Guarantor, Guarantor will hold the same in trust for the benefit of the Noteholders and promptly pay the same to Administrative Agent for application to the Obligations. 17. During the period that Noteholders have any commitment to lend or participate in Letter of Credit Exposure under the Loan Papers, or any amount payable under any Note remains unpaid or any Letter of Credit remains outstanding, and throughout any additional preferential period subsequent thereto, Guarantor hereby waives any and all rights of subrogation to which Guarantor may otherwise be entitled against Borrower, or any other guarantor of the Obligations, as a result of any payment made by Guarantor pursuant to this Guaranty. 18. As of the date hereof, the fair saleable value of the property of Guarantor is greater than the total amount of liabilities (including contingent and unliquidated liabilities) of Guarantor, and Guarantor is able to pay all of its liabilities as such liabilities mature and Guarantor does not have unreasonably small capital within the meaning of Section 548, Title 11, United States Code, as amended. In computing the amount of contingent or liquidated liabilities, such liabilities have been computed at the amount which, in light of all the facts and circumstances existing as of the date A-5 83 hereof, represents the amount that can reasonably be expected to become an actual or matured liability. 19. If any provision of this Guaranty is held to be illegal, invalid, or unenforceable, such provision shall be fully severable; this Guaranty shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of this Guaranty a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid and enforceable. 20. (a) Except to the extent required for the exercise of the remedies provided in the other security instruments, Guarantor hereby irrevocably submits to the nonexclusive jurisdiction of any Texas state or federal court over any action or proceeding arising out of or relating to this Guaranty or any other Loan Paper, and Guarantor hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Texas state or federal court. Guarantor hereby irrevocably waives, to the fullest extent permitted by Law, any objection which it may now or hereafter have to the laying of venue of any Litigation (as hereinafter defined) arising out of or in connection with this Guaranty or any of the Loan Papers brought in district courts of Dallas County, Texas, or in the United States District Court for the Northern District of Texas, Dallas Division. Guarantor hereby irrevocably waives any claim that any Litigation brought in any such court has been brought in an inconvenient forum. Guarantor hereby irrevocably consents to the service of process out of any of the aforementioned courts in any such Litigation by the mailing of copies thereof by certified mail, return receipt requested, postage prepaid, to Guarantor's office at __________________________________________. Guarantor irrevocably agrees that any legal proceeding against Noteholders shall be brought in the district courts of Dallas County, Texas, or in the United States District Court for the Northern District of Texas, Dallas Division. Nothing herein shall affect the right of any Noteholder to commence legal proceedings or otherwise proceed against Guarantor in any jurisdiction or to serve process in any manner permitted by applicable Law. As used herein, the term "Litigation" means any proceeding, claim, lawsuit or investigation (1) conducted or threatened by or before any court or governmental department, commission, board, bureau, agency or instrumentality of the United States or of any state, commonwealth, nation, territory, possession, county, parish, or municipality, whether now or hereafter constituted or existing, or (2) pending before any public or private arbitration board or panel. (b) Nothing in this Paragraph 20 shall affect any right of any Noteholder to serve legal process in any other manner permitted by Law or affect the right of any Noteholder to bring any action or proceeding against Guarantor in the courts of any other jurisdictions. A-6 84 (c) To the extent that Guarantor has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, Guarantor hereby irrevocably waives such immunity in respect of its obligations under this Guaranty and the other Loan Papers. 21. THIS GUARANTY AND THE OTHER LOAN PAPERS COLLECTIVELY REPRESENT THE FINAL AGREEMENT BY AND AMONG NOTEHOLDERS, ADMINISTRATIVE AGENT, AND GUARANTOR AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF NOTEHOLDERS, ADMINISTRATIVE AGENT, AND GUARANTOR. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG NOTEHOLDERS, ADMINISTRATIVE AGENT, AND GUARANTOR. 22. GUARANTOR, FOR ITSELF, ITS SUCCESSORS AND ASSIGNS, HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ITS RIGHT TO A JURY TRIAL, IN ANY LITIGATION ARISING OUT OF OR IN CONNECTION WITH THIS GUARANTY OR ANY OF THE OTHER LOAN PAPERS. 23. THIS GUARANTY AND THE OTHER LOAN PAPERS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. EXECUTED and effective as of the date first above written. GUARANTOR: ------------------------------------------ By: -------------------------------------- Name: ------------------------------------ Title: ------------------------------------ A-7 85 EXHIBIT B NOTE $25,000,000 Dallas, Texas March 24, 2000 FOR VALUE RECEIVED, the undersigned, Humphrey-Hill, L.P., a Texas limited partnership ("Borrower"), promises to pay to the order of Bank of America, N.A. ("Bank"), at the offices of Bank of America, N.A., as Administrative Agent ("Administrative Agent"), at 901 Main Street, 64th Floor, Dallas, Texas 75202, the principal sum of Twenty-Five Million Dollars ($25,000,000), or so much thereof as may be advanced and outstanding, together with interest, as hereinafter described. This Note has been executed and delivered pursuant to, and is subject to and governed by, the terms of that certain Credit Agreement dated as of March 24, 2000 (as hereafter renewed, extended, amended, or supplemented, the "Agreement") among Borrower, Bank, certain other financial institutions listed on Schedule 1 thereto and Administrative Agent. Unless otherwise defined herein or unless the context hereof otherwise requires, each term used herein with its initial letter capitalized has the meaning given to such term in the Agreement. Borrower also promises to pay interest on the unpaid principal amount hereof in like money at the offices of Administrative Agent above referenced from the date hereof at the rates applicable to amounts outstanding under the Revolving Loan provided in the Agreement and on the dates specified in the Agreement. The principal balance of this Note shall be paid at the times and in the amounts required by the Agreement. The entire outstanding principal balance hereof and all accrued but unpaid interest thereon shall be due and payable in full on the Termination Date. Upon and subject to the terms and conditions of the Agreement, Borrower shall be entitled to prepay the principal of or interest on this Note from time to time and at any time, in whole or in part. Upon the occurrence and continuance of an Event of Default, and upon the conditions stated in the Agreement, Administrative Agent may, at its option, and shall, to the extent required in accordance with the terms of the Agreement, declare the entire unpaid principal of and accrued interest on this Note immediately due and payable (provided that, upon the occurrence of certain Events of Default, and upon the conditions stated in the Agreement, such acceleration shall be automatic), without notice (except as otherwise required by the Agreement), demand, or presentment, all of which are hereby waived, and the holder hereof shall have the right to offset against this Note any sum or sums owed by the holder hereof to Borrower. All past-due principal of and, to the extent permitted by law, accrued interest on this Note shall, at the option of the holder hereof, bear interest B-1 86 at the lesser of (a) the Maximum Lawful Rate, or (b) the Base Rate plus 2% until paid from the due date. Notwithstanding the foregoing, if at any time, any rate of interest calculated under Section 2.3 of the Agreement (the "Contract Rate") exceeds the Maximum Lawful Rate, the rate of interest hereunder shall be limited to the Maximum Lawful Rate, but any subsequent reductions in the Contract Rate shall not reduce the rate of interest on this Note below the Maximum Lawful Rate until the total amount of interest accrued equals the amount of interest which would have accrued (including the amount of interest which would have accrued prior to the payment or prepayment of any portion of this Note) if the Contract Rate had at all times been in effect. In the event that at maturity (stated or by acceleration), or at final payment of this Note, the total amount of interest paid or accrued on this Note is less than the amount of interest which would have accrued if the Contract Rate had at all times been in effect with respect thereto, then at such time Borrower shall pay to the holder of this Note an amount equal to the difference between (a) the lesser of the amount of interest which would have accrued if the Contract Rate had at all times been in effect and the amount of interest which would have accrued if the Maximum Lawful Rate had at all times been in effect, and (b) the amount of interest actually paid or accrued on this Note. HUMPHREY-HILL, L.P., a Texas limited partnership By: EXCO Resources, Inc. a Texas corporation, its general partner By: -------------------------------------- Name: ------------------------------------ Title: ------------------------------------ B-2 87 LOANS, MATURITIES, AND PAYMENTS OF PRINCIPAL AND INTEREST
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B-3 88 EXHIBIT C OPERATING AGREEMENT [to be attached] C-1 89 EXHIBIT D SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement") is executed and effective as of March 24, 2000, by Humphrey-Hill, L.P., a Texas limited partnership ("Debtor"), in favor of Bank of America, N.A., as Administrative Agent for the Banks are parties to the Credit Agreement (as herein defined) ("Secured Party"). W I T N E S S E T H : WHEREAS, Secured Party, Debtor and the financial institutions listed under the designation "Banks" on the signature pages thereto (the "Banks") are parties to that certain Credit Agreement dated as of March 24, 2000 pursuant to which the Banks have agreed to provide Debtor with a multiple advance term credit facility, all on the terms more particularly set forth therein (such Credit Agreement, as the same may be modified, amended, renewed, extended or restated from time to time is hereinafter referred to as the "Credit Agreement"; unless otherwise defined herein, terms used herein with their initial letter capitalized shall have the meaning given such terms in the Credit Agreement); and WHEREAS, the Banks have required, as a condition precedent to making the Initial Borrowing under the Credit Agreement, that Debtor execute and deliver this Agreement to Secured Party for the ratable benefit of the Banks. NOW, THEREFORE, in consideration of these premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, and intending to be legally bound hereby, Debtor hereby agrees with Secured Party, for the ratable benefit of Banks as follows: 1. Defined Terms. As used herein, the following terms shall have the following meanings: "Account Debtor" means, with respect to any Account (as herein defined) of Debtor, the party that is liable to Debtor with respect to such Account. "Accounts" has the meaning assigned in the UCC. "Chattel Paper" has the meaning assigned in the UCC. "Collateral" has the meaning assigned to it in Section 2 of this Agreement. D-1 90 "Contracts" means any and all contracts between Debtor and any other party as the same may from time to time be amended, supplemented or otherwise modified, including, without limitation, (a) all rights of Debtor to receive monies due and to become due to it thereunder or in connection therewith, (b) all rights of Debtor to damages arising out of, or for, breach or default in respect thereof, and (c) all rights of Debtor to perform and to exercise all remedies thereunder. Without limiting the foregoing, "Contracts" shall include that certain Operating Agreement, and all rights of Debtor thereunder. "Copyright License" means any written agreement now or hereafter in existence granting to Debtor any right to use any Copyright. "Copyrights" means (a) all copyrights, rights and interests in copyrights, works protectable by copyright, copyright registrations and copyright applications now owned or hereafter created or acquired by Debtor, (b) all renewals of any of the foregoing, (c) all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing, including, without limitation, damages or payments for past or future infringements of any of the foregoing, (d) the right to sue for past, present and future infringements of any of the foregoing, (e) all rights corresponding to any of the foregoing throughout the world, and (f) all goodwill associated with and symbolized by any of the foregoing. "Deposit Account" has the meaning assigned in the UCC. "Document" has the meaning assigned in the UCC. "Equipment" has the meaning assigned in the UCC. "General Intangibles" has the meaning assigned in the UCC. "Instrument" has the meaning assigned in the UCC. "Intellectual Property" means collectively all of the following: Copyrights, Copyright Licenses, Patents, Patent Licenses, Trademarks and Trademark Licenses. "Inventory" has the meaning assigned in the UCC. "Mortgage" means that certain Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production of even date herewith, granted by Debtor to Secured Party and filed (or to be filed) of record in the real property records of Pecos County, Texas. "Patent License" means any written agreement now or hereafter in existence granting to Debtor any right to use any invention on which a Patent is in existence. D-2 91 "Patents" means (a) all patents and patent applications now owned or hereafter created or acquired by Debtor and the inventions and improvements described and claimed therein, and patentable inventions, (b) the examinations, reissues, divisions, continuations, renewals, extensions and continuations-in-part of any of the foregoing, (c) all income, royalties, damages or payments now and hereafter due and/or payable under any of the foregoing with respect to any of the foregoing, including, without limitation, damages or payments for past or future infringements of any of the foregoing, (d) the right to sue for past, present and future infringements of any of the foregoing, (e) all rights corresponding to any of the foregoing throughout the world, (f) all inventions, designs, proprietary or technical information, know-how, other data or information, software, databases, all embodiments or fixations thereof and related documentation, and all other trade secret rights not described above, and (g) all goodwill associated with any of the foregoing. "Permitted Encumbrances" has the meaning given such term in the Credit Agreement. "Proceeds" means all "Proceeds" as such term is defined in the UCC. "Trademark License" means any written agreement now or hereafter in existence granting to Debtor any right to use any Trademark. "Trademarks" means (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, all elements of package or trade dress goods and all general intangibles of like nature together with the goodwill of Debtor's business connected with the use thereof and symbolized thereby, service marks, logos, other business identifiers, prints and labels on which any of the foregoing have appeared or appear, all registrations and recordings thereof, and all applications in connection therewith including registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, (b) all reissues, extensions or renewals thereof, (c) all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing or with respect to any of the foregoing including damages or payments for past or future infringements of any of the foregoing, (d) the right to sue for past, present and future infringements of any of the foregoing, (e) all rights corresponding to any of the foregoing throughout the world, and (f) all goodwill associated with and symbolized by any of the foregoing. "UCC" means the Uniform Commercial Code as from time to time in effect in each of the jurisdictions where the Collateral or a portion thereof is situated. "Vehicles" means all cars, trucks, trailers, construction and earth moving equipment and other vehicles covered by a certificate of title under the law of any state and all tires and other appurtenances to any of the foregoing. D-3 92 2. Grant of Security Interest. As collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations, Debtor hereby assigns, mortgages, pledges and hypothecates to Secured Party, and hereby grants to Secured Party for the ratable benefit of the Banks, a continuing first and prior lien and security interest in all of the following property wherever located and now owned or at any time hereafter acquired by Debtor or in which Debtor now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"), subject to no prior Liens other than Permitted Encumbrances: (1) all Accounts; (2) all Chattel Paper; (3) all Contracts; (4) all Copyrights; (5) all Copyright Licenses; (6) all Deposit Accounts; (7) all Documents; (8) all Equipment; (9) all General Intangibles; (10) all Instruments; (11) all Inventory; (12) all Patents; (13) all Patent Licenses; (14) all Trademarks; (15) all Trademark Licenses; (16) all Vehicles; (17) all books and records of Debtor (including, without limitation, customer lists, credit files, computer programs, printouts, and other computer materials and records); D-4 93 (18) all other deposit accounts, monies and other property and assets of Debtor of any kind, whether in Debtor's possession or under the control of Secured Party or a bailee; and (19) to the extent not otherwise included, all accessions to, substitutions for and all replacements, betterments, Proceeds and products of any and all of the foregoing, including, without limitation, proceeds of and unearned premiums with respect to insurance policies insuring any of the foregoing. 3. Rights of Secured Party; Limitations on Secured Party's and Bank's Obligations. (a) Debtor Remains Liable under Accounts, Chattel Paper and Contracts. Anything herein to the contrary notwithstanding, Debtor shall remain liable under each Account, each item of Chattel Paper, and each Contract to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement constituting a part of or giving rise to each such Account or item of Chattel Paper and in accordance with and pursuant to the terms and provisions of each such Contract. Neither Secured Party nor any Bank shall have any obligation or liability under any Account or item of Chattel Paper (or any agreement or item of Chattel Paper giving rise thereto) or Contract by reason of or arising out of this Agreement or the receipt by Secured Party or any Bank of any payment relating to such Account, item of Chattel Paper or Contract pursuant hereto, nor shall Secured Party be obligated in any manner to perform any of the obligations of Debtor under or pursuant to any Account or item of Chattel Paper (or any agreement giving rise thereto) or under or pursuant to any Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any Account (or any agreement giving rise thereto) or under any Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. (b) Notice to Account Debtor, Obligors under Chattel Paper and Contracting Parties. At any time during the existence of an Event of Default, Secured Party may (and upon request of Secured Party, Debtor shall) notify Account Debtors on the Accounts, obligors with respect to Chattel Paper and parties to the Contracts that the Accounts, the Chattel Paper and the Contracts have been assigned to Secured Party and that payments in respect thereof shall be made directly to Secured Party. At any time during the continuance of an Event of Default, or at any time before an Event of Default and with the prior consent of Debtor, which consent shall not be unreasonably withheld, Secured Party may in its own name or in the name of others, communicate with Account Debtors on the Accounts, obligors with respect to the Chattel Paper and parties to the Contracts to verify with them to its satisfaction the existence, amount and terms of any Accounts, Chattel Paper or Contracts. (c) Collections on Accounts and Contracts. Secured Party hereby authorizes Debtor to collect the Accounts, Chattel Paper and Contracts, subject to Secured Party's direction and control, and Secured Party may curtail or terminate said authority at any time that an Event of Default has D-5 94 occurred which is continuing. All Proceeds while held by Secured Party (or by Debtor in trust for Secured Party) shall continue to be collateral security for all of the Obligations and shall not constitute payment thereof until applied as hereinafter provided. At Secured Party's request after an Event of Default, Debtor shall deliver to Secured Party all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Accounts and Contracts, including, without limitation, all original orders, invoices and shipping receipts. At Secured Party's request prior to an Event of Default, Debtor shall deliver to Secured Party certified copies of any and all such documents. 4. Representations and Warranties. Debtor hereby represents and warrants that: (a) Title; No Other Liens. Except for the Permitted Encumbrances, Debtor is the legal and beneficial owner of each item of the Collateral free and clear of any and all Liens or claims of others, and no other person or entity has any right, title or interest therein. No security agreement, financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as may have been filed in favor of Secured Party or in connection with a Permitted Encumbrance. No item of Chattel Paper contains any legend or other notation indicating that it is subject to a Lien in favor of any Person other than Secured Party or constitutes property or assets of any Person other than Debtor. (b) Perfected First Priority Liens. Except for and subject only to the Permitted Encumbrances, the Liens and security interests evidenced hereby constitute first priority perfected Liens on the Collateral in favor of Secured Party, which are prior to all other Liens on the Collateral created by Debtor and in existence on the date hereof and which are enforceable as such against all creditors of and purchasers from Debtor and against any owner or purchaser of the real property where any of the Collateral is located and any present or future creditor obtaining a Lien on such real property. (c) No Defenses. No dispute, right of setoff, counterclaim or defense exists with respect to all or any part of the Collateral. (d) Consents. No consent of any party (other than Debtor) to any Contract any obligor with respect to any Chattel Paper or any Account Debtor in respect of any Account is required in connection with the execution, delivery and performance of this Agreement. Each Account, each item of Chattel Paper and each Contract is in full force and effect and constitutes a valid and legally enforceable obligation of the obligor in respect thereof or the parties thereto, except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally, and (ii) the availability of equitable remedies may be limited by equitable principals of general applicability. No consent or authorization of, filing with or other act by or in respect of any Governmental Authority is required in connection with the execution, delivery, performance, validity or enforceability of any of the Accounts, Chattel Paper or Contracts by any party thereto other than those which have been duly obtained, made or performed, and the same are in full force and effect and do not subject the scope of any such Account, item of Chattel Paper or Contract to D-6 95 any material adverse limitation, either specific or general in nature. Neither Debtor, nor (to the best of Debtor's knowledge) any other party to any Account, item of Chattel Paper or Contract is in default or is likely to become in default in the performance or observance of any of the terms thereof. The right, title and interest of Debtor in, to and under each Account, each item of Chattel Paper and each Contract are not subject to any defense, offset, counterclaim or other claim, nor have any of the foregoing been asserted or alleged against Debtor as to any of the foregoing. Debtor has delivered to Secured Party a complete and correct copy of each Contract, including all amendments, supplements and other modifications thereto. No amount payable to Debtor under or in connection with any Account, item of Chattel Paper or Contract referred to above is evidenced by any Instrument which has not been delivered to Secured Party. (e) [Intentionally Deleted]. (f) Chief Executive Office; Employer ID Number. Debtor's principal place of business (or, if Debtor has more than one principal place of business, Debtor's chief executive office) is located at the address set forth on Schedule I hereto. Debtor's Employer Identification Number is set forth on Schedule I hereto. (g) Farm Products. None of the Collateral constitutes, or is the Proceeds of, farm products. (h) Intellectual Property. Debtor does not own or hold any right or interest in Intellectual Property with a value (considered in the aggregate) in excess of $25,000. (i) Chattel Paper. Debtor does not own or hold any Chattel Paper. (j) Instruments. Debtor does not own or hold any Instruments. (k) Vehicles. Debtor does not own or hold any Vehicles. (l) Deposit Accounts. Schedule II hereto is a true and correct list of all Deposit Accounts maintained by Debtor on the date hereof. (m) Power and Authority; Authorization. Debtor has the power and authority and the legal right to execute and deliver, to perform its obligations under, and to grant the Liens and security interests on the Collateral pursuant to, this Agreement and has taken all necessary action to authorize its execution, delivery and performance of, and grant of the Liens and security interests on the Collateral pursuant to, this Agreement. (n) Enforceability. This Agreement constitutes a legal, valid and binding obligation of Debtor enforceable in accordance with its terms, except as (i) the enforceability hereof may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally, and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability. D-7 96 (o) No Conflict. The execution, delivery and performance of this Agreement will not violate any provision of any Law or contractual obligation of Debtor and will not result in the creation or imposition of any Lien on any of the properties or revenues of Debtor pursuant to any Law or contractual obligation of Debtor, except as contemplated hereby. (p) No Consents, etc. No consent or authorization of, filing with, or other act by or in respect of, any Governmental Authority and no consent of any other party (including, without limitation, any creditor of Debtor), is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement. 5. Covenants. Debtor covenants and agrees with Secured Party for the ratable benefit of the Banks that, from and after the date of this Agreement until the Obligations are paid in full: (a) Further Documentation; Pledge of Instruments. At any time and from time to time, upon the written request of Secured Party, and at the sole expense of Debtor, Debtor will promptly and duly execute and deliver such further assignments, certificates, supplemental writings, instruments and documents and take such further action as Secured Party may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the UCC in effect in any jurisdiction with respect to the Liens and security interests evidenced hereby. Debtor also hereby authorizes Secured Party to file any such financing or continuation statement without the signature of Debtor to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement for filing in any jurisdiction. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note or other Instrument, such Instrument shall be immediately delivered to Secured Party, shall be duly endorsed in a manner satisfactory to Secured Party, and shall constitute Collateral pursuant to this Agreement. (b) Indemnification. Debtor agrees to pay, and to indemnify, defend and hold Secured Party and each Bank harmless from, any and all liabilities, costs and expenses (including, without limitation, reasonable legal fees and expenses) (i) with respect to, or resulting from, any delay in paying any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral, (ii) with respect to, or resulting from, any delay in complying with any Laws applicable to any of the Collateral or (iii) in connection with any of the transactions contemplated by this Agreement. In any suit, proceeding or action brought by Secured Party under any Account or Contract for any sum owing thereunder, or to enforce any provisions of any Account or Contract, Debtor will save, indemnify, defend and hold Secured Party and each Bank harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of the Account Debtor or obligor thereunder, arising out of a breach by Debtor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such Account Debtor or obligor or its successors from Debtor. D-8 97 (c) Maintenance of Records. Debtor will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including, without limitation, a record of all payments received and all credits granted with respect to the Accounts, Chattel Paper and Contracts. Debtor will mark its books and records pertaining to the Collateral to evidence this Agreement and the Liens and security interests evidenced hereby. For the further security of Secured Party and the Banks, Secured Party shall have a security interest, subject to no Liens other than Permitted Encumbrances, in all of Debtor's books and records pertaining to the Collateral, and, after and during the continuance of an Event of Default, Debtor shall turn over any such books and records to Secured Party or to its representatives at the request of Secured Party. (d) Right of Inspection. Secured Party, each Bank and their respective representatives shall at all times have full and free access upon reasonable notice and during normal business hours to all the books, correspondence and records of Debtor, and Secured Party, each Bank and their respective representatives may examine the same, take extracts therefrom and make photocopies thereof. Secured Party, each Bank and their respective representatives shall at all times also have the right upon reasonable notice and during normal business hours to enter into and upon any premises where any of the Inventory or Equipment is located for the purpose of inspecting the same, observing its use or otherwise protecting its interests therein. Debtor shall pay the costs incurred by Secured Party and each Bank in connection with any such exercise of its rights pursuant to this Section 5(d) to the extent required by the Credit Agreement. (e) Compliance with Laws, etc. Debtor will comply with all Laws applicable to the Collateral or any part thereof or to the operation of Debtor's business. (f) Compliance with Terms of Chattel Paper and Contracts, etc. Debtor will perform and comply in all material respects with all of its obligations under the Chattel Paper and Contracts and all its other contractual obligations relating to the Collateral. (g) Payment of Obligations. To the extent required pursuant to Section 8.7 of the Credit Agreement, Debtor will pay promptly when due all Taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of its income or profits therefrom, as well as all claims of any kind (including, without limitation, claims for labor, materials and supplies) against or with respect to the Collateral. (h) Limitation on Liens on Collateral. Debtor will not create, assume or permit to exist, will defend the Collateral against, and will take such other action as is necessary to remove, any Lien or claim on or to the Collateral, other than the Permitted Encumbrances, and will defend the right, title and interest of Secured Party and the Banks in and to any of the Collateral against the claims and demands of all parties whomsoever other than holders of Permitted Encumbrances with respect to such Permitted Encumbrances. (i) Limitations on Dispositions of Collateral. Debtor will not sell, transfer, lease, abandon or otherwise dispose of any of the Collateral, or attempt, offer or contract to do so, except as may D-9 98 be permitted by the Credit Agreement. Upon the sale, transfer, lease, abandonment or disposition of any of the Collateral as permitted under the Credit Agreement, the Lien granted by this Agreement shall continue with respect to any Proceeds received by Debtor upon such sale, transfer, lease, abandonment or disposition. (j) Limitations on Modifications, Waivers, Extensions of Agreements Giving Rise to Accounts and Material Agreements. Debtor will not (i) amend, modify, terminate or waive any provision of any Contract, any item of Chattel Paper or any agreement giving rise to or forming a part of an Account or a Deposit Account or any item of Chattel Paper in any manner, (ii) fail to exercise promptly and diligently each and every material right which it may have under each Contract, each item of Chattel Paper and each agreement giving rise to an Account or a Deposit Account, or (iii) fail to deliver to Secured Party a copy of each material demand, notice or document received by it relating in any way to any Contract required to be delivered to Secured Party pursuant to the terms of the Credit Agreement, Chattel Paper or any agreement giving rise to an Account or a Deposit Account. (k) Limitations on Discounts, Compromises, Extensions of Accounts. Without the prior consent of Secured Party, Debtor will not grant any extension of the time of payment of any item of Chattel Paper or any Account, compromise, compound or settle the same for less than the full amount thereof, release, wholly or partially, any party liable for the payment thereof, or allow any credit or discount whatsoever thereon, provided that Debtor may, during any fiscal year, grant credits or discounts of up to $25,000 in the aggregate on Accounts. (l) Maintenance of Equipment. Debtor will maintain each item of Equipment as provided in the Credit Agreement and Mortgage. (m) Maintenance of Insurance. Debtor will at all times maintain the insurance required by the Mortgage. (n) Further Identification of Collateral. Debtor will furnish to Secured Party and each Bank from time to time upon request statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail and in form satisfactory to Secured Party. (o) Notices. Debtor will advise Secured Party and each Bank promptly, in reasonable detail, at their respective addresses set forth for notice in the Credit Agreement, (i) of any Lien (other than Permitted Encumbrances) on, or claim asserted against, any of the Collateral and (ii) of the occurrence of any other event which could reasonably be expected to have a Material Adverse Effect on the aggregate value of the Collateral hereunder. (p) Changes in Locations, Name, etc. Debtor will not change the location of its chief executive office from that specified in Schedule I, and Debtor will not change its name, identity or corporate structure to such an extent that any financing statement filed by Secured Party in D-10 99 connection with this Agreement would become seriously misleading, unless it shall give prior written notice as soon as practicable thereof and prior to effecting any such change take such steps as Secured Party may deem necessary or advisable to continue the perfection and priority of the security interest granted pursuant hereto; provided, that nothing contained herein shall be deemed to permit anything prohibited by the Credit Agreement. (q) Vehicles. Debtor will maintain each vehicle in good operating condition, ordinary wear and tear and immaterial impairments of value and damage by the elements excepted, and will provide all maintenance, service and repairs necessary for such purpose. No Vehicle shall be removed from the state which has issued the certificate of title therefor for a period in excess of thirty (30) consecutive days. With respect to any Vehicle acquired by Debtor subsequent to the date hereof, within five (5) days after the date of acquisition thereof, if requested by Secured Party an application for certificate of title indicating Secured Party's Lien on the Vehicle covered by such certificate, and any other necessary documentation, shall be filed in each office in each jurisdiction which Secured Party shall deem advisable to perfect its Lien on the Vehicle. (s) Deposit Accounts. Debtor will not amend, modify, terminate or waive any provision of any agreement giving rise to or forming a part of any Deposit Account, and Debtor will not open any new Deposit Account or enter into any agreement giving rise to or forming a part of any new Deposit Account unless, within thirty (30) days after such event, Debtor advises Secured Party, in reasonable detail, as to the name of the institution or organization in which such Deposit Account shall be maintained together with such Deposit Account number. (t) Tax I.D. Debtor will not change its employer identification number set forth on Schedule I of this Agreement unless it shall have given prior written notice to Secured Party. 6. Secured Party's Appointment as Attorney-in-Fact. (a) Powers. Debtor hereby irrevocably constitutes and appoints Secured Party and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Debtor and in the name of Debtor or in its own name, from time to time in Secured Party's discretion, for the purpose of carrying out the terms of this Agreement, but only during the existence of an Event of Default, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, Debtor hereby gives Secured Party the power and right, on behalf of Debtor, without notice to or assent by Debtor, but only during the existence of an Event of Default, to do the following: (1) in the case of any Collateral in the name of Debtor or its own name, or otherwise, to take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of monies due under, or with respect to, any Collateral and to file any claim or to take any other action or D-11 100 proceeding in any court of law or equity or otherwise deemed appropriate by Secured Party for the purpose of collecting any and all such monies due or with respect to such Collateral whenever payable; (2) to pay or discharge Taxes and Liens, other than Permitted Encumbrances, levied or placed on or threatened against the Collateral, to effect any repairs or any insurance called for by the terms of this Agreement and to pay all or any part of the premiums therefor and the costs thereof; and (3) (a) to direct any party liable for any payment under any of the Collateral to make payment of any and all monies due or to become due thereunder directly to Secured Party or as Secured Party shall direct; (b) to ask or demand for, collect, receive payment of and receipt for, any and all monies, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (c) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (d) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (e) to defend any suit, action or proceeding brought against Debtor with respect to any Collateral; (f) to settle, compromise or adjust any suit, action or proceeding described in the preceding clause and, in connection therewith, to give such discharges or releases as Secured Party may deem appropriate; (g) to assign any Trademark (along with the goodwill of the business to which any such Trademark pertains), throughout the world for such term or terms, on such conditions, and in such manner, as Secured Party shall in its sole discretion determine; and (h) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes, and to do, at Secured Party's option and Debtor's expense, at any time, or from time to time, all acts and things which Secured Party deems necessary to protect, preserve or realize upon the Collateral and to effect the intent of this Agreement, all as fully and effectively as Debtor might do. Debtor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is power coupled with an interest and shall be irrevocable until the Obligations shall have been paid in full or this Agreement shall have been terminated. (b) Other Powers. Debtor also authorizes Secured Party, at any time and from time to time, during the continuance of an Event of Default, to execute, in connection with the sale provided for in this Section 6, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. D-12 101 (c) No Duty on the Part of Secured Party. The powers conferred on Secured Party hereunder are solely to protect the interests of Secured Party and the Banks in the Collateral and shall not impose any duty upon Secured Party or any Bank to exercise any such powers. The Banks shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and no Bank nor any Bank's officers, directors, employees or agents shall be responsible to Debtor for any act or failure to act hereunder, except for its own gross negligence or willful misconduct, it being the intent of the parties hereto that Secured Party shall not be accountable for its own negligence. 7. Performance by Secured Party of Company's Obligations. If Debtor fails to perform or comply with any of its agreements contained herein and Secured Party, as provided for by the terms of this Agreement, or any Bank shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, the expenses of Secured Party and any such Bank incurred in connection with such performance or compliance, together with interest thereon at the Maximum Lawful Rate on demand shall be payable by Debtor to Secured Party, and shall constitute obligations secured hereby. 8. Proceeds. Upon request of Secured Party, during the continuance of an Event of Default (a) all Proceeds received by Debtor consisting of cash, checks and other non-cash items shall be held by Debtor in trust for Secured Party, segregated from other funds of Debtor and shall, forthwith upon receipt by Debtor be turned over to Secured Party for the ratable benefit of the Banks in the exact form received by Debtor (duly endorsed by Debtor to Secured Party, if required), and (b) any and all such Proceeds received by Secured Party (whether from Debtor or otherwise) may, in the sole discretion of Secured Party, be held by Secured Party as collateral security for, and/or then or at any time thereafter may be applied by Secured Party against, the Obligations (whether matured or unmatured), such application to be in such order as Secured Party shall elect. Any balance of such Proceeds remaining after the Obligations shall have been paid in full shall be paid over to Debtor or to whomsoever may be lawfully entitled to receive the same. 9. Remedies. (a) General. If an Event of Default shall occur and be continuing, Secured Party may exercise, in addition to all other rights and remedies granted to it in this Agreement and in the other Loan Papers, all rights and remedies of a secured party under the UCC. Without limiting the generality of the foregoing, or any other right available to Secured Party hereunder, Secured Party, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon Debtor or any other party (all and each of which demands, offenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of Secured Party or elsewhere upon such terms and conditions as it may deem advisable and at such D-13 102 prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Secured Party and each Bank shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in Debtor, which right or equity is hereby waived and released. Debtor further agrees, at Secured Party's request, to assemble, or cause the assembly of, the Collateral and make it available to Secured Party at places which Secured Party shall reasonably select, whether at Debtor's premises or elsewhere. Secured Party shall apply the net Proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of Secured Party hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in the manner provided by the Credit Agreement, and only after such application and after the payment by Secured Party of any other amount required by any provision of law, need Secured Party account for the surplus, if any, to Debtor. To the extent permitted by applicable law, Debtor waives all claims, damages and demands it may acquire against Secured Party arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least five (5) days before such sale or other disposition. Debtor shall remain liable for any deficiency if the Proceeds of any sale or other disposition of the Collateral are insufficient to pay the Obligations and the fees and disbursements of any attorneys employed by Secured Party to collect such deficiency. 10. Secured Party's Responsibility With Respect to Collateral. Neither Secured Party nor any Bank shall have any duty to fix or preserve rights against prior parties to the Collateral, and neither Secured Party nor any Bank shall ever be liable for failure to use diligence to collect any amount payable with respect to the Collateral, or any part thereof, but shall be liable only to account to Debtor any amount Secured Party or any Bank may actually collect or receive thereon and for acts constituting gross negligence or willful misconduct. Secured Party's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under the UCC or otherwise, shall be to deal with it in the same manner as Secured Party deals with similar property for its own account. Neither Secured Party, nor any Bank nor any of their directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of Debtor or otherwise other than acts constituting gross negligence or willful misconduct. 11. Waiver of Certain Rights. To the full extent that it may lawfully so agree, Debtor agrees that it will not at any time plead, claim or take the benefit of any appraisement, valuation, stay, extension, moratorium or redemption law nor or hereafter in force in order to prevent or delay the enforcement of this Agreement, or the absolute sale of all or any part of the Collateral or the possession thereof by any purchaser at any sale hereunder, and Debtor hereby waives the benefit of all such laws to the extent it lawfully may. D-14 103 12. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 13. Performance at Debtor's Expense. The cost and expense of performing or complying with any and all of the Obligations shall be borne solely by Debtor, subject to any specific limitations thereon provided for in the Credit Agreement, and no portion of such cost and expense shall be, in any way and to any extent, credited against any installment on or portion of the Obligations. 14. Survival. Each and all of the Obligations and each and all of Debtor's representations and warranties hereunder shall survive the execution and delivery of this Agreement, and shall continue in full force and effect until the Obligations shall have been paid in full. 15. Severability. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable, this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part thereof, and the remaining provisions thereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom so as to achieve the original intent of Debtor and Secured Party. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid and enforceable. 16. Paragraph Headings. The paragraph headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 17. Cumulative Remedies. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law or in any of the other Loan Papers. 18. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto, the Banks parties to the Credit Agreement and each such Persons' respective successors and assigns; except, that Debtor may not assign or otherwise transfer any of its rights under this Agreement. 19. Limitation on Interest. Regardless of any provision contained in this Agreement or in the other Loan Papers, no Bank shall be entitled to receive, collect, or apply, as interest on the Revolving Loans, any amount in excess of the Maximum Lawful Rate, and in the event any Bank ever receives, collects or applies as interest any such excess, such amount which would be deemed excessive interest shall be deemed a partial prepayment of principal and treated hereunder as such; and if the Revolving Loan is paid in full, any remaining excess shall promptly be paid to Debtor. In determining whether or not the interest paid or payable under any specific contingency exceeds the Maximum Lawful Rate, Debtor, Secured Party and each Bank shall, to the extent permitted under applicable law, (a) characterize any nonprincipal payment as an expense, fee or premium rather than D-15 104 as interest, (b) exclude voluntary prepayments and the effects thereof and (c) amortize, prorate, allocate and spread, in equal parts, the total amount of the interest throughout the entire contemplated term of the Notes, so that the interest rate is the Maximum Lawful Rate throughout the entire term of the Notes; provided, however, that if the unpaid principal balance thereof is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Lawful Rate, the Banks shall refund to Debtor the amount of such excess and, in such event, neither Secured Party nor any Bank shall be subject to any penalties provided by any laws for contracting for, charging, taking, reserving or receiving interest in excess of the Maximum Lawful Rate. 20. GOVERNING LAW. THIS AGREEMENT, THE NOTES, AND THE OTHER LOAN PAPERS HAVE BEEN EXECUTED AND DELIVERED IN THE STATE OF TEXAS AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA, EXCEPT TO THE EXTENT THAT THE LAWS OF A STATE IN WHICH COLLATERAL IS LOCATED NECESSARILY GOVERNS (A) THE PERFECTION AND PRIORITY OF THE LIEN AND SECURITY INTEREST CREATED HEREBY WITH RESPECT TO SUCH COLLATERAL, AND (B) THE EXERCISE OF ANY REMEDIES (INCLUDING THE FORECLOSURE OF SUCH LIEN AND SECURITY INTEREST) SUCH WITH RESPECT TO SUCH COLLATERAL. 21. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, telecopy or similar writing) and shall be given to such party at its address, telex or telecopy number set forth in the Credit Agreement or such other address, telex or telecopy number as such party may hereafter specify by notice to the other party. Each such notice, request or other communication shall be effective (i) if given by telex or telecopy, when such telex or telecopy is transmitted to the telex or telecopy number specified in this Section 21 and the appropriate answer back is received or receipt is otherwise confirmed, (ii) if given by mail, three (3) Business Days after deposit in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in this Section 21. 22. Multiple Counterparts. This Agreement may be executed in a number of identical counterparts, each of which for all purposes is to be deemed an original, and all of which constitute collectively, one Agreement; but in making proof of this Agreement, it shall not be necessary to produce or account for more than one such counterpart. It is not necessary that each party hereto execute the same counterpart so long as identical counterparts are executed by each such party hereto. 23. No Waiver. No course of dealing between any Bank, Secured Party and Debtor, nor any failure to exercise, nor any delay in exercising on the part of Secured Party of any right hereunder or under the Loan Papers shall operate as a waiver hereof or thereof; nor shall any single or partial exercise of any right hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right. D-16 105 24. Amendments and Modifications. This Agreement shall be modified or amended only in a written document, signed by Secured Party and Debtor. 25. FINAL AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN PAPERS COLLECTIVELY REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 26. WAIVER OF JURY TRIAL. DEBTOR, FOR ITSELF, ITS SUCCESSORS AND ASSIGNS AND SECURED PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. 27. SUBMISSION TO JURISDICTION; WAIVER OF SERVICE AND VENUE. (A) DEBTOR CONSENTS AND AGREES TO THE JURISDICTION OF ANY STATE COURT SITTING IN THE COUNTY OF DALLAS, STATE OF TEXAS, AND TO THE JURISDICTION OF ANY FEDERAL COURT SITTING IN THE NORTHERN DISTRICT OF TEXAS, AND WAIVES ANY OBJECTION BASED ON VENUE OR FORUM NON CONVENIENS WITH RESPECT TO ANY ACTION INSTITUTED THEREIN, AND AGREES THAT ANY DISPUTE CONCERNING THE RELATIONSHIP BETWEEN SECURED PARTY OR ANY BANK, ON THE ONE HAND, AND DEBTOR, ON THE OTHER HAND, OR THE CONDUCT OF ANY PARTY IN CONNECTION WITH THIS AGREEMENT OR OTHERWISE SHALL BE HEARD ONLY IN THE COURTS DESCRIBED ABOVE. (B) DEBTOR HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY CERTIFIED MAIL OR HAND DELIVERY TO DEBTOR AT ITS ADDRESS SET FORTH IN THE SIGNATURE PAGE HERETO. DEBTOR HEREBY CONSENTS TO SERVICE OF PROCESS AS AFORESAID. (C) NOTHING IN THIS SECTION 27 SHALL AFFECT THE RIGHT OF SECURED PARTY OR ANY BANK TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF SECURED PARTY OR ANY BANK TO BRING ANY ACTION OR PROCEEDING AGAINST DEBTOR OR ANY OF ITS PROPERTY IN THE COURTS OR ANY OTHER JURISDICTION. IN WITNESS WHEREOF, Debtor has caused this Agreement to be duly executed and delivered as of the date first above written. Debtor: HUMPHREY-HILL, L.P., a Texas limited partnership By: EXCO Resources, Inc., a Texas corporation, its general partner By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- D-17 106 SCHEDULE I PRINCIPAL PLACE OF BUSINESS/CHIEF EXECUTIVE OFFICE AND EMPLOYER IDENTIFICATION NUMBER EXCO Resources, Inc. 5735 Pineland, Suite 235 Dallas, Texas 75231 Taxpayer Identification Number: 75-2825676 D-18 107 SCHEDULE II DEPOSIT ACCOUNTS D-19 108 EXHIBIT E REQUEST FOR BORROWING Reference is made to that certain Credit Agreement dated as of March 24, 2000 (as from time to time amended, the "Agreement"), among Humphrey-Hill, L.P. ("Borrower"), Bank of America, N.A., as Administrative Agent ("Administrative Agent"), and the financial institutions listed on Schedule 1 thereto, as Banks ("Banks"). Terms which are defined in the Agreement and which are used but not defined herein are used herein with the meanings given them in the Agreement. Pursuant to the terms of the Agreement, Borrower hereby requests a Borrowing in the amount of $_____________ to be advanced on , . Borrower requests that the Borrowing to be made hereunder shall be [A BASE RATE BORROWING] [A EURODOLLAR BORROWING] and shall have the Interest Periods all as set forth below:
Type of Borrowing Aggregate Amount Interest Period ----------------- ---------------- --------------- - --------------------------------- ----------------------- ---------------------- - --------------------------------- ----------------------- ---------------------- - --------------------------------- ----------------------- ----------------------
Borrower and the Authorized Officer of Borrower signing this instrument hereby certify that: (a) Such officer is the duly elected, qualified and acting officer of Borrower as indicated below such officers signature hereto. (b) The representations and warranties of Borrower set forth in the Agreement and the Loan Papers delivered to Administrative Agent and Banks are true and correct on and as of the date hereof, with the same effect as though such representations and warranties had been made on and as of the date hereof or, if such representations and warranties are expressly limited to particular dates, as of such particular dates. Since the date of the last financial reports of Borrower delivered to each Bank pursuant to Section 9.1 of the Agreement, there has not occurred any event or condition which has resulted in, or could reasonably be expected to result in, a Material Adverse Change. (c) There does not exist on the date hereof, any condition or event which constitutes a Default or Event of Default, nor will any such Default or Event of Default exist E-1 109 upon Borrower's receipt and application of the proceeds requested hereby. Borrower will use the proceeds hereby requested in compliance with the applicable provisions of the Agreement. (d) Borrower has performed and complied with all agreements and conditions in the Agreement and the other Loan Papers required to be performed or complied with by Borrower on or prior to the date hereof, and each of the conditions precedent to the Borrowing contained in the Agreement remain satisfied in all material respects. (e) After giving effect to the Borrowing requested hereby, the Outstanding Credit will not be in excess of the Borrowing Base on the date requested for the making of such Borrowing. (f) The Availability on the date hereof, and prior to giving effect to the Borrowing requested hereby, is $_______________________. (g) The Borrowing requested herein will be used for the following purposes: [ ] Pay a portion of the Purchase Price for the Nebraska Acquisition [NOT TO EXCEED $6,800,000]. [ ] Other general corporate purposes in the amount of $____________ [NOT TO EXCEED THE AVAILABILITY]. IN WITNESS WHEREOF, this instrument is executed as of March 24, 2000. HUMPHREY-HILL, L.P., a Texas limited partnership By: EXCO Resources, Inc., a Texas corporation, its general partner By: -------------------------------- Name: ------------------------------ Title: ----------------------------- E-2 110 EXHIBIT F REQUEST FOR LETTER OF CREDIT Reference is made to that certain Credit Agreement dated as of March 24, 2000 (as from time to time amended, the "Agreement"), among Humphrey-Hill, L.P. ("Borrower"), Bank of America, N.A., as Administrative Agent ("Administrative Agent"), and the financial institutions listed on Schedule 1 thereto, as Banks ("Banks"). Terms which are defined in the Agreement and which are used but not defined herein are used herein with the meanings given them in the Agreement. Pursuant to the terms of the Agreement, Borrower hereby requests Administrative Agent to issue a Letter of Credit for the account of Borrower as follows: Type of Commitment: ------------------ Requested Amount $ ------------------------ Requested Date of Issuance ------------------------ Requested Expiration Date ------------------------ Summary of Terms (provide a brief description of the purpose of such Letter of Credit and the conditions under which the drafts under such Letter of Credit are to be available) ------------------------ Beneficiary (Name/Address) ------------------------ ------------------------ ------------------------ ------------------------ ------------------------
Such Letter of Credit is more particularly described in the Letter of Credit Application and Agreement of Administrative Agent which is attached hereto. Borrower and the Authorized Officer of Borrower signing this instrument hereby certify that: (a) Such officer is the duly elected, qualified and acting officer of Borrower as indicated below such officer's signature hereto. (b) The representations and warranties of Borrower set forth in the Agreement and the other Loan Papers delivered to Administrative Agent and each Bank are true and correct on and as of the date hereof, with the same effect as though such representations and warranties had been made on and as of the date hereof, or if such representations and warranties are expressly limited to particular dates, as of such particular dates. No Material F-1 111 Adverse Change has occurred since the date of the last financial reports of Borrower delivered to Banks pursuant to Section 9.1 of the Agreement. (c) There does not exist on the date hereof any condition or event which constitutes a Default or Event of Default, nor will any such Default or Event of Default exist upon the issuance of the Letter of Credit requested hereby. Borrower will use the Letter of Credit solely for purposes permitted by the Agreement. (d) Borrower has performed and complied with all agreements and conditions in the Agreement and the other Loan Papers required to be performed or complied with by Borrower on or prior to the date hereof, and each of the conditions precedent to the issuance of Letters of Credit contained in the Agreement remain satisfied in all material respects. (e) After the issuance of the Letter of Credit requested hereby, the Outstanding Credit will not be in excess of the Borrowing Base in effect on the date requested for the issuance of such Letter of Credit. IN WITNESS WHEREOF, this instrument is executed as of March 24, 2000. HUMPHREY-HILL, L.P., a Texas limited partnership By: EXCO Resources, Inc., a Texas corporation, its general partner By: -------------------------------- Its: ------------------------------- F-2 112 EXHIBIT G NOTICE OF CONTINUATION AND CONVERSION NOTICE Reference is made to that certain Credit Agreement dated as of March 24, 2000 (as from time to time amended, the "Agreement"), among Humphrey-Hill, L.P. ("Borrower"), Bank of America, N.A., as Administrative Agent ("Administrative Agent"), and the financial institutions listed on Schedule 1 thereto, as Banks ("Banks"). Terms which are defined in the Agreement and which are used but not defined herein are used herein with the meanings given them in the Agreement. [ ] Reference is hereby made to the existing Eurodollar Loan outstanding under the Agreement in the amount of $________ which is subject to an Interest Period expiring on _________________, _____. Borrower hereby requests that on the expiration of such Interest Period the portion of the principal of such Eurodollar Loan which is subject to such Interest Period be made the subject of [ ] the Base Rate Loan or [ ] a Eurodollar Loan having an Interest Period of ____ months. [ ] Borrower hereby requests that on ____________, _____, a portion of the principal of the Base Rate Loan in the amount of $__________ be made the subject of a Eurodollar Loan having an Interest Period of ______ (__) months. Borrower and the Authorized Officer of Borrower signing this instrument hereby certify that: (a) Such officer is the duly elected, qualified and acting officer of Borrower as indicated below such officer's signature hereto; (b) There does not exist on the date hereof any condition or event which constitutes a Default or Event of Default; and (c) The representations and warranties of Borrower set forth in the Agreement and the Loan Papers delivered to Administrative Agent and each Bank are true and correct on and as of the date hereof, with the same effect as though such representations and warranties had been made on and as of the date hereof or, if such representations and warranties are expressly limited to particular dates, as of such particular dates. G-1 113 IN WITNESS WHEREOF, this instrument is executed as of _____________, _____. HUMPHREY-HILL, L.P., a Texas limited partnership By: EXCO Resources, Inc., a Texas corporation, its general partner By: -------------------------------- Its: ------------------------------- G-2 114 EXHIBIT H CERTIFICATE OF OWNERSHIP INTERESTS This Certificate of Ownership Interests (this "Certificate") is executed and delivered pursuant to that certain Credit Agreement dated as of March 24, 2000 (as amended from time to time, the "Agreement"), among Humphrey-Hill, L.P. ("Borrower"), Bank of America, N.A., as Administrative Agent ("Administrative Agent"), and the financial institutions listed on Schedule I thereto, as Banks ("Banks"). Unless otherwise defined herein, all capitalized terms shall have the meanings given such terms in the Agreement. In order to induce Banks to extend credit to Borrower under the Agreement, Borrower hereby represents and warrants to Administrative Agent and each Bank that (a) Exhibit A attached hereto is a complete and accurate description of all Mineral Interests described in the Initial Reserve Report including all Nebraska Properties (the "Initial Borrowing Base Properties"), (b) after giving effect to the closing of the Nebraska Acquisition, Borrower will hold good and defensible title, subject only to Permitted Encumbrances, to the Initial Borrowing Base Properties, (c) Borrower's share of (i) the costs for each of the Initial Borrowing Base Properties is not greater than the decimal fraction set forth in the Initial Reserve Report before and after payout, as the case may be, and described therein by the respective designations "working interests," "WI," "gross working interest," "GWI," or similar terms (except in such cases where there is a corresponding increase in the net revenue interest), and (ii) production from, allocated to, or attributed to each of such Initial Borrowing Base Properties is not less than the decimal fraction set forth in the Initial Reserve Report before and after payout, as the case may be, and described therein by the designations net revenue interest, NRI, or similar terms, and (d) to Borrower's actual knowledge after due inquiry, each well drilled in respect of each of the Initial Borrowing Base Properties described in the Initial Reserve Report (A) is capable of, and is presently, producing Hydrocarbons in commercially profitable quantities, and Borrower is receiving (or will receive) payments for its share of production, with no funds in respect of any thereof being presently held in suspense, other than any such funds being held in suspense pending delivery of appropriate division orders, and (B) has been drilled, bottomed, completed and operated in compliance with all applicable Laws and no such well which is currently producing Hydrocarbons is subject to any penalty in production by reason of such well having produced in excess of its allowable production. H-1 115 Borrower acknowledges and agrees that each Bank is relying on this Certificate and the representations and warranties herein contained in extending credit under the Agreement and but for Borrower's execution and delivery of this Certificate, Banks would not extend credit under the Agreement. Executed as of the 24th day of March, 2000. HUMPHREY-HILL, L.P., a Texas limited partnership By: EXCO Resources, Inc., a Texas corporation, its general partner By: -------------------------------- Name: ------------------------------- Title: ------------------------------ H-2 116 EXHIBIT A [To be attached] H-3 117 EXHIBIT I-1 FINANCIAL OFFICER'S CERTIFICATE The undersigned, the Chief Financial Officer of EXCO Resources, Inc., a Texas corporation ("EXCO") hereby (a) delivers this Certificate pursuant to Section 9.1(c) of that certain Credit Agreement (the "Agreement") dated as of March 24, 2000, among Humphrey-Hill, L.P., Bank of America, N.A., as Administrative Agent ("Administrative Agent"), and the financial institutions listed on Schedule 1 thereto, as Banks ("Banks"), and (b) certifies to each Bank, with the knowledge and intent that Banks may, without any independent investigation, rely fully on the matters herein in connection with the Agreement, as follows: 1. Attached hereto as Schedule I are the financial statements of EXCO as of and for the Fiscal [ ] Year [ ] Quarter (check one) ended ____________, ____. 2. Such financial statements are true and correct in all materials respects, have been prepared on a consistent basis in accordance with GAAP (except as otherwise noted therein) and fairly present the financial condition of EXCO as of the date indicated therein and the results of operations for the respective periods indicated therein. 3. Except as described on Schedule II hereto, the representations and warranties of EXCO set forth in the Loan Papers delivered to Administrative Agent and each Bank are true and correct on and as of the date hereof, with the same effect as though such representations and warranties had been made on and as of the date hereof or, if such representations and warranties are expressly limited to particular dates, as of such particular dates. Unless otherwise defined herein, all capitalized terms used herein shall have the meaning given such terms in the Agreement. IN WITNESS WHEREOF, the undersigned has duly executed this Financial Officer's Certificate as of March 24, 2000. EXCO Resources, Inc., a Texas corporation By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- I-1-1 118 Schedule I Financial Statements (to be attached) I-1-2 119 Schedule II Qualifications to Representations and Warranties I-1-3 120 EXHIBIT I-2 FINANCIAL OFFICER'S CERTIFICATE The undersigned, the Chief Financial Officer of EXCO Resources, Inc., the General Partner of Humphrey-Hill, L.P., a Texas limited partnership ("Borrower") hereby (a) delivers this Certificate pursuant to Section 9.1(c) of that certain Credit Agreement (the "Agreement") dated as of March 24, 2000, among Borrower, Bank of America, N.A., as Administrative Agent ("Administrative Agent"), and the financial institutions listed on Schedule 1 thereto, as Banks ("Banks"), and (b) certifies to each Bank, with the knowledge and intent that Banks may, without any independent investigation, rely fully on the matters herein in connection with the Agreement, as follows: 1. Attached hereto as Schedule I are the financial statements of Borrower as of and for the Fiscal [ ] Year [ ] Quarter (check one) ended ____________, ____. 2. Such financial statements are true and correct in all materials respects, have been prepared on a consistent basis in accordance with GAAP (except as otherwise noted therein) and fairly present the financial condition of Borrower as of the date indicated therein and the results of operations for the respective periods indicated therein. 3. Attached hereto as Schedule II are detailed calculations used by Borrower to establish that Borrower was in compliance with the requirements of Article 11 of the Agreement on the date of the financial statements attached as Schedule I hereto. 4. Unless otherwise disclosed on Schedule III attached hereto and incorporated herein by reference for all purposes, neither a Default nor an Event of Default has occurred which is in existence on the date hereof; provided, that for any Default or Event of Default disclosed on Schedule III attached hereto, Borrower is taking or proposes to take the action to cure such Default or Event of Default set forth on Schedule III. 5. On the date of the financial statements attached hereto as Schedule I (a) (check one) [ ] there is no Material Gas Imbalance or [ ] the amount of the net gas imbalances under Gas Balancing Agreements to which Borrower or any of its Subsidiaries is a party or by which any Mineral Interests owned by Borrower or any of its Subsidiaries is bound is ____________, and (b) the aggregate amount of all Advance Payments received under Advance Payment Contracts to which Borrower or any of its Subsidiaries is a party or by which any Mineral Interests owned by Borrower or any of its Subsidiaries is bound which have not been satisfied by delivery of production, if any, is ______________. 6. Attached hereto as Schedule IV is a summary of the Hedge Transactions to which Borrower or any of its Subsidiaries is a party on the date of the financial statements attached hereto as Schedule I. I-2-1 121 7. Except as described on Schedule V hereto, the representations and warranties of Borrower set forth in the Agreement and the Loan Papers delivered to Administrative Agent and each Bank are true and correct on and as of the date hereof, with the same effect as though such representations and warranties had been made on and as of the date hereof or, if such representations and warranties are expressly limited to particular dates, as of such particular dates. Unless otherwise defined herein, all capitalized terms used herein shall have the meaning given such terms in the Agreement. IN WITNESS WHEREOF, the undersigned has duly executed this Financial Officer's Certificate as of March 24, 2000. EXCO RESOURCES, INC., a Texas corporation By: ------------------------------ Name: ---------------------------- Title: --------------------------- I-2-2 122 Schedule I Financial Statements (to be attached) I-2-3 123 Schedule II Compliance Calculations (to be attached) I-2-4 124 Schedule III Defaults/Remedial Action (to be attached) I-2-5 125 Schedule IV Summary of Hedge Transactions (to be attached) I-2-6 126 Schedule V Qualifications to Representations and Warranties I-2-7 127 EXHIBIT J ASSIGNMENT AND ACCEPTANCE Reference is made to that certain Credit Agreement dated as of March 24, 2000 (the "Agreement") among Humphrey-Hill, L.P. ("Borrower"), Bank of America, N.A., as Administrative Agent ("Administrative Agent") and the financial institutions listed on Schedule 1 thereto, as Banks ("Banks"). Terms defined in the Agreement are used herein with the same meaning. The "Assignor" and the "Assignee" referred to on Schedule 1 agree as follows: 1. Assignor hereby sells and assigns to Assignee, without recourse and without representation or warranty except as expressly set forth herein, and Assignee hereby purchases and assumes from Assignor, an interest in and to Assignor's rights and obligations under the Agreement and the other Loan Papers as of the date hereof equal to the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Agreement and the other Loan Papers. After giving effect to such sale and assignment, Assignee's Commitment, Assignee's Commitment Percentage and the principal amount of the Revolving Loan owing to Assignee will be as set forth on Schedule 1. 2. Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Papers or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Papers or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or the performance or observance by Borrower of any of its obligations under the Loan Papers or any other instrument or document furnished pursuant thereto; and (iv) attaches the Note held by Assignor and requests that Administrative Agent exchange such Note for new Notes payable to the order of Assignee in an amount equal to the Commitment assumed by Assignee pursuant hereto and to Assignor in an amount equal to the Commitment retained by Assignor, if any, as specified on Schedule 1. 3. Assignee (i) confirms that it has received a copy of the Agreement, together with copies of the financial statements referred to in Section 9.1 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon Administrative Agent, Assignor or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes Administrative Agent to take such action as agent on its behalf and to exercise such powers and J-1 128 discretion under the Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Agreement are required to be performed by it as a Bank; and (vi) attaches any U.S. Internal Revenue Service or other forms required under Section 4.6(d). 4. Following the execution of this Assignment and Acceptance, it will be delivered to Administrative Agent for acceptance and recording by Administrative Agent. The effective date for this Assignment and Acceptance (the "Effective Date") shall be the date of acceptance hereof by Administrative Agent, unless otherwise specified on Schedule 1. 5. Upon such acceptance and recording by Administrative Agent, as of the Effective Date, (i) Assignee shall be a party to the Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Bank thereunder, and (ii) Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Agreement. 6. Upon such acceptance and recording by Administrative Agent, from and after the Effective Date, Administrative Agent shall make all payments under the Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to Assignee. Assignor and Assignee shall make all appropriate adjustments in payments under the Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of Texas. 8. This Assignment and Acceptance may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of Schedule 1 to this Assignment and Acceptance by telecopier shall be effective as delivery of a manually executed counterpart of this Assignment and Acceptance. IN WITNESS WHEREOF, Assignor and Assignee have caused Schedule 1 to this Assignment and Acceptance to be executed by their officers thereunto duly authorized as of the date specified thereon. J-2 129 SCHEDULE 1 to ASSIGNMENT AND ACCEPTANCE Percentage interest assigned: % -------- Assignee's Commitment: $ ------- Assignee's Commitment Percentage: % -------- Aggregate outstanding principal amount of Revolving Loans assigned: $ ------- Principal amount of Note payable to Assignee: $ ------- Principal amount of Note payable to Assignor: $ ------- Effective Date (if other than date of acceptance by Administrative Agent): * , 19 ------- --
[NAME OF ASSIGNOR], as Assignor By: ------------------------------- Title: ------------------------- Dated: , 19 -------------------- --- [NAME OF ASSIGNEE], as Assignee By: ------------------------------- Title: ------------------------- Domestic Lending Office: Eurodollar Lending Office: J-3 130 * This date should be no earlier than five Domestic Business Days after the delivery of this Assignment and Acceptance to the Administrative Agent. Accepted and Approved this 24th day of March, 2000 BANK OF AMERICA, N.A., as Administrative Agent By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- Approved this ____ day of ____________, _____ HUMPHREY-HILL, L.P., a Texas limited partnership By: EXCO Resources, Inc., a Texas corporation, its general partner By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- J-4 131 EXHIBIT K PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (this "Agreement") is made as of March 24, 2000 by Taurus Acquisition, Inc., a Texas corporation (herein called "Pledgor"), in favor of Bank of America, N.A., as Administrative Agent for the ratable benefit of Banks (as defined below) (herein called "Pledgee"). W I T N E S S E T H: WHEREAS, Pledgor, Humphrey-Hill, L.P., a Texas limited partnership ("Borrower"), Pledgee, Bank of America, N.A., as Administrative Agent, and Banks are parties to a Credit Agreement dated as of March 24, 2000, pursuant to which Banks have made (or will make) a revolving credit loan to Borrower and agreed to issue and participate in letters of credit issued on behalf of Borrower (as from time to time amended, herein called the "Credit Agreement"); WHEREAS, it is a condition to the agreement of Banks to extend credit under the Credit Agreement that Pledgor execute and deliver this Agreement in favor of Pledgee for the benefit of Banks; and WHEREAS, the board of directors of Pledgor has determined that Pledgor's execution, deliver and performance of this Agreement may reasonably be expected to benefit Pledgor, directory or indirectly, and are in the best interests of Pledgor. NOW, THEREFORE, in consideration of the premises and in order to induce Banks to extend credit under the Credit Agreement, Pledgor hereby agrees with Pledgee as follows: ARTICLE I. Definitions and References Section 1.1 General Definitions. As used herein, the terms "Agreement," "Borrower," "Credit Agreement," "Pledgee," and "Pledgor," shall have the meanings indicated above, and the following terms shall have the following meanings: "Bank" means any financial institution reflected on Schedule 1 to the Credit Agreement and its successors and assigns, and "Banks" shall mean all Banks. "Code" means the Uniform Commercial Code in effect in the State of Texas on the date hereof. K-1 132 "Collateral" means all property of whatever type, in which Pledgee at any time has a security interest pursuant to Section 2.1. "Commitment" means the agreement or commitment by Banks to make loans or otherwise extend credit to Borrower under the Credit Agreement, and any other agreement, commitment, statement of terms or other document contemplating the making of loans or advances or other extension of credit by Banks to or for the account of Borrower which is now or at any time hereafter intended to be secured by the Collateral under this Agreement. "Equity" means shares of capital stock or a partnership, profits, capital or member interest, or options, warrants or any other right to substitute for or otherwise acquire the capital stock or a partnership, profits, capital or member interest of Borrower. "Obligation Documents" means the Credit Agreement, the Notes, the other Loan Papers, and all other documents and instruments under, by reason of which, or pursuant to which, any or all of the Obligations are evidenced, governed, secured, or otherwise dealt with, and all other agreements, certificates, and other documents, instruments and writings heretofore or hereafter delivered in connection herewith or therewith. "Obligations" means all present and future indebtedness, obligations and liabilities of whatever type which are or shall be secured pursuant to Section 2.2. "Other Liable Party" means any Person, other than Borrower, who may now or may at any time hereafter be primarily or secondarily liable for any of the Obligations or who may now or may at any time hereafter have granted to Pledgee or Banks a Lien upon any property as security for the Obligations. "Pledged Equity" has the meaning given it in Section 2.1. Section 1.2 Other Definitions. Reference is hereby made to the Credit Agreement for a statement of the terms thereof. All capitalized terms used in this Agreement which are defined in the Credit Agreement and not otherwise defined herein shall have the same meanings herein as set forth therein. All terms used in this Agreement which are defined in the Code and not otherwise defined herein or in the Credit Agreement shall have the same meanings herein as set forth therein, except where the context otherwise requires. Section 1.3 Exhibits. All exhibits attached to this Agreement are a part hereof for all purposes. Section 1.4 Amendment of Defined Instruments. Unless the context otherwise requires or unless otherwise provided herein, references in this Agreement to a particular agreement, instrument or document also refer to and include all renewals, extensions, amendments, modifications, supplements or restatements of any such agreement, instrument or document, K-2 133 provided that nothing contained in this Section 1.4 shall be construed to authorize any Person to execute or enter into any such renewal, extension, amendment, modification, supplement or restatement. Section 1.5 References and Titles. All references in this Agreement to Exhibits, Articles, Sections, subsections, and other subdivisions refer to the Exhibits, Articles, Sections, subsections and other subdivisions of this Agreement unless expressly provided otherwise. Titles appearing at the beginning of any subdivision are for convenience only and do not constitute any part of any such subdivision and shall be disregarded in construing the language contained in this Agreement. The words "this Agreement," "herein," "hereof," "hereby," "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The phrases "this Section" and "this subsection" and similar phrases refer only to the Sections or subsections hereof in which the phrase occurs. The word "or" is not exclusive, and the word "including" (in all of its forms) means "including without limitation". Pronouns in masculine, feminine and neuter gender shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa unless the context otherwise requires. ARTICLE II. Security Interest Section 2.1 Grant of Security Interest. As collateral security for all of the Obligations, Pledgor hereby pledges and assigns to Pledgee and grants to Pledgee a continuing first priority security interest for the benefit of Banks in and to all of the following rights, interests and property: (a) all of the issued and outstanding Equity of Borrower now owned or hereafter acquired by Pledgor including, without limitation, the Equity of Borrower owned by Pledgor on the date hereof (all of the foregoing being herein sometimes called the "Pledged Equity"); (b) any and all proceeds or other sums arising from or by virtue of, and all dividends and distributions (cash or otherwise) payable and/or distributable with respect to, all or any of the Pledged Equity described in clause (a) preceding; and (c) all cash, securities, dividends and other property at any time and from time to time receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Equity described in clause (a) hereof and any other property substituted or exchanged therefor. Section 2.2 Obligations Secured. The security interest created hereby in the Collateral constitutes continuing collateral security for all of the following obligations, indebtedness and liabilities, whether now existing or hereafter incurred: K-3 134 (a) Credit Agreement Indebtedness. The payment by Borrower, as and when due and payable, of all amounts from time to time owing by Borrower under or in respect of the Credit Agreement, the Notes or any of the other Obligation Documents. (b) Renewals. All renewals, extensions, amendments, modifications, supplements, or restatements of, or substitutions for, any of the foregoing. (c) Performance. The due performance and observance by Borrower of all of its other obligations from time to time existing under or in respect of any of the Obligation Documents. (d) Hedge Transactions. The payment and performance of any and all present or future obligations of Borrower according to the terms of any present or future Hedge Transaction, including, without limitation, any present or future swap agreements, cap, floor, collar, exchange, transaction, forward agreement or other exchange or protection agreements relating to crude oil, natural gas or other Hydrocarbons, or any option with respect to any such transaction now existing or hereafter entered into between and/or among Pledgor, Borrower, Pledgee, any Bank or any affiliate of any of the foregoing. ARTICLE III. Representations Warranties and Covenants Section 3.1 Representations and Warranties. Pledgor represents and warrants as follows: (a) Ownership and Liens. Pledgor has good and marketable title to the Collateral free and clear of all Liens, encumbrances or adverse claims, except for the security interest created by this Agreement. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office except such as have been filed in favor of Pledgee relating to this Agreement. (b) No Conflicts or Consents. Neither the ownership or the intended use of the Collateral by Pledgor, nor the grant of the security interest by Pledgor to Pledgee herein, nor the exercise by Pledgee of its rights or remedies hereunder, will (i) conflict with any provision of (a)any domestic or foreign law, statute, rule or regulation, (b) the articles of incorporation, certificate of limited partnership, partnership agreement, regulations, charter or bylaws of Pledgor, or (c) any agreement, judgment, license, order or permit applicable to or binding upon Pledgor, or (ii) result in or require the creation of any Lien, charge or encumbrance upon any assets or properties of Pledgor except as expressly contemplated in the Obligation Documents. Except as expressly contemplated in the Obligation Documents, no consent, approval, authorization or order of, and no notice to or filing with, any court, Governmental Authority or third party is required in K-4 135 connection with the grant by Pledgor of the security interest herein, or the exercise by Pledgee of its rights and remedies hereunder. (c) Security Interest. Pledgor has and will have at all times full right, power and authority to grant a security interest in the Collateral to Pledgee in the manner provided herein, free and clear of any Lien, adverse claim, or encumbrance. This Agreement creates a valid and binding security interest in favor of Pledgee in the Collateral securing the Obligations. The taking possession by Pledgee (for the ratable benefit of Banks) of all certificates, instruments and cash constituting Collateral from time to time and the filing of the financing statements delivered concurrently herewith by Pledgor to Pledgee will perfect, and establish the first priority of, Pledgee's security interest hereunder in the Collateral securing the Obligations. No further or subsequent filing, recording, registration, other public notice or other action is necessary or desirable to perfect or otherwise continue, preserve or protect such security interest except for continuation statements or filings as contemplated in Section 3.3(b). (d) Pledged Equity. (i) Pledgor is the legal and beneficial owner of the Pledged Equity issued by Borrower, (ii) the Pledged Equity is duly authorized and issued, fully paid and non-assessable, and all documentary, stamp or other Taxes or fees owing in connection with the issuance, transfer and/or pledge thereof hereunder have been paid, (iii) no dispute, right of setoff, counterclaim or defense exists with respect to all or any part of the Pledged Equity, (iv) the Pledged Equity is free and clear of all Liens, options, warrants, puts, calls or other rights of third Persons, and restrictions, other than (a) those Liens arising under this Agreement or any other of the Loan Papers and Liens for Taxes not yet due and payable, and (b) restrictions on transferability imposed by applicable state and federal securities Laws, (v) Pledgor has full right and authority to pledge the Pledged Equity for the purposes and upon the terms set out herein, (vi) certificates (or other evidence acceptable to Pledgee) representing the Pledged Equity have been delivered to Pledgee, together with a duly executed blank stock power (as applicable) with signatures guaranteed, for each certificate, and (vii) Borrower has not issued, and there are not outstanding, any options, warrants or other rights to acquire capital stock, membership interests, or partnership interests of Borrower. Section 3.2 Affirmative Covenants. Unless Pledgee shall otherwise consent in writing, Pledgor will at all times comply with the covenants contained in this Section 3.2 from the date hereof and so long as any part of the Obligations or Commitments is outstanding. (a) Ownership and Liens. Pledgor will maintain good and marketable title to all Collateral free and clear of all Liens encumbrances or adverse claims, except for the security interest created by this Agreement and the security interests and other encumbrances expressly permitted by the Credit Agreement. Pledgor will cause to be terminated any financing statement or other registration with respect to the Collateral, except such as may exist or as may have been filed in favor of Pledgee. Pledgor will defend Pledgee's right, title and special property and security interest in and to the Collateral against the claims of any Person. K-5 136 (b) Further Assurances. Pledgor will, at its expense and at any time and from time to time, promptly execute and deliver all further instruments and documents and take all further action that may be necessary or desirable or that Pledgee may request in order (i) to perfect and protect the security interest created or purported to be created hereby and the first priority of such security interest; (ii) to enable Pledgee to exercise and enforce its rights and remedies hereunder in respect of the Collateral; or (iii) to otherwise effect the purposes of this Agreement, including, without limitation: (a) executing and filing such financing or continuation statements, or amendments thereto, as may be necessary or desirable or that Pledgee may request in order to perfect and preserve the security interest created or purported to be created hereby; and (b) furnishing to Pledgee from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Pledgee may reasonably request, all in reasonable detail. (c) Delivery of Pledged Equity. All certificates, instruments and writings evidencing the Pledged Equity shall be delivered to Pledgee on or prior to the execution and delivery of this Agreement. All other certificates, instruments and writings hereafter evidencing or constituting Pledged Equity shall be delivered to Pledgee promptly upon the receipt thereof by or on behalf of Pledgor. All such Pledged Equity shall be held by or on behalf of Pledgee pursuant hereto and shall be delivered in the same manner and with the same effect as described in Section 2.1 and Section 3.1 hereof. Upon delivery, such equity interests shall thereupon constitute "Pledged Equity" and shall be subject to the Liens herein created, for the purposes and upon the terms and conditions set forth in this Agreement and the other Loan Papers. (d) Proceeds of Pledged Equity. If Pledgor shall receive, by virtue of its being or having been an owner of any Pledged Equity, any (i) shares of capital stock, membership interests and/or partnership interests (including any certificate representing any shares of capital stock, membership interests and/or partnership interests or distribution in connection with any increase or reduction of capital, reorganization, reclassification, merger, consolidation, sale of assets, or spinoff or split-off), promissory note or other instrument or writing; (ii) option or right, whether as an addition to, substitution for, or in exchange for, any Pledged Equity or otherwise; (iii) dividends payable in cash (except such dividends permitted to be retained by Pledgor pursuant to Section 4.7 hereof) or in securities or other property; or (iv) dividends or other distributions in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in surplus, Pledgor shall receive the same in trust for the benefit of Pledgee, shall segregate it from Pledgor's other property, and shall promptly deliver it to Pledgee in the exact form received, with any necessary endorsement or appropriate stock powers duly executed in blank, to be held by Pledgee as Collateral. (e) Status of Pledged Equity. The certificates (or other instruments and writings) evidencing the Pledged Equity shall at all times be valid and genuine and shall not be altered. The Pledged Equity at all times shall be duly authorized, validly issued, fully paid, and non- assessable, shall not be issued in violation of the pre-emptive rights of any Person or of any agreement by which Pledgor or Borrower bound, and, except for the partnership agreement, regulations or K-6 137 bylaws of Borrower, shall not be subject to any restrictions or conditions with respect to the transfer, voting or capital of any Pledged Equity. Section 3.3 Negative Covenants. Unless Pledgee shall otherwise consent in writing, Pledgor will at all times comply with the covenants contained in this Section 3.3 from the date hereof and so long as any part of the Obligations or the Commitments is outstanding. (a) Transfer or Encumbrance. Pledgor will not sell, assign (by operation of law or otherwise), transfer, exchange, lease or otherwise dispose of any of the Collateral, nor will Pledgor grant a Lien upon or execute, file or record any financing statement or other registration with respect to the Collateral, nor will Pledgor allow any such Lien, financing statement, or other registration to exist or deliver actual or constructive possession of the Collateral to any other Person other than Liens in favor of Pledgee. (b) Financing Statement Filings. Pledgor recognizes that financing statements pertaining to the Collateral have been or may be filed where Pledgor maintains any Collateral, has its records concerning any Collateral or has its chief executive office or chief place of business. Without limitation of any other covenant herein, Pledgor will not cause or permit any change to be made in its name, identity or corporate, partnership or limited liability company structure, or any change to be made to a jurisdiction other than as represented in Section 3.1 hereof in (i) the location of any records concerning any Collateral, or (ii) in the location of its chief executive office or chief place of business, unless Pledgor shall have notified Pledgee of such change at least thirty (30) days prior to the effective date of such change, and shall have first taken all action required by Pledgee for the purpose of further perfecting or protecting the security interest in favor of Pledgee in the Collateral. In any notice furnished pursuant to this subsection, Pledgor will expressly state that the notice is required by this Agreement and contains facts that may require additional filings of financing statements or other notices for the purposes of continuing perfection of Pledgee's security interest in the Collateral. (c) Impairment of Security Interest. Pledgor will not take or fail to take any action which would in any manner impair the enforceability of Pledgee's security interest in any Collateral. (d) Restrictions on Pledged Equity. Except for the partnership agreement, regulations or bylaws of Borrower, Pledgor will not enter into any agreement creating, or otherwise permit to exist, any restriction or condition upon the transfer, voting or control of any Pledged Equity. K-7 138 ARTICLE IV. Remedies, Powers and Authorizations Section 4.1 Provisions Concerning the Collateral. (a) Additional Financing Statement Filings. Pledgor hereby authorizes Pledgee to file, without the signature of Pledgor where permitted by law, one (1) or more financing or continuation statements, and amendments thereto, relating to the Collateral. Pledgor further agrees that a carbon, photographic or other reproduction of this Agreement or any financing statement describing any Collateral is sufficient as a financing statement and may be filed in any jurisdiction Pledgee may deem appropriate. (b) Power of Attorney. Pledgor hereby irrevocably appoints Pledgee as Pledgor's attorney-in-fact and proxy, with full authority in the place and stead of Pledgor and in the name of Pledgor or otherwise, from time to time in Pledgee's discretion, to take any action (except for the exercise of any voting rights pertaining to the Pledged Equity or any part thereof) and to execute any instrument, certificate or notice which Pledgee may deem necessary or advisable to accomplish the purposes of this Agreement including, without limitation: (i) to request or instruct Pledgor (and each registrar, transfer agent, or similar Person acting on behalf of Pledgor) to register the pledge or transfer of the Collateral to Pledgee; (ii) to otherwise give notification to Pledgor, registrar, transfer agent, financial intermediary, or other Person of Pledgee's security interests hereunder; (iii) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (iv) to receive, indorse and collect any drafts or other instruments, documents and chattel paper; and (v) to file any claims or take any action or institute any proceedings which Pledgee may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Pledgee with respect to any of the Collateral. (c) Performance by Pledgee. If Pledgor fails to perform any agreement or obligation contained herein, Pledgee may itself perform, or cause performance of, such agreement or obligation, and the expenses of Pledgee incurred in connection therewith shall be payable by Pledgor under Section 4.4. (d) Collection Rights. Pledgee shall have the right at any time, upon the occurrence and during the continuance of an Event of Default, to notify any or all obligors (including without limitation Pledgor) under any accounts or general intangibles included among the Collateral of the assignment thereof to Pledgee and to direct such obligors to make payment of all amounts due or to become due to Pledgor thereunder directly to Pledgee and, upon such notification and at the expense of Pledgor and to the extent permitted by law, to enforce collection thereof and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Pledgor could have done. After Pledgor receives notice that Pledgee has given any notice referred to above in this subsection, (i) all amounts and proceeds (including instruments and writings) received by Pledgor in respect of such accounts or general intangibles shall be received in trust for the benefit of Pledgee hereunder, shall be segregated from other funds of Pledgor and shall be forthwith paid over to Pledgee in the same form as so received (with any necessary indorsement) to be held as cash collateral and (a) released to Pledgor upon the remedy of all Defaults or Events of Default, or (b) if any Event of Default shall have occurred and be continuing, applied as specified in Section 4.3, and (ii) Pledgor will not adjust, settle or K-8 139 compromise the amount or payment of any such account or general intangible or release wholly or partly any account debtor or obligor thereof (including without limitation Pledgor) or allow any credit or discount thereon. Section 4.2 Event of Default Remedies. If an Event of Default shall have occurred and be continuing, Pledgee may from time to time in its discretion, without limitation and without notice except as expressly provided below: (a) exercise in respect of the Collateral, in addition to other rights and remedies provided for herein, under the other Obligation Documents or otherwise available to it, all the rights and remedies of a secured party on default under the Code (whether or not the Code applies to the affected Collateral); (b) require Pledgor to, and Pledgor hereby agrees that it will at its expense and upon request of Pledgee forthwith, assemble all or part of the Collateral as directed by Pledgee and make it available to Pledgee at a place to be designated by Pledgee which is reasonably convenient to both parties; (c) reduce its claim to judgment against Pledgor or foreclose or otherwise enforce, in whole or in part, the security interest created hereby by any available judicial procedure; (d) dispose of, at its office, on the premises of Pledgor or elsewhere, all or any part of the Collateral, as a unit or in parcels, by public or private proceedings, and by way of one or more contracts (it being agreed that the sale of any part of the Collateral shall not exhaust Pledgee's power of sale, but sales may be made from time to time, and at any time, until all of the Collateral has been sold or until the Obligations have been paid and performed in full), and at any such sale it shall not be necessary to exhibit any of the Collateral; (e) buy (or allow any Bank to buy) the Collateral, or any part thereof, at any public sale; (f) buy (or allow any Bank to buy) the Collateral, or any part thereof, at any private sale if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations; (g) apply by appropriate judicial proceedings for appointment of a receiver for the Collateral, or any part thereof, and Pledgor hereby consents to any such appointment; and (h) at its discretion, retain the Collateral in satisfaction of the Obligations whenever the circumstances are such that Pledgee is entitled to do so under the Code or otherwise (provided that Pledgee shall in no circumstances be deemed to have retained the Collateral in satisfaction of the Obligations in the absence of an express notice by Pledgee to Pledgor that Pledgee has either done so or intends to do so). K-9 140 Pledgor agrees that, to the extent notice of sale shall be required by law, at least five (5) days' notice to Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Pledgee shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Pledgee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Section 4.3 Application of Proceeds. If any Event of Default shall have occurred and be continuing, Pledgee may in its discretion apply any cash held by Pledgee as Collateral, and any cash proceeds received by Pledgee in respect of any sale of, collection from, or other realization upon all or any part of the Collateral, to any or all of the following in such order as Pledgee may elect: (a) to the repayment of the reasonable costs and expenses, including reasonable attorneys' fees and legal expenses, incurred by Pledgee in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral, (iii) the exercise or enforcement of any of the rights of Pledgee hereunder, or (iv) the failure of Pledgor to perform or observe any of the provisions hereof; (b) to the payment or other satisfaction of any Liens, encumbrances, or adverse claims upon or against any of the Collateral; (c) to the reimbursement of Pledgee for the amount of any obligations of Pledgor or any Other Liable Party paid or discharged by Pledgee pursuant to the provisions of this Agreement or the other Obligation Documents, and of any expenses of Pledgee payable by Pledgor hereunder or under the other Obligation Documents; (d) to the satisfaction of any other Obligations or any other indebtedness of Pledgor and/or Borrower to Banks or Pledgee; (e) by holding the same as Collateral; (f) to the payment of any other amounts required by applicable law (including, without limitation, Section 9.504(a)(3) of the Code or any successor or similar, applicable statutory provision); and (g) by delivery to Pledgor or to whomsoever shall be lawfully entitled to receive the same or as a court of competent jurisdiction shall direct. Section 4.4 Release and Expenses. In addition to, and not in qualification of, any similar obligations under other Obligation Documents: K-10 141 (a) Pledgor agrees to release and forever discharge Pledgee and each Bank from and against any and all claims, losses and liabilities growing out of or resulting from this Agreement (including, without limitation, enforcement of this Agreement). The foregoing release and discharge shall apply whether or not such claims, losses and liabilities are in any way or to any extent owed, in whole or in part, under any claim or theory of strict liability or are, to any extent caused, in whole or in part, by any negligent act or omission of any kind by Pledgee or any Bank. (b) Pledgor will upon demand pay to Pledgee the amount of any and all costs and expenses, including the fees and disbursements of Pledgee's counsel and of any experts and agents, which Pledgee may incur in connection with (i) the transactions which give rise to this Agreement; (ii) the preparation of this Agreement and the perfection and preservation of the security interest created under this Agreement; (iii) the administration of this Agreement; (iv) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral; (v) the exercise or enforcement of any of the rights of Pledgee hereunder; or (vi) the failure by Pledgor to perform or observe any of the provisions hereof, except expenses resulting from Pledgee's gross negligence or willful misconduct. Section 4.5 Non-Judicial Remedies. In granting to Pledgee the power to enforce its rights hereunder without prior judicial process or judicial hearing, Pledgor expressly waives, renounces and knowingly relinquishes any legal right which might otherwise require Pledgee to enforce its rights by judicial process. In so providing for non-judicial remedies, Pledgor recognizes and concedes that such remedies are consistent with the usage of trade, are responsive to commercial necessity, and are the result of a bargain at arm's length. Nothing herein is intended to prevent Pledgee or Pledgor from resorting to judicial process at either party's option. Section 4.6 Other Recourse. Pledgor waives any right to require Pledgee or Banks to proceed against any other Person, exhaust any Collateral or other security for the Obligations, or to have any Other Liable Party joined with Pledgor in any suit arising out of the Obligations or this Agreement, or pursue any other remedy in Pledgee's power. Pledgor further waives any and all notice of acceptance of this Agreement and of the creation, modification, rearrangement, renewal or extension for any period of any of the Obligations of any Other Liable Party from time to time. Pledgor further waives any defense arising by reason of any disability or other defense of any Other Liable Party or by reason of the cessation from any cause whatsoever of the liability of any Other Liable Party. Until all of the Obligations shall have been paid in full, Pledgor shall have no right to subrogation and Pledgor waives the right to enforce any remedy which Pledgee or any Bank has or may hereafter have against any Other Liable Party, and waives any benefit of and any right to participate in any other security whatsoever now or hereafter held by Pledgee. Pledgor authorizes Pledgee and each Bank, without notice or demand and without any reservation of rights against Pledgor and without affecting Pledgor's or Borrower's liability hereunder or on the Obligations, from time to time to (a) take or hold any other property of any type from any other Person as security for the Obligations, and exchange, enforce, waive and release any or all of such other property,(b) apply the Collateral or such other property and direct the order or manner of sale thereof as Pledgee may in its discretion determine, (c) renew, extend for any period, K-11 142 accelerate, modify, compromise, settle or release any of the obligations of any Other Liable Party in respect to any or all of the Obligations or other security for the Obligations, (d) waive, enforce, modify, amend or supplement any of the provisions of any Obligation Document with any Person other than Pledgor, and (e) release or substitute any Other Liable Party. Section 4.7 Voting Rights, Dividends Etc. in Respect of Pledged Equity. (a) So long as no Event of Default shall have occurred and be continuing Pledgor may receive and retain any and all dividends or interest paid in respect of the Pledged Equity; provided, however, that any and all (i) dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of or in exchange for, any Pledged Equity, (ii) dividends and other distributions paid or payable in cash in respect of any Pledged Equity in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in surplus, and (iii) cash paid, payable or otherwise distributed in redemption of, or in exchange for, any Pledged Equity, shall be, and shall forthwith be delivered to Pledgee to hold as, Pledged Equity and shall, if received by Pledgor, be received in trust for the benefit of Pledgee, be segregated from the other property or funds of Pledgor, and be forthwith delivered to Pledgee in the exact form received with any necessary indorsement or appropriate stock powers duly executed in blank, to be held by Pledgee as Collateral. (b) Upon the occurrence and during the continuance of an Event of Default: (i) all rights of Pledgor to receive and retain the dividends and interest payments which Pledgor would otherwise be authorized to receive and retain pursuant to subsection (a) of this Section shall automatically cease, and all such rights shall thereupon become vested in Pledgee which shall thereupon have the right to receive and hold as Pledged Equity such dividends and interest payments; (ii) without limiting the generality of the foregoing, Pledgee may at its option exercise any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to any of the Pledged Equity (except voting rights) as if it were the absolute owner thereof, including, without limitation, the right to exchange, in its discretion, any and all of the Pledged Equity upon the merger, consolidation, reorganization, recapitalization or other adjustment of Pledgor or Borrower, or upon the exercise by Pledgor or Borrower of any right, privilege or option pertaining to any K-12 143 Pledged Equity, and, in connection therewith, to deposit and deliver any and all of the Pledged Equity with any committee, depository, transfer agent, registrar or other designated agent upon such terms and conditions as it may determine; and (iii) all dividends and interest payments which are received by Pledgor contrary to the provisions of subsection (b) (i) of this Section shall be received in trust for the benefit of Pledgee, shall be segregated from other funds of Pledgor, and shall be forthwith paid over to Pledgee as Pledged Equity in the exact form received, to be held by Pledgee as Collateral. Anything herein to the contrary notwithstanding, Pledgee may not exercise any voting rights pertaining to the Pledged Equity and Pledgor may at all times exercise any and all voting rights pertaining to the Pledged Equity or any part thereof for any purpose not inconsistent with the terms of this Agreement or any other Obligation Document; provided, however, upon the occurrence and during the continuance of a Default or an Event of Default, Pledgor will not exercise or refrain from exercising any such right, as the case may be, if Pledgee gives notice that, in Pledgee's judgment, such action would result in a Material Adverse Change with respect to the value of the Pledged Equity or the benefits to Pledgee of its security interest hereunder. Section 4.8 Private Sale of Pledged Equity. Pledgor recognizes that Pledgee may deem it impracticable to effect a public sale of all or any part of the Pledged Equity and that Pledgee may, therefore, determine to make one or more private sales of any such securities to a restricted group of purchasers who will be obligated to agree, among other things, to acquire such securities for their own account, for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sale may be at prices and on terms less favorable to the seller than the prices and other terms which might have been obtained at a public sale and, notwithstanding the foregoing, agrees that such private sales shall be deemed to have been made in a commercially reasonable manner and that Pledgee shall have no obligation to delay the sale of any such securities for the period of time necessary to permit Pledgor to register such securities (with no obligation of Pledgor to accomplish such registration) for public sale under the Securities Act of 1933, as amended. Pledgor further acknowledges and agrees that any offer to sell such securities which has been (a) publicly advertised on a bona fide basis in a newspaper or other publication of general circulation in the financial community of Dallas, Texas (to the extent that such an offer may be so advertised without prior registration under the Securities Act), or (b) made privately in the manner described above to not less than fifteen (15) bona fide offerees shall be deemed to involve a "public sale" for the purposes of Section 9.504(c) of the Code (or any successor or similar, applicable statutory provision) as then in effect in the State of Texas, notwithstanding that such sale may not constitute a "public offering" under the Securities Act of 1933, as amended, and that Pledgee may, in such event, bid for the purchase of such securities. K-13 144 ARTICLE V. Miscellaneous Section 5.1 Notices. Any notice or communication required or permitted hereunder shall be given in writing, sent by personal delivery, by telecopy, by delivery service with proof of delivery, or by registered or certified United States mail, postage prepaid, addressed to the appropriate party as follows: To Pledgor: Taurus Acquisition, Inc. c/o EXCO Resources, Inc. 5735 Pineland Drive, Suite 233 Dallas, Texas 75231 Fax No.: (214) 368-2087 To Pledgee: Bank of America, N.A., as Administrative Agent 901 Main Street, 64th Floor Dallas, Texas 75202 Fax No. (214) 209-1285 or to such other address or to the attention of such other individual as hereafter shall be designated in writing by the applicable party sent in accordance herewith. Any such notice or communication shall be deemed to have been given (a) in the case of personal delivery or delivery service, as of the date of first attempted delivery at the address or in the manner provided herein, (b) in the case of telecopy, upon receipt, or (c) in the case of registered or certified United States mail, three (3) days after deposit in the mail. Section 5.2 Amendments. No amendment of any provision of this Agreement shall be effective unless it is in writing and signed by Pledgor, Pledgee and Banks, and no waiver of any provision of this Agreement, and no consent to any departure by Pledgor therefrom, shall be effective unless it is in writing and signed by Pledgee and Banks, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given and to the extent specified in such writing. Section 5.3 Preservation of Rights. No failure on the part of Pledgee or any Bank to exercise, and no delay in exercising, any right hereunder or under any other Obligation Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. Neither the execution nor the delivery of this Agreement shall in any manner impair or affect any other security for the Obligations. The rights and remedies of Pledgee and Banks provided herein and in the other Obligation Documents are cumulative of and are in addition to, and not exclusive of, any rights or remedies provided by law. The rights of Pledgee and Banks under any Obligation Document against any party thereto are not conditional or contingent on any attempt by Pledgee or Banks to K-14 145 exercise any of its rights under any other Obligation Document against such party or against any other Person. Section 5.4 Unenforceability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or invalidity without invalidating the remaining portions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 5.5 Survival of Agreements. All representations and warranties of Pledgor herein, and all covenants and agreements herein shall survive the execution and delivery of this Agreement, the execution and delivery of any other Obligation Documents and the creation of the Obligations. Section 5.6 Other Liable Party. Neither this Agreement nor the exercise by Pledgee or any Bank or the failure of Pledgee or any Bank to exercise any right, power or remedy conferred herein or by law shall be construed as relieving any Other Liable Party from liability on the Obligations or any deficiency thereon. This Agreement shall continue irrespective of the fact that the liability of any Other Liable Party may have ceased or irrespective of the validity or enforceability of any other Obligation Document to which Pledgor or any Other Liable Party may be a party, and notwithstanding the reorganization, death, incapacity or bankruptcy of any Other Liable Party, and notwithstanding the reorganization or bankruptcy or other event or proceeding affecting any Other Liable Party. Section 5.7 Binding Effect and Assignment. This Agreement creates a continuing security interest in the Collateral and (a) shall be binding on Pledgor and its successors and permitted assigns, and (b) shall inure, together with all rights and remedies of Pledgee hereunder, to the benefit of Pledgee and Banks and their respective successors, transferees and assigns. Without limiting the generality of the foregoing, Pledgee and Banks may pledge, assign or otherwise transfer any or all of their respective rights under any or all of the Obligation Documents to any other Person, and such other Person shall thereupon become vested with all of the benefits in respect thereof granted herein or otherwise. None of the rights or duties of Pledgor hereunder may be assigned or otherwise transferred without the prior written consent of Pledgee and Banks. Section 5.8 Termination. It is contemplated by the parties hereto that there may be times when no Obligations are outstanding, but notwithstanding such occurrences, this Agreement shall remain valid and shall be in full force and effect as to subsequent outstanding Obligations. Upon the satisfaction in full of the Obligations, upon the termination or expiration of the Credit Agreement and any other Commitment of Banks to extend credit to Borrower, and upon written request for the termination hereof delivered by Pledgor to Pledgee and Banks, this Agreement and the security interest created hereby shall terminate and all rights to the Collateral shall revert to Pledgor. Pledgee will, upon Pledgor's request and at Pledgor's expense, (a) return to Pledgor such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to K-15 146 the terms hereof, and (b) execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination. Section 5.9 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA. Section 5.10 Counterparts. This Agreement may be separately executed in any number of counterparts, all of which when so executed shall be deemed to constitute one and the same Agreement. Section 5.11 Loan Paper. This Agreement is a "Loan Paper", as defined in the Credit Agreement, and, except as expressly provided herein to the contrary, this Agreement is subject to all provisions of the Credit Agreement governing such Loan Paper. K-16 147 IN WITNESS WHEREOF, Pledgor has caused this Agreement to be executed and delivered by its officer thereunto duly authorized, as of the date first above written. TAURUS ACQUISITION, INC., a Texas corporation By: ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- K-17 148 SCHEDULE 1 FINANCIAL INSTITUTIONS
=================================================================================================================================== Bank Commitment Amount Commitment Percentage - ----------------------------------------------------------------------------------------------------------------------------------- Bank of America, N.A. $25,000,000 100% ===================================================================================================================================
=================================================================================================================================== Domestic Lending Eurodollar Lending Office Office Address for Notice Administrative Agent - Address - ----------------------------------------------------------------------------------------------------------------------------------- 901 Main Street, 64th 901 Main Street, 64th 901 Main Street, 64th 901 Main Street, 64th Floor Floor Floor Floor Dallas, Texas 75202 Dallas, Texas 75202 Dallas, Texas 75202 Dallas, Texas 75202 Fax No. (214) 508-1285 Fax No. (214) 508-1285 Fax No. (214) 508-1285 Fax No. (214) 508-1285 ===================================================================================================================================
Schedule 1 149 SCHEDULE 2 LITIGATION AND CLAIMS o Case #93-11958, 261st Court, Travis County, Texas styled Ladd Petroleum Corporation v. State of Texas General Land Office affecting State leases included within the Gomez South Unit #1 (Gomez #1-D and #1-A Wells), the FSOC - Dixel Gas Unit #2 (Dixel #2 Well), and FSOC-Leon Gas Unit (Leon #1 Well), Pecos County, Texas. OTHER THAN THE ABOVE, NONE. Schedule 2 150 SCHEDULE 3 ORGANIZATION STRUCTURE; NATURE OF BUSINESS 1. Borrower is a Texas limited partnership. 3. Borrower's Partners:
- -------------------------------------------------------------------------------------------------------------------- CAPITAL ACCOUNT AFTER REEVALUATION OF THE NEBRASKA INITIAL PROPERTIES, PARTNER CAPITAL ADMISSION OF EXCO PARTNERSHIP (AND CLASSIFICATION) CONTRIBUTION RESOURCES, INC. INTEREST - -------------------------------------------------------------------------------------------------------------------- J.M. Hill (L.P.) $50,000.00 $1,731,372.00 24.5% Charles Humphrey (L.P.) $47,960.00 1,660,607.00 23.5% EXCO Resources, Inc. (G.P.) $68,628.00 $68,628.00 1% Taurus Acquisition, Inc. (L.P.) $3,431,372.00 $3,431,372.00 50% Humphrey Oil Corporation (L.P.) $2,040.00 $70,766.00 1% - --------------------------------------------------------------------------------------------------------------------
4. EXCO is the sole owner of all legal and beneficial interest in and to 100% of the issued outstanding capital stock of Taurus of every class. 5. There are no outstanding warrants, options, subscription rights, convertible securities or other rights to purchase interests in Borrower or Taurus. Schedule 3 EX-10.28 4 AMENDED AND RESTATED AGREEMENT 1 EXHIBIT 10.28 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF HUMPHREY-HILL, L.P. (A TEXAS LIMITED PARTNERSHIP) THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. WITHOUT REGISTRATION, THESE SECURITIES MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED AT ANY TIME WHATSOEVER, EXCEPT ON DELIVERY TO THE PARTNERSHIP OF AN OPINION OF COUNSEL SATISFACTORY TO THE GENERAL PARTNER OF THE PARTNERSHIP THAT REGISTRATION IS NOT REQUIRED FOR THE TRANSFER, OR THE SUBMISSION TO THE GENERAL PARTNER OF THE PARTNERSHIP OF OTHER EVIDENCE SATISFACTORY TO THE GENERAL PARTNER TO THE EFFECT THAT ANY TRANSFER WILL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR ANY RULE OR REGULATIONS PROMULGATED THEREUNDER. ADDITIONALLY, ANY SALE OR OTHER TRANSFER OF THESE SECURITIES IS SUBJECT TO CERTAIN RESTRICTIONS THAT ARE SET FORTH IN THE AGREEMENT OF LIMITED PARTNERSHIP OF THE PARTNERSHIP. 2 AGREEMENT OF LIMITED PARTNERSHIP OF HUMPHREY-HILL, L.P. (A TEXAS LIMITED PARTNERSHIP) TABLE OF CONTENTS
Page ARTICLE 1 GENERAL....................................................................................1 1.1. Formation.........................................................................1 1.2. Name and Certificate..............................................................1 1.3. Office and Agent..................................................................1 1.4. Term..............................................................................1 1.5. Purposes..........................................................................2 1.6. Other Activities of Partners......................................................2 1.7. Limits............................................................................2 ARTICLE 2 DEFINITIONS................................................................................2 2.1. Definitions.......................................................................2 2.2. Other Definitions.................................................................8 ARTICLE 3 CAPITALIZATION.............................................................................8 3.1. Identification....................................................................8 3.2. Additional Capital Contributions..................................................8 3.3. Remedies for Failure to Fund Additional Capital Contributions.....................8 3.4. Capital Accounts..................................................................8 3.5. Withdrawal or Reduction of Partners' Capital Contributions........................9 3.6. Limitation on Liability...........................................................9 3.7. Operations.......................................................................10 ARTICLE 4 ALLOCATIONS, DISTRIBUTIONS, ELECTIONS AND REPORTS.........................................11 4.1. Allocation Among Partners........................................................11 4.2. Allocation of Costs and Expenses.................................................13 4.3. Allocation of Net Cash Flow......................................................13 4.4. Income Tax Allocations...........................................................13 4.5. Code Section 704(c)..............................................................14 4.6. Recapture Income.................................................................14 4.7. Sections 743 and 734 Election....................................................14 4.8. Varying Interests................................................................14 4.9. Nonrecourse Liabilities..........................................................15 4.10. Records and Reports..............................................................15 4.11. Returns and Other Elections......................................................15 4.12. Tax Matters Partner..............................................................15 4.13. Bank Accounts....................................................................16 4.14 Certain Payments; Distributions of Cash..........................................16
Agreement of Limited Partnership of Humphrey-Hill, L.P. i 3 4.15 Limitation on Distribution.......................................................17 4.16 Transferred Interests............................................................17 4.17 Accounting Principles; Designated Accountant.....................................17 ARTICLE 5 ROLE OF LIMITED PARTNERS..................................................................17 5.1. Management of Business...........................................................17 5.2. Bankruptcy; Death................................................................18 5.3 Inspection of Records............................................................18 ARTICLE 6 MANAGEMENT................................................................................18 6.1. Day-to-Day Management............................................................18 6.2. Reliance.........................................................................18 6.3. Restrictions on Authority........................................................19 6.4. Duties...........................................................................19 6.5. Compensation and Reimbursement...................................................19 6.6. Indemnification..................................................................19 6.7. Appointment and Replacement......................................................20 6.8. Approval and Meetings............................................................20 6.9. General Partner as Attorney-in-Fact..............................................20 6.10. Execution of Documents...........................................................21 ARTICLE 7 TRANSFER OF INTERESTS.....................................................................21 7.1. Additional Interests.............................................................21 7.2. Restrictions on Transfer.........................................................21 7.3. Confidentiality..................................................................25 7.4. Withdrawal.......................................................................25 ARTICLE 8 DISSOLUTION...............................................................................26 8.1. Causes...........................................................................26 8.2. Reconstitution...................................................................26 8.3. Interim Manager..................................................................26 ARTICLE 9 WINDING UP AND TERMINATION................................................................26 9.1. General..........................................................................26 9.2. Liquidation......................................................................26 9.3. Creation of Reserves.............................................................27 9.4. Final Accounting.................................................................27 ARTICLE 10 MISCELLANEOUS.............................................................................28 10.1. Notices..........................................................................28 10.2. Application of Law; Venue.......................................................28 10.3. Terms............................................................................28 10.4. References to This Agreement.....................................................28 10.5. Amendment........................................................................29 10.6. Severability.....................................................................29 10.7. No Third-Party Beneficiary.......................................................29 10.8. Sole and Absolute Discretion.....................................................29 10.9. Binding Effect...................................................................29 10.10. Complete Agreement...............................................................29 10.11. Title to Partnership Property....................................................29
Agreement of Limited Partnership of Humphrey-Hill, L.P. ii 4 10.12. Reliance on Authority of Persons Signing Agreement...............................29 10.13. Partition Rights.................................................................30 10.14. Area of Mutual Interest..........................................................30 10.15. Agreement in Counterparts........................................................30 Attachment: Exhibit A - Certain Information Regarding the Partnership and Partners Exhibit B - Depiction of Area of Mutual Interest
Agreement of Limited Partnership of Humphrey-Hill, L.P. iii 5 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF HUMPHREY-HILL, L.P. (A TEXAS LIMITED PARTNERSHIP) THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP (this "AGREEMENT") is made as of the 24th day of March, 2000, by and among Humphrey Oil Corporation, a Texas corporation as a resigning general partner hereby converting to the status of limited partner ("HUMPHREY OIL"), EXCO Resources, Inc. ("EXCO"), a Texas corporation, as successor general partner hereby (the "GENERAL PARTNER"), and those Persons (hereinafter defined) who execute this Agreement as limited partners (with Humphrey Oil collectively, the "LIMITED PARTNERS"), and they together hereby form a limited partnership (the "PARTNERSHIP") pursuant to the Act (hereinafter defined). WHEREAS, the Partners (as hereinafter defined) desire to amend and restate their agreement of limited partnership, dated February 17, 2000. WHEREAS, the Partners desire to more fully set forth their agreement regarding owning and operating and managing the Property (as hereinafter defined). NOW, THEREFORE, to state the entire agreement of the Partners with respect to their rights and obligations as Partners and with respect to the Partnership and its affairs, and in consideration of these premises, it is hereby agreed as follows: ARTICLE 1 GENERAL 1.1. Formation. The Partnership is hereby formed under the terms of this Agreement. Except as otherwise provided in this Agreement, the rights and liabilities of the Partners are governed by the Act. 1.2. Name and Certificate. The name of the Partnership is "Humphrey-Hill, L.P." The General Partner shall promptly cause to be prepared and filed a separate amended and restated certificate of limited partnership to satisfy the requirements of the Act. 1.3. Office and Agent. The registered office, registered agent and principal place of business of the Partnership are set forth on Exhibit A. The registered office, registered agent or principal place of business may be changed by the General Partner after the General Partner delivers a written notice regarding such change to the Partners. 1.4. Term. The Partnership was formed as a limited partnership on the date that the certificate of limited partnership was filed with the Secretary of State of the State of Texas, and shall continue until terminated pursuant to this Agreement. Agreement of Limited Partnership of Humphrey-Hill, L.P. 1 6 1.5. Purposes. The purpose of the Partnership shall be to transact the following business with respect to the AMI: to acquire the Pecos Properties; to engage in the acquisition of oil and natural gas property interests and the exploration, development and exploitation of such interests, including the drilling of wells for the production of oil, natural gas and water and to acquire by purchase, lease, or otherwise machinery, equipment, drilling rigs, and pipe for the drilling of oil, gas and water wells; to engage in the production of oil, natural gas and any and all other petroleum products and to store, treat and market the same; to transport gasoline, oils, liquefied petroleum gases, natural gases, and to acquire by purchase, lease or otherwise trucks, trailers, tanks, pipelines, and other equipment necessary or required for the transportation of the aforesaid commodities. The Partnership shall have any and all powers necessary or desirable to carry out the purposes and business of the Partnership, to the extent that the same may be lawfully exercised by limited liability companies under the Act. Without limiting the foregoing, the Partnership shall have any and all powers necessary to borrow money and to enter into other capital transactions and to provide guaranties and grant security interests in any or all of its assets in connection therewith. 1.6. Other Activities of Partners. Neither this Agreement nor any principle of law or equity shall preclude or limit, in any respect, the right of any Partner to engage in or derive profit or compensation from any activities or investments, nor give the Partnership or any Partner any right to participate or share in such activities or investments or any profit or compensation derived therefrom. 1.7. Limits. The relationship between and among the Partners is limited to the carrying on of the business of the Partnership in accordance with this Agreement. That relationship shall be construed and deemed to be a limited partnership for the sole and limited purpose of carrying on that business. This Agreement does not create a general partnership between the parties or authorize any party to act as general agent for any other party. ARTICLE 2 DEFINITIONS 2.1. Definitions. In this Agreement, the following terms, unless the context otherwise requires, have the meanings indicated: "ACCOUNTANT" means the certified public accountant or firm of certified public accountants, if any, selected by the General Partner to perform accounting functions on behalf of the Partnership. "ACT" means the Texas Revised Limited Partnership Act, TEX.REV.CIV.STAT. art. 6132a-1, et seq., as amended, from time to time (or any corresponding provisions of succeeding law). "ADJUSTED CAPITAL ACCOUNT" means, with respect to any Partner as of the end of a Fiscal Year, the Capital Account maintained for that Partner as of that time, modified as follows: (a) Increased by the amount, if any, of such Partner's share of the Partnership Minimum Gain of the Partnership as determined under Treasury Regulations Section 1.704-2(g)(1); (b) Increased by the amount, if any, of such Partner's share of the Partner Nonrecourse Debt Minimum Gain of the Partnership pursuant to Treasury Regulations Section 1.704-2(i)(5); (c) Decreased by the amount, if any, of cash that is reasonably expected to be distributed to such Partner, but only to the extent that the amount thereof exceeds any offsetting increase in such Agreement of Limited Partnership of Humphrey-Hill, L.P. 2 7 Partner's Capital Account that is reasonably expected to occur during (or prior to) the Fiscal Year during which such distributions are reasonably expected to be made as determined under Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(6); and (d) Decreased by the amount, if any, of loss and deduction that is reasonably expected to be allocated to such Partner pursuant to Code Section 704(e)(2) or 706(d), Treasury Regulations Section 1.751-1(b)(2)(ii) or Treasury Regulations Section 1.704-1(b)(2)(iv)(k). "ADJUSTED CAPITAL ACCOUNT DEFICIT" means, with respect to any Partner as of the end of a Fiscal Year, the deficit balance, if any, in that Partner's Adjusted Capital Account as of that time after crediting the Adjusted Capital Account by the amount, if any, that such Partner is treated as being obligated to contribute subsequently to the capital of the Partnership as determined under Treasury Regulations Section 1.704-1(b)(2)(ii)(c). "AGREED VALUE" means the fair market value of an Interest as of the Partnership's most recently completed fiscal quarter preceding the date of the Transfer Event Notice. The Agreed Value shall be determined by agreement between the Selling Partner and the Optionee Partner, or, if such agreement has not been reached by the 30th day after the date of the notice or other event that requires the determination of Agreed Value, then the Selling Partner and the Optionee Partner shall each select an independent oil and natural gas appraisal firm within 10 days to determine the fair market value of the Interest. In the event that the independent oil and natural gas appraisal firms selected by the Selling Partner and the Optionee Partner cannot agree on the fair market value of the Interest, then the two independent investment oil and natural gas appraisal firms shall mutually select a third independent oil and natural gas appraisal firm to determine the fair market value of the Interest, and the value determined by such independent oil and natural gas appraisal firm shall be binding upon all of the parties hereto. Each such independent oil and natural gas appraisal firm may use any customary method of determining fair market value. The cost of the independent oil and natural gas appraisal firm selected by the Selling Partner shall be paid by the Selling Partner, the cost of the independent oil and natural gas appraisal firm selected by the Optionee Partner shall be paid by the Optionee Partner, and the cost of the independent oil and natural gas appraisal firm selected by the two independent oil and natural gas appraisal firms appointed by each of the Selling Partner and the Optionee Partner shall be paid one-half by the Selling Partner and one-half by the Optionee Partner. Each party shall have the opportunity to present information to the oil and natural gas appraisal firm regarding the fair market value of the Interest. In determining the Agreed Value, the independent oil and natural gas appraisal firms shall not discount the Agreed Value, or take any deductions with respect thereto, due to (i) any restrictions on the transferability of the Interest as a result of this Agreement, the securities laws or otherwise, or (ii) the Interest representing a minority interest in the Partnership. "AGREEMENT" or "PARTNERSHIP AGREEMENT" means this Amended and Restated Agreement of Limited Partnership, as amended, from time to time. "AMI" means the land which is depicted on the map attached hereto as Exhibit "B." "APPROVAL OF THE PARTNERS" or "APPROVED BY THE PARTNERS" means the affirmative approval, determined under Section 6.8, of Partners then entitled to vote who hold in the aggregate more than fifty-one percent (51%) of the Interests. "BANKRUPTCY" means, for any Partner, that Partner's taking or acquiescing in the taking of an action seeking relief under, or advantage of, any applicable debtor relief, liquidation, receivership, Agreement of Limited Partnership of Humphrey-Hill, L.P. 3 8 conservatorship, bankruptcy, moratorium, rearrangement, insolvency, reorganization, or similar law affecting the rights or remedies of creditors generally, as in effect from time to time. "BOOK BASIS" means, with respect to any asset, the asset's tax basis; provided, however, that (i) if property is contributed to the Partnership, the initial Book Basis of such property shall be its fair market value on the date of contribution; (ii) if the Capital Accounts of the Partnership are adjusted pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(f) to reflect the fair market value of the Partnership's assets, the Book Basis of each such asset shall be adjusted to equal its fair market value as of the time of such adjustment in accordance with such Treasury Regulations; and (iii) the Book Basis of all assets shall be adjusted thereafter by depreciation and amortization as provided in Treasury Regulations Section 1.704-1(b)(2)(iv)(g). "BUSINESS DAY" means a day other than a Saturday, Sunday or other day which is a nationally recognized holiday in the United States of America. "CAPITAL ACCOUNT" means, with respect to any Partner, the account maintained for that Partner in a manner that the appropriate Officer of the Company determines is in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv) and Section 3.4. "CAPITAL CONTRIBUTION" means, with respect to any Partner, the amount of money or property contributed to the Partnership with respect to the interest in the Partnership held by that Person. "CARRYING VALUE" means, with respect to any Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination; provided, however, that the Carrying Value of any property shall be adjusted from time to time in accordance with Section 3.4(b) to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the Partners in their reasonable judgment. The Carrying Value of each asset will be increased or decreased to reflect any adjustment to the adjusted basis of the asset under Code Section 734(b) or 743(b), but only to the extent that the adjustment is taken into account in determining Capital Accounts under Treasury Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that the Carrying Value will not be adjusted under this definition to the extent that an adjustment pursuant to Section 3.4(b) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment under this sentence. "CODE" means the Internal Revenue Code of 1986, as amended from time to time (or any corresponding provisions of succeeding law). "CONSENT" means either the Approval of the Partners or a Supermajority Vote of the Partners, as determined herein. "CONTRIBUTION DUE DATE" shall have the meaning set forth in Section 3.2. "CREDIT FACILITY" means the Credit Agreement, to be entered into among the Partnership, [Bank of America, N.A., as Administrative Agent], and the lenders party thereto, as amended from time to time. "CURATIVE ALLOCATION" means any allocation of an item of income, gain, deduction, loss or credit pursuant to the provisions of Section 4.1(c). Agreement of Limited Partnership of Humphrey-Hill, L.P. 4 9 "ECONOMIC RISK OF LOSS" has the meaning set forth in Treasury Regulations Section 1.752-2(a). "EXCO PARTNERS" means Taurus Acquisition, Inc. and EXCO Resources, Inc. "FISCAL YEAR" means the twelve-month period ending December 31 of each year; provided that the initial Fiscal Year shall be the period beginning on the effective date of this Agreement and ending December 31, 2000, and the last Fiscal Year shall be the period beginning on January 1 of the calendar year in which the final liquidation and termination of the Partnership is completed and ending on the date such final liquidation and termination is completed (to the extent any computation or other provision hereof provides for an action to be taken on a Fiscal Year basis, an appropriate proration or other adjustment shall be made in respect of the initial and final Fiscal Years to reflect that such periods are less than full calendar year periods). "GAAP" means generally accepted accounting principles in the United States of America set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board in effect from time to time. "GENERAL PARTNER" means any Person who (i) is referred to as such in the first paragraph of this Agreement, or has become a General Partner pursuant to the terms of this Agreement, and (ii) has not ceased to be a General Partner pursuant to the terms of this Agreement. "HUMPHREY-HILL PARTNERS" means Charles B. Humphrey, Humphrey Oil and J.M. Hill. "INDEPENDENT APPRAISER" means Lee Keeling & Associates, Inc. or any substitute firm selected by the General Partner. "INITIAL CAPITAL CONTRIBUTION" has the meaning set forth in Section 3.1. "INTEREST" means the ownership interest in the Partnership received by a Partner, expressed as a percentage on Exhibit A, as adjusted from time to time as provided in this Agreement. "LIMITED PARTNER" means any Person who (i) has executed this Agreement and whose name is set forth as a Limited Partner on Exhibit A, and (ii) has not ceased to be a Limited Partner pursuant to the terms of this Agreement. "LOSSES" means, for each Fiscal Year, the losses and deductions of the Partnership determined in accordance with accounting principles consistently applied from year to year employed under the Partnership's method of accounting and as reported, separately or in the aggregate, as appropriate, on the Partnership's information tax return filed for federal income tax purposes, plus any expenditures described in Code Section 705(a)(2)(B). "MAJOR ACTIONS" shall have the meaning set forth in Section 6.3. "MAXIMUM LAWFUL RATE" means the maximum, lawful, non-usurious rate that may be charged, collected or received on a particular loan under applicable laws. Agreement of Limited Partnership of Humphrey-Hill, L.P. 5 10 "NET CASH FLOW" means all cash flow, receipts and revenues generated by the Partnership minus amounts necessary for (i) Operating Expenses, (ii) a reserve fund for future Operating Expenses (as determined in the discretion of the General Partner), (iii) debt service of the Partnership, or (iv) any other expenses of the Partnership. "NONRECOURSE DEDUCTIONS" has the meaning assigned to that term in Treasury Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Fiscal Year shall be determined in accordance with the rules of Treasury Regulations Section 1.704-2(c). "NONRECOURSE LIABILITY" has the meaning assigned to that term in Treasury Regulations Section 1.752-1(a)(2). " OIL AND GAS PROPERTY" means each separate "oil and gas property" (as defined in Code Section 614) owned from time to time by the Partnership as a result of acquisitions or otherwise. "OPERATING EXPENSES" means the costs, expenses, or charges incurred by the Partnership, including, without limitation, salaries, professional fees, wages, all other expenses incurred in the day-to-day operation of the Partnership and any fees or expenses paid in accordance with Section 6.5. "PARTICIPATING PARTNERS" means the Partners that elect to participate in a Subsequent Operation, as described in Section 3.7. "PARTNER NONRECOURSE DEBT" has the meaning assigned to that term in Treasury Regulations Section 1.704-2(b)(4). "PARTNER NONRECOURSE DEBT MINIMUM GAIN" means an amount, with respect to each Partner Nonrecourse Debt, determined in accordance with Treasury Regulations Section 1.704-2(i)(3). "PARTNER NONRECOURSE DEDUCTIONS" has the meaning assigned to that term in Treasury Regulations Section 1.704-2(i). "PARTNERS" means the General Partner and all Limited Partners, where no distinction is required by the context in which the term is used herein. "PARTNERSHIP" means Humphrey-Hill, L.P., a Texas limited partnership. "PARTNERSHIP MINIMUM GAIN" means the amount determined pursuant to the provisions of Treasury Regulations Section 1.704-2(d). "PECOS AGREEMENT" means the Purchase and Sale Agreement, dated February 22, 2000, between the Partnership and the Nebraska Public Gas Authority. "PECOS PROPERTIES" means the interests in the Gomez Field, Pecos County, Texas to be acquired pursuant to the Pecos Agreement. "PERSON" means any corporation, limited liability company, partnership, joint venture, co-tenancy, trust, any other legal entity or natural person, whether or not a party to this Agreement. Agreement of Limited Partnership of Humphrey-Hill, L.P. 6 11 "PROFITS" means, for each Fiscal Year, the income and gains of the Partnership determined in accordance with accounting principles consistently applied from year to year employed under the Partnership's method of accounting and as reported, separately or in the aggregate, as appropriate, on the Partnership's information tax return filed for federal income tax purposes, plus any income described in Code Section 705(a)(1)(B). "PRO RATA" means the ratio determined by dividing the Interests of Partners to whom a particular provision of this Agreement is stated to apply by the aggregate of the Interests of all Partners to whom that provision is stated to apply. "PROPERTY" means all of the assets of the Partnership. "RECAPTURE INCOME" means any gain recognized by the Partnership (computed without regard to any adjustment required by Code Section 734 or 743) upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset, except that the term Recapture Income shall exclude all gain recharacterized as ordinary income pursuant to Code Section 1245 or 1250. "REGULATORY ALLOCATIONS" means any allocation (or limitation imposed on any allocation) of an item of income, gain, deduction or loss pursuant to Section 4.1(b), such allocations (or limitations thereon) set forth in Section 4.1(b) being directly or indirectly provided in Treasury Regulations promulgated under Code Section 704(b). "REVERSE 704(c) ALLOCATIONS" means allocations required under Treasury Regulations Section 1.704-3(a)(6). "SECTION 1245 RECAPTURE" means any gain recognized by the Partnership (computed without regard to any adjustment required by Code Section 734 or 743) upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income under Code Section 1245. "SECTION 1250 RECAPTURE" means any gain recognized by the Partnership (computed without regard to any adjustment required by Code Section 734 or 743) upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income under Code Section 1250. "SIMULATED BASIS" means, with respect to any Oil and Gas Property, the Carrying Value of such Oil and Gas Property, as adjusted to reflect (a) additions to basis and (b) Simulated Depletion Deductions. "SIMULATED DEPLETION DEDUCTIONS" means a depletion allowance computed for each year with respect to each Oil and Gas Property, using either the cost depletion method or the percentage of depletion method (computed in accordance with Code Section 613 at the rates specified in Code Section 613A (c)(5) without regard to the limitations of Code Section 613A, which theoretically could apply to any Partner) as determined by the Partnership, subject, however, to the requirements set forth in Treasury Regulations Section 1.704-1(b)(2)(iv)(k). Simulated Depletion Deductions shall be determined as necessary by reference to the Simulated Basis of the Oil and Gas Property. "SIMULATED GAINS" or "SIMULATED LOSS" mean, respectively, the simulated gains or losses computed by the Partnership with respect to each Oil and Gas Property pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(k)(2) and by reference to its Simulated Basis. Agreement of Limited Partnership of Humphrey-Hill, L.P. 7 12 "SUBSEQUENT OPERATION" shall have the meaning set forth in Section 3.7 of this Agreement. "SUPERMAJORITY VOTE OF THE PARTNERS" means the affirmative approval of the Partners who own in the aggregate more than 70 % of the Interests. "TRANSFER" means, as a noun, the sale, assignment, exchange, pledge, hypothecation or other disposition of a Interest, or any part thereof, directly or indirectly, or the sale, assignment, exchange, pledge, hypothecation, or other disposition of a controlling interest in the equity securities of a Partner, and as a verb, voluntarily to transfer, sell, assign, exchange, pledge, hypothecate or otherwise dispose of. "TREASURY REGULATIONS" means the Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). 2.2. Other Definitions. All terms used in this Agreement which are not defined in this Article 2 have the meanings contained elsewhere in this Agreement. ARTICLE 3 CAPITALIZATION 3.1. Identification. The name, address, initial contribution to the capital of the Partnership and Interest of each Partner are set forth on Exhibit A (as to each Partner, such amount being referred to herein as such Partner's "Initial Capital Contribution"). 3.2. Additional Capital Contributions. If the General Partner determines that the amounts contributed to the Partnership by the Partners with regard to the Initial Capital Contributions are insufficient to (i) operate the Pecos Properties or other properties acquired by the Partnership within the AMI or (ii) maintain a minimum working capital of $200,000, then within 15 days of receipt of notice (the "Contribution Due Date") provided by the General Partner, the Partners shall make additional Capital Contributions (for which the Partners Pro Rata shall be responsible) to the Partnership. 3.3. Remedies for Failure to Fund Additional Capital Contributions. If the General Partner calls for additional Capital Contributions in accordance with Section 3.2(i) and one or more Partners fail to make their required additional Capital Contribution within 15 days after delivery of notice to such party(ies), then the following shall occur (unless waived in writing by the non-defaulting Partners): if any Partner fails to so fund its additional Capital Contribution, then the non-defaulting Partner(s) shall be permitted to fund such defaulting Partner's portion. Thereafter, if the non-defaulting Partner should fund the defaulting Partner's portion, all cash, income, gain, loss, expense, deduction or credit otherwise distributable or allocable to the defaulting Partner shall instead be distributed to the paying Partner until the paying Partner has recouped from distributions of cash made in accordance with Section 4.3 or Section 9.2 that otherwise would have been distributed or allocated to the defaulting Partner a sum equal to 300% of the defaulted-upon additional Capital Contribution. 3.4. Capital Accounts (a) Separate Capital Accounts; Adjustments. A separate Capital Account shall be maintained for each Partner. Each Partner's Capital Account shall be increased by (i) the amount of money contributed by the Partner to the Partnership, (ii) the fair market value (as determined in good faith by the Agreement of Limited Partnership of Humphrey-Hill, L.P. 8 13 General Partner) of any property contributed by the Partner to the Partnership, (iii) the amount of any Partnership liabilities that are assumed by that Partner or that are secured by any Partnership property distributed to that Partner, and (iv) the amount of Profits allocated to that Partner, including a disproportionate allocation in accordance with Section 3.3 or Section 3.7(a). Each Partner's Capital Account shall be decreased by (i) the amount of money distributed to that Partner by the Partnership, (ii) the fair market value (as determined in good faith by the Partnership) of any property distributed to that Partner by the Partnership, (iii) the amount of any Partner's liabilities that are assumed by the Partnership or that are secured by any property contributed by that Partner to the Partnership and (iv) the amount of Losses allocated to that Partner. (b) Revaluations. In connection with a contribution of money or other property (other than a de minimis amount) to the Partnership by a new or existing Partner as consideration for an interest in the Partnership, the Partner's Capital Accounts shall be adjusted in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(f). As of the date of this Agreement, the Partners agree that the Pecos Agreement has a fair market value of $3,362,745 and that the Partnership's unrealized gain in the Pecos Agreement is $3,362,745 which shall be allocated Pro Rata to Humphrey Oil, Hill and Humphrey immediately prior to the admission of the EXCO Partners such that the Capital Account of each such Partner shall be as set forth on Exhibit "A". Additionally, the Carrying Value of the Pecos Agreement will be adjusted accordingly. The Partners further agree that upon closing of the Pecos Properties the Carrying Value of the Pecos Properties shall be increased to reflect the Carrying Value of the Pecos Agreement. (c) Transfer of Capital Account. On a Transfer of Assets, the Capital Account of the transferor shall become the Capital Account of the transferee to the extent that it relates to the Transferred Interest. (d) Compliance. The manner in which Capital Accounts are to be maintained pursuant to this Section is intended to comply with the requirements of Code Section 704(b) and the Treasury Regulations promulgated thereunder. 3.5. Withdrawal or Reduction of Partners' Capital Contributions. (a) Repayment of Capital Subordinated to Liabilities. Except as may be otherwise specifically provided herein, no Partner shall receive from Partnership property any part of its Capital Contribution until all liabilities of the Partnership, except the liabilities to Partners on account of their Capital Contributions, have been paid or there remains property of the Partnership sufficient to pay those liabilities. (b) Withdrawals. No Partner has the right to withdraw all or any part of its Capital Contribution or to receive any return on any portion of its Capital Contribution, except as may be otherwise specifically provided herein. Under circumstances involving a return of any Capital Contribution, no Partner has the right to receive property other than cash. (c) No Priority Among Partners. Except as may be otherwise specifically provided in this Agreement, no Partner shall have priority over any other Partner, either as to the return of Capital Contributions or as to Profits, Losses or distributions, provided that this subsection shall not apply to loans (as distinguished from Capital Contributions) that a Partner has made to the Partnership. 3.6. Limitation on Liability. Except as otherwise provided in this Agreement, no Limited Partner shall be liable for the debts, liabilities, contracts or any other obligations of the Partnership. Except as otherwise provided herein, a Limited Partner shall be liable to make only any additional capital contributions Agreement of Limited Partnership of Humphrey-Hill, L.P. 9 14 required in this Agreement and shall not be required to lend any funds to the Partnership. Notwithstanding any of the foregoing to the contrary, to the extent required by applicable law, a Partner receiving a distribution shall be liable to the Partnership for any sum, not in excess of such amount distributed plus interest from the date of such return, necessary to discharge the liabilities of the Partnership to creditors who extended credit or whose claim arose before such distribution. 3.7. Operations. (a) The Pecos Properties are subject to and bound by the terms of certain joint operating agreements (the "OPERATING AGREEMENTS") which have been executed by all, or substantially all, of the working interest owners in such properties. So long as the General Partner owns an interest in the Partnership, the General Partner shall be the contract operator for the Partnership whenever the Partnership is the operator under any of the Operating Agreements and shall be entitled to all overhead recoveries provided for in the Operating Agreements, as such agreements may have been amended or changed through course of performance. Under the terms of the Operating Agreements the Partnership or any other working interest owner may propose operations on existing wells or the drilling of a new well (which operations are herein referred to collectively as "SUBSEQUENT OPERATIONS"). Any Limited Partner may consult with the General Partner regarding operations of the Partnership including the proposal of a Subsequent Operation. The General Partner shall notify each of the Partners of any proposed Subsequent Operation (including proposals by the Partnership or a Partner) with an estimated cost greater than $100,000. Such notice shall be reasonably detailed and specify whether the General Partner intends to participate in the proposed Subsequent Operation. Within 15 days after receipt of such notice, each of the Partners shall notify the General Partner of its election to either participate or not participate in such Subsequent Operation. Failure to so notify the General Partner within such 15 day period will constitute a Partner's election to take the same action as the General Partner with respect to such Subsequent Operation. If all of the Partner's elect to participate in a Subsequent Operation, the Partnership will pay for the Subsequent Operation either: (i) with cash on hand in the Partnership; (ii) to the extent cash on hand is insufficient to pay for such Subsequent Operation, by drawing down the Credit Facility; and (iii) if cash on hand and the Credit Facility are insufficient to pay for such Subsequent Operation, by the Partners making additional Capital Contributions to the Partnership in proportion to their respective interests in the Partnership. Any such Capital Contribution will be mandatory. A Partner's failure to make such Capital Contribution within fifteen (15) days after being notified of the necessity therefore shall automatically constitute such Partner's election not to participate in such Subsequent Operation and the Partnership's participation in such Subsequent Operation will be on the basis set forth in Section 3.7(b). (b) In the event the General Partner notifies the Partners of a Subsequent Operation and one or more of the Partners (including the General Partner) declines to participate (a "NON-PARTICIPATING PARTNER"), the Partners (including the General Partner) who have elected to participate in the proposed Subsequent Operation (the "PARTICIPATING PARTNERS") may either proceed with the Subsequent Operation or decline to proceed. The Participating Partners may only proceed with a Subsequent Operation if the Participating Partners agree how to fund the Non-Participating Partner(s)' share of the proposed Subsequent Operation. Each Participating Partner shall have the right, but not the obligation, to fund it's Pro Rata share (such share being determined based upon the Participation Partner's Interest relative to the aggregate Interests of all of the Participating Partners) of the proposed Subsequent Operation. If a Participating Partner declines to fund its Pro Rata share of the Non-Participating Partner(s)' Pro Rata share of the proposed Subsequent Operation, the other Participating Partner(s) shall either agree to bear the balance of the Non- Participating Partner(s)' Pro Rata share of the proposed Subsequent Operation or the Partnership shall not participate in such operation. If the Participating Partner(s) elect to proceed with the Subsequent Operation as proposed, the Partnership's share of such operation will be conducted in the Partnership's name (with the Agreement of Limited Partnership of Humphrey-Hill, L.P. 10 15 Partnership being the named party in interest), but funding for such Subsequent Operation will be provided solely by the Participating Partner(s) by making additional Capital Contributions called in accordance with Section 3.2. A Partner's failure to make such Capital Contributions within 15 days after being notified of the necessity therefore shall automatically constitute such Partner's election not to participate in such Subsequent Operation and the Partnership's participation in such Subsequent Operation will be on the basis set forth in Section 3.7(b). All cash, income, gain, loss, expense, deduction or credit in respect of such Subsequent Operation shall be allocated to the Participating Partner(s) until they have recouped from distributions of cash made in accordance with Section 4.3 or Section 9.2 directly attributable to the Subsequent Operation that otherwise would have been allocated to the Non-Participating Partner(s) a sum equal to 300% of additional Capital Contribution that would have been made by the Non-Participating Partner(s) had they participated in the Subsequent Operation. The Partnership shall separately account and segregate for all cash generated by such Subsequent Operation for this proposal. Upon recoupment of such amount and except as may be otherwise provided for herein, all items of cash, income, gain, loss, expense, deduction or credit shall be allocated to the Partners in accordance with their Interests. ARTICLE 4 ALLOCATIONS, DISTRIBUTIONS, ELECTIONS AND REPORTS 4.1. Allocation Among Partners. (a) Except as set forth in Section 4.1(b) and Section 4.1(c), all Profits and Losses and all related items of income, gain, loss, deduction and credit shall be allocated, charged or credited to the Partners Pro Rata. (b) Notwithstanding anything to the contrary in this Section 4.1, the following special allocations shall be made in the following order: (i) A Partner shall not be allocated any item of loss and deduction to the extent that such allocation would cause or increase a Adjusted Capital Account Deficit. To the extent any allocation of an item of loss or deduction would cause or increase a Adjusted Capital Account Deficit, then such loss or deduction shall be allocated to the other Partners in proportion to their positive Adjusted Capital Account balances, subject, however, to the limitations of this Section 4.1(b)(i). (ii) Except as otherwise provided in Treasury Regulations Section 1.704-2(f), notwithstanding anything to the contrary in this Section 4.1(b), if there is a net decrease in Partnership Minimum Gain during any Fiscal Year, each Partner shall be specially allocated items of gross income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, determined in accordance with Treasury Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section 4.1(b)(ii) is intended to comply with the minimum gain chargeback provision contained in Treasury Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. (iii) Except as otherwise provided in Treasury Regulations Section 1.704-2(i)(4), notwithstanding anything to the contrary in this Section 4.1(b), if there is a net decrease in Partner Nonrecourse Debt Minimum Gain with respect to Partner Nonrecourse Debt during any Fiscal Year, each Partner with a share of Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Agreement of Limited Partnership of Humphrey-Hill, L.P. 11 16 Debt, determined in accordance with Treasury Regulations Section 1.704-2(i)(5), shall be specially allocated items of Partnership gross income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Treasury Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section 4.1(b)(iii) is intended to comply with the minimum gain chargeback provision contained in Treasury Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith. (iv) If any Partner unexpectedly receives an adjustment, allocation or distribution described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) which causes or increases an Adjusted Capital Account Deficit, such Partner shall be allocated items of gross income and gain in an amount and manner sufficient to eliminate such Adjusted Capital Account Deficit as quickly as possible; provided, however that an allocation pursuant to this Section 4.1(b)(iv) shall be made if and only if and only to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section 4.1(b) have been tentatively made as if this Section 4.1(b)(iv) were not in this Agreement. This Section 4.1(b)(iv) is intended to comply with the qualified income offset provision contained in Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. (v) In the event any Partner has a deficit Capital Account at the end of any Fiscal Year which is in excess of the sum of (A) the amount such Partner is obligated to restore and (B) the amount such Partner is deemed to be obligated to restore pursuant to the penultimate sentences of Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Partner shall be specially allocated items of Partnership income and gain in the amount of such excess as quickly as possible; provided, however that an allocation pursuant to this Section 4.1(b)(v) shall be made if and only if and only to the extent that such Partner would have a deficit Capital Account balance (as adjusted above in this Section 4.1(b)(v)) after all other allocations provided for in this Section 4.1(b) (other than Section 4.1(b)(iv)) have been tentatively made as if this Section 4.1(b)(v) were not in this Agreement. (vi) The Simulated Depletion Deductions for each Oil and Gas Property shall be allocated among the Partners in the same proportion as their share of the Simulated Basis of the Oil and Gas Property was allocated among the Partners as provided below in this Section 4.1(b)(vi). Any Simulated Loss from the sale or other disposition of an Oil and Gas Property shall be allocated among all Partners in proportion to their shares of the Simulated Basis of such Oil and Gas Property to the extent of their Simulated Basis. Any Simulated Gain shall be allocated to the Partners in the same manner as the amount realized from a sale or disposition in excess of the Simulated Basis shall have been allocated under Section 4.4. The Simulated Basis of each Oil and Gas Property shall be allocated among the Partners Pro Rata. (vii) Nonrecourse Deductions for any Fiscal Year or other period shall be allocated to the Partners Pro Rata. (viii) Any Partner Nonrecourse Deductions for any Fiscal Year or other period shall be allocated to the Partners who bear the Economic Risk of Loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with the provisions of Treasury Regulations Section 1.704-2(i). Agreement of Limited Partnership of Humphrey-Hill, L.P. 12 17 (ix) To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or 743(b) is required, pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such item of gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such section of the Treasury Regulations. (c) Regulatory Allocations are intended, but only to the extent necessary, to comply with certain requirements of the Treasury Regulations. It is intended that, to the extent possible, the application and effect of all Regulatory Allocations (other than Section 4.1(b)(vi)) shall be minimized and offset either with other Regulatory Allocations (other than Section 4.1(b)(vi)) or with special allocations of other items of Partnership income, gain, loss, or deduction pursuant to this Section 4.1(c). Therefore, notwithstanding any other provision of Article 4 (other than the Regulatory Allocations), the Partnership shall make such offsetting special allocations of Partnership income, gain, loss, or deduction or items thereof in whatever manner the General Partner reasonably and in good faith determines to be appropriate so that, after such offsetting allocations are made, each Partner's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Partner would have had if the Regulatory Allocations (other than Section 4.1(b)(vi)) were not part of this Agreement and all Partnership items were allocated pursuant to Section 4.1(a) and Section 4.1(b)(vi). In exercising his discretion under this Section 4.1(c), the General Partner shall take into account future Regulatory Allocations under Section 4.1(b)(ii) and Section 4.1(b)(iii) that, although not yet made, are likely to offset other Regulatory Allocations previously made under Section 4.1(b)(vii) and Section 4.1(b)(viii). 4.2. Allocation of Costs and Expenses. All costs and expenses of the Partnership shall be allocated and charged to the Partners Pro Rata. 4.3. Allocation of Net Cash Flow. Except as otherwise provided in Section 3.3 and Section 3.7(b), Net Cash Flow (which shall not include Capital Contributions and loans to the Partnership) shall be allocated and credited to the Partners Pro Rata. 4.4. Income Tax Allocations. (a) For federal, state and local income tax purposes, except as otherwise provided in this Section 4.4, each item of income, gain, loss, deduction and credit of the Partnership shall be allocated among the Partners in accordance with the corresponding book allocations thereof as provided in Section 4.1. (b) The deduction for depletion with respect to each separate Oil and Gas Property shall be computed for federal income tax purposes separately by the Partners rather than the Partnership in accordance with Code Section 613A(c)(7)(D). For purposes of such computation, except as required under Code Section 704(c) as administered by the Partnership under Section 4.5, the adjusted tax basis of each Oil and Gas Property shall be allocated to the Partners Pro Rata. It is the intent of these provisions to comply with Treasury Regulations Section 1.613A-3(e)(5) so that the allocation of adjusted tax basis of each Oil and Gas Property shall be deemed to be in accordance with a Partner's proportionate interest in the capital or income of the Partnership. (c) Each Partner shall separately keep records of such Partner's share of the adjusted basis in each separate Oil and Gas Property, adjust such share of the adjusted basis for any cost or percentage depletion allowable with respect to such Oil and Gas Property and use such adjusted basis in the computation Agreement of Limited Partnership of Humphrey-Hill, L.P. 13 18 of such Partner's cost depletion or in the computation of its gain or loss on the disposition of such Oil and Gas Property by the Partnership. It is the intent of the Partnership to comply with Treasury Regulations Section 1.613A-3(e)(3)(iii)(B). Consistent with Treasury Regulations Section 1.613A-3(e)(3)(iii), each Partner agrees to furnish to the Partnership, within thirty (30) days of receipt of written request by the Partnership, a written statement which clearly and accurately states the amount of that Partner's adjusted basis and depletion deductions with respect to each existing Oil and Gas Property. In determining depletion deductions for purposes of applying Treasury Regulations Section 1.613A-3(e)(3)(iii), each Partner must treat as actually deducted any amount disallowed and carried over as a result of the sixty-five percent (65%) of income limitation of Code Section 613A(d)(1). For the purposes of the separate computation of gain or loss by each Partner on the taxable disposition of each separate Oil and Gas Property, the Partnership shall allocate the amount realized (as that term is defined under Code Section 1001) from such disposition to the Partners, except as may be required by Section 4.5 Pro Rata. 4.5. Code Section 704(c). Under Code Section 704(c) and Treasury Regulations Section 1.704-3, income, gain, loss, deduction and amount realized with respect to any asset contributed to the capital of the Partnership, solely for federal income tax purposes, shall be allocated among the Partners so as to take into account any variation between the adjusted tax basis of the asset for federal income tax purposes and the initial Carrying Value. If the Carrying Value of any asset is adjusted under Section 3.4(b), subsequent allocations of income, gain, loss, deduction and amount realized, solely for federal income tax purposes, shall be allocated among the Partners so as to take into account any variation between the adjusted tax basis of the asset and its Carrying Value as adjusted in the manner required under Treasury Regulations Section 1.704-3(a)(6). The allocations required by this Section 4.5 shall be made using the traditional method unless otherwise agreed by the Limited Partners. 4.6. Recapture Income. Any gain allocated to the Partners upon the sale or other taxable disposition of any Partnership asset shall, to the extent possible, after taking into account other required allocations of gain pursuant to Section 4.4 and Section 4.5, be characterized as Recapture Income in the same proportions and to the same extent as such Partners (or their predecessors in interest) have been allocated any deductions directly or indirectly giving rise to the treatment of Recapture Income. All Section 1245 Recapture and Section 1250 Recapture shall be allocated to the Partners and Assignees in accordance with the provisions of Treasury Regulations issued under Code Section 1245 and Code Section 1250, respectively. 4.7. Sections 743 and 734 Election. All items of income, gain, loss, deduction and credit recognized by the Partnership for federal income tax purposes and allocated to the Partners in accordance with the provisions hereof shall be determined without regard to any election under Code Section 754 that may be made by the Partnership; provided, however, that such allocations, once made, shall be adjusted as necessary or appropriate to take into account those adjustments permitted or required by Code Sections 734 and 743. 4.8. Varying Interests. Each item of Partnership income, gain, loss and deduction attributable to a transferred interest in the Partnership shall, for federal income tax purposes, be determined on an annual basis and prorated on a monthly basis and shall be allocated to the Partners as of the last day of the preceding month; provided, however, that gain or loss on a sale or other disposition of any assets of the Partnership other than in the ordinary course of business shall be allocated to the Partners as of the first business day of the month in which such gain or loss is recognized for federal income tax purposes. The Partners may revise, alter or otherwise modify such methods of allocation as they determine necessary, to the extent permitted or required by Code Section 706 and the regulations or rulings promulgated thereunder. Agreement of Limited Partnership of Humphrey-Hill, L.P. 14 19 4.9. Nonrecourse Liabilities. For purposes of Treasury Regulations Section 1.752-3(a)(3), the Partners agree that "excess nonrecourse liabilities" of the Partnership (as defined in Treasury Regulations Section 1.752-3(a)(3)) shall be allocated to the Partners Pro Rata. 4.10. Records and Reports. At the expense of the Partnership, the General Partner shall maintain records and accounts of all operations and expenditures of the Partnership and submit monthly reports regarding same to each of the Partners. The Partnership shall use commercially reasonable efforts to provide within thirty (30) days of the end of each fiscal quarter (other than the fourth quarter) to each Partner (i) unaudited financial statements of the Partnership (including balance sheet, profit or loss statement, and statement of cash flows) prepared in accordance with GAAP and (ii) a projected budget for the ensuing fiscal quarter. The Partnership shall use commercially reasonable efforts to provide within sixty (60) days of the end of each Fiscal Year audited financial statements of the Partnership prepared in accordance with GAAP prepared by the Partnership's Accountant. In conjunction with the preparation of the audited financial statements, the Partnership shall engage the Independent Appraiser to prepare an appraisal report, in a format customarily provided to companies reporting under the Securities Exchange Act of 1934, as amended, of the Partnership's oil and natural gas assets. The Partnership shall deliver such other financial reports reasonably requested by a Partner. At a minimum, the Partnership shall keep at its principal place of business the following records: (a) A current list that states: (i) The name and mailing address of each Partner, and (ii) The Interest owned by each Partner; (b) Copies of the federal, state and local information or income tax returns for each of the Partnership's six most recent tax years (or such shorter period that the Partnership has been in existence): (c) A copy of the certificate of limited partnership and the Agreement, all amendments or restatements and executed copies of any powers of attorney. (d) Correct and complete books and records of account of the Partnership; and (e) Any other books, records or documents required by the Act or other applicable law. 4.11. Returns and Other Elections. The General Partner shall cause the preparation and timely filing of all tax returns required to be filed by the Partnership pursuant to the Code and all other tax returns deemed necessary and required in each jurisdiction in which the Partnership does business. Copies of the returns, or pertinent information therefrom, shall be furnished to the Partners within 75 days after the end of each Fiscal Year of the Partnership. Subject to Section 6.3(a), all elections permitted to be made by the Partnership under federal or state laws shall be made by the General Partner. 4.12. Tax Matters Partner. The General Partner is hereby designated to be the "tax matters partner" of the Partnership pursuant to Code Section 6231(a)(7). The Tax Matters Partner, as provided in Code Sections 6221-6233 shall be empowered to deal with the Internal Revenue Service and with state tax administrative agencies with respect to administrative and judicial proceedings and settlement of disputes arising from the preparation and filing of United States and state Partnership returns. However, in all such dealings the Tax Matters Partner shall consult with all Partners before agreeing to any adjustments to Partnership taxable income or other items that might increase the tax liability of the other Partners. Agreement of Limited Partnership of Humphrey-Hill, L.P. 15 20 Furthermore, all decisions to seek or not to seek technical advice with respect to such adjustments or to appeal such adjustments administratively, whether or not the matter requiring such decision was initiated at the suggestion of the Tax Matters Partner or by another Partner, shall be made only after the Tax Matters Partner has consulted with all Partners The Tax Matters Partner shall take all necessary action to ensure that all other Partners are given proper and timely notice of the initiation of an administrative proceeding with respect to returns filed for the Partnership and shall perform promptly and properly all other duties required of the Tax Matters Partner under the Code and the Treasury Regulations thereunder. In the event the Internal Revenue Service issues a Notice of Final Partnership Administrative Adjustment ("Notice") and the Tax Matters Partner, within the ninety (90)-day period during which a petition for readjustment of partnership items may be filed, decides not to contest such Notice, the Tax Matters Partner shall promptly notify all other Partners of its decision concerning such Notice. In the event the Tax Matters Partner decides to contest such Notice, before formally instituting an action to contest such Notice, the Tax Matters Partner shall consult all Partners as to (i) the issues to be raised in the petition for readjustment of Partnership items, (ii) the forum in which such Notice will be contested, and (iii) other matters relating to the conduct of such proceeding. The Tax Matters Partner shall keep the other Partners apprised of the progress of any United States or state income tax administrative or judicial proceedings arising from the preparation and filing of returns for the Partnership. The Tax Matters Partner, before initiating any action with respect to any of the following, shall consult with all Partners: (a) Agreeing to any extension of the period of limitation for assessment of income tax arising from the filing of Partnership returns; (b) Submitting any existing documents to the Internal Revenue Service or any state tax administrative agency as a result of requests for information; (c) Submitting any written statement of position to the Internal Revenue Service or to any state tax administrative agency regarding issues raised as a result of the examination of any Partnership return prepared and filed; (d) Filing a Request for Administrative Adjustment; (e) Initiating any appeal from a judicial proceeding relating to any Notice or Request for Administrative Adjustment pertaining to Partnership returns; or (f) Retaining counsel or any other party, including expert witnesses, to represent, assist or advise the Tax Matters Partner with regard to United States or state income tax matters arising from Partnership returns. 4.13. Bank Accounts. All funds of the Partnership shall be deposited in its name in an account maintained in an insured, commercial financial institution, as determined by the General Partner. The funds of the Partnership shall not be commingled with the funds of any other Person. Checks may be drawn on the Partnership account or accounts only for the purposes of the Partnership and shall be signed by the General Partner. 4.14 Certain Payments; Distributions of Cash. Agreement of Limited Partnership of Humphrey-Hill, L.P. 16 21 (a) Within five (5) days after the closing of the acquisition of the Pecos Properties, the Partnership shall pay the sum of $100,000.00 to Rodger Walker as a commission in connection with the acquisition. (b) Within five (5) days after the closing of the acquisition of the Pecos Properties, the Partnership shall pay the sum of $100,000.00 to Humphrey Oil on behalf of the Humphrey-Hill Partners as a return of capital in the amount contributed to the Partnership for the deposit paid to Nebraska Public Gas Agency in connection with the acquisition of the Pecos Properties. Within such 30 day period the Partnership shall also reimburse Humphrey Oil Corporation and EXCO Resources, Inc. for all third party, out-of-pocket expenses incurred in their due diligence review and acquisition of the Pecos Properties including, but not limited to, all legal, land, title opinions, site investigations, engineering and other direct costs. (c) So long as the Partnership shall have cash on hand of at least $200,000 and subject to the provisions of the Credit Facility, no later than 15 days after the last day of each calendar month the Partnership shall distribute to the Partners Pro Rata (unless redirected pursuant to Section 3.3 or Section 3.7) all cash on hand, unless otherwise agreed to by all of the Partners. 4.15 Limitation on Distribution. No distribution shall be declared and paid unless, after the distribution is made, the assets of the Partnership are in excess of all liabilities of the Partnership (as determined in accordance with GAAP applied on a consistent basis), except liabilities to Partners on account of their Capital Contributions. 4.16 Transferred Interests. Distributions of Partnership assets in respect of an Interest in the Partnership shall be made only to the persons or entities who, according to the books and records of the Partnership, are the holders of record of the Interests in respect of which such distributions are made on the actual date of distribution. The Partnership and the Partners shall not incur any liability for making distributions in accordance with the provisions of the preceding sentence, whether or not the Partnership or the Partners have knowledge or notice of any Transfer or purported Transfer of ownership of any Interest in the Partnership. 4.17 Accounting Principles; Designated Accountant. The Profits and Losses of the Partnership shall be determined in accordance with GAAP applied on a consistent basis. Until changed in accordance with the terms of this Agreement by Supermajority Vote of the Partners, Ernst & Young, LLP shall be the Partnership's independent auditor. ARTICLE 5 ROLE OF LIMITED PARTNERS 5.1. Management of Business. Except as otherwise provided herein the Limited Partners, as such, may not take part in the operation, management or control (within the meaning of the Act) of the business of the Partnership, transact any business in the name of the Partnership or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by a director, officer, general partner, employee or agent of a General Partner or any affiliates of a General Partner shall not affect, impair or eliminate the limitations on the liability of the Limited Partners under this Agreement. Except as otherwise provided in the Act or as expressly stated herein, the Limited Partners shall not have any liability to contribute money or property to the Partnership and shall not be personally liable for any obligations of the Partnership. In furtherance of the intent of the parties that the Limited Partners shall be liable to creditors Agreement of Limited Partnership of Humphrey-Hill, L.P. 17 22 of the Partnership only for its respective contributed capital and undistributed share of Partnership profits and surplus, the General Partner shall: (a) Arrange to prosecute, defend, settle or compromise actions at law or in equity at the expense of the Partnership as such may be necessary to enforce or protect the interests of the Partnership; and (b) Satisfy any obligation, judgment, decree, decision or settlement in the following order: first, out of any insurance proceeds available therefor; and finally, out of assets and income of the Partnership. 5.2. Bankruptcy; Death. None of the Bankruptcy, death, disability, or declaration of incompetence of a Limited Partner shall cause a dissolution of the Partnership. However, the rights of that Limited Partner to share in the profits and losses of the Partnership and to receive distributions of the funds of the Partnership shall, on the happening of one of these events, devolve on that estate, legal representative, or successors in interest, as the case may be, of that Limited Partner subject to the terms and conditions of this Agreement. The estate, representative, or successors in interest of that Limited Partner are liable for all of the unsatisfied obligations, if any, of that Limited Partner. In no event shall the estate, representative, or successors in interest become a limited partner in the Partnership, other than a deceased Limited Partner's spouse or children or a trust established for the benefit of a deceased Limited Partner's spouse or children. 5.3 Inspection of Records. The Limited Partners or their representatives shall have the right to examine and copy the books and records of the Partnership during normal business hours, which books and records shall be kept at the General Partner's principal place of business in Dallas, Texas. ARTICLE 6 MANAGEMENT 6.1. Day-to-Day Management. Subject to the limitations contained herein, including but not limited to Section 6.3, the General Partner shall have all of the rights and powers as are necessary, advisable, or convenient to the management and business affairs of the Partnership to the extent permitted under the Act. 6.2. Reliance. Except as specifically provided in this Agreement, no Partner, other than the General Partner, shall have the authority to bind the Partnership to any agreement, contract, or undertaking with any third party. Any Person dealing with the Partnership may rely (without duty of further inquiry) on a certificate signed by any General Partner as to: (a) The identity of any General Partner or any Limited Partner; (b) The existence or nonexistence of any fact or facts which constitute a condition precedent to acts by any General Partner or which are in any other manner germane to the affairs of the Partnership; (c) The Persons authorized to execute and deliver any instrument or document of the Partnership; or Agreement of Limited Partnership of Humphrey-Hill, L.P. 18 23 (d) Any act or failure to act by the Partnership or any other matter whatsoever involving the Partnership or any Partner. 6.3. Restrictions on Authority. (a) Major Actions. Without first obtaining the Supermajority Vote of the Partners, the General Partner shall not cause or permit the Partnership to take any Major Action (as defined below). The term "Major Action" means any of the following actions or decisions: (i) A merger, consolidation or share exchange; (ii) A sale of all or substantially all of the Partnership's assets; (iii) A liquidation and/or dissolution of the Partnership; (iv) Converting the Partnership from a limited partnership to another form of entity, changing the Partnership jurisdiction of organization or causing the Partnership to become a taxable entity for federal income tax purposes; (v) Commencing bankruptcy or insolvency proceedings; (vi) Amending this Agreement to change any minority Partner protection set forth herein; (vii) Changing the "tax matters partner" of the Partnership from the Partner designated as such in Section 4.12; (viii) Other than in connection with a dissolution of the Company pursuant to Article 8, distributing non-cash assets of the Partnership to any Partner; or (ix) Election or appointment of a new General Partner. 6.4. Duties. The General Partner shall manage and control the Partnership and its business and affairs in accordance with the standards of the industry, and shall use reasonable, good faith efforts to carry out the business of the Partnership. The General Partner shall devote itself to the business of the Partnership to the extent required to carry out the business of the Partnership, but shall not be precluded from being involved in other businesses or activities. The General Partner shall perform its duties under this Agreement with ordinary prudence and in a manner characteristic of a businessman in similar circumstances. 6.5. Compensation and Reimbursement. Except as to overhead recovery made by the General Partner under the terms of the Operating Agreements, the General Partner shall not be reimbursed for its overhead allocable to the business of the Partnership; provided, however, that the General Partner shall be reimbursed by the Partnership for any and all reasonable out-of-pocket expenses, fees, and costs incurred in connection with the organization, business, and affairs of the Partnership. 6.6. Indemnification. The General Partner shall be indemnified and held harmless by the Partnership, including advancement of expenses, but only to the extent that the assets of the Partnership are sufficient therefor, from and against all claims, liabilities, and expenses arising out of any management of the affairs of the Partnership, but excluding those caused by the gross negligence or willful misconduct of Agreement of Limited Partnership of Humphrey-Hill, L.P. 19 24 the General Partner, subject to all limitations and requirements imposed by the Act. These indemnification rights are in addition to any rights that the General Partner may have against third parties. 6.7. Appointment and Replacement. (a) The initial general partner of the Partnership was Humphrey Oil. Upon execution of this Amended and Restated Agreement of Limited Partnership, Humphrey Oil does hereby resign as general partner and its general partner interest is hereby converted into a 1% Limited Partner's Interest. Simultaneously, EXCO Resources, Inc. does hereby become the General Partner holding a 1% Interest. (b) Each General Partner shall serve in such capacity unless and until replaced pursuant to this Agreement. In the event of the liquidation, dissolution, Bankruptcy, withdrawal, or disability of any Person herein or hereafter named as General Partner, the Partners shall appoint a successor General Partner in accordance with Section 6.3(a)(ix); provided, that Humphrey Oil shall succeed EXCO Resources, Inc., unless the Partners appoint another General Partner. 6.8. Approval and Meetings. (a) Actions and decisions requiring Consent of the Partners may be authorized or made either by vote of the required Partners taken at a meeting of the required Partners or by written consent of same without a meeting. For the purpose of determining the Partners entitled to vote on, or to vote at, any meeting of the Partners or on a request for written consent, the record date for any such determination shall be the day before a General Partner delivers notice of the meeting or its request for written consent. (b) The General Partner may call a meeting to obtain Consent of the Partners for an action or decision under this Agreement by delivering to the other Partners notice of the time and purpose of the meeting at least ten (10) days before the day of the meeting. Each meeting of Partners shall be conducted by the General Partner. Meetings may be held by telephone conference and participation by a Partner in a meeting by telephone conference shall constitute presence of that Partner. (c) The General Partner may propose that actions or decisions requiring Consent of the Partners be approved by written consent of the required Partners in lieu of a meeting by delivering to the required Partners notice of the proposal of the General Partner. The written consent of a Partner to that proposal may be evidenced by its signature on a counterpart of the proposal or by a separate writing (including a telex, telecopy, telegram, etc.) that identifies the proposal with reasonable specificity and states that it consents to that proposal. For purposes of obtaining a written consent, the General Partner may require the response of the requisite Partners within a specified time (the "Response Date") provided the Response Date is not less than five (5) days from the date of the notice. 6.9. General Partner as Attorney-in-Fact. For the purposes of the business of the Partnership only, each Limited Partner hereby makes, constitutes, and appoints the General Partner and each successor General Partner, with full power of substitution and re-substitution, the true and lawful attorney-in-fact for the Limited Partner and in the name, place, and stead of the Limited Partner and for the use and benefit of the Limited Partner, to sign, execute, certify, acknowledge, swear to, file, and record (i) this Agreement and all agreements, certificates, instruments, and other documents amending or changing this Agreement, as now exist or hereafter amended, which the General Partner deems necessary, desirable, or appropriate to reflect (A) the exercise by the General Partner of any power granted to him under this Agreement; (B) any amendments adopted by the Partners in accordance with the terms of this Agreement; (C) the admission of any additional or substituted Partner in accordance with this Agreement; and (D) the disposition by any Agreement of Limited Partnership of Humphrey-Hill, L.P. 20 25 Partner of his interest in the Partnership; and (ii) any certificates, instruments, and documents required by, or appropriate under, Texas law or any other state or jurisdiction in which the Partnership is doing or intends to do business. Each Limited Partner authorizes each such attorney-in-fact to take any further action that the attorney-in-fact considers necessary or advisable in connection with any of the foregoing, hereby giving each such attorney-in-fact full power and authority to do and perform each and every act or thing whatsoever requisite or advisable to be done in connection with the foregoing, as fully as the Limited Partner might or could do, and hereby ratifying and confirming all that any attorney-in-fact lawfully does or causes to be done by virtue thereof or hereof. Each Limited Partner shall execute a separate power of attorney in recordable form evidencing the power of attorney granted under this Section 6.9 if so requested by the General Partner. The power of attorney granted pursuant to this Section 6.9: (a) Is a special power of attorney coupled with an interest and is irrevocable; (b) May be exercised by any attorney-in-fact by listing the Limited Partners executing any agreement, certificate, instrument, or other document with the single signature of any such attorney-in-fact acting as attorney-in-fact for the listed Limited Partners; and (c) Shall survive the bankruptcy, insolvency, dissolution, or cessation of existence of a Limited Partner and shall survive the delivery of an assignment by a Limited Partner of the whole or a portion of his interest in the Partnership, except that where the assignment is of the entire interest of the Limited Partner in the Partnership, and the assignee, with the consent of the General Partner, is admitted as a substituted Limited Partner, then the power of attorney shall survive the delivery of the assignment for the sole purpose of enabling the attorney-in-fact to effect the substitution. 6.10. Execution of Documents. All Partners shall, on the request of the General Partner, promptly execute all documents and instruments necessary or helpful in carrying out actions of the Partnership that have been properly authorized. ARTICLE 7 TRANSFER OF INTERESTS 7.1. Additional Interests. Additional Interests may be created and issued to Persons and to existing Partners, on a unanimous vote of the Partners, on the terms and conditions determined by a Supermajority Vote of the Partners at the time of such creation or issuance. The terms of issuance must specify the applicable Interests to be issued. The provisions of this Section 7.1 shall not apply to Transfers of Interests. 7.2. Restrictions on Transfer. (a) Prohibitions on Transfers of EXCO Partners' Interest. The EXCO Partners shall not Transfer all or part of their Interest without the prior written consent of the Humphrey-Hill Partners, which consent may not be unreasonably withheld, and shall not make any other Transfer of all or part of their Interest except in accordance with the other provisions of this Agreement. Any attempted Transfer of all or part of its Interest by the EXCO Partners, except in accordance herewith, shall be void and ineffectual. (b) Prohibitions on Transfers of Humphrey-Hill Partners' Interest. Except as to transfers to a Limited Partner's spouse or children or family trusts established for the benefit of a Limited Partner's Agreement of Limited Partnership of Humphrey-Hill, L.P. 21 26 spouse and/or children of the age of majority, none of the Humphrey-Hill Partners shall Transfer all or part of their Interest without the prior written consent of the EXCO Partners, which consent may not be unreasonably withheld, and shall not make any other Transfer of all or part of their Interest except in accordance with the other provisions of this Agreement. Any attempted Transfer of all or part of their Interest by the Humphrey-Hill Partners, except in accordance herewith, shall be void and ineffectual. (c) Right of First Refusal on Voluntary Transfers. The Partners may Transfer any or all of their Interest (the disposing partner being the "Selling Partner"), subject to the non-disposing partners' (herein, the "Optionee Partners") right of first refusal (whether under this Section or under Section 7.2(d); the "Right of First Refusal"). If a Selling Partner wishes to Transfer any of their Interest as permitted in this Section 7.2(c), then the Selling Partner shall enter into a written agreement (the "Purchase Agreement") with a third party (the "Offeror"), providing for the purchase by the Offeror of all or a portion of the Selling Partner's Interest. Whether or not stated in the Purchase Agreement, the Offeror's right to purchase, and the Selling Partner's right to Transfer, any or all of the Selling Partner's Interest shall be subject to the Optionee Partners' Rights of First Refusal. Not later than the fifth (5th) day after the execution by the Selling Partner and the Offeror of the Purchase Agreement, the Selling Partner shall deliver a written notice (the "Notice") to the Optionee Partners, notifying the Optionee Partners that the Selling Partner wishes to sell the Selling Partner's Interest and setting forth the amount of the Selling Partner's Interest to be so sold. The Selling Partner shall attach to the Notice a copy of the Purchase Agreement, together with all exhibits and other attachments. If the Purchase Agreement is subject to a financing condition, then (i) the Selling Partner shall attach to the Notice a copy of a letter from a recognized regional or national investment banking firm addressed to the Selling Partner to the effect that such firm believes that there is a substantial likelihood that the Offeror will be able to obtain the financing necessary to satisfy the financing condition and (ii) the Offeror shall covenant in the Purchase Agreement to use commercially reasonable efforts to obtain such financing. The Notice also shall identify the Offeror and any "ultimate parent entity" (or entities) (as that term is defined in the Hart-Scott-Rodino Antitrust Improvements Act) of the Offeror, and all other terms, agreements or understandings with respect to the transaction not otherwise disclosed in the Notice or the Purchase Agreement (and the exhibits and attachments thereto). On or before the tenth (10th) business day after the Optionee Partners' receipt of the Notice, the Optionee Partner shall notify the Selling Partner in writing whether the Optionee Partner wishes to exercise its Right of First Refusal. If the Optionee Partner(s) exercises its Right of First Refusal pursuant to this Section 7.2(c), then the Optionee Partner shall purchase all, and not less than all, of the Selling Partner's Interest that was the subject of the Purchase Agreement on the same terms and conditions set forth in the Purchase Agreement. If the Optionee Partner exercises its Right of First Refusal pursuant to this Section 7.2(c), then the Optionee Partner shall consummate the purchase of the Selling Partner's Interest not later than the 30th day after the date on which the Optionee Partner delivers notice to the Selling Partner to the effect that the Optionee Partner will exercise its Right of First Refusal pursuant to this Section 7.2(c). If the Optionee Partner does not timely notify the Selling Partner that the Optionee Partner will exercise its Right of First Refusal pursuant to this Section 7.2(c) or if the Optionee Partner notifies the Selling Partner that the Optionee Partner will not exercise its Right of First Refusal pursuant to this Section 7.2(c), then the Selling Partner may consummate the sale of the applicable Selling Partner's Interest to the Offeror; provided, however, that (i) the Selling Partner's Interest must be transferred at the same price and on terms and conditions not more favorable to the Offeror than those contained in the Purchase Agreement delivered to the Optionee Partner pursuant to the Notice and (ii) such transaction must be consummated not later than a commercially reasonable time after (x) the Optionee Partner notifies the Selling Agreement of Limited Partnership of Humphrey-Hill, L.P. 22 27 Partner that the Optionee Partner will not exercise its Right of First Refusal pursuant to this Section 7.2(c) or (y) the expiration of the ten (10)-day period during which the Optionee Partner can give timely notice of the exercise of its Right of First Refusal pursuant to this Section 7.2(c), without the timely delivery by the Optionee Partner of such notice. If the transaction with the Offeror is not consummated in accordance with the immediately-preceding sentence, then no Transfer may occur unless the Selling Partner again offers the Selling Partner's Interest to the Optionee Partner in accordance with the provisions of this Section 7.2(c). (d) Right of First Refusal on Prohibited or Involuntary Transfers. If at any time a Selling Partner: (i) shall make or enter into a binding agreement to make a Transfer of any Selling Partner's Interest in violation of this Article 7 hereof; (ii) shall make an assignment for the benefit of creditors; (iii) shall file, or consent to the filing of, a petition under any bankruptcy law or petition for, or consent to, the taking of possession by a trustee, receiver or similar official of any of the Selling Partner's assets; (iv) shall be adjudicated or declared as bankrupt or insolvent under any Bankruptcy law; (v) shall suffer an attachment, sequestration, foreclosure, turnover order, writ of execution or garnishment, or any other method of seizure to be levied against any of Selling Partner's Interest or any interest therein, which attachment, sequestration, foreclosure, turnover order, writ of execution or garnishment is not otherwise satisfied or terminated prior to the time of the transfer of such Selling Partner's Interest or any interest therein; or (vi) shall have any Interest, subjected to Transfer in any other way whatsoever (other than as permitted in this Article 7. (any of the foregoing being referred to as a "Transfer Event"); then the Selling Partner or its representative, as applicable, shall within five (5) days of such Transfer Event deliver a written notice (the "Transfer Event Notice") to the Optionee Partner, setting forth in reasonable detail the circumstances of such Transfer Event. The Transfer Event Notice shall constitute an offer of the entire record and beneficial interest in the Selling Partner's Interest involved in the Transfer Event (the "Offered Interest") for sale to the Optionee Partner at the price and on the terms and conditions set forth in this Section 7.3(d). If the Transfer Event Notice is not delivered to the Optionee Partner, then upon being advised of any such Transfer Event, the Optionee Partner shall notify the Selling Partner or its representative, as applicable, that the Offered Interests are deemed offered to the Optionee Partner. In such case, the Transfer Event Notice shall be deemed received by the Optionee Partner on the date the Optionee Partner mail the above-described notice to the Selling Partner or its representative (as applicable). If the Optionee Partner elect to purchase the Offered Interest pursuant to this Section 7.2(d), then the purchase price for such Interest shall be the Agreed Value of such Interest. The Optionee Partner may pay the purchase price for the Offered Interest by delivering to the Selling Partner or its representative (as applicable) a promissory note payable in five (5) equal annual installments and bearing interest at seven percent (7%) per annum. Agreement of Limited Partnership of Humphrey-Hill, L.P. 23 28 Upon receipt (including in all cases a deemed receipt) of the Transfer Event Notice, the Offered Interest shall be deemed to be offered to the Optionee Partner, which shall have thirty (30) days from the date the Selling Partner receives the Transfer Event Notice to determine whether it wishes to purchase the Offered Interest and to notify Selling Partner or its representative, (as applicable) of such decision. If an Optionee Partner wishes to purchase the Offered Interest, then such purchase shall be consummated not later than the sixtieth (60th) day after the later of (i) the date on which the Independent Appraiser delivers its valuation report or (ii) the date on which the Optionee Partner notifies the Selling Partner or its representative (as applicable) of the Optionee Partner's exercise of its Right of First Refusal pursuant to this Section 7.2(d). If the Optionee Partner elects not to purchase the Offered Interest pursuant to this Section 7.2(d), then such Offered Interest may be disposed of pursuant to the description of the Transfer Event in the Transfer Event Notice; provided, however, such transaction must be consummated within a commercially reasonable time after (i) the Optionee Partner notifies the Selling Partner that the Optionee Partner will not exercise its Right of First Refusal pursuant to this Section 7.2(d) or (ii) the expiration of the thirty (30)-day period during which the Optionee Partner can give timely notice of its exercise of the Right of First Refusal pursuant to this Section 7.2(d), without the timely delivery by the Optionee Partner of such notice; provided further, that the acquiror or recipient of the Selling Partner's Interest involved in the Transfer must first execute and deliver an agreement in a form reasonably acceptable to the General Partner. The Offered Interest must be disposed of at the same price and on terms and conditions no more favorable to the outside purchaser as those contained in the Transfer Event Notice. If such price, terms or conditions are to vary or if the Transfer is not consummated in accordance with the first sentence of this paragraph, then no Transfer may occur unless the Selling Partner or its representative (as applicable) again offers the Offered Interest to the Optionee Partner in accordance with the provisions of this Section 7.2(d). (e) Conditions to Transfer; Effective Date. The Partnership may not recognize for any purpose any purported Transfer of all or part of an Interest until the other applicable provisions of this Section 7.2 have been satisfied, the applicable provisions of any other agreement relevant thereto to which the Partnership and any Partner are parties have been complied with and the General Partner has received, on behalf of the Partner, a document (i) executed by both the Partner effecting the Transfer (or if the Transfer is on account of the death, incapacity, or liquidation of the transferor, executed by the transferor's representative) and the Person to whom the Interest or part thereof is Transferred whereby that Person agrees to be bound by this Agreement, (ii) including the notice address of any Person to be admitted to the Partnership as a Partner, (iii) setting forth the Interests, after the Transfer, of the Partner effecting the Transfer and the transferee (which together must total the Interests of the Partner effecting the Transfer before the Transfer), and (iv) containing a representation and warranty that the Transfer was made in accordance with applicable laws and regulations (including securities and tax laws). Each Transfer that complies with the provisions of this Section 7.2 is effective as of the day on which the General Partner receives the notification of Transfer and the other requirements of this Article 7 have been met. (f) Securities Law Conditions to Transfer. The Partnership may not recognize for any purpose any purported Transfer of all or part of an Interest until the other applicable provisions of this Section 7.2 have been satisfied and the General Partner has received, on behalf of the Partnership, a favorable opinion of legal counsel acceptable to the General Partner to the effect that either (i) the Transfer of the Interests or part thereof subject to the Transfer or admission has been registered under the Securities Act of 1933, as amended, and any applicable state securities laws or (ii) the Transfer or admission is exempt from registration under those laws. The General Partner, however, may waive any or all of the requirements of this Section 7.2(f). Agreement of Limited Partnership of Humphrey-Hill, L.P. 24 29 (g) Partnership Expenses Reimbursed by Transferor and Transferee. The Partner effecting a Transfer and any Person admitted to the Partnership in connection therewith shall jointly and severally pay, or reimburse the Partnership for, all out-of-pocket costs incurred by the Partnership in connection with the Transfer or admission (including without limitation the legal fees incurred in connection with the legal opinions referred to in Section 7.2(f) by the tenth (10th) day after the receipt by that Person of the Partnership's invoice for the amount due. If payment is not made by the date due, then the unpaid amount shall accrue interest, at a rate per annum equal to the Maximum Lawful Rate from the date due until the date paid. The Partnership may offset any distributions payable to any Person admitted to the Partnership against any such unpaid amount, together with interest thereon. In such event the withdrawing Partner shall receive a distribution of its interest in kind or as otherwise agreed to by all the Partners. (h) Transferor Ceases To Be a Partner. A Partner who Transfers all of his Interest ceases to be a Partner of the Partnership and no longer has the rights or privileges of a Partner. (i) Partners May Elect to Adjust Tax Basis. On the Transfer of all or part of an Interest, at the request of the transferee of that Interest, the Partners may cause the Partnership to elect, pursuant to Code Section 754 or the corresponding provisions of subsequent law, to adjust the tax basis of the Partnership properties as provided by Code Sections 734 and 743. 7.3. Confidentiality. The Partners acknowledge that, from time to time, they may receive information from or concerning the Partnership in the nature of trade secrets or that otherwise is confidential, the release of which may damage the Partnership or Persons with which it does business. In addition to any other obligations of any Partner pursuant to any agreement between the Partnership and such Partner or otherwise, each Partner agrees that it shall hold in strict confidence any such information that it receives concerning the Partnership and may not use or disclose it to any Person other than another Partner, except for disclosures (i) compelled by law (but the Partner must notify the other Partners promptly of any request for that information, before disclosing it, if legal and practicable), (ii) to advisers or representatives of, or lenders to, the Partner or Persons to whom that Partner's Interest may be Transferred as permitted by this Agreement, but only if the recipients have been notified of, and have agreed to be bound by, the provisions of this Section 7.3, or (iii) of information that the Partner also has received from a source independent of the Partnership that the Partner reasonably believes obtained that information without breach of any obligation of confidentiality. The Partners acknowledge that breach of the provisions of this Section 7.3 may cause irreparable injury to the Partnership for which monetary damages are inadequate, difficult to compute, or both. Accordingly, the Partners agree that the provisions of this Section 7.3 may be enforced by injunctive relief for specific performance. 7.4. Withdrawal. No Partner has the right to withdraw from the Partnership as a Partner other than as permitted by this Agreement; provided, however, that any Partner may withdraw as a Partner at any time after (i) the Partnership has repaid in full the Credit Facility and no Partnership indebtedness remains outstanding or (ii) such Partner has repaid in full all of that Partner's Pro Rata share of the Credit Facility and any other indebtedness of the Partnership attributable to such Partner's Interest and the secured lienholder with respect to any Partnership property has agreed to release its lien as to such Partner's undivided interest or otherwise consented to the withdrawal. In such event the withdrawing Partner shall receive a distribution of its Interest in kind (on an undivided basis) or as otherwise agreed to by all of the Partners. Such withdrawal shall be subject to: (a) balancing of the withdrawing Partner's Capital Account as provided in Section 9.2 by either a cash distribution from or a Capital Contribution to the Partnership prior to the distribution in kind; and (b) any property distributed to a Partner in kind which is, at the time such property is distributed, subject to a Subsequent Operation which in which there were Non-Participating Partners, shall remain subject to the 300% recovery provided for in Section 3.7(b). Agreement of Limited Partnership of Humphrey-Hill, L.P. 25 30 ARTICLE 8 DISSOLUTION 8.1. Causes. The Partnership shall be dissolved on the first to occur of any of the following events, and each Partner hereby expressly waives any right that it might otherwise have to dissolve the Partnership: (a) The Partnership has not completed the purchase of the Pecos Properties by March 31, 2000; (b) On the election to dissolve the Partnership by a Supermajority Vote of the Partners; or (c) An event requiring such action under the Act. Nothing contained in this Section 8.1 is intended to grant to a Partner the right to dissolve the Partnership at will (by retirement, resignation, withdrawal or otherwise), or to exonerate a Partner from liability to the Partnership and the remaining Partners if that Partner dissolves the Partnership at will. A dissolution at will of the Partnership is in contravention of this Agreement for purposes of the Act or any successor statute. 8.2. Reconstitution. If dissolution of the Partnership results from the occurrence of an event described in Section 8.1(a) or Section 8.1(c), then the Partnership may be reconstituted and its business continued pursuant to the Act. If a reconstitution is completed, an appropriate amendment to this Agreement and, if necessary, to the certificate of limited partnership shall be executed and, in the case of the certificate of limited partnership, if necessary, appropriately filed of record. The rights of the remaining Partners after reconstitution, and the rights and liabilities of any Partner wrongfully dissolving the Partnership in contravention of this Agreement, shall be as provided for under the laws of the State of Texas. 8.3. Interim Manager. If the Partnership is dissolved as a result of an event described in Section 8.1, the General Partner, subject to the Approval of the Partners, may appoint an interim manager of the Partnership, who shall have and may exercise all the rights, powers and duties of the General Partner under this Agreement, until (i) the new General Partner is elected pursuant to Section 6.7, if the Partnership is reconstituted pursuant to Section 8.2, or (ii) a liquidator is appointed by the interim manager subject to the Approval of the Partners, if the Partnership is not reconstituted. ARTICLE 9 WINDING UP AND TERMINATION 9.1. General. If the Partnership is dissolved and is not reconstituted, then the General Partner shall begin to wind up the Partnership and to liquidate and sell the assets of the Partnership all pursuant to the Act. Subject to Section 6.3, the General Partner shall determine the time, manner and terms of any sale or sales of Property pursuant to such liquidation, having due regard to the activity and condition of the relevant market and general financial and economic conditions. 9.2. Liquidation. In the course of the winding up and terminating of the business and affairs of the Partnership, its assets (other than cash) shall be sold, its liabilities and obligations to creditors and all Agreement of Limited Partnership of Humphrey-Hill, L.P. 26 31 expenses incurred in its liquidation shall be paid, and all resulting taxable items shall be allocated as provided in Article 4. All Property shall be sold on liquidation of the Partnership, and no Property shall be distributed in kind to the Partners, unless it is distributed in proportion to the amounts that each Partner is due under this Section 9.2. Thereafter, the net proceeds from those sales (after deducting all selling costs and expenses in connection therewith), together with (at the expiration of the one (1)-year period referred to in Section 9.3) the balance in the reserve account referred to in Section 9.3, shall be distributed to the Partners as follows: (i) if necessary, distributions shall first be made to one or more of the Partners until the positive Capital Account balances are Pro Rata; and (ii) subject to Section 9.3, all Partnership assets will be distributed Pro Rata. For purposes of determining each Partner's Capital Account upon liquidation, all changes (increases and decreases) in a Partners' Capital Account resulting from less than all of the Partner's participation in a Subsequent Operation under Section 3.7 shall be disregarded, including, without limitation, increases in a Partner's Capital Account as a result of additional Capital Contributions by the Participating Partners and decreases in a Participating Partner's Capital Account as a result of recovery of the 300% allocation described in Section 3.7(b). If at the time of liquidation the Participating Partners have not yet recovered all of the 300% allocation described in Section 3.7(b), from any Subsequent Operation, the portion of the proceeds of the Purchase Price allocated to such Subsequent Operation in the sale of the well or wells to which such 300% allocation pertains shall first be paid to the Participating Partners until they have recovered such 300% allocation prior to including such proceeds in the reserve account. The documentation of any transaction involving the sale of a well upon which a Subsequent Operation has been performed in which there were Non-participating Partners shall specifically state the portion of the purchase price which is attributable to such Subsequent Operation. The General Partner shall use all reasonable efforts to effect complete liquidation of the Partnership within one year after the date on which the Partnership is dissolved. Each holder of an interest in the Partnership shall look solely to the assets of the Partnership for all distributions and shall have no recourse therefor (on dissolution or otherwise) against the Partnership or the other Partners. On the completion of the liquidation of the Partnership and the distribution of all funds of the Partnership, the Partnership shall terminate, and the General Partner shall have the authority to execute and record all documents required to effectuate the dissolution and termination of the Partnership. Distributions pursuant to this Section 9.2 may be made to a trust established for the benefit of the Partners for the purposes of liquidating the Property, collecting amounts owed to the Partnership, and paying contingent or unforeseen liabilities or obligations of the Partnership. 9.3. Creation of Reserves. After making payment or provision for payment of all fixed and determinable debts and liabilities of the Partnership and all expenses of liquidation, the General Partner may set up, for a period not to exceed one year after the date of dissolution, the cash reserves that the General Partner deems reasonably necessary for any contingent or unforeseen liabilities or obligations of the Partnership. 9.4. Final Accounting. Within a reasonable time following the completion of the liquidation, the General Partner shall supply to the Partners a statement which shall set forth (i) the assets and the liabilities of the Partnership as of the date of complete liquidation, (ii) the distributions to each Partner pursuant to Section 9.2, and (iii) the amount retained as reserves by the General Partner pursuant to Section 9.3. Agreement of Limited Partnership of Humphrey-Hill, L.P. 27 32 ARTICLE 10 MISCELLANEOUS 10.1. Notices. (a) Any notice, notification, demand or request provided or permitted to be given under this Agreement must be in writing and shall have been deemed to have been properly given, unless explicitly stated otherwise, if sent by (i) Federal Express or other comparable overnight courier, (ii) registered or certified mail, postage prepaid, return receipt requested, or (iii) telecopy during normal business hours to the place of business of the recipient. (b) For purposes of all notices, the addresses and telecopy numbers of the Partners are set forth on Exhibit A. (c) All notices, notifications, demands or requests so given shall be deemed given and received (i) if mailed, three (3) Business Days after being deposited in the mail; (ii) if sent via overnight courier, the next Business Day after being deposited; or (iii) if telecopied on a Business Day, that day, or if telecopied on a day that is not a Business Day, the next day that is a Business Day. (d) Any notice, notification, demand or request delivered by hand delivery or messenger shall be deemed properly given and received when the delivery receipt therefor is signed or initialed by a business employee of any recipient or by an adult resident at the residence of any recipient. 10.2. Application of Law; Venue. THIS AGREEMENT AND THE APPLICATION OR INTERPRETATION HEREOF, SHALL BE GOVERNED EXCLUSIVELY BY THE LAWS OF THE STATE OF TEXAS, OTHER THAN AS TO MATTERS OF GOVERNANCE ARISING UNDER THE ACT WHICH SHALL BE GOVERNED BY THE ACT. EXCLUSIVE VENUE FOR ANY ACTION RELATING TO THIS AGREEMENT SHALL BE MAINTAINED IN DALLAS COUNTY, TEXAS. EACH PARTY HEREBY CONSENTS TO PERSONAL JURISDICTION AND SERVICE OF PROCESS IN THE STATE OF TEXAS FOR MATTERS BETWEEN THE PARTIES HERETO THAT ARISE OUT OF THIS AGREEMENT. To the extent permitted by applicable law, each Partner hereby waives and agrees not to assert, by way of motion, as a defense or otherwise in any such action, any claim (i) that it is not subject to the jurisdiction of the above-named courts, (ii) that the action is brought in an inconvenient forum, (iii) that it is immune from any legal process with respect to itself or its property, (iv) that the venue of the suit, action or proceeding is improper or (v) that this Agreement, or the subject matter hereof, may not be enforced in or by such courts. 10.3. Terms. Common nouns and pronouns shall be deemed to refer to the masculine, feminine, neuter, singular, and plural, as the identity of the Person or Persons may in the context require. Any reference to the Code or other statutes or laws shall include all amendments, modifications, or replacements of the specific sections and provisions concerned. 10.4. References to This Agreement. Unless otherwise expressly stated, references to numbered or lettered articles, sections and subsections herein contained are to articles, sections and subsections of this Agreement. The terms "HEREIN," "HEREOF," "HEREUNDER," "HEREBY," "THIS AGREEMENT" and other similar references shall be construed to mean and include this Amended and Restated Agreement of Limited Agreement of Limited Partnership of Humphrey-Hill, L.P. 28 33 Partnership and all amendments thereof and supplements thereto unless the context shall clearly indicate or require otherwise. 10.5. Amendment. This Agreement may be amended, supplemented or restated only by Approval of the Partners; provided, however that any amendment hereto necessary to effect any matter referred to in Section 6.3 shall require a Supermajority Vote of the Partners. 10.6. Severability. If any provision of this Agreement or any application of such provision to any Person or circumstances shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provisions to other Persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 10.7. No Third-Party Beneficiary. This Agreement is made solely and specifically between and for the benefit of the parties hereto and their respective successors and assigns, subject to the expressed provisions hereof relating to successors and assigns. No other Person has any rights, interest, or claims hereunder or is or will be entitled to any benefits under or on account of this Agreement as a third-party beneficiary or otherwise unless specifically provided in this Agreement. 10.8. Sole and Absolute Discretion. Except as otherwise provided in this Agreement, all actions that any General Partner may take and all determinations that any General Partner may make pursuant to this Agreement may be taken and made at the sole and absolute discretion of that General Partner. 10.9. Binding Effect. Subject to the provisions of this Agreement relating to transferability, this Agreement shall be binding upon and inure to the benefit of the parties signatory hereto, and their respective distributees, successors and assigns. 10.10. Complete Agreement. This Agreement [and the Agreement among Partners] constitutes the complete and exclusive statement of the agreement between the Partners and replaces and supersedes all prior agreements, except for any agreement executed contemporaneously herewith by and among the Partners or any of them contemporaneously herewith. This Agreement supersedes all written and oral statements, and no representation, statement, condition, or warranty not contained in this Agreement shall be binding on the Partners or have any force or effect whatsoever. No Partner has rendered any services to, or on behalf of, any other Partner or the Partnership, and no Partner shall have any rights with respect to any services which might be alleged to have been rendered. 10.11. Title to Partnership Property. To the extent that Property is held in the name of a Partner, the Property shall be deemed held by that Partner as agent and nominee for and on behalf of the Partnership. Any other property acquired by or standing in the name of any Partner shall be conclusively presumed not to be Property, unless an instrument in writing, signed by such Partner, shall specify to the contrary. 10.12. Reliance on Authority of Persons Signing Agreement. If a Partner is a Person other than a natural person, the Partnership (i) is not required to determine the authority of the Person signing this Agreement to make any commitment or undertaking on behalf of such entity or to determine any fact or circumstance bearing upon the existence of the authority of such Person; (ii) is not required to see to the application or distribution of proceeds paid or credited to Persons signing this Agreement on behalf of such entity; (iii) is entitled to rely on the authority of the Person signing this Agreement with respect to the giving of consent on behalf of such entity in connection with any matter for which consent is permitted or required under this Agreement; and (iv) is entitled to rely on the authority of any general partner, joint venturer, Agreement of Limited Partnership of Humphrey-Hill, L.P. 29 34 manager, co-or successor trustee, or president or vice president (as the case may be), of any such entity the same as if such Person were the Person originally signing this Agreement on behalf of such entity. 10.13. Partition Rights. No Partner shall have the right to the partition of any Property or to take any action or initiate or prosecute any judicial proceeding for the partition, or the partition and sale, of any Property. 10.14. Area of Mutual Interest. Should any of the Partners acquire an oil and gas lease or oil, gas and mineral lease or an interest therein, mineral or royalty interests or other rights pertaining to the exploration for and production of oil, gas and other minerals in and under the land which is depicted on the map attached hereto as Exhibit B (such land being hereinafter referred to as the "AMI"), the Partner acquiring such lease, interest or right (the "ACQUIRING PARTNER") shall notify the the Partnership in writing within ten (10) business days after such acquisition is made, furnishing copies of the instruments evidencing such acquisition and advising the full consideration paid and obligations assumed in connection therewith. The Partnership shall have thirty (30) days from the time it receives such notice within which to purchase such lease, interest or right from the Acquiring Partner by reimbursing the Acquiring Partner for all of its costs, considerations and assuming all obligations of the Acquiring Partner in connection with such acquisition. Failure of the Partnership to exercise its right to purchase within such thirty (30) day period shall be deemed to be an election not to purchase such lease, interest or right. 10.15. Agreement in Counterparts. This Agreement may be executed in several counterparts, and all so executed shall constitute one Agreement, binding on all of the parties hereto, notwithstanding that all the parties are not signatories to the original or the same counterpart. REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. SIGNATURE PAGE(S) FOLLOW. Agreement of Limited Partnership of Humphrey-Hill, L.P. 30 35 IN WITNESS WHEREOF, this Agreement is effective as of the day and year first above written. SUCCESSOR GENERAL PARTNER: EXCO RESOURCES, INC., a Texas corporation By: /s/ T.W. EUBANK ---------------------------------- T.W. Eubank, President LIMITED PARTNERS: TAURUS ACQUISITION, INC., a Texas corporation By: /s/ T.W. EUBANK ---------------------------------- T.W. Eubank, President /s/ J.M. HILL -------------------------------------- J.M. HILL /s/ CHARLES B. HUMPHREY -------------------------------------- CHARLES B. HUMPHREY HUMPHREY OIL CORPORATION, a Texas corporation, as resigning General Partner and as Limited Partner By: /s/ CHARLES B. HUMPHREY ---------------------------------- Charles B. Humphrey President Agreement of Limited Partnership of Humphrey-Hill, L.P. 31 36 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF HUMPHREY-HILL, L.P. (A TEXAS LIMITED PARTNERSHIP) EXHIBIT A 1. Name of Partnership: Humphrey-Hill, L.P. 2. Address, Telephone and Facsimile c/o EXCO Resources, Inc. Number of Principal Office: 5735 Pineland Drive Suite 235 Dallas, Texas 75231 Telephone: (214) 368-2084 Facsimile: (214) 368-2087 3. Registered Agent and Office: Richard E. Miller EXCO Resources, Inc. 5735 Pineland Drive Suite 235 Dallas, Texas 75231 Telephone: (214) 368-2084 Facsimile: (214) 368-2087 4. General Partner: EXCO Resources, Inc. a Texas corporation Address, Telephone and Facsimile 5735 Pineland Drive Number of Principal Office: Suite 235 Dallas, Texas 75231 Telephone: (214) 368-2084 Facsimile: (214) 368-2087 Initial Contribution: $68,628.00 Interest in Partnership: 1% General Partner Interest Time of or Events Requiring Additional Contribution(s): As provided in the Partnership Agreement Effective Date Became Partner: March 24, 2000
Agreement of Limited Partnership of Humphrey-Hill, L.P. 37 5. Limited Partner: J. M. Hill ("Hill") Address, Telephone and Facsimile Number of Principal Office: 3500 Oak Lawn Avenue Suite 590 Dallas, Texas 75219 Telephone: (214) 528-9620 Facsimile: (214) 528-9621 Initial Contribution: $50,000.00 After Reevaluation of the Property, the Capital Account After Admission of EXCO Resources, Inc is: $1,731,372.00 Interest in Partnership: 24.5% Limited Partner Interest Time of or Events Requiring Additional Contribution(s): As provided in the Partnership Agreement Effective Date February 17, 2000 Became Partner: 6. Limited Partner: Charles B. Humphrey ("Humphrey") Address, Telephone and Facsimile Number of Principal Office: 3500 Oak Lawn Avenue Suite 590 Dallas, Texas 75219 Telephone: (214) 528-9620 Facsimile: (214) 528-9621 Initial Contribution: $47,960.00 After Reevaluation of the Property, the Capital Account After Admission of EXCO Resources, Inc. is: $1,660,607.00 Interest in Partnership: 23.5% Limited Partner Interest Time of or Events Requiring Additional Contribution(s): As provided in the Partnership Agreement
Agreement of Limited Partnership of Humphrey-Hill, L.P. A - 2 38 Effective Date Became Partner: February 17, 2000 7. Limited Partner: Humphrey Oil Corporation Address, Telephone and Facsimile Number of Principal Office: 3500 Oak Lawn Avenue Suite 590 Dallas, Texas 75219 Telephone: (214) 528-9620 Facsimile: (214) 528-9621 Initial Contribution: $2,040.00 After Reevaluation of the Property, the Capital Account After Admission of EXCO Resources, Inc. is: $70,766.00 Interest in Partnership: 1% Limited Partner Interest Time of or Events Requiring Additional Contribution(s): As provided in the Partnership Agreement Effective Date Became Partner: February 17, 2000 8. Limited Partner: Taurus Acquisition, Inc. ("Taurus"), a Delaware corporation Address, Telephone and Facsimile c/o EXCO Resources, Inc. Number of Principal Office: 5735 Pineland Drive Suite 235 Dallas, Texas 75231 Telephone: (214) 368-2084 Facsimile: (214) 368-2087 Initial Contribution: $3,431,372 Interest in Partnership: 50% Limited Partner Interest Time of or Events Requiring Additional Contribution(s): As provided in the Partnership Agreement
Agreement of Limited Partnership of Humphrey-Hill, L.P. A - 3 39 Effective Date Became Partner: March 24, 2000
Agreement of Limited Partnership of Humphrey-Hill, L.P. A - 4 40 EXHIBIT B AREA OF MUTUAL INTEREST [MAP OF AREA OF MUTUAL INTEREST] Agreement of Limited Partnership of Humphrey-Hill, L.P. B - 1 EX-10.29 5 AMENDMENT TO AMENDED AND RESTATED AGREEMENT OF LP 1 EXHIBIT 10.29 AMENDMENT TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF HUMPHREY-HILL, L.P. This Amendment to the Amended and Restated Agreement of Limited Partnership (the "Agreement") of Humphrey-Hill, L.P. (the "Partnership") is made as of April 14, 2000 by and among EXCO Resources, Inc., a Texas corporation as the general partner of the Partnership, Taurus Acquisition, Inc., a Texas corporation, as resigning limited partner of the Partnership, EXCO (Delaware), Inc., a Delaware corporation, as a new limited partner of the Partnership, Humphrey Oil Corporation, as a limited partner of the Partnership, Charles B. Humphrey, as a limited partner of the Partnership and J.M. Hill, as a limited partner of the Partnership. The Partnership is a duly formed limited partnership under the Texas Revised Limited Partnership Act. The Agreement was unanimously adopted by all of the partners of the Partnership on March 24, 2000. The Agreement is hereby amended in accordance with Section 10.5 of the Agreement as follows: 1. The Agreement is hereby amended to change the name of the Partnership from "Humphrey-Hill, L.P." to "Pecos-Gomez, L.P." and to reflect the transfer of a 50% limited partnership interest in the Partnership from Taurus Acquisition, Inc. to EXCO (Delaware), Inc. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Agreement. 2. Section 1.2 of the Agreement is hereby amended and restated in its entirety as follows: 1.2 Name and Certificate. The name of the Partnership is "Pecos-Gomez, L.P." The General Partner shall promptly cause to be prepared and filed a separate amended and restated certificate of limited partnership to satisfy the requirements of the Act. 3. The definition of "EXCO Partners" in Section 2.1 of the Agreement is hereby amended and restated in its entirety: "EXCO Partners" means EXCO (Delaware), Inc. and EXCO Resources, Inc. 4. The definition of "Partnership" in Section 2.1 of the Agreement is hereby amended and restated in its entirety: "Partnership" means Pecos-Gomez, L.P., a Texas limited partnership. 5. Exhibit "A" to the Agreement is hereby amended and restated in its entirety as follows: 2 EXHIBIT A 1. Name of Partnership: Pecos-Gomez, L.P. 2. Address, Telephone and Facsimile c/o EXCO Resources, Inc. Number of Principal Office: 5735 Pineland Drive Suite 235 Dallas, Texas 75231 Telephone: (214) 368-2084 Facsimile: (214) 368-2087 3. Registered Agent and Office: Richard E. Miller EXCO Resources, Inc. 5735 Pineland Drive Suite 235 Dallas, Texas 75231 Telephone: (214) 368-2084 Facsimile: (214) 368-2087 4. General Partner: EXCO Resources, Inc. a Texas corporation Address, Telephone and Facsimile 5735 Pineland Drive Number of Principal Office: Suite 235 Dallas, Texas 75231 Telephone: (214) 368-2084 Facsimile: (214) 368-2087 Initial Contribution: $68,628.00 Interest in Partnership: 1% General Partner Interest Time of or Events Requiring Additional Contribution(s): As provided in the Partnership Agreement Effective Date Became Partner: March 24, 2000 5. Limited Partner: J. M. Hill ("Hill") Address, Telephone and Facsimile Number of Principal Office: 3500 Oak Lawn Avenue Suite 590 Dallas, Texas 75219 Telephone: (214) 528-9620 Facsimile: (214) 528-9621 Initial Contribution: $49,000.00 After Reevaluation of the Property, the Capital Account After Admission of
- 2 - 3 EXCO Resources, Inc is: $1,730,373.00 Interest in Partnership: 24.5% Limited Partner Interest Time of or Events Requiring Additional Contribution(s): As provided in the Partnership Agreement Effective Date February 17, 2000 Became Partner: 6. Limited Partner: Charles B. Humphrey ("Humphrey") Address, Telephone and Facsimile Number of Principal Office: 3500 Oak Lawn Avenue Suite 590 Dallas, Texas 75219 Telephone: (214) 528-9620 Facsimile: (214) 528-9621 Initial Contribution: $49,000.00 After Reevaluation of the Property, the Capital Account After Admission of EXCO Resources, Inc. is: $1,661,745.00 Interest in Partnership: 23.5% Limited Partner Interest Time of or Events Requiring Additional Contribution(s): As provided in the Partnership Agreement Effective Date Became Partner: February 17, 2000 7. Limited Partner: Humphrey Oil Corporation Address, Telephone and Facsimile Number of Principal Office: 3500 Oak Lawn Avenue Suite 590 Dallas, Texas 75219 Telephone: (214) 528-9620 Facsimile: (214) 528-9621 Initial Contribution: $2,000.00 After Reevaluation of the Property, the Capital Account After Admission of
- 3 - 4 EXCO Resources, Inc. is: $70,627.00 Interest in Partnership: 1% Limited Partner Interest Time of or Events Requiring Additional Contribution(s): As provided in the Partnership Agreement Effective Date Became Partner: February 17, 2000 8. Limited Partner: EXCO (Delaware), Inc. ("EXCO Delaware"), a Delaware corporation Address, Telephone and Facsimile c/o EXCO Resources, Inc. Number of Principal Office: 5735 Pineland Drive Suite 235 Dallas, Texas 75231 Telephone: (214) 368-2084 Facsimile: (214) 368-2087 Initial Contribution: $3,431,372 Interest in Partnership: 50% Limited Partner Interest Time of or Events Requiring Additional Contribution(s): As provided in the Partnership Agreement Effective Date Became Partner: April 14, 2000
6. Except as provided for in this Amendment, the Agreement, as amended, shall remain in full force and effect and is hereby reaffirmed. * * * * * - 4 - 5 IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date first written above. GENERAL PARTNER: EXCO RESOURCES, INC. By: /s/ T. W. EUBANK -------------------------------------- Name: T. W. Eubank Title: President LIMITED PARTNERS: TAURUS ACQUISITION, INC., as resigning limited partner By: /s/ T. W. EUBANK -------------------------------------- Name: T. W. Eubank Title: President EXCO (DELAWARE), INC., as new limited partner By: /s/ T. W. EUBANK -------------------------------------- Name: T. W. Eubank Title: President HUMPHREY OIL CORPORATION By: /s/ CHARLES B. HUMPHREY -------------------------------------- Name: Charles B. Humphrey Title: President /s/ CHARLES B. HUMPHREY ----------------------------------------- CHARLES B. HUMPHREY /s/ J.M. HILL ----------------------------------------- J.M. HILL - 5 - EX-27 6 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 14,393,000 0 3,860,000 0 0 18,670,000 36,738,000 6,309,000 55,786,000 1,786,000 0 0 0 136,000 42,322,000 55,786,000 4,026,000 4,953,000 1,384,000 2,719,000 0 0 71,000 2,234,000 760,000 1,474,000 0 0 0 1,474,000 .21 .21
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